3.

DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES

INDIA
Economic growth is projected to strengthen to above 7%, gradually recovering from
the transitory adverse impact of rolling out the Goods and Services Tax (GST) and
measures to choke off the black economy, including demonetisation. In the longer run,
the GST will boost corporate investment, productivity and growth by creating a single
market and reducing the cost of capital equipment. Investment will be further supported
by the plan to recapitalise public banks and by the new road plan.
Recent measures to digitise the economy and improve tax compliance should boost
tax revenue in the medium term. They are accompanied by an increase in public
pensions and wages, as well as debt write-offs in some states, resulting in a broadly
neutral fiscal stance over the projection period. Given the high public debt-to-GDP ratio,
increasing social infrastructure, such as health and education, will require raising more
property and income tax revenue. With inflation expectations adjusting down, there
could be room for further cuts in interest rates if inflation durably remains below 4%.
Non-performing loans have increased, largely reflecting recognition efforts, and are
particularly high in public banks. Steps have been taken to clean up banks' balance
sheets, giving creditors more control over the stressed entities. A new bankruptcy law is
also being implemented. The large recapitalisation plan for public banks should be
accompanied by governance reform. External debt remains low and foreign exchange
reserves have increased, reducing vulnerabilities.

Consumption is driving growth

After suffering from a temporary setback, the economy is bouncing back. Ahead of the
implementation of the GST in July 2017, enterprises ran down their inventories, causing a
fall in manufacturing activity. Since the new tax regime is in place, some businesses have
struggled to adjust to the underlying information technology system. Small enterprises
with limited cash flows and exporters have suffered from delays in getting refunds for

India
Private consumption has recovered Industrial production has bottomed out
Two wheelers¹ Industrial production index¹
Y-o-y % changes Y-o-y % changes
60 14

50 12

40 10

30 8

20 6

10 4

0 2

-10 0

-20 -2
2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

1. The data are seasonally adjusted and smoothed using a two-month moving average filter.
Source: Society of Indian Automobile Manufacturers; and Central Statistics Office.
1 2 http://dx.doi.org/10.1787/888933631665

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 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES

India: Demand, output and prices

2014 2015 2016 2017 2018 2019

Current
Percentage changes, volume
prices INR
(2012/2013 prices)
trillion

GDP at market prices 124.5 8.0 7.1 6.7 7.0 7.4

Private consumption 72.3 6.1 8.7 7.4 7.4 7.4
Government consumption 13.0 3.3 20.8 10.4 7.3 9.4
Gross fixed capital formation 37.8 6.5 2.4 2.8 4.6 6.8
Final domestic demand 123.2 5.9 8.1 6.5 6.6 7.5
Stockbuilding1 5.0 0.0 0.0 0.0 0.0 0.0
Total domestic demand 128.2 7.7 6.6 7.7 6.5 7.4
Exports of goods and services 28.6 -5.3 4.5 2.0 4.4 4.8
Imports of goods and services 32.4 -5.9 2.3 7.2 2.4 5.1
Net exports1 - 3.7 0.2 0.4 -1.1 0.4 -0.1
Memorandum items
GDP deflator _ 1.8 3.6 4.0 4.2 4.0
Consumer price index _ 4.9 4.5 3.2 4.6 4.2
Wholesale price index2 _ -3.6 1.7 3.1 4.0 4.1
General government financial balance3 (% of GDP) _ -6.4 -6.4 -6.1 -5.9 -5.7
Current account balance (% of GDP) _ -1.0 -0.8 -1.6 -1.7 -1.5
Note: Data refer to fiscal years starting in April.
1. Contributions to changes in real GDP, actual amount in the first column.
2. WPI, all commodities index.
3. Gross fiscal balance for central and state governments.
Source: OECD Economic Outlook 102 database.

1 2 http://dx.doi.org/10.1787/888933632672

taxes paid on inputs. Industrial production and exports are, however, rebounding
suggesting that disruptions from GST implementation are abating.
C o n s u m p t i o n h a s re c ove re d a f t e r t h e l i q u i d i t y c r u n ch a s s o c i a t e d w i t h
demonetisation. Indicators of rural consumption, such as two-wheelers sales, have
rebounded, also supported by generous crops and higher rural wages. The large increases
in wages, pensions and various allowances for public servants are also boosting private
consumption, in particular in urban areas. Import growth has slowed, after the surge in
gold and silver import ahead of tax changes. Investment has failed to rebound so far,
affected by the weak financial position of most public banks and some corporations,
combined with low capacity utilisation.

Structural reforms are needed to support inclusive growth, with marginal leeway for
monetary policy
There is scope for improving the quality of public finances. Recent efforts to move
away from the informal economy and to digitise transactions are boosting tax revenue.
However, non-tax revenues, including dividends, privatisation and telecom receipts, are
below budget targets. On the spending side, wages and various allowances for government
employees are being adjusted up while several states have announced farm loan waivers.
Given the already relatively high deficit and debt-to-GDP ratios, this leaves little scope for
further stimulus in the short term. Still, in the medium term, the GST should spur tax

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3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES

India
Core inflation has hovered around 4% Real interest rates¹ are high
Y-o-y % changes %
12 10.0
Repo rate
Base rate of five major banks
10 7.5

8 5.0

6 2.5

4 0.0

Headline inflation
2 Core inflation -2.5

0 -5.0
2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 2017

1. Real interest rates are calculated using the consumer price index.
Source: Central Statistics Office; and Reserve Bank of India.
1 2 http://dx.doi.org/10.1787/888933631684

revenue. To support inclusive growth with better social and physical infrastructure,
measures should be taken to raise more revenue from property and personal income taxes.
The existing slack in the economy and the benign inflation environment provide room
for some monetary policy easing. Consumer price inflation has declined dramatically,
supported by the move to inflation targeting and measures to reduce the fragmentation of
agricultural markets. Transitory factors have helped, including demonetisation, which led
to a sharp fall in the price of perishable goods, large discounts offered by retailers to run
down inventories before the new GST, the rupee appreciation and subdued commodity
prices. Overall, inflation has fluctuated well below the 4% target since October 2016 and
inflation expectations are adjusting down. Some price spikes are likely in the coming
months, as base effects vanish.
The resolution of non-performing loans is progressing slowly. Many of them originate
from delays in infrastructure projects and are backed by “real” assets which could be
expected to become profitable if projects are completed swiftly. They are also concentrated
in a few companies, making the resolution process easier. If existing resolution
mechanisms do not deliver rapidly, the creation of a bad bank could be considered. The
comprehensive recapitalisation plan for public banks (about 1.3% of GDP), announced in
October 2017, should enable them to extend new loans. To avoid a renewed accumulation
of bad loans in the future, the plan should be accompanied by governance reform for public
banks.
Creating more and better quality jobs, for both women and men, is necessary to
promote inclusive growth. Some states have reformed labour regulations, encouraged by
the central government benchmarking efforts. Central government proposals to modernise
labour codes should be pursued. Improving the quality and timeliness of labour data is also
key to assess outcomes and design better policies.

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 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES

Growth is projected to strengthen as investment revives

Recent reform efforts will gradually pay off and economic growth will strengthen.
Measures recently introduced to ease tax compliance requirements for small enterprises,
refund taxes faster to exporters and streamline GST rates will ease the adjustment to the
new tax regime. Private consumption will remain solid as public wages and rural incomes
are growing steadily. Investment should recover gradually, as capacity utilisation increases.
The GST, by lowering the price of capital goods and creating a single market, will spur
investment demand. The recent increase in imports of capital goods is encouraging. Large
infrastructure projects, such as the initiative to add 35 000 km of new highways over the
next five years (at a cost equivalent to about 3.4% of GDP) and freight rail corridors, will also
boost investment. The availability of credit will become a key factor.
The prospect for further structural reforms, in particular in the labour market, is a
clear positive risk for growth. Too strong an increase in public wages and allowances,
combined with new loan write-offs at the state level, may squeeze much needed
investment in social and physical infrastructure and thus weigh on inclusive growth.

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