India's reformist attitude not seen in many countries: OECD Chief Economist

Pereira said that India needs to prioritise education, skilling and take up reforms to improve business climate, reduce informality, ease FDI restrictions in the economy to attract investments

India has all it takes to have a strong rate of growth over the next few decades, Alvaro Santos Pereira, chief economist of the Organisation for Economic Co-operation and Development (OECD), said in an interview with Ruchika Chitravanshi in New Delhi. Speaking on the sidelines of the Kautilya Economic Conclave, Pereira said the country needed to prioritise education and skilling and take up reforms to improve the business climate, reduce informality, and ease restrictions on foreign direct investment (FDI). Edited excerpts:

How concerned are you about the impact of the West Asian crisis on global and India’s growth?

We know shipping costs have gone up 160 per cent because of the disruption since last year. If there is a significant escalation of conflict, that will disrupt trade and impact energy prices. 

Then it will have a significant impact on the trade flows of countries that import energy and others too, and particularly on trade costs.

How feasible is India’s target of becoming a developed country by 2047? Do you think there is a threat of falling in the middle-income trap?

I’m not concerned about the middle-income trap for India. India has all it takes to continue having a very strong rate of growth over the next few decades. 

There have been significant reforms in the past 10 years in many areas. On top of this, there’s been an important improvement in infrastructure. And more importantly, there’s the intention of continuing the reforms. 

I see a dynamism, an entrepreneurial spirit, and a reformist attitude I don’t see in many countries.

What are the reforms India needs to focus on?

Education is a priority. You have a young labour force and a young population, and improving skills and education is going to be instrumental. 

These are areas that both states and the federal government have to work on. Another area is to improve the business climate. In terms of indicators like FDI restrictiveness, you’ve been improving, but it is still more restricted than in other countries. 

The same goes for services trade restrictiveness. In order to attract more investment, India needs to work on licensing and permits. 

You’ve come a long way since you dropped the licence raj … But you can still improve upon the complexity of regulations. Another area that is important is to reduce informality.

What reforms are needed to reduce informality?

First, you need to work on pension reform: Increase the coverage of pension and social protection in India. You should do tax reform to reduce labour taxes. 

The third is to continue to work on reducing the cost of formalising workers. Labour legislation has improved, but more can be done to reduce rigidity. 

The world over, we are seeing protectionism. And in India, we have production-linked incentive (PLI) schemes. What do you think of this approach?

An open economy brings in a lot more investment and creates jobs. 

For other parts of the economy in which you can continue opening up, there will be great opportunities to grab in the next few years to bring in more investment to India, as long as you continue to reduce the barriers and make it simpler to invest in India.

Do you mean the PLI scheme should be phased out?

You need to increase the attractiveness for investors to invest in India. India has all the hallmarks of being a base to export to the rest of the world. 

Can the growth trajectory India is aspiring to be built on the services sector? Or it has to be led by manufacturing?

You need to have more productive agriculture too. You need to have solid manufacturing. 

I like the initiative of  “Make in India”. You have excellent services and hi-tech services, but you won’t be able to employ everybody there. Manufacturing will play a very important role.

What do you think of India’s concern around carbon tax and its impact on developing countries? 

We agree with India. There are many ways of achieving climate mitigation. India too needs to work on adaptation. 

We have an initiative called the “Inclusive Forum of Carbon Mitigation Approaches” (IFCMA) to look at different options countries have to reach net zero.