OECD urges India to pare govt ownership in banks, insurance companies

The Organisation for Economic Co-operation and Development (OECD) on Tuesday urged India to further promote structural reforms in the financial sector by reducing government ownership of banks and insurance companies and liberalise foreign direct investment by removing remaining restrictions.

In its latest Going for Growth 2023 report, the OECD charted country-specific structural policy priorities to strengthen growth fundamentals and pave the way for successful green and digital transitions. The recommendations are in four key policy areas, such as enhancing the design of social support programs, lifting potential growth by removing obstacles to effective resource utilisation, securing faster progress towards decarbonization, and making digital transformation a driver of productivity growth.

The OECD said India’s recent reforms reduced government participation in the finance sectors, allowing greater foreign participation in insurance, defence, petroleum and natural gas, and telecoms. “However, in the last few years, private conglomerates have increased their role in the economy, with negative consequences for competition,” the report stated.  

Despite the reduction in non-performing loans and the creation of an asset reconstruction company (also known as a ‘bad bank’), resolution procedures remain slow, it said.

The OECD said the government needed to enhance resilience in the financial sector by accelerating the Insolvency and Bankruptcy Code process, managing non-performing assets, and providing appropriate government supervision. It also advised the creation of quality jobs by modernising labour regulations and skill development programmes.

The Paris-based group of rich countries asked India to enhance access to affordable and secure high-speed broadband networks and services in rural areas and for micro, small, and medium enterprises and poor households. It also asked the government to boost digital literacy and skill development through education and training in women and marginalised groups.

It said despite high mobile telephone penetration and the success of public policies promoting digitalisation of government services finance, education, and health, as well as delivery of social services, large digital divides persist in India by location, gender, age, income, wealth, and firm size.

The OECD said that while both monetary and multidimensional poverty rates had declined in India, at least before the pandemic, inequality of opportunities and social protection remains a challenge, with migrant workers and women being particularly vulnerable due to poor competencies and skills. “The Right to Education Act introduced the obligation to provide free and compulsory education for all children from age six to 14, but actual coverage is lower and quality is lagging,” it added.

The group said India needs to enhance social mobility by widening access to social services and infrastructure, especially ensuring equal access to high-quality education for all children at least from six to 14 years, for successful implementation.

Though India has committed to reducing greenhouse gas emissions and increasing the share of renewable energy, the OECD held that the energy mix is still highly dependent on fossil fuels and coal, the import bill has increased, and energy efficiency is low. “Air pollution, extreme weather episodes, and droughts are becoming increasingly problematic,” it added.

The OECD advised the government to further increase the share of renewable energy by facilitating long-term investment in clean energy development projects.

“Improve the performance of state-owned distribution companies (discoms), incentivise private sectors to adopt more energy efficient and less carbon-intensive measures, and provide additional government support to shift household cooking fuels from biomass-based to less-carbon intensive sources,” the OECD advised.