Alvaro Santos Pereira, Chief Economist, Organization for Economic Cooperation and Development (OECD), in a presentation on the Indian economy expressed his optimism about the India story. He calls India a champion of growth but highlighted the need to focus on education and skill development in the next phase of reforms. He was in  New Delhi to attend the third edition of Kautilya Economic Conclave, which was organised by The Institute of Economic Growth in partnership with the Ministry of Finance, between October 4 and 6.

Pereira spoke to Shweta Punj, Economic Policy Editor, Moneycontrol on the sidelines of the event.
Edited excerpts from the interview:You have expressed your optimism about the India story. What stands out for you in India?

Pereira: I think what is exciting and revealing about India is that when you come here, you see a lot of enthusiasm of the people how the country is faring. But in particular, what I really like — and I follow more than 60 countries around the world directly — is that there's been a lot of reforms in the past 10 years. Reforms are needed to continue to progress and to grow faster, or at least to grow as strong as you've been doing lately. That's what I like about India. It's exactly this reformist attitude that you can see prevailing and across all levels of government. Every time that I come here, I see progress. The country's moving very well. India will continue to do really well in the next few decades.

What specific reforms do you think have worked very well for India, and what reforms are you bullish on going forward?

Pereira: Some of the reforms that worked extremely well for India were certainly the landmark reform on GST, which was quite important. But also reforms on the insolvency and bankruptcy system also hold the key because they allowed more dynamism for companies. We also liked the policies of competitive federalism. They allowed states to introduce some reforms and compete with each other. The labor reforms that were introduced in 2020 were significant as well.

There's another area that I would like to highlight that I think worked well, and bringing in more investments. It is to decrease restrictions in terms of foreign direct investment (FDI) and also in other areas, reducing barriers to entry in certain sectors. Clearly, reforms are paying off. You know, when you have a 7 per cent growth rate or close to it, and projected to be that way for a long time, it shows that the country has become very attractive for investors — both domestic and foreign — and the reform momentum will likely continue.

What about the reforms that you would like to see going forward?

Pereira: Improve education. Even though there has been a huge improvement in the past few years. This is an area where more can be done in terms of improving the quality and upgrading skills to bridge the gap in regional disparities. This will also help improve the business climate. India can improve in both trade openness and service trade restrictiveness. You can still attract more investment by reducing entry barriers and improving competition. Reforms are also required to reduce informality. Of course, there’s a rural versus urban component. Informal rates in India are still significantly high. However, it’s not unique to India, because many countries more or less are facing a similar issue. Peru, Colombia and many other countries have fairly high informality rates. Informality has an impact on the growth potential of the economy, productivity and job creation. Reforms are required to increase social protection, reduce social security contributions. India has been able to increase pension systems and expand its coverage.  Besides, continued reform of the tax system is quite important. Also, reducing barriers, especially licencing procedures for Indian companies, have improved dramatically in the last 30 years.  From that time,  80 institutions were needed to obtain a licence for a business. However, regulation can still be simplified. The introduction of zero licence procedures will be useful and persisting with labour reforms will reduce the cost of formalisation. If you look at those four big reforms, this is going to be quite important to fight and reduce informality, making growth more inclusive and also improving productivity.

So, looking at the global context right now, the geopolitical situation is very volatile. China is going very aggressive on its stimulus. But when you look at India, what are its vulnerabilities at this point ?  And what's your outlook for India and China?

Pereira: In the short run, we are seeing slower growth in China. We're seeing growth below 5 per cent and certainly around 4.4-5 per cent next year. China's growth is a lot less buoyant than what it was in the past, in part because even though it is doing alright in terms of manufacturing exports, consumption has been fairly subdued. Hence, stimulus can help. The weakness in the Chinese economy has to do with the massive real estate sector, which needs an adjustment. The big question is: how smooth is the adjustment going to be. You have two issues related to the real estate sector that are plaguing China. One is the high debt burden: 170 per cent of the GDP, which constrains investment. On the other hand, the large real estate sector has led to mushrooming ghost towns. Going forward, the adjustment likely is not going to be so smooth. The growth in China won’t be so buoyant. This is reflected in demand for commodities across the world.

On the contrary, India will do extremely well in the next few years and decades because of inclusive growth. The country is specialising in sectors that will be in great demand in the future such as information, communication and technology (ICT). With government initiatives like “Make in India”, there will be more internal demand and boost to export. Massive capital expenditures are being made to ramp up both physical and digital infrastructure, which will sustain growth as well. So, what are the challenges? I think India has to follow its own way. So I think as long as you continue to reform, as long as you continue to improve your attractiveness to domestic and foreign investors, they will come. You just need to continue to make the country a more attractive destination for investments.

On the taxation front, do you feel the need for better taxation policies, easier tax compliance?

Pereira: Let’s go back to the Goods and Services Tax (GST) reform.  When I visit Brazil and other countries, very often, I give the example of the GST reform, because it was so important to consolidate the tax base. And I think there's areas of taxation that you can certainly continue to improve.

I think, to improve the tax system is something that you see countries doing over the years. It takes some time. It's important to understand in terms of exemptions. Do you have too many exemptions? How can you increase the tax base? What can you do to become more competitive for investment and also find ways to increase your revenue?.

You  mentioned the need to open up the Indian economy? What specific sectors need to be further opened up and why? 

Pereira: When we talk about FDI, restrictiveness and our indices, basically, is an overall index that looks at manufacturing and services sectors. Sometimes, either because of complex regulations or because licencing procedures are too complex, sometimes you're not too attractive or not  as attractive as you'd like to be. And so these are areas that you need to continue working.

What's your growth outlook for India?

Pereira: We're forecasting 6.7 per cent this year and 6.8 per cent next year. It’s very close to 7 per cent. You'll get to 7 per cent in any of those years, especially next year.

If you grow at 7 per cent that means that every 10 years you double your income. It's a very fast rate approach. And in December, we'll come back with numbers for 2026 but so far, we're talking about 7 per cent a year, which is very solid.

India is a G20 champion of growth. You are the fastest growing country in the G20 and among the OECD countries. You're also the fastest-growing country right now.

What’s the big message that you are taking back from Prime Minister Narendra Modi’s address at the Kautilya Economic Conclave?

Pereira: I think the big message is that India has implemented big reforms, which we agree with. But the PM is not happy. He wants to continue to transform the country and keep up with the reform momentum. His message is music to my ears. The reforms will help in several areas, including building infrastructure. You have hit the right tones. The next few years will be very good for India.