While acknowledging that barriers to FDI have been reduced by India in various sectors, the Paris-based think tank said that more needs to be done for efficient allocation of capital.

"Easing administrative and regulatory burden on companies and encouraging infrastructure development would promote economic activity," the Organisation for Economic Cooperation and Development (OECD) said in a report.
To spur creation of formal jobs, labour market duality should be reduced while labour laws need to be simplified. Besides, the "rather stringent employment protection legislation should be reconsidered," the report titled 'Going for Growth' said.
According to OECD, the FDI barriers have been reduced in particular in telecom, civil aviation, railways, defence, construction and multi-brand retail.
"Financial reforms are gradually implemented and the Reserve Bank of India has taken steps to increase competition in the banking sector as well as its efficiency but more is needed to achieve a more efficient allocation of capital," it noted.
Further, the report said that reforms to promote the development of a dynamic and efficient financial sector are needed to support investment and inclusive growth.
"The Reserve Bank of India approved the issuance of new banking licenses in 2014 and now allows banks to open branches without prior permission. Foreign banks can open subsidiaries and branches across the country, subject to domestic regulation," it added.

Suggesting a way forward, OECD said that bank portfolio restrictions should be eased, including gradual reduction  in the share of government bonds held by banks and have a plan to phase out priority lending.

"Allow greater participation by foreign investors in the financial service sector and further promote the entry of new private banks," the report noted.
OECD Secretary-General Angel Gurria said an ambitious reform agenda can help boost jobs, productivity and support demand.
"We understand the difficulties many governments face in pushing for reforms, in a context of weak demand, limited budgetary leeway and high unemployment.
"But we still see structural reforms – combined with effective fiscal and monetary policy – as part of an essential trilogy to boost growth," he said.

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