Document of The World Bank FOR OFFICIAL USE ONLY Report No. 22541 IN MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ONA COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR INDIA June 27, 2001 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency unit: Rupees (Rs) as of NMarch S. 2001 LISSI = Rs. 46.7 GOVERNMENT FISCAL Y EAR April 1 2001- Nlarch 31. 2002 ABBREVIATIONS AND ACRONYMIS AAA Analytical and Advisory IFC International Finance Activities Corporation ADB Asian Development Bank ILEP International Federation of Anti AP Andhra Pradesh Leprosy Associations APL Adaptable Program Loan IhlF International Monetary Fund ARPP Annual Report on Portfolio IT Information Technology Performance KfW Kreditanstalt fOir Wiederaufbau AusAID Australian Agency for JBIC Japan Bank for International International Development Cooperation BOP Balance of Payments MIGA Multilateral Investment CAE Country Assistance Evaluation Guarantee Agency CDF Comprehensive Development MP Madhya Pradesh Framework IvIYRADA Mysore Rural Agricultural CDS City Development Strategy Development Agency (an NOGO) CIDA Canadian International NGO Non-Governmental Organization Development Agency NHAI National Highway Authority of DANIDA Danish Intemational India Development Assistance NHFS-2 National Family Health Survey DFID Department of International NPA Non-Performing Asset Development (U.K) OED Operations Evaluation DPEP District Primary Education Department Program PPIAF Public-Private Infrastructure DPIP District Poverty Initiatives Advisory Facility Project PSP Private Sector Participation EU European Union PWD Public Works Department FDI Foreign Direct Investment RBH Reserve Bank of India FSAP Financial Sector Assessment RWSS Rural Water Supply and Program Sanitation GDP Gross Domestic Product SDC Swiss Agency for Development GDPfc Gross Domestic Product at factor & Cooperation cost SDP State Domestic Product GEF Global Environmental Facility SEB State Electricity Board GNFS Goods and Non-factor Services SEWA Self Employed Women Go[ Government of India Association (NGO) GTZ German Development S[DA Swedish International Corporation Development Agency IBRD International Bank for SME Small and Medium Enterprise Reconstruction and Development SSPR Structural and Social Policy IDA International Development Review Association ULB Urban Local Body UNAIDS Joint United Nations Program on UNIFEMI United Nations Development HIV/AIDS Fund for Women 1'NDAF UN Development Assistance UP Uttar Pradesh Framework USAID U.S. Agency for International UNDCP United Nations International Development Drug Control Program WHO World Health Organization UNDP United Nations Development WPI Wholesale Price Index Program WTO World Trade Organization UNESCO United Nations Educational, WWF World Wide Fund for Nature Scientific and Cultural Organization UNFPA United Nations Population Fund UNICEF United Nations Children's Fund The World Bank Vice President Nts. Mieko Nishimizu Country Director Mr. Edwin Lim Task Managers Ms. Joelle Chassard and Mr. Stephen Howes The International Finance Corporation Vice President : Mr. Assaad Jabre Director. South Asia Department : Mr. Bernard C. Pasquier Taskl Manager : Mr. Neil Gregory FOR OFFICIAL USE ONLY TABLE OF CONTENTS EXECUTIVE SUMMARY ...........................................................i 1. INDIA'S POVERTY REDUCTION STRATEGY ........................................................... 1 A. Poverty in India ..........................................................l1 B. Political and Economic Context - A Decade of Change ....................................................3 Political Developments ...........................................................3 Economic Developments ............................................................4 Emerging Role of the States in Economic Policies ...........................................................7 C. India's Poverty Reduction Strategy ...........................................................8 The Five Year Plans and Poverty Reduction Strategy .......................................................8 Growth with Social Justice and Equity ...........................................................8 Government Effectiveness and Private Sector Development ............................. ................8 More Effective Pro-Poor Interventions ........................................................... 10 The Role of the States in Poverty Reduction and Reforms ............................................... 12 Implications of India's Poverty Reduction Strategy for the Bank Group ......................... 12 II. THE BANK GROUP'S STRATEGY .......................................................... 14 A. Inputs to Strategy Formulation .......................................................... 14 Country Assistance Evaluation .......................................................... 14 Lessons Learnt from the Last CAS .......................................................... 14 Consultations .......................................................... 15 B. Overview of Bank Group Strategy .......................................................... 15 C. Strategic Principles .......................................................... 16 Selectivity .......................................................... 16 Partnership and Outreach .......................................................... 18 Programmatic Approach .......................................................... 20 HI. PROGRAM PRIORITIES .......................................................... 24 A. Strengthening the Enabling Environment for Development and Growth ..................... 24 Improving Government Effectiveness .......................................................... 24 Promoting Private Sector Led Growth ....................... ................................... 25 B. Supporting Critical Pro-Poor Interventions .......................................................... 28 Promoting Education and Health for All .......................................................... 29 Accelerating Pro-poor Rural Development .......................................................... 30 IV. BANK GROUP OPERATIONS .......................................................... 32 A. World Bank Portfolio and Assistance Program .......................................................... 32 Portfolio Management .......................................................... 32 Lending Program .......................................................... 33 Non-Lending Services .......................................................... 36 B. IFC Portfolio and Program .......................................................... 37 C. MIGA Program .......................................................... 38 D. Operational Decentralization .......................................................... 38 E. Risk Management ...................... 39 Political and Program Risks ...................... 39 Credit and Exposure Risks ...................... 40 This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - BOXES Box 1 India's Significance for Achievement of the International Development Goals .................................................1 Box 2 Reforms in the States ................................................ 12 Box 3 Scaling Up for Impact: Examples from the Bank's Program in India .............. 19 Box 4 Poverty and Social Monitoring in Uttar Pradesh .............................................. 22 Box 5 Core Labor Standards in India and Child Labor ............................................... 29 TABLES Table 1 Economic and Social Indicators for India's Major States ...................................2 Table 2 Selected Macro Economic Indicators, 1990-2001 ..............................................6 Table 3 Key Economic Indicators: 2000-2004 Projections .............................................6 Table 4 Portfolio Trends - FY96-00 ................................................ 32 Table 5 Problem Projects at Start of Fiscal Year ........ ......................................... 32 Table 6 Self-activating Triggers: Implications for the FY02-04 Base Case Lending Program ................................................ 34 Table 7 Lending Scenarios: Base and low case - FY02-04 ................................. 35 Table 8 Projects Managed by Staff of the New Delhi Office (NDO) ............................ 38 FIGURES Figure 1 A Diagrammatic Representation of the Country Assistance Strategy .............. 16 Figure 2 India - Lending Program FY97-04 ................................................ 34 Figure 3 India - IBRD Exposure Scenarios 2001 to 2020 .............................................. 41 ANNEXES Annex 1 Listening to India's Poor Annex 2 India: Reducing Poverty, Accelerating Development (SSPR) Annex 3 India: CAE - Management Action Record Annex 4 A Snapshot of the CAS Consultations Annex 5 Examples of Bank partnerships with Bilateral and Multilateral Agencies Annex 6 Procurement and Financial Management: Fiduciary Issues Annex 7 India IBRD Lending Scenario and Exposure Chart Annex B 1 India At-a-Glance Annex B2 Selected Indicators of Bank Portfolio Performance and Management Annex B3 Proposed IBRD/IDA Base-Case Lending Program for IBRD, IFC and MIGA Annex B4 Summary of Non-lending Services Annex B5 Social Indicators Annex B6 Key Economic Indicators Annex B7 Key Exposure Indicators Annex B8 Status of Bank Group Operations and Statement of IFC's Held and Disbursed Portfolio Annex B9 Country Program Matrix (FY02-04) Annex B 10 Summary of Development Priorities EXECUTIVE SUMMARY i. Poverty in India: a global challenge. Poverty reduction is not only India's most compelling challenge, but also a challenge of global significance. According to World Bank figures, India has some 433 nillion people living on less than US$1 a day, 36% of the total number of poor in the world. India also has some 20% of the world's out-of-school children. While most social indicators are improving in India, infant and maternal mortality remain high, and there are new challenges too, including a resurgence of tuberculosis and the spread of HIV/AIDS which, if unchecked, could become a major threat to India's future. ii. India's Poverty Reduction Strategy. India's strategy for poverty reduction, the fundamental elements of which are contained in the Ninth Five-Year Plan and its Mid-Term Appraisal, sets the pursuit of growth with social justice and equity as its basic objective. To achieve this goal, the Plan's strategy is articulated along two main directions: * First, it calls on the state to depart from its traditional role "of being a pervasive controller of private sector activity, and also a direct producer through public sector enterprises" to one aimed at "enabling [the] private sector to reach its full potential." To improve the enabling environment, the strategy calls for greater public and private investment in infrastructure, the restoration of fiscal balance, and continued liberalization, especially in agriculture, foreign trade, and financial markets. * Second, the Plan emphasizes that "what is involved is not so much a reduction in the role of the state as a reorientation." Three "areas of special importance for state interventions" are highlighted: provision for all of basic minimum services, such as education and health; generation of productive employment; and restoration of regional balance. In both of the latter two areas, the Plan acknowledges the primary importance of rural development and public investment in agriculture. iii. In addition, the Plan reflects the increasing importance of the states in complementing the role of the central government in the implementation of the poverty reduction strategy. India's Constitution grants considerable power to the states in terms of regulatory oversight, tax and expenditure assignments, provision of infrastructure, and provision of social services. Before the 1990s, states' discretion in policy making was limited by the dominance of national political parties and central planning. The changes in the 1990s have made the quality of a state's own economic and social management a much more important determinant of its growth and social performance. The Ninth Plan explicitly recognizes the importance of state-level reform, and envisages "healthy competition among the states for evolving efficient and socially desirable policies." iv. Bank Group Strategy.' The Group's strategy builds not only on the Government's poverty reduction strategy, but also on the Bank's past programs and extensive analytical work unidertaken on poverty in India. Comparison of the findings from this work and the Government's diagnosis and strategy reveals a high level of shared understanding with respect to both the constraints to poverty reduction and the measures required to relax these constraints. A recurring theme of both Bank analytical work and Plan documents is the need to accelerate the pace of reform. The primary challenge for the Bank Group, therefore, is one of providing incentives for reformn, and assisting with implementation. l This Country Assistance Strategy has been discussed with the Government of India, but the Government does not necessarily endorse all its contents, judgments and opinions. -ii - v. Strategic Principles. The strategy follows three core strategic principles: • Selectivity is vital in a country as large and as full of potential as India. As in the previous CAS, Bank assistance will continue to be focussed on poorer states that are implementing wide-ranging reform programs. This allows for a CDF approach to be taken to promote growth and accelerate poverty reduction, based on a deeper understanding of the state's specific social, political and economic position as well as a wide-ranging and high-level partnership. In other states, support will be provided to those sectors implementing reforms while in the poorest but non-reforming states, policy dialogue and capacity building will be more effective interventions than lending. * The Bank's state focus is balanced by a strong but selective program of support to the central government for national issues, involving both lending and non-lending services. Four important areas of focus at the central government level are: agriculture and rural development, fiscal and governance reform, financial sector development, and health sector reforms. There are important complementarities between state and central work. Many issues are being pursued at both levels, using a dual-track approach, from financial accountability, to procurement, to private participation in infrastructure. Moreover, the Bank's program in any state is pursued with the approval and participation of the Government of India; the comprehensive reform agenda the Bank supports in the focus states, for instance, is based on that proposed by the Government of India for states to follow. * Partnerships. To use the Bank Group's limited resources in a catalytic manner, strong partnerships are needed with our clients and other donors and stake-holders, based on a shared vision and principles. The Government of India is of course the Bank's principal partner, but additional partnerships are pursued with its support. IFC has important partnerships with a number of Indian financial institutions. Partnerships at the state level are particularly important, not only with the concerned state government, but also with other donors - most of whom are now adopting a state focus. Scaling up is another important aspect of partnership: the Bank can scale up smaller donor-backed initiatives, while the lessons learnt from state-level work can be used by Government of India in formulating its national policies, and scaled up by the Government to other states. X A programunatic approach. The significant policy agenda contained in this strategy as well as the experimental nature of some of the Bank's pro-poor rural development initiatives require a long-term perspective. The Bank's strategy therefore increasingly takes a programmatic approach, matching instruments to the nature and content of the programs pursued. This programmatic approach also enables the Bank to better mainstream social, gender and environmental considerations into the program. But it is demanding, and will require increased focus on fiduciary safeguards, and monitoring and learning over the CAS period. vi. The Bank Group's program priorities are defined around the Ninth Plan themes of strengthening the enabling environment for development and sustainable growth and supporting critical interventions of special benefit to the poor and disadvantaged. vii. Strengthening the Enabling Environmentfor Development and Growth involves the parallel and complementary tasks of improving government effectiveness and enabling the private sector to contribute fully to economic development. * Improving government effectiveness. India's deteriorating fiscal position warrants an increased emphasis on fiscal reform. There is also now a widespread consensus in India that fiscal reforms need to be accompanied by improvements in governance to tackle endemic problems such as over-staffing, corruption, and poor budgetary management. From the - iii - vantage of selectivity, it is in the focus states that the Bank has the relationship and depth of engagement necessary to be most effective in this core reform area. Fiscal and governance reforms take several years to be effective, and the Bank's support needs to be flexible and consistent enough to withstand the uncertainties that India's complex political environment generates. Moving forward with reforms also requires assurance of a reasonable degree of financial support over the medium term. Hence the Bank's planned use of programmatic structural adjustment loans to the states as a means of providing predictable performance- based budget support and enabling the states to restore their financial equilibrium while undertaking reforms at the same time. Equally important, the Bank is integrating cross- cutting governance reforms into the design of sectoral operations and into the Bank's sectoral dialogue to improve service delivery and strengthen government effectiveness on a sector-by- sector basis. The Bank is also strengthening its dialogue with Gol on fiscal and governance issues, and deepening its analytical base. Promoting private-sector led growth is the area in which the synergies between the different parts of the Bank Group can be best realized. Activities in this area will be oriented towards four main goals: supporting the provision of adequate infrastructure, both through an expanded role for the private sector and through better public-sector management and increased funding; accelerating rural growth, through agricultural deregulation and expanded provision of rural infrastructure; improving competitiveness in industry and services, through IFC support for restructuring and growth of internationally competitive firms, work on improving the investment climate at the state level, and dialogue at the national level on "second-generation reforms"; and selective interventions to support financial sector development. viii. Pro-poor Interventions. India's poverty reduction strategy recognizes the importance of government intervening to ensure that opportunities for improved livelihood are widely available across the entire spectrum of society, that the security of these livelihoods is promoted and that the constraints that inhibit and exclude people from participating in and sharing the benefits of development are removed. The Bank's focus on two areas - promoting education and health for all, and supporting pro-poor rural development - reflects their critical importance as well as the Bank's comparative advantage. * Promoting Health and Education for All. The Bank Group will continue its strong support for the social sectors, with a special focus on promoting gender equity. In education, the successful Bank-Gol partnership in respect of the District Primary Education Program is approaching a new phase. The Government has decided to replace DPEP with a new, expanded Education for All program; as a result, Bank support is likely to be extended beyond lower primary to upper primary. The Bank Group's health work will be increasingly decentralized and tied to building state capacity, more focused on the relative strengths of government, local communities, NGOs and the private sector, and will pay greater attention to environmental health issues. • Pro-poor rural development. The Bank's rural projects are designed not only to develop rural infrastructure, but to directly attack rural poverty, enhance social protection, and protect the natural resource base for the approximately 75% of India's poor who live in rural areas. Interventions in this area are designed to be community-based, to target vulnerable groups (women, scheduled castes and tribes, landless) and to support decentralization to and empowerment at the local level. ix. IBRDIIDA Program. The India portfolio is one of the Bank's largest. Portfolio performnance in the 1990s has been average, but there are indications of improvement in the second half of the 1990s, which we plan to sustain through our portfolio improvement strategy. - Iv - The EBRD/IDA lending scenarios are unchanged from those in the previous CAS, with a base case of US$3 billion and a low case of about half that level. The strategy calls for an increasing use of programmatic adjustment loans to support state reforms, expected to account for about US$500-900 million a year in the base case. The program is largely self-regulating in that it is predicated on policy reforms which, if delayed, will automatically shift the program from the base case to the low case. In addition, monitoring of key macroeconomic and structural variables as well as portfolio performance will be used to decide on total lending volumes. The current IDA allocation to India is about US$850 million per year, on a per capita basis much below that which could be justified by India's poverty and recent performance. The self-regulating nature of the program, on the other hand, will mean that IDA commitments will only be about half of current allocations if structural reforms are stalled. x. IFC and MIGA. Future investment volumes will depend upon further progress in key policy reforms, particularly to open up opportunities for private investment in infrastructure, and continued liberalization of the investment and trade regime. IFC investments will mainly be concentrated in infrastructure, the financial sector (including wholesaling of funds to small and medium enterprises) and mid-size manufacturing and service companies. As IFC's experience in the social sectors builds up, it also plans to invest more in health and education. On current trends, IFC approvals are expected to total around US$1.0-1.5 billion over FY01-03 compared to approximately US$300 million in the FY98-00 period. Local currency and guarantee products are expected to account for a significant proportion of new lending. MIGA currently has no India exposure, but has just concluded a marketing tour, and expects high demand once India's infrastructure sectors are restructured. xi. Non-Lending Services will be used to bolster lending effectiveness, to meet due diligence requirements at both the national and the state level, and to promote capacity building and knowledge sharing, in cases where it is important to open the dialogue on development and poverty reduction challenges, e.g., in poor non-reforming states, or where policy reforms are required without a corresponding need for financial assistance (e.g., financial sector, macroeconomnic dialogue with Gol). xii. Benefits and Risks. India today represents a window of opportunity for the Bank Group and the benefits of this program of support are huge. Without successful poverty reduction in India, it will be impossible to achieve the International Development Goals. But there are also many risks, chiefly relating to sustainability - of the reform process, of the country's fiscal position, and of many of the pro-poor interventions supported by the Bank Group. The programmatic approach, alignment to India's poverty reduction strategy, the emphasis on monitoring and learning and the self-regulating nature of the lending program are all intended to mitigate these risks. India: Country Assistance Strategy Page I I. INDIA'S POVERTY REDUCTION STRATEGY A. POVERTY IN INDIA 1. Poverty reduction is India's most compelling challenge, a challenge of global significance. According to Bank figures (World Development Indicators 2000), India has some 433 million people living on less than US$1 a day, twice the number of poor in Sub- Saharan Africa, and 36% of the total number of poor in the world (Box 1). Estimates based on India's own official poverty lines indicate that there were 350 million poor living in India in the mid-1990s. By either standard, poverty remains an enormous problern. Box 1: India's Sigauc e for Achieve rient of the Intiernitiona Dev doowt Godas International Development Current Position of India India's Relative Goals Importance in the World 1. Reduce the proportion of According to the international standard Using the $1/day poverty people living in extreme of a $ 1/day poverty line, 44% of India's line, Bank figures show poverty by half between 1990 population are poor (Bank estimate for that 36% of the world's and 2015 1997). Estimates based on Indian poor are in India. poverty lines are lower. 2. Enroll all children in 79% of India's elementary school age- 20% of the world's primary school by 2015 group children (6-14) are enrolled children (aged 6-14) out of (1998-99). Enrollment rates are school are in India. increasing over time (up from 68% in 1992-93). 3. Make progress towards There is a 9 percentage point gender gap 20% of the world's gender gender equality and in elementary education (ages 6-14) in gap in elementary empowering women by India (1998-99). This is down from 17 education (aged 6-14) is on eliminating gender disparities percentage points in 1992-93. account of India. in primary and secondary education by 2015 4. Reduce infant and child 95 out of every 1,000 children born in 23% of the world's under-5 mortality rates by two-thirds India die before age 5. Levels are only child deaths every year are between 1990 and 2015 declining slowly. in India. 5. Reduce maternal mortality 540 maternal deaths per 100,000 live 25% of world's maternal rate by three-quarters births. 1990s show no decline in deaths every year are in between 1990 and 2015 maternal mortality. India. 6. Provide access for all who 52% of Indian couples do not use 22% of the world's need reproductive health contraceptives. Use of contraceptives is unsupplied demand for services by 2015 on the rise. reproductive health services is in India. 7. Implement national According to Bank estimates, the annual 30% of the world's deaths strategies for sustainable cost of environmental degradation is from poor access to water development by 2005 so as to estimated at 6-8% of GDP. and sanitation, 25% of reverse the loss of deaths from indoor air environmental resources by pollution are accounted for 2015 by India. In terms of bio- diversity, India is one of 12 _ mega-diversity countries. Note: The source for the second column of 2-6 is the India National Family Health Survey (NFHS-2). Figures in the third column are indicative estimates, which use various sources for global data. The poverty figures in the first row depend crucially on the choice of poverty line, assumptions concerning purchasing power parity, etc. Given the debate on poverty trends in India, the figures in the first row should be treated with special caution. India: Country Assistance Strategy Page 2 2. Since the First Five Year Plan (1951-1955), India's policy makers have recognized the massive scale of India's poverty. Over nine Plan periods, India has been able to raise its growth rate from 2% in the first half of the 1950s to 6% in the last two decades, the highest outside of East Asia. While this growth has been associated with a significant reduction in the rate of poverty in the 1970s and 1980s, statistical problems in recent household surveys make it difficult to know with certainty what happened to poverty in the 1990s. There has in fact been an intense debate over recent poverty trends in India. The emerging consensus appears to be that there was some fall in poverty in the 1990s, but the size of the decline is still unclear. 3. India's non-income poverty is also of international proportions: 20% of children out of school in the world are estimated to be in India, and the country accounts for some 20% of the world's gender gap in elementary education. Most non-income dimensions of well being are improving. Literacy and school enrollments are rising, and infant mortality is declining, as are fertility rates. However, infant and matemal mortality remain high, and there are new challenges too, including a resurgence of tuberculosis and the spread of HIV/AIDS which, unchecked, could become a major threat to India's future. HIV/AIDS prevalence is about 4 million, up from less than half a million in the early 1990s. 4. While some gender indicators have improved, with a rapidly declining gender gap in enrollment and female life expectancy now exceeding male, the overall picture remains one of stark inequality. The sex ratio declined from 972 females per 1000 males in 1901 to 927 according to the last Census in 1991, though the Ninth Plan targets an improvement to 943 by 2002. Amartya Sen attributes India's serious sex imbalance to "the comparative neglect of female health and nutrition, especially - but not exclusively - during childhood." 5. These aggregate indicators hide massive regional variations in terms of both income and non-income dimensions across India's states, as Table 1 indicates. While the disparities between states in non-income indicators are declining, albeit slowly, income gaps appear to be growing. Richer states grew faster over the 1990s, and may also have done better at reducing poverty. Table 1 Economic and l tors for Inia's Major Sitaes Population Headcount Ratio a/ Literacy Rate JUnder-5 Mortality 1998 1993-94 1997 Rate 199819 bl (millions) (%) (%) (per 1000 live births) Andhra Pradesh 75.1 21.9 54.0 85.5 Bihar 99.2 55.2 49.0 105.1 Gujarat 48.0 24.2 68.0 85.1 Haryana 19.7 25.2 60.9 76.8 Karnataka 51.8 32.9 58.0 69.8 Kerala 32.1 25.1 93.0 18.8 Madhya Pradesh 79.2 42.5 56.0 137.6 Maharashtra 90.7 36.8 74.0 58.1 Orissa 35.7 48.6 51.0 104.4 Punjab 23.4 11.5 62.1 72.1 Rajasthan 53.2 27.5 55.0 114.9 Tamil Nadu 61.6 35.4 70.0 63.3 Uttar Pradesh 168.6 41.6 56.0 122.5 West Bengal 78.6 36.9 72.0 67.6 All India 975.0 36.1 62.0 94.9 a./ Based on India's official poverty line b./ NFHS-2 India: Country Assistance Strategy Page 3 6. Well documented in India's development plans and economic literature, the multi- faceted nature of poverty in India has been recently brought out by "Voices of the Poor", a series of interviews with the poor carried out by an Indian NGO, a summary of which is presented in Annex 1. Interviews with India's poor revealed their vulnerability - to disease, crop failures, labor market fluctuations, domestic violence, natural disasters, floods and cyclones - and their ensuing sense of insecurity. All such events hit the poor particularly hard, and are generally important causes of falling, or falling deeper, into poverty. 7. India's physical environment is deteriorating in both urban and rural areas. A recent Bank estimate of annual environmental degradation in India is about 6-8% of GDP. About 40% of this cost is related to the burden of disease due to unsafe water and poor sanitation, 35% due to air pollution, including both indoor and urban air pollution, 15% due to soil degradation, and 10% due to other forms of degradation of natural resource such as forests and fisheries. The poor are particularly vulnerable to the impacts of environmental degradation. More than 20% of urban dwellers live in slums and are grossly over-exposed to air and water pollution. Conditions are particularly adverse in India's largest cities. The elderly, children, and the poor suffer disproportionately from adverse health impacts linked to pollution and overcrowding. Solutions to India's full range of environmental problems can only come through the integration of environmental considerations with the overall development and reform process. B. POLITICAL AND ECONOMIC CONTEXT - A DECADE OF CHANGE POLITICAL DEVELOPMENTS 8. Greater openness, transparency, and competition have influenced India's political and economic life in the 1990s. On the political front, notwithstanding occasional religious and ethnic tensions, the world's largest democracy has continued to accommodate extraordinary diversity - linguistic, ethnic, religious, regional, and social. Constitutional amendments in 1993 have given legal foundation to local governments, and strengthened participatory processes at the local level, including a mandatory requirement that one-third of local representatives be women, and that seats be reserved for the scheduled castes and tribes in proportion to their population. Electoral processes have become more transparent and rule- bound with the Election Commission asserting its autonomy in a more forthright manner. In the federal government, there has been a consistent growth in the influence of small parties representing regional or special interests. As a result, no government in the 1990s has commanded an absolute majority in Parliament, and all governments in this decade have had to rely on the implicit or explicit support of small parties. 9.. India saw three elections in three years during 1996-99. The election of September 1999 led to a relatively more stable coalition government, its members being elected on the basis of a common program. The national agenda has thus been able to focus on economnic and developmental issues, though it continues to be buffeted by occasional political uncertainty. On balance, this has led to some forward movement on the reform front. However, expectations of rapid reform have given way to the realization that the pace will still be gradual because of political costs, coalition politics, and the diversity of opinions within the country. India: Country Assistance Strategy Page 4 ECONOMIC DEVELOPMENTS 10. Economic growth. The reforms introduced in the 1990s have led to large improvements in economic performance. Growth surged to an unprecedented 7% during 1993-97, and has averaged 6% since. More importantly perhaps, growth in the 1990s was based on greater openness, negligible current account deficits (around 1% of GDP), high levels of foreign exchange reserves (US$42 billion as of February 2001), and a significant increase in the share of private in total investment. 11. Global integration. India has become much more integrated with the world economy over the 1990s. Imports and exports have increased their share in GDP by ten percentage points. On the policy side, quantitative restrictions are being phased out, and will be eliminated by April 2001, tariffs have declined, and FDI procedures have been streamlined and liberalized. This progress notwithstanding, India remains one of the most protected economies in the world. Tariffs were more than halved in the first half of the 1990s (from an average rate of 128% in 1990-91 to 41% in 1995-96), but have fallen very slowly since and are still very high by international standards (30% on average). Foreign direct investment, though higher than in the early 1990s, is still very low compared to other large developing countries (US$2.5 billion per year compared to US$32 billion in Brazil and nearly US$40 billion in China, in the second half of the 1990s). Attracting substantially higher FDI inflows will require the government to continue to reduce regulatory restrictions, move on domestic liberalization, and improve the business environment. 12. India's private sector now faces twin challenges: to expand its role into areas formerly in the preserve of government or public enterprises, and to reduce its reliance on protection and regulation and become internationally competitive. The potential of the private sector in India is nowhere more evident than with respect to information technology (IT). The IT sector has shown tremendous growth in recent years, with revenues estimated at US$8 billion in 2000. IT software exports are already worth about US$3 billion compared to total merchandise exports of US$43 billion, and are growing at 50% a year. In contrast, other parts of India's private sector reflect the legacy of a long period of heavy regulation and protection. Many sectors are characterized by excess capacity, but consolidation and restructuring is made difficult by the closely held nature of most firms, and the weakness of company balance sheets. Most companies are over-leveraged, with access to equity markets limited to the very top tier of companies. Similarly, access to bank credit is severely limited (especially for longer tenors) to all but the top 'blue chip' borrowers. 13. Agriculture, while never regulated to the extent of industry, still suffers from a plethora of regulations which are just beginning to be lifted. Growth was about 3% through the 1990s, similar to that of the 1980s, but below the government's target of 4%. Despite a slowing-down in food-grain production, India is currently suffering from a glut of grains, and public storage levels are at some 45 million tonnes, well above buffer requirements, and a drain on public finances. While terms of trade for agriculture have improved over the 1990s for agriculture, India is currently suffering from low world prices for most primary commodities. Meanwhile, the input subsidies agriculture has come to rely on - for fertilizers, power and water - are unsustainable. Reforming the agricultural sector will be a priority in the coming years. 14. Financial sector. Even before the reforms of the 1990s, India had a well-developed fimancial system, well above what would usually be expected of a country at India's level of development. During the 1990s, with deregulation of interest rates, easing of directed credit, India: Country Assistance Strategy Page 5 strengthening of prudential regulation norms and supervisory agencies, and some freeing of entry, the financial system has become sounder, with lower levels of non-performing assets and much higher capitalization. There is, nevertheless, a difficult and unfinished agenda, recently explored by a high level commnittee (the second Narasimham Committee on financial sector reform), a World Bank sector study on banking, and a joint Bank-IMF Financial Sector Assessment Program. 15. India's financial sector mobilizes substantial resources but invests a large part of them in government debt - about 40% of deposits in the case of banks - well above minimum statutory requirements. This pattern of asset holding, reflective of India's long history of large fiscal deficits, reduces India's susceptibility to financial crisis, but also reduces credit availability to the private sector. Non-performing assets, net of provisions, are a small fraction of total bank assets (2.7%) or GDP (under 2%), but are large relative to lending to the private sector and the banks' capital. Regulation and supervision have improved substantially since the 1980s and are largely up to international standards, but far from best practice. A bill to reduce government equity in public banks to 33% was tabled in Parliament in December 2000, but has not yet been debated; the Finance Ministry has indicated that the proposal would not change the essential public sector character of these banks. India's capital markets are deep for a low-income country, and improvements have been made to make transactions more secure, and strengthen minority shareholders' rights, but further reforms to improve transparency, and develop the long-term debt market are needed. Insurance was recently reformed to allow new entrants, with mninority participation by foreigners. Judicial enforcement of loan contracts remains slow, despite attempts at improvement. 16. Macroeconormic performance and fiscal deficits. India's macroeconomic performance over the 1990s has generally been satisfactory (Table 2), and the country successfully weathered the East Asia crisis. However, the country's inability to reduce its fiscal deficits at both the central and state levels has been a persistent problem over the past two decades. Over the last few years, India's fiscal performance has deteriorated, and the general government deficit is now at 9.1%, about the same as at the start of the 1990s. The deterioration has been particularly sharp at the state level (para. 22). India's fiscal deficits are an obstacle to reducing inflation to international levels, imply higher real interest rates and a heavy burden of interest payments for the government (which crowds out government spending in capital formation and in the social sectors), and negatively affect economic growth. 17. India's large fiscal deficit poses a serious constraint to monetary policy and debt management policy. If the deficit is financed mostly by expanding Reserve Bank of India (RB I) credit to the government, the effect will be higher inflation and pressure for the depreciation of the Rupee and, eventually, higher nominal interest rates. If the deficit is financed mostly by borrowing in the domestic market (and monetary policy kept tight), the effect will be higher real interest rates and crowding out of private sector demand - as happened in 1999-00. While in the past, government control over the financial sector allowed borrowing at very low real interest rates, this will no longer be the case in the future given the gradual liberalization of the financial sector. India: Country Assistance Strategy Page 6 0000000777Tabe 2: Selecte Macr EcQuon00 00fj2* ic kit0ait{rs,190-200A1 0;000 0 00j 1990-91 91-92 95-96 96-97 97-98 98-99 99-00 2000-Olp GDPfc growth (% per year) 5.4 0.8 7.3 7.5 5.0 6.8 6.4 5.8 WPI Inflation (% per year) 10.3 13.7 7.7 6.4 4.8 6.9 3.3 7.0 Domestic Investment (% of GDP) 25.2 22.7 26.5 21.9 23.4 21.8 22.9 24.4 Private Investment (% of GDP) 15.9 13.3 18.9 14.9 16.7 15.2 16.3 16.7 Current Account Balance (% of GDP) -3.2 -0.6 -1.8 -1.3 -1.3 -1.0 -1.0 -1.2 Export Growth (GNFS,US$ (% per year)) 8.6 1.1 20.2 4.9 8.4 5.3 13.7 16.1 Import Growth (GNFS, US$ (% per year)) 12.7 -21.0 23.6 8.8 6.5 -1.2 14.8 17.1 Central Government Deficit (% of GDP) 6.6 5.2 4.4 4.1 4.9 5.5 5.4 5.2 State Government Deficit (% of GDP) 3.2 2.8 2.6 2.7 2.9 4.3 4.8 4.2 General Government Deficit (% of GDP) 9.2 7.3 6.6 6.4 7.3 9.2 9.7 9.1 Consolidated Public sector Deficit (% of GDP) 11.2 9.4 8.2 8.7 8.2 9.9 11.3 11.0 Consolidated Public Sector Total Debt (% GDP) 85.6 88.8 79.1 75.7 77.2 76.6 80.5 84.2 Consolidated Public Sector Domestic Debt (% GDP) 66.1 65.6 60.7 59.9 62.0 61.9 66.1 For. Exch. Reserves (months of GNFS imports) 0.9 2.8 4.1 4.9 5.3 6.2 6.3 6.2 For. Exch. Reserves (% reserve money) 5.0 14.7 30.1 40.2 45.3 48.4 54.6 External Debt (% of GDP) 26.5 32.0 26.7 24.4 23.1 23.3 22.0 22.3 External Debt Service (% of current receipts) 32.1 28.8 27.3 21.7 21.1 17.3 17.5 13.1 p = projected 18. Effectively addressing India's fiscal deficits requires a combination of steady improvement in tax revenue collection, rationalization of government spending and structural reform to strengthen economic growth. There is an active tax reform agenda under implementation, with the aim of reversing India's declining tax/GDP ratio. The Expenditure Reform Commission has recommended various reforms to cut wasteful spending. The Fifth Pay Commission's recommendations for a steep decline in the staff strength of the civil service and changes in business processes are now starting to be gradually implemented. In addition, the tabling of a Fiscal Responsibility Bill in India's Parliament is an important step to provide legislative backing to greater fiscal discipline, though the impact of this type of legislation will be limited if the government does not implement effective tax reform and gradually rationalize public spending. A number of states have produced White Papers to inform the public of their fiscal predicament, and are following them up with multi-year medium-term fiscal frameworks to define a path towards fiscal sustainability. :777 ~ ~ Tal 3: I0ey Ecozojni Ind; T fi j1icatos: 20-200 roetons 00: 0j 0j 2000-01 2001-02 2002-03 2003-04 GDPfc growth (% per year) 5 8 6.0 6.3 6.5 WPI Inflation (% per year) 7.0 6.5 6.0 6.0 Domestic Investment (% of GDP) 24.4 24.8 25.0 25.3 Private Investment (% of GDP) 16.7 17.6 17.7 17.9 Current Account Balance (% of GDP) -1.2 -1.2 -1.4 -1.6 Export Growth (GNFS,US$ (% per year)) 16.1 12.5 11.7 11.0 Import Growth (GNFS, US$ (% per year)) 17.1 11.9 11.3 10.5 For. Exch. Reserves (months of GNFS imports) 6.2 5.7 5.6 5.0 External Debt (% of GDP) 22.3 20.9 20.1 18.8 External Debt Service (% of current receipts) 13.1 12.6 12.4 14.9 19. Medium-term prospects and external environment. In the medium term, given the current rates of growth of the labor force (above 2%), capital stock (about 5.5 %) and productivity (about 2% per annum), maintaining an average rate of economnic growth of 6- 6.5% is feasible for India (Table 3). However, reaching the 7-9% growth target set by the Ninth Plan for the years after 2002 will require higher investment and, correspondingly, India: Country Assistance Strategy Page 7 higher savings. To attract higher domestic and foreign investment, India has to improve the quality of the regulatory environment to elimninate distortions and strengthen competition domestically and with the rest of the world. To increase the share of domestic savings available to finance new investment, India has to reduce its large fiscal imbalances - this will also strengthen macroeconomic stability and attract foreign savings. While the volume of private international capital flows worldwide has fallen in recent years from their peak in the mid-1990s, India's economic prospects and strong external position have kept it an attractive destination. It will remain so if it stays the course of reform. The recent budget (February 2001) proposes to liberalize agriculture and labor markets, open the trade regime and deregulate small-scale industries further, reform the pension system, and simplify and strengthen the tax system. Relatively low interest rates and growing world trade will continue to be supportive of India's integration in the global economy. EMERGING ROLE OF THE STATES IN ECONOMIC POLICIES 20. India is a Union of 28 States and 7 Union Territories. Half of these 28 states are larger than most countries in the world, with populations in excess of 30 million people (Table 1). India's Constitution grants considerable power to the states in terms of regulatory oversight, tax and expenditure assignments, provision of infrastructure, and provision of social services. The states account for 51% of general government spending (center, states, and local) and a much higher proportion (75% to over 90%) of public spending on health, education, and irrigation. Before the 1990s, states' discretion in policy making was limited by the dominance of national political parties and central planning. The changes in the 1990s have made the quality of a state's own economic and social management a much more important determinant of its growth and social performance. 21. In taking on their new responsibilities, the states have been confronted with the legacy of several decades of central planning. In particular, they inherited a large stock of infrastructure - in the form of irrigation, power and water utilities, roads, etc - without established cost recovery and accountability systems to ensure their financial viability, maintenance, and expansion over time. The states also inherited overstaffed and poorly governed public agencies for infrastructure and social service delivery systems. 22. The result of the above has been serious fiscal problems, high indebtedness, and a deteriorating composition of expenditure in favor of salaries, pensions and interest, and away from non-wage operations and maintenance and capital spending. State-level fiscal deficits have approximately doubled as a percentage of GDP from their level of three years ago, in large part due to an overly-generous national pay settlement. Many states are now facing a liquidity crisis, under which they are unable to keep current on their obligations to creditors and suppliers. The states' resultant inability to step up development spending in health, education, and infrastructure has emerged as one of the most important constraints to development in India. Accelerating state reforms is therefore of critical importance. 23. Structural reforms are required to reduce the role of the state in the economy to improve state-level finances, and increase accountability, effectiveness, and transparency. Implementing this agenda has proven much more difficult and time-consuming than anyone expected. While progress is primarily dependent on reform breakthroughs and turnaround in individual states, and then on inter-state demonstration and competition effects to increase the spread and momentum of reform, leadership of the central government will be critical in accelerating state reforms. India: Country Assistance Strategy Page 8 24. Though adoption of structural reforms at the state level has been slow, several important sectoral and fiscal reform initiatives have been taken over the last few years. Perhaps the first was the restructuring and privatization of the power sector in the state of Orissa, and, starting slightly later, the comprehensive fiscal and sectoral reform program of the Government of Andhra Pradesh. Other states which have initiated important fiscal, sectoral and governance reforms include Karnataka, Uttar Pradesh, Gujarat, Madhya Pradesh and Rajasthan. C. INDIA'S POVERTY REDUCTION STRATEGY THE FIVE YEAR PLANS AND POVERTY REDUCTION STRATEGY 25. India has developed elaborate consultative and consensus-building processes for the formulation of economic and social policies. The Planning Commission, and the Five Year Plans it produces, have a special role in this process and in articulating the country's poverty reduction strategy. While a product of the Central Government, the Plans are developed through wide consultations, including at the National Development Council, the national forum for central and state governments. India's current strategy for poverty reduction is articulated in considerable detail in the Ninth Five Year Plan, which covers the period 1997 to 2002, and the Mid-Term Appraisal completed in October 2000. The rest of this section draws on these two documents in summarizing India's poverty reduction strategy. GROWTH WITH SOCIAL JUSTICE AND EQuITY 26. The overriding objective of India's poverty reduction strategy today is growth with social justice and equity. While projecting public and private investment requirements, the Plan gives greater priority, in a liberalized environment, to "planning for policy" and suggesting the major directions for policy reforms and interventions. Issues related to governance and institutions are also a theme of the strategy, which envisages greater local participation to improve the effectiveness of delivery mechanisms for poverty reduction, and which emphasises the empowerment of women, the poor and local communities. 27. The Plan's 15-year long-term perspective targets an average annual growth rate of 7.4%, starting with 6.5% for the Ninth Plan period and increasing in successive Plan periods, with a view to reducing poverty to below 10% of the population over this period. The Plan targets a current account deficit of 2. 1% of GDP and a combined center-state fiscal deficit of 6.8% of GDP, which is sustainable with inflation of around 7%. 28. Given the enormous size and complexity of the task at hand, India's poverty reduction strategy necessarily envisages a multi-pronged approach, which is massive in its scope. It is not possible to provide a full summary here. The following sections outline three key elements of India's strategy of particular relevance to the Bank Group program, namely: (i) promoting faster growth and development by increasing government effectiveness and private sector development; (ii) increasing the effectiveness of pro-poor interventions; and (iii) increasing the role of the states in poverty reduction and reforms. GOVERNMENT EFFECTIVENESS AND PRIVATE SECTOR DEVELOPMENT 29. Fiscal sustainability. The Plan documents note the precariousness of the current fiscal situation, and recommend corrective measures at both the central and state levels. Tax India: Country Assistance Strategy Page 9 reforms focused on base broadening and improving compliance are intended to halt the decline in the tax-to-GDP ratio. Tighter expenditure controls are also important, especially in relation to the wage bill. Subsidies, both explicit subsidies at the central level, such as for food and fertilizers, and implicit at the state level, such as for power, higher education and irrigation, will need to be cut. 30. Improving the quality of governance is emerging as a key element of India's poverty reduction strategy. In his address to the National Development Council meeting held on February 19, 1999, the Prime Minister stated: "People often perceive the bureaucracy as an agent of exploitation rather than a provider of service. Corruption has become a low risk and high reward activity. Frequent and arbitrary transfers (of government officials) combined with limited tenures are harming the work ethics and lowering the morale of honest officers. While expecting discipline and diligence from the administration, the political executive should self-critically review its own performance. Unless we do this, we cannot regain credibility in the eyes of the people who have elected us to serve them. " 31. As highlighted in the Plan, the bureaucracy is becoming increasingly subject to political interference, a phenomenon most manifest in the shrinking average tenure attached to many government positions, especially at the state level. The judicial system is not functioning well: currently an estimated 25 million cases are pending in various courts. Tackling these, and related problems, will require reformns dealing with the civil service, the judicial system, anti-corruption strategies, etc., and the active involvement of civil society. The Mid-Term Appraisal outlines a comprehensive strategy along these lines and highlights that "administrative and legal refonns should be an integral part of the reform agenda. " 32. One very important development over the 1990s is the devolution of responsibilities to the third-tier or local governments. In the wake of the 73rd and 74th Amendments, adopted in 1993, many states have developed ambitious plans for decentralization that are at various stages of implementation. The Plan endorses the move towards decentralization, and notes that both local governments and user groups have a role to play in enhancing beneficiary participation and control. 33. Privatization. Although successive governments through the 1990s have proclaimed their commitment to privatization, or disinvestment, the Plan acknowledges that actual progress made has been very slow. This remains a controversial area of policy, although the Finance Minister announced last year that government equity in nearly all public enterprises would be brought down to 26% or less. While some transactions are underway, progress remains unsatisfactory; the government strategy calls for the process of disinvestment to be accelerated. 34. Domestic and external liberalization. Growth in India benefited greatly from the reduction of industrial investment licensing regulations. However, the business environment continues to be unpredictable, discretionary and burdensome. The government strategy recognizes the importance of further domestic liberalization, including: (i) immediate abolition of small-scale reservations in critical export areas, and phasing-out of reservations in other areas; (ii) deregulation in labor policy, accompanied by introduction of unemployment insurance; (iii) completion of the dismantling of administrative prices (e.g., in petroleum products); and (iv) reduction of clearance delays and harassment of businesses by excessive inspection requirements. To continue the liberalization of the external regime initiated in 1991, the strategy calls for a time frame to be laid down for a phased reduction of tariffs from their current average level of 30% to an average of 10%. India: Country Assistance Strategy Page 10 35. Agricultural reforms. Attacking rural poverty will require deregulation and more liberal rural policies as well as an expansion of rural infrastructure to boost agricultural growth and tackle the problems identified in para. 13. The Ninth Plan thus sets out a multi- dimensional reform agenda for improving incentives to produce, rationalizing subsidies and promoting investments, besides extending protective cover to the poor. A review and elimination of myriad controls in the domestic market for agricultural produce is presented as an urgent necessity. Other rural development reforms identified pertain to rural credit, land reforms, and the development of rain-fed areas and exploitation of ground water potential. 36. Infrastructure bottlenecks. The Plan recognizes that infrastructure bottlenecks have become a major constraint on growth. Although public investment in infrastructure will remain central, mobilization of private investment is also important. The Plan recognizes that private investment has been deterred by the slow pace of policy reforrn, the high degree of uncertainty over the policy and regulatory frameworks, the unreliability of the legal system to enforce contracts, and exposure to political interference and corruption. Key infrastructure sectoral issues include the following: * The transport sector is one that the Plan recognizes will continue to rely largely on public investment. Currently, it is inefficient and under-funded, resulting in growing congestion and longer delays, all of which push up costs for Indian producers. The government is moving towards improving road sector management, creating various road funds at the state and central levels financed by road users through diesel/petrol cess, and making tangible progress on the proposed "quadrilateral" national highway linking the four largest cities in the country. l Urban infrastructure. Despite the relative deceleration in India's rate of urbanization over the last 20 years, the gap between demand and supply of basic urban services has widened as a result of ineffective management, inadequate funding and poor project development. Urban water has good potential for private sector participation, but the basic regulatory framework and commercial orientation is yet to develop. * Power sector reform. According to the Government's strategy, "reforms in the energy sector should start with the restructuring of State Electricity Boards (SEBs). Unbundling the SEBs and separating generation, transmission and distribution into separate corporations will make it possible to monitor efficiency levels in each activity and also to create appropriate incentives for efficiency in each area. Unbundling will also make it easier to allow private sector operators in each area in a suitable manner. " 37. Skilled labor. The bottlenecks constraining growth in India also include shortages of appropriately skilled and trained personnel. Although India has one of the world's largest stocks of scientists, engineers and technicians, the quality of their training below the first tier is poor. The Ninth Plan documents give a basic thrust to improving the quality and relevance of technical education by networking institutions both in government and the private sector, linking institutions with industry and community better, and developing "centers of excellence. " The Plan also places emphasis on issues of governance of universities and colleges, and resource mobilization, including full cost recovery from students who can afford to pay. MORE EFFECTIVE PRO-POOR INTERVENTIONS 38. India's poverty reduction strategy is based on the premise that "economic growth and employment opportunities in themselves may not be sufficient to improve the living conditions India: Country Assistance Strategy Page 11 of the poor. They need to be accompanied by measures which enhance the social and physical conditions of existence. " The Ninth Plan recognizes that, "despite considerable efforts, provision of social infrastructure and services remain inadequate... Primary education, primary health care, safe drinking water, nutrition and sanitation require heavy investment which has to be provided out of public funds... .Furthermore, recognizing the localized nature of these essential services, it is desirable that control over operation and maintenance of the facilities should be in the hands of peoples' institutions and local associations. " 39. Education. India's poverty reduction strategy looks at education as "the most vital and crucial investment in human development, " with elementary education receiving the highest priority. The Ninth Plan seeks to achieve universal elementary education (age 6-14) through several measures: * Amendment of the Constitution to make elementary education afundamental right. • Decentralization of planning, supervision, and management of education through local bodies. * Social mobilization of local communitiesfor adult literacy campaigns andfor promotion of primary education. • Stronger partnership with NGOs and voluntary organizations. • Advocacy and media campaigns. • Provision of opportunitiesfor non-formal and alternative educationfor out of school children in the most backward areas andfor unreached segments of the population. The Cabinet has recently sanctioned the Sarva Shiksha Abhiyan (Education for All), a centrally sponsored scheme within which all existing government programs supporting elementary education will be placed and which will provide substantial additional financial support to the states. 40. Health. In the Ninth Plan, the focus is on integrating communicable, non- communicable and nutrition related health services, through strengthening and better utilization of existing health care institutions. The Plan aims to minimize the existing disparities between states and ensure that reforms do not result in deterioration of health status in poorer segments of the population. Special attention is given to gearing up to combat the new threat of HIV/AIDS. The National Population Policy 2000 affirms the government's commitment to gender-sensitive policies with a holistic approach to population and development through decentralized planning and program implementation. It focuses on health communication and behavior change, convergence of service delivery at the village level, meeting the unmet needs for family welfare services, ensuring coverage of the under- served population in urban slums and tribal communities, and increasing collaboration with the private sector and NGOs. 41. More effective anti-poverty programs. India spends heavily on anti-poverty programs in rural areas, but many question the efficiency and efficacy of these expenditures and their vulnerability to corruption and rent seeking. The Mid-Term Appraisal notes that the "role of anti-poverty programs to supplement the growth effort is not only valid in the post- reform period but becomes even greater to protect the rural poor against adverse consequences of economic reforms. " However, the government recognizes the need to restructure such programs for effective implementation and for enhancing the productivity of the beneficiaries in the rural areas. "A major weakness in the implementation of poverty alleviation programs has been the lack of participation by the people for whom the programs India: Country Assistance Strategy Page 12 are meant. Strong local governance such as expectedfrom Panchayati Raj Institutions - responsive to the needs of beneficiaries, encouraging mobilization of the rural poor and open to social audit - promises better delivery of poverty alleviation programs. TEE ROLE OF THE STATES IN POVERTY REDUCTION AND REFORMS 42. The government's poverty reduction strategy explicitly recognizes the importance of state-level reform, and envisages "healthy competition among the states for evolving efficient and socially desirable policies. " It puts forward the concept of "cooperative federalism," whereby much greater freedom would be given to states to determine not only their own priorities but also the modalities of public intervention and provision of goods and services. Box 2: Reforms in the States Reforms in the states should consist of the following elements: 1. Tax Reforms: A tax reform program which includes rationalization of tax structure is an area of high priority. It is essential to restore the buoyancy of tax revenues and increase tax /SDP ratios. 2. Expenditure Reform: States must initiate comprehensive expenditure reform programs to reduce unproductive and wasteful expenditure on one hand and improve the quality of expenditure on the other. Unwarranted rapid increases in salaries and subsidies of recent years must be curbed. On the other hand, capital expenditure and maintenance, which have been experiencing shortfalls, must be protected. Wage bill of the states needs to be closely monitored. 3. Improvement in Fiscal Administration and Management: Strengthening, streamlining and simplification of the tax machinery is a must to check tax evasion and promote tax compliance. It will also help to improve the business environment. Moreover improved management of expenditure will ensure more efficient use of scarce funds. This will entail reforms in budgeting, accounting, internal control and audit, cash and debt management and management information system. 4. Public Sector Enterprises Reform including Disinvestment: Public sector enterprises, in particular the SEBs [State Electricity Boards] and the SRTCs [State Road Transport Corporations] have proved to be a big drain on states resources. States must implement reforms to bring these enterprises under professional management and run them in a commercially viable manner. 5. Power Sector Reforms: Power sector reforms are essential if states are to get back on the path offiscal sustainability. SEBs are the single most important drain on states' resources. Power tariffs must ensure cost recovery and the culture of non-payment of dues by customers to public utilities must be curbed. 6. Improved Infrastructure: The state of infrastructure both physical and social, is acting as a drag on growth in most states. Infrastructure sector calls for urgent intervention if the growth process is to be accelerated and statesfinances are to benefit. More efficient management, higher investment and greater cost recovery would, in general, be required in these areas. User charges for water, transport and other services must be suitably enhanced. 43. Unlike the reforms of the early 1990s, what is needed now are reforms at the state as well as the central government level. The Mid-Term Appraisal sets out a comprehensive reform program for the states (Box 2). The Plan also calls on the states to be more active in universalizing primary education, increasing the literacy rate, and improving health indicators. IMPLICATIONS OF INDIA'S POVERTY REDUCTION STRATEGY FOR THE BANK GROUP 44. Since the last CAS, the Bank has done extensive work on poverty, with the objective of understanding its social, human and economic dimensions as well as the priority measures needed to reduce poverty and improve living conditions. A comprehensive Structural and Social Policy Review (SSPR) completed last year, used poverty reduction as a central and India: Country Assistance Strategy Page 13 unifying theme. The Executive Summary of this report, which provides an overview of the Bank's analysis of the poverty issue in India, is attached as Annex 2. Comparison of the findings from the Bank's analytical work, including the recent World Development Report on Poverty (2000/01), and the government's diagnosis and strategy reveals a high-level of shared understanding with respect to both the constraints to poverty reduction and the measures required to relax these constraints. In particular, there is broad consensus over the major challenges facing India today: * To accelerate growth and widen economic opportunities for the poor, through higher investments and improved maintenance in key sectors (e.g., in agriculture, infrastructure) and a better policy environment. * To expand human capabilities, which means achieving India's goal of education for all, and significant improvements in health status and security through more effective provision of basic services at the local level. * To ensure basic entitlements - food, shelter, safety - for all people, to reduce risk and provide adequate protection for the vulnerable, destitute, and socially marginalized - in particular women and children from poor families; and * To empower India's poorest citizens, by bringing them into the process of decision- making at all levels - this requires a public sector that is more effective, transparent, and accountable to citizens at all levels. 45. One recurring theme of both the Bank's analytical work and Plan documents is the need to accelerate the pace of reform. The problem in India is not that the constraints to poverty reduction are not well understood; the problem is rather that reforms are very difficult to implement, at both the central government level and, increasingly, at the state level. Reversing decades of populism and neglect does not come easily. The primary challenge for the Bank Group is therefore one of providing incentives for reform, and assisting with implementation. In this regard, the Bank Group can play an important role by aligning itself to India's national strategy for poverty reduction, and finding areas within which it can make a significant contribution. Part II of the CAS details the Bank Group's strategy and program from this perspective. India: Country Assistance Strategy Page 14 II. THE BANK GROUP'S STRATEGY A. INPUTS TO STRATEGY FORMULATION COUNTRY ASSISTANCE EVALUATION 46. The Bank's program in India over the last ten years has recently been the subject of a Country Assistance Evaluation (CAE) by the Operations Evaluation Department (OED). The overall rating of the CAE for the decade is moderately satisfactory. With respect to the last CAS period (1998-2000), the CAE concludes: "The relevance of the assistance strategy, however, has improved substantially over the past two years through a more sharpened focus on poverty reduction, a more selective approach to state assistance and greater attention to governance and institutions. Although it is too early to gauge its efficacy, recent initiatives hold strong promise of substantial improvement in performance." The main 2 recommendations of the CAE are the following: • To enhance the effectiveness of its assistance, the Bank should: (i) link the overall lending volumes tofiscal discipline at the federal level and to progress in structural reforms in agriculture and the implementation of an effective rural development strategy, as progress in these areas is crucial for rural poverty reduction; and (ii) further concentrate new lending in reforming states, where an assistance strategy has been agreed with the state government. Similarly, sectoral lending volumes should be linked to agreements on sector-specific policies and institutionalframeworks. * The Bank should systematically monitor the poverty and gender impacts of Bank-assisted projects and programs. It should also assist government agencies to do the same for the overall public expenditure programs. * The Bank should strengthen aid coordination on country assistance strategies and on critical sector strategies (e.g., agriculture and rural development). Greater coordination would enhance the effectiveness of external assistance, and would enable greater selectivity in the Bank's own programs. LESSONS LEARNT FROM THE LAST CAS 47. Experience with implementation of the last CAS has been positive, but has taught a number of lessons: * The focus on reforming states over the last three years has brought many benefits. State reforms have, however, been more difficult to initiate and sustain than expected, and many of the reforns the Bank Group is supporting are politically controversial. The benefits of reform (e.g., fewer power blackouts, reliable drinking water supply, fiscal sustainability) start appearing only after substantial initial cost (e.g., higher tariffs, reduced subsidies, staff retrenchment) and controversy (e.g., privatization). For the future, Bank support for reforms needs to give more attention to the electoral cycle at the 2 Bank management has largely endorsed these recommendations - see Annex 3 for the Management Response to the CAE recommendations as contained in the Management Action Record. India: Country Assistance Strategy Page 15 state level and the importance of broad political ownership of reforms. * The Bank has been heavily involved in power sector reforms for several years now, beginning in Orissa in 1996, and now in five other states as well (Haryana, Andhra Pradesh, Uttar Pradesh, Rajasthan and Karnataka). Since then, privatization of distribution, once dismissed as an option, has become national policy. Independent regulatory conmnissions have been established in almost all major states. Power reforms may, however, require much longer than the Bank had earlier anticipated. Agricultural and residential customers continue to receive huge subsidies, but are unwilling to pay more until power quality improves. Meanwhile, the burden of past financial losses is mounting, and high-paying industrial consumers are leaving the grid, making the task of privatization all the more difficult. The adaptable program loan (APL) instrument has proven to be effective in this context (para. 64). A review, by external consultants, of the Orissa experience has yielded useful lessons for implementing power sector reforms elsewhere. CONSULTATIONS 48. As part of the process of updating the Bank Group's country assistance strategy, a series of consultations were organized both on experience with past assistance and on priorities for the future. Twelve sectoral workshops were organized in conjunction with OED. They were attended by 40 plus participants drawn from a range of backgrounds - central and state government officials, NGOs, academics, private sector, and other multilateral and bilateral agencies. The final workshop was attended by a similarly diverse group numbering over 100 in total. These workshops gave participants the chance to look both backwards, to review the past, and forwards, to make suggestions for the future, and helped the Bank Group to ground its ambitions for the future in the reality of past implementation outcomes. 49. Separate consultation workshops were conducted in the capitals of three states. In addition, EFC and the Bank conducted a consultation with representatives of the business cornmunity in Mumbai. A "Bank in India" image survey was commissioned to garner the perceptions of different sectors of Indian society towards the World Bank. Finally, a CAS web site was established to continue the CAS dialogue in electronic form.3 Some of the main findings of these consultations are summarized in Annex 4. B. OVERVIEW OF BANK GROUP STRATEGY 50. Given the level of shared understanding between the Government and the Bank in respect of both diagnosis and strategy, this CAS is built around the strategic objectives of India's Ninth Five Year Plan. This approach received strong support during the CAS consultations. The Bank Group's program objectives are thus defined around the Plan themes of strengthening the enabling environmentfor development and growth and supporting critical interventions of special benefit to the poor and disadvantaged. To translate the broad poverty reduction strategy of India to a specific Bank Group assistance program, the strategic principles of selectivity, partnership, and a programmatic approach 3 www.worldbank.org/indiacas India: Country Assistance Strategy Page 16 will be applied, in consultation with the Government of India, the Bank Group's principal partner in the country. Figure 1 illustrates the overall approach taken in this CAS, and summarizes the link between the Government's Plan, the Bank Group's strategic principles and program priorities. Annex B9 provides further details in the form of a program matrix. Figure 1: A Diagrammatic Representation of the Country Assistance Strategy POVERTY REDUCTION (The Overarching Objective) IF INDIA'S POVERTY REDUCTION STRATEGY STRATEGIC PRINCIPLES Selectivity Partnership Programmatic Approach PROGRAM PRIORITIES Strengthen the Enabling Envirounment Support Critical Pro-Poor Interventions Improving government effectiveness Promoting education and health for all Fiscal reform Elementary education Governance reform Health Decentralization Accelerating pro-poor rural development Promoting private sector led growth More effective delivery mechanisms Provision of adequate infrastructure Strengthening the rural safety net Accelerating rural growth Beneficiary participation Competitiveness in industry and services Financial sector development Community-driven urban development C. STRATEGIC PRINCIPLES SELECTIVITY 51. Underlying both the selection of the Bank Group's strategic priorities and their implementation is the principle of selectivity, especially important in a country as large and as full of potential as India There is a need to focus, not just on what is important, but also on where Bank Group assistance can have the greatest impact. There are areas of business from which the Bank Group has disengaged completely in the interests of selectivity. For example, it no longer supports crop-specific rural development schemes or the national railways. In other areas, a clear division of labor makes sense. For example, IBRD/IDA will no longer finance sectors such as thermal generation, telecom and ports, coal, oil and gas, where the private sector can invest with support from IFC and MIGA as required. Above all, selectivity in the Indian context means: (i) maintaining the state focus, (ii) selective India: Country Assistance Strategy Page 17 interventions in other, non-focus states, and (iii) a strong but selective program of support for the Government of India. State Focus 52. In line with the Plan's emphasis on the importance of state governments as determinants of India's success in reducing poverty (paras. 4243), the Bank's assistance strategy has also been reoriented over the last CAS period. It now focuses mainly on those states that (i) have chosen to embark on a comprehensive program of economic reforms, including fiscal and governance reforms and reforms of key sectors such as power, (ii) have expressed interest in entering into a partnership with the Bank, and (iii) where poverty levels are relatively high. Andhra Pradesh (AP) became the Bank's first focus state three years ago and has since been joined by Uttar Pradesh (UP) and Karnataka. An active dialogue has also been established with a few other states such as Orissa and Rajasthan. Lending to the focus states is expected to be about 40% of the Bank's lending program over the CAS period. 53. The focus state strategy enables the Bank to initiate a Comprehensive Development Framework (CDF) approach that would probably not be possible at the all-India level. It allows for a broad approach to be taken to promote growth and accelerate poverty reduction, based on a deeper understanding of a state's specific social, political and economic position as well as a wide-ranging and high-level partnership. The Bank's assistance program in a focus state is normally articulated around a state-specific assistance strategy. Developed in consultation with the Government of India, this builds on the vision and policy statements of the state government and aims at maximizing the synergies between different lending and non-lending activities, including institutional capacity building through technical assistance, across a wide range of economic activities and through partnership with other donor agencies to maximize impact. The comprehensive reform agenda the Bank supports in the focus states is based on that proposed by the Government of India for states to follow (Box 2). 54. An important question is whether the Bank might be missing a large segment of India's poor by concentrating on a few reforming states. In fact, most of India's poorer states are embracing reform to one degree or another, and major funding agencies are active in all of them. The three states the Bank is currently most active in, Uttar Pradesh, Andhra Pradesh and Karnataka, for instance, are all relatively poor, either in terms of income poverty, or social indicators, or both. Moreover, the Bank intends to continue to support social sector projects in India's poorest states, whether or not they are focus states, provided that there is some assurance that the support will not be wasted due to corruption or poor governance. In some of the poorest but non-reforming states, policy dialogue and capacity building may well be the most effective interventions of the Bank. All states will benefit from the catalytic demonstration effect of accelerated development in states pursuing comprehensive reforms. Unusual sectoral merit 55. In addition to working closely with a relatively small number of focus states, there will be a continuing need for activities in other states, especially those pursuing important sectoral reforms. Such activities will need to be justified by using merit criteria, such as: (i) having an unusually high development or demonstration impact, because of their innovative nature, or the importance, either of the investment, or of the reform being promoted (e.g., decentralized rural water supply in Kerala); (ii) extending support to the social sectors in India's poorest states, provided there is a good likelihood of the funds being used effectively; India: Country Assistance Strategy Page 18 or (iii) being in states which are not focus states for the Bank but nevertheless reforming at least in some key sectors. Support for Government of India 56. The Bank's state focus needs to be balanced by a strong but selective program of support to the national government. On the lending side, there are a number of issues which are best tackled at the national level, such as the development of a national highway system, or the combating of infectious diseases, including HIV/AIDS. On the non-lending side, the Bank will continue to focus on technical assistance, dissemination, and dialogue on issues of national importance where the Bank has international expertise. The Bank plays a useful convening role in India, and has organized and is planning a number of national conferences, co-sponsored with the Government of India. Four priority areas for policy dialogue in the coming years at the national level are: agriculture and rural development, fiscal and governance reform, financial sector development, and health sector reforms. PARTNERSHIP AND OUTREACH 57. To use the Bank Group's limited resources effectively and with catalytic impact requires establishing partnerships with the Bank Group's clients and other donors and stakeholders, based on a shared vision and principles. The Government of India is of course the Bank Group's principal partner, but additional partnerships are pursued with its support. IFC has important partnerships with a number of Indian financial institutions. An illustrative list of partnerships is presented in Annex 5; more details are provided in the country program matrix (Annex B9). 58. Partnerships at the state level are particularly important in the context of the Bank's state work. First, integral to the state focus is the building of a close partnership with the Bank's client, the reforming state government, that must be able to see in the Bank a partner capable of providing sustained support while it implements politically difficult and controversial reforms. Second, the Bank's support to state governments is delivered in partnership with the Central Government. Lending to the states is pursued only with the endorsement of the Government of India. As the Government of India is increasingly turning to performance and incentive-based resource allocations (first for fiscal reforms, now for power reforms), there are tremendous opportunities to deepen the partnership with GoI. The Bank's adjustment lending to Uttar Pradesh, for instance, was effectively co-financed by the Central Government through their performnance-based fund allocations backed by a Memorandum of Understanding comprising policy conditions very similar to the adjustment loan. 59. Partnerships with donors are characteristic of most of the Bank's work. In highways, for instance, a joint Bank-ADB assistance strategy is being formulated. Projects prepared with the Bank's transport technical assistance project are being considered for financing by ADB. Partnerships with the UN family in its focus areas for India, of decentralization and gender, are also important. Partnerships will also continue to be a mainstay of the Bank's engagement in the health sector (including HIV/AIDS, malaria, leprosy, etc.) where bilateral donors and multilateral agencies (e.g., UN, EU) have traditionally concentrated their assistance. In addition, as several bilateral donors have recently strengthened their aid program to India, the Bank, through its country office in Delhi, will intensify its information-sharing and coordination activities, particularly with regards to sectors or states of specific interest to the local donor community. Increasingly the Bank is India: Country Assistance Strategy Page 19 working with NGOs and other elements of the civil society in designing and implementing its projects. 60. Partnerships for the global environment. The Bank-India partnership with the Global Environmental Facility (GEF) and the Montreal Protocol includes the world's second largest program to eliminate the production and use of ozone-depleting substances, and a long-term partnership on climate change. The climate change strategy is coordinated with India's power reform programs (which will, in themselves, bring substantial global environmental benefits) and promotes both renewable energy and energy efficiency gains. It will assist India in building its existing technologies and capabilities in climate-friendly technologies as well as attracting possible future Clean Development Mechanism resources. With respect to bio-diversity, the South Asia Region's forestry, natural and water resources strategies provide the basis for future GEF support. A new India GEF strategy, currently under discussion with the Government of India, is expected to lead to an expanded GEF program in the coming years. 61. Scaling up is essential in India for impact, and can only be done through partnerships. There are areas in the CAS where the Bank's experience has been relatively limnited but where bilateral donors as well as some multilateral agencies have developed an impressive track record of successful experiments, particularly in rural development and urban slum improvement. Often the scale of these experiments is constrained by the volume of resources available to them, but by building on these successful initiatives, the Bank is able to scale them up. The Bank itself can also pilot successful innovations, which Government of India is then able to scale up. Box 3 gives some examples of successful scaling-up experiences in which the Bank has been involved. Box 3: Scaling Up for Impact: Examples from the Bank's program in India Universalizing Elementary Education. The District Primary Education Program (DPEP) is a Gol program which aims at universalizing access to primary education with a special focus on girls and other socially disadvantaged groups. Initiated in 1995, on the basis of various pilot donor-supported primary education projects, DPEP now covers 242 districts in 15 states of the country, and is supported by a group of five donors - the Bank, DFID (UK) , the Netherlands, the European Union, and UNICEF. Building on the success and design of the project, the Government of India has recently launched another centrally sponsored scheme Sarva Shiksha Abhiyan (Education for All) to replace DPEP. The new scheme will cover the entire elementary stage of education (ages 6 to 14) and will be implemented in all states of the country. Rural Water Supply and Sanitation. Over the past decade, the Bank has assisted three different state governments in implementing rural water supply and sanitation (RWSS) pilot projects. These made impressive progress in successively developing and implementing innovative strategies to improve the sector's performance. In 1998, India, with the Bank's support, developed a national sector strategy for RWSS that was widely discussed with the states and the donor community. This strategy was significantly influenced by the success of the Bank- financed projects. India is now conmmitted to institutionalizing a demand-driven, community-based approach for rural water supply across the country. The Central Government has started reserving 20% of central funds (about US$80 million annually) allocated for rural water supply to states implementing reforms in the sector. The Bank has now agreed with the Government of India on a generic projectlprogram design, incorporating basic reform principles, to which any interested state can sign on. Power Sector Reforms. The Bank began supporting power sector reforms in the small state of Orissa in 1996. The reforms adopted in that state - corporatization and unbundling of the electricity board, followed by privatization and establishment of an independent regulator - are now being pursued by many states, with the encouragement of and incentives from the Central Government. India: Country Assistance Strategy Page 20 62. Outreach. An important complement to partnership is the Bank Group's overall outreach. The pace at which reforms can be implemented is significantly affected by public opinion. The onus of informing the public and developing consensus rests with the concerned governments, who need to devise appropriate communication strategies. However, in response to the issues raised at the CAS consultations (Annex 4), a special effort will be made to extend the Bank Group's own outreach and to establish continual dialogue with stakeholders. This will be done through wider dissemination of the Bank Group's reports and disclosure of project documents (especially in local languages), greater engagement with civil society organizations and opinion makers, and keeping stakeholders of specific projects continually informed and consulted. PROGRAMMATIC APPROACH 63. In India, the Bank has to think of its support and goals over the longer term, with change taking place over a period of many years rather than overnight. Increasingly, therefore, the Bank is taking a programmatic approach towards its support to India, be it at the central level or in the states, and using different instruments depending on the nature and content of the programs pursued. Programmatic instruments 64. Adaptable program loans (APLs) are particularly well-suited to the Bank's support for power sector reforms in the states and were the instruments used in Haryana and Andhra Pradesh during the last CAS period. Giving clients an early indication of the Bank's long- term support for politically challenging reforms proved to be critical in getting the reform process underway in these states. The need to lay out the reform implementation process as well as the ability to identify milestones ex-ante helped forge a closer partnership between the state governments and the Bank, clarified expectations and maintained an open and transparent framework for pursuing a very difficult policy agenda. The flexibility provided by the APL, enabling the Bank to pace its assistance with the government's ability to pursue reforms, and to give assurance of quick support the moment the program is resumed, has proven to be particularly helpful in Haryana where the program has been stalled following a change in government. 65. With the state-focussed assistance strategy, the Bank is also supporting a complex array of social and structural reforms in states that are invariably facing severe budgetary constraints. The core program of fiscal and governance reforms is an area for which the Bank's programmatic approach is best suited: reforms take several years to be effective, and support needs to be flexible and consistent enough to withstand the uncertainties India's complex political environment generates. Moving forward with reforms also requires assurance of a reasonable degree of financial support over the medium-term. Hence, the Bank's planned use of programmatic structural adjustment loans (PSALs) to the states as a means of providing predictable performance-based budget support and enabling the states to restore their financial equilibrium while undertaking reforms at the same time. 66. A programmatic approach is also effective in community-based rural development projects which involve sectoral policy changes as well as a high degree of experimentation and piloting. As explained in the next section (para. 102), adopting a programmatic investment lending approach whereby individual projects are tailored to the particular circumstances and needs of individual states, learning and adjusting takes places as projects are implemented, and scaling up is done as successes are identified, has become a India: Country Assistance Strategy Page 21 fundamental element of the CAS. It will be intensified to support decentralization and community-based development, through a mix of mutually-reinforcing analytical and project work. The scaling up of programs outlined in Box 3, often in collaboration with partners, has been possible only through a programmatic approach. Mainstreaming environmental and social considerations 67. This CAS aims to support the fundamental goals of social development, gender equity, and environmental protection and improvement not as separate interventions but by including actions in these areas in a programmatic approach. For example, work in the environment will stress: the environmental determinants of health, and how to tackle them (para. 98); the links between rural poverty and natural resource degradation (para. 99); and the reductions in pollution possible by improved environmental governance. Energy- environmental linkages will continue to be a part of the Bank's support for India's power sector reform programs (para. 84), and will complement work on global environmental issues (para. 60). 68. Given the seriousness of gender inequities in India, the Bank plans to intensify its efforts to mainstream gender in the coming CAS period. The primary means for doing this remains through education and health interventions with particular targeting for women and children (paras. 95 and 98). Women's empowerment is a prominent component of the Bank- supported community-based projects, many of which are working with women's groups (para. 102). Gender issues will feature more in non-lending services: for example, state-level rural policy reviews can highlight discrimination against women in respect of property rights. Gender-disaggregated monitoring and evaluation (M&E) is increasingly used to track progress in reducing gender inequality; building capacity in government to do the same will be a natural complement (para. 71). 69. A programmatic approach also enables the Bank to strengthen its medium-term approach to safeguard compliance, a critical, and often controversial, issue in India. This is consistent with the emerging emphasis on strategic (sectoral and regional) environmental and social assessments, local ownership, consensus-building and capacity-development among the Bank's clients. Activities ranging from training to working with interested governments to developing sectoral environmental or resettlement policies will improve outcomes for all projects in a particular sector, not just those which happen to be financed by the Bank. Building an effective alliance with governments and other stakeholders for improving environmental and social outcomes is key for success, and will have much greater impact than the imposition of any number of compliance conditions in relation to any specific project. Fiduciary safeguards 70. Fiduciary safeguards also take on an increased importance within a programmatic approach, as the focus shifts from ring-fencing projects to ensuring sound financial practices across government. A comprehensive national review of procurement practices is being carried out. The first phase, dealing with central government procurement practices, is complete. Its recommendations are now under review, while a second phase assessment is being carried out for state government procurement practices in Karnataka, Uttar Pradesh, and Tamil Nadu. National and state-level assessments of financial management and accountability have been initiated. Key lessons learnt and recommendations from this analytical work are summarized in Annex 6, which also outlines plans for the future. India: Country Assistance Strategy Page 22 Promotion of transparency in procurement and financial accountability are also key elements of the Bank's governance work in India. Monitoring and leamning 71. For the programmatic approach to succeed, the Bank needs to significantly enhance its capacity to monitor intermediate and final outcomes, be they of policy reforms at the state level or of individual projects, and to improve its work based on what is learnt. The monitoring of individual projects will be strengthened, building on the regional poverty monitoring and evaluation workshop held in Delhi in June, 2000. The Bank is also assisting individual states, first Uttar Pradesh and now Karnataka, to establish poverty and social monitoring systems to track changes in key intermediate and outcome indicators, including access to public services as well as income and non-income dimensions of poverty. The objective is to build capacity to put more information about key poverty outcomes and variables into the public domain. It can then be used in several ways, including: to identify positive as well as adverse consequences of reforms on the poor; to improve performance and accountability of public sector entities; and to keep the public informed of successes and difficulties linked to the reform process. Box 4 gives an update of the progress made to date in Uttar Pradesh. Box 4: Poverty and Social Monitoring in Uttar Pradesh The Government of Uttar Pradesh is implementing a 5-year program, the UP Poverty and Social Monitoring System (UP PSMS), to monitor overall progress at reducing poverty and improving key gender and social indicators in the state. The UP PSMS entails both defining and measuring key performance indicators, and using the information to inform policy making and enhance transparency and performance in delivery of core services. The Government is not the only stakeholder in the UP PSMS; the system has the longer term objective of keeping the public informed regarding the impact of policy, reform and spending decisions on the poor. Work on the UP PSMS has been ongoing for nearly a year. A core set of gender-and caste-disaggregated poverty outcome indicators was identified and a special poverty module, measuring a wide range of key indicators at the household level, added to the state sample of the 1999/00 National Sample Survey (NSS). Data from this module is now available and the UP Government is preparing a report documenting baseline poverty indicators. Other initiatives are also underway, for example, to assess and computerize the extensive base of information available at the village, block, and district level. The UP PSMS is an important institutional reform. Developing greater capacity in government to collect, analyze and use information to assess and ultimately improve performance will require continuing support. 72. Learning from reform experiments is also important (e.g., review of implementation of power sector reforms in Orissa). The Bank will continue to emphasize monitoring and evaluation of reforms, particularly fiscal adjustment and governance where, despite significant variations in the initial conditions, there is tremendous potential for states to learn from - and indeed challenge - one another. The recently held States Reform Forum was a step in this direction. The Bank will also monitor carefully and undertake supporting analytic work to better understand the impacts of its innovative participatory rural development projects and alternative delivery mechanisms. 73. The success of the Government's poverty reduction strategy as well as of the efficacy of Bank Group support for that strategy can be judged ultimately by reference to India's progress towards the International Development Goals (Box 1). The Bank plans to support the Central Government to better monitor these and related key development outcomes. Given the ongoing debate on poverty measurement, it is not possible to set targets for poverty reduction for the next few years which would command widespread support. Until there is a India: Country Assistance Strategy Page 23 greater consensus, the Bank will focus on monitoring progress in terms of intermediate variables such as GDP growth, agricultural growth, real wages, agricultural productivity and food prices, and will also continue to support research to try to help resolve this important debate. To tackle the more general problem of weaknesses in the statistical system, the Government of India has established a National Statistical Commission, which is shortly to submit its first report. The Bank expects to resume discussions with the Government on support for statistical strengthening and modernization once the Commission has reported. 74. Quantitative targets for key human development indicators are easier to derive from existing baseline data: * Based on the GoI policy on universal elementary enrollment by 2009, India should have by 2004 (the end of the CAS period): . achieved 90% enrollment of 6-14 year olds (up from 79% currently) . and halved the gender gap to 4.5 percentage points. • To be on track to meet its health targets by the IDG target date of 2015, India should have, by 2004: . reduced under-5 mortality to 80 per 1000 (from 95 today) . reduced maternal mortality to 400 per 100,000 live births (from 540 today) . and increased access to contraceptive services to 64% of eligible couples (up from 48% today). India: Country Assistance Strategy Page 24 III. PROGRAM PRIORITIES A. STRENGTHENING THE ENABLING ENVIRONMENT FOR DEVELOPMENT AND GROWTH 75. The Bank Group is committed to supporting achievement of the Ninth Plan goal of strengthening the enabling environment. This involves the parallel and complementary tasks of improving government effectiveness and allowing the private sector to contribute fully to economic development. The Bank Group's strategy focuses, within each of these themes, on more specific objectives based on its comparative advantage, using the strategic principles articulated in the previous section. IMPROVING GOVERNMENT EFFECTIVENESS 76. The Bank Group fully supports the priority the Government accords to fiscal and governance reforms (paras. 29-32). In April 2000, the Bank extended the first adjustment loan to India after a gap of almost seven years to support Uttar Pradesh' s fiscal and governance reform programs. This initial loan will be followed by similar one-tranche adjustment loans to other reforming states (e.g., Karnataka, Andhra Pradesh, and possibly Orissa, in addition to Uttar Pradesh itself). Over the CAS period, adjustment lending of US$500-900 million a year for fiscal and governance reforms in the context of annual total lending of US$3 billion is planned. Fiscal reform 77. The core vehicle for fiscal reform is the development and implementation of medium-term fiscal frameworks which, by cutting wasteful spending and reversing tax ratio declines, can lead to fiscal sustainability while protecting and indeed promoting priority social and infrastructure spending. They have now been adopted by several states, including Andhra Pradesh and Uttar Pradesh (with Bank support), and Gujarat and Madhya Pradesh (with support from the ADB). Experience confirms that strengthening these frameworks is not a technical matter, but rather an issue of institutionalizing them into the government's planning and budgeting process and providing incentives for key stakeholders to adhere to aggregate targets and to better prioritize spending within these targets. Over the coming CAS period, reforms to better institutionalize public expenditure management will become an increasingly central aspect of programs that the Bank will support. Governance Reform 78. There is a widespread consensus in India, endorsed by Ninth Plan documents, that fiscal reforms need to be accompanied by improvements in governance. Since so many of the sectors suffer from common problems (over-staffing, corruption, poor budgetary management, lack of public financial accountability, weak monitoring and evaluation), the Bank plans to address this by supporting state-level comprehensive, inter-sectoral governance reform programs, particularly in the focus states, through adjustment lending. Equally important, the Bank is integrating these institutional reforms into the design of its sectoral operations and into its sectoral dialogue to improve service delivery and strengthen India: Country Assistance Strategy Page 25 government effectiveness on a sector-by-sector basis. This approach is being taken across the sectors, from roads to power, and education to health and environment, in the Bank's focus states - again it is the in-depth engagement allowed for by the focus state strategy which enables the Bank to follow this CDF approach. 79. While the Bank's main operational focus is at the state level, it will also intensify its dialogue on the complex fiscal and governance issues facing the central government. In this case, the Bank sees analytical work, technical assistance, and policy dialogue as more appropriate instruments to support Gol in developing a fiscal deficit reduction strategy. The Bank will need to work concurrently with the central and state governments on a number of issues such as fiscal federalism and public financial accountability and to support initiatives, which began almost two years ago, to link the allocation of central resources to reforms and perforrnance at the state level. 80. Analytical work. The agenda for improving government effectiveness is a complex one, which involves considerable learning by doing. The Bank's latest economic report (SSPR) as well as its state reports all go into fiscal and governance issues in depth. However, there is still need for much more analytical work, and the Bank expects governance to be a focus of non-lending services in the coming years. The Bank will continue with public expenditure reviews at the state level, and will also complete a national public expenditure review in the coming CAS period. The Bank will also be undertaking institutional assessments, particularly at the sectoral level, and aims to develop monitorable indicators for measuring progress in government effectiveness. The Bank's analytical work in governance will also focus on issues of fiduciary responsibility, such as procurement and financial accountability (Annex 6). Decentralization 81. Strengthening local governments to improve service delivery, responsiveness and accountability has been a priority of the Government since the Constitutional Amendments of 1993. Capacity building of Urban local bodies (ULBs) is now the cornerstone of the Bank's urban sector strategy. The Bank has recently completed its first in-depth analysis of rural decentralization issues. While the Bank is still learning its way in this complex area, it can already identify decentralization to local governments as part of its strategy to ensure that pro-poor rural initiatives are based on beneficiary consultation, empowerment and participation (para. 102). In the medium term, the Bank will work with interested states, through both its governance dialogue and its sectoral projects, in three priority areas: (i) clarifying the roles and functions of the three levels of local governments vis-a-vis each other, line agencies and user groups; (ii) financial devolution and improved local taxation and cost recovery; and (iii) improved accountability to local constituents. PROMOTING PRIVATE SECTOR LED GROWTH 82. As noted in the Ninth Plan, promoting private sector led growth and investment will be critical for accelerated poverty reduction in India. The Bank Group will focus on four areas covered by the Ninth Plan's strategies in this area: (i) availability of high-quality infrastructure; (ii) creating the conditions for accelerated growth in rural areas; (iii) promoting competitiveness in industry and services; and (iv) strengthening the financial sector. India: Country Assistance Strategy Page 26 Availability of high-quality infrastructure 83. The Bank Group's strategy is to help create the necessary conditions for both the private and public sectors to play their roles efficiently. It is widely accepted, for example, that most investments in India's transport system will have to come from within the public sector (para. 36). This places enormous importance on public sector reform in transport to improve construction and maintenance efficiency. Institutional strengthening, at both the national and the state level, and reforms to promote transparency, contracting out, and stakeholder involvement, are key to the Bank Group' s transport reform program. Transport will be an important component of the Bank program in India, with on average one national highway, and one to two state transport projects every year. There is also scope for private investment in selected components of the transport network, including ports, airports, toll roads and bridges. Whenever the enabling environment is adequate, IFC will help finance pioneering investments in these areas. 84. The Bank Group will continue its support for power sector reforms, one of the main components of the earlier CAS (para. 47). The Bank Group is increasingly integrating its fiscal and power analysis and reforms as it becomes clearer that without power sector reformns no state will be able to devote sufficient resources to the social sectors and other high-priority areas. The Bank is also paying greater attention to power-rural linkages through analytical work, which shows how farmers will benefit rather than lose from power sector reforms. Bank loans in power will continue to finance pre-privatization investments to improve quality, but may also reflect a new emphasis on complementary rural infrastructure investments to mitigate the cost of power sector reforms on farming communities. Over the coming CAS period, operations are planned to support power sector reforms in Andhra Pradesh, Uttar Pradesh, Rajasthan and Karnataka. In power, IFC' s focus is on supporting pioneering private investments in those states that demonstrate commnitment to power sector reforms, with a high priority on supporting the newly privatized distribution companies that the reform process will establish. IFC will also support captive, co-generation, renewable energy, energy-efficient power projects and other private projects selling power to third parties. 85. Improved connectivity is essential if the poor are to benefit from technological change, and to support continued rapid growth of India's IT industry. To address the problems of limited last mile access, poor domestic bandwidth and poor international bandwidth, EFC will consider investments in fixed line and cellular telephones, international gateway operators, and domestic fiber optic backbones. IFC and the Bank will support innovative applications of information and communication technologies to serve the poor. 86. Urban water and sanitation is also an area where the private sector has an important potential role to play, even though the sector is currently even less financially viable and commercially oriented than the power sector. The Bank Group has developed a new urban water strategy that emphasizes private sector provision, and plans a number of dissemination and consensus-building activities to help reforming urban bodies identify and implement private sector solutions. In those states or urban centers where reforms are establishing an enabling environment for a viable and sustainable role for the private sector, IFC will lend its support to efficient private sector involvement in water supply & sanitation and solid waste management. Beyond urban water, the Bank will support the strengthening of municipal urban services through urban reform programs (e.g., in Gujarat), and related financial inter-mediation packages, and strategies to integrate urban infrastructure into wider India: Country Assistance Strategy Page 27 financing systems (e.g., Community Infrastructure, Andhra Pradesh Urban Poverty and Karnataka Municipal Capacity Building projects). 87. Disaster management and rehabilitation. India is extremely disaster-prone. Since 1975, the total number of people seriously affected by disasters in India has been an average of about 50 million people per year. The November 1999 Orissa super-cyclone and the January 2001 Gujarat earthquake killed about 10,000 and 20,000 people respectively. The Bank was requested to provide assistance on both occasions. At the time of finalization of this CAS, the Bank is working to prepare an assistance package in response to the Gujarat earthquake. The core elements of this and similar packages are physical and social infrastructure, housing rehabilitation and strengthening of disaster management capacity. Since natural disasters are a major source of vulnerability in India, the Bank is planning work on strengthening disaster management capacity, at both the national and the state level. Accelerating rural growth 88. About 75% of India's poor live in rural areas, and of these about 80% are largely dependent on agriculture. The Bank will continue to support investments and reforms in rural infrastructure (irrigation, rural roads and markets, drinking water supply and sanitation), and agricultural support services (technology generation and dissemination). To meet the growing challenge of sustainable and more equitable use of increasingly scarce water resources in India, the Bank's support in the water sector (e.g., in Rajasthan, Uttar Pradesh and Karnataka) will be closely linked to institutional reforms, greater user participation and cost recovery. The Bank will also support the Government's increased emphasis on the holistic development of rain-fed areas, where a large share of the rural poor reside, using watersheds as the basis and taking a participatory approach (para. 102), e.g., Karnataka Watershed and Andhra Pradesh Rural Poverty projects. 89. The other requirement for accelerating rural growth is agricultural deregulation. The Bank's overall analytical work on deregulation of the rural economy is largely complete and the measures needed to liberalize agricultural input and output markets, for example, are well known and lie largely, although not exclusively, with the central government. The Bank will continue with its program of research, dialogue and dissemination in this area. In addition, in future, Bank involvement in the rural sector in its focus states will be preceded by rural policy reviews which will highlight state-specific as well as central government constraints and remedies in the rural sector, and which will form a basis for dialogue in the concerned state. IFC will explore possibilities to promote the development of competitive and efficient agricultural markets by investing in key agribusiness activities where the private sector has so far played a limited role (e.g., food supply chains, warehouse industry). Competitiveness in Industry and Services 90. The Bank Group will work with selected state governments on deregulation and improvement of the investment climate, while continuing to engage the central government through policy dialogue and advice on reforms that fall within its purview (e.g., trade liberalization and deregulation, labor market regulations, entry & exit regulations). The Bank will also focus on promoting policy and institutional reforms in the area of technical education to improve the quality of India's pool of technical manpower. EFC will assist by investing in second-tier manufacturing and service companies that are either moving towards a regional and/or global presence or restructuring and modernizing to become internationally competitive. Many of these companies also need to restructure their finances as, during the India: Country Assistance Strategy Page 28 years when the local equity markets were inactive, they became over-leveraged. In supporting the financial restructuring of fundamentally viable companies in partnership with local institutions, IFC will aim to mobilize additional resources from Indian financial markets, thus creating synergies with its financial market development work. Since many companies have limited capacity to take on foreign currency debt, investments will often be made in local currency, using guarantees of loans from domestic financial institutions or by providing local currency loans using swap arrangements. IFC's work with these companies will also promote improved corporate governance and attention to environmental and social sustainability. Financial Sector Development 91. The Bank Group will provide selective support for financial sector development. The Bank will offer analytical advice and possibly technical assistance to government and regulatory institutions as needed. Key imperatives are to improve regulation, supervision and transparency to cope with the increased private sector role in the sector, improve information in the system (for example by developing a credit registry), and improve the legal framework for use of collateral. The Bank will also work with the government in selected areas of capital markets supervision and regulation and improving the pension system. 92. IFC will take the lead on capital market development by investing in private banks and financial institutions and helping them strengthen their capacity to mobilize resources and extend financial services, by supporting the use of innovative market instruments, and by selective credit enhancements to promote market acceptance of longer-term debt. IFC's ability to assist in the development of the local debt market is constrained by the large-scale absorption of savings into government debt and the pattern of institutions holding paper until maturity, which means that the essential ingredients for an active market - a willing buyer and a willing seller - are not yet present. IFC's work in the debt market will therefore be at the margins, helping to develop the necessary market infrastructure and to introduce new products such as partial credit guarantees of rupee bond issues. It also plans to invest in housing finance companies and assist in the creation of a secondary mortgage mnarket via pilot securitization of mortgages. IFC will pay particular attention through its financial market development efforts to promoting greater access to finance by small and medium enterprises. 93. An aspect of the financial sector of particular relevance to the poor is micro-finance. IFC recently made its first investment in India in a commercial micro-finance provider, and will continue to focus on micro-finance, helping to develop sustainable commercial institutions in the under-served sector. Two Bank-funded projects have started to help rural self-help groups (frequently groups of women) to utilize the substantial but often inaccessible rural banking system. The demand-side approach to the reform of rural banking and spread of micro-finance in India is a promising one. The Bank will monitor the results closely before deciding whether to intensify this strategy or change course. In urban areas, the Bank is also helping to develop a pilot project to enhance access to credit for the urban poor and low-income groups for community infrastructure through community-based finance institutions. B. SUPPORTING CRITICAL PRO-POOR INTERVENTIONS 94. India's poverty reduction strategy recognizes the importance of government intervening to ensure that opportunities for improved livelihood are widely available across India: Country Assistance Strategy Page 29 the entire spectrum of society, that the security of these livelihoods is promoted and that the constraints that inhibit and exclude people from participating in and sharing the benefits of development are removed. The Bank's focus on two areas, promoting education and health, and supporting pro-poor rural development, reflects their critical importance as well as the Bank's comparative advantage. PROMOTING EDUCATION AND HEALTH FOR ALL Elementary Education 95. The selective thrust of the Bank's intervention will continue to be to support India's goal to achieve universal elementary education, with particular focus on improving the quality of education provided, and giving priority to the poor and disadvantaged, particularly girls and children in rural areas. Reducing the number of out-of-school children will contribute to the fight against child labor (Box 5). 96. So far, the Bank's main vehicle for achieving these objectives has been the District Primary Education Program (DPEP). The Bank is now entering a new phase, based on an agreement with the Government that there is a need to move beyond DPEP, including by extending support beyond lower primary (for children aged 6-10) to upper primary (for ages 11-14). The extent and scope of Bank assistance in the future for elementary education will largely depend on reaching agreement with Gol on Bank support for Gol's new mission for education (para. 39) and on the Bank's role in supporting state governments, who are the main financiers of education in India. Support for elementary education is therefore included in the lending program though the exact content remains to be identified. 97. Success in elementary education during the 1990s has highlighted important pressures for change in specific areas of education - urban education (particularly elementary education for the poorest), private education, secondary education, and integrated child development interventions that maximize poor children's life chances through education and provide special assistance to working children. The Bank is already supporting analytic work in some of these areas and is prepared to add to this work in consultation with the Government. IFC is considering investments in private educational enterprises, with a particular focus on exploiting new information and communication technologies. Box 5: Core Labor Standards in India and Child Labor India has ratified four of the eight International Labor Organization conventions on core labor standards. The four not ratified concern the freedom of association, the right to organize, and two conventions concerning child labor. Freedom of association is guaranteed under the Indian Constitution, while the right of industrial workers to organize is protected under the Trade Unions Act of 1926. Child labor is a serious problem, though estimates on the number of working children vary - eleven million were recorded in the 1991 census, but many consider this to be an under-estimate. Hazardous forms of child labor are illegal under the Indian Constitution. Increasing efforts are being made by government, civil society and international organizations to combat child labor. On the part of the Bank, the more recent DPEP projects give special options to target working children, for example, schools with timings convenient to them. Looking beyond its education projects, the Bank is also committed in all its projects to "do no harm" to children via inadvertently promoting or even funding activities involving child labor. The Bank is experimenting through the Andhra Pradesh District Poverty Initiatives Project with working with NGOs to bring children out of the work place and into school. India: Country Assistance Strategy Page 30 Health 98. The Bank's strategy in health is shaped around three objectives: (i) to focus on health issues of priority to the poor, including child health, reproductive health, and communicable disease control; (ii) to assist in developing the capacity to manage public health programs effectively, such as in surveillance and food and drug control; and (iii) to aid in developing more efficient, effective, and sustainable health systems at the state level, that will better serve the needs of the poor. Particular focus will be placed on meeting new health threats such as LIL/AIDS, through implementation of the second phase of the Bank's support for India's HI/AIDS prevention program (para. 3). In addition, lessons learned from the large ongoing health portfolio in India and analytical work also lead to several areas of new emphasis: • Bank-assisted health efforts will be increasingly decentralized and tied to building state capacity to manage health systems effectively, and more and more integrated through a programmatic approach. * Building on a major piece of sector work on public/private roles in health currently under completion, as well as on successful public/private partnerships in various Bank-assisted health projects, the Bank Group will support India in developing health strategies which focus more than before on the relative strengths of government, local communities, NGOs and the private sector. IFC will also support investments to improve the quality of private health care services. * The Bank will pay greater attention to environmental health issues, including water, sanitation and indoor air pollution, on which important sector work has recently been done. The Bank is now modifying the design of its new water and sanitation projects to help maximize health benefits, and hopes to pilot cross-sectoral approaches to improving the health and livelihoods of the poor through concentrating health, infrastructure, education, and environmental interventions in specific areas. ACCELERATING PRO-POOR RURAL DEVELOPMENT 99. The Bank's efforts to support key investments in rural infrastructure and support services are designed not only to promote more rapid and sustained rural growth (para. 88), but also to directly attack rural poverty and enhance social protection. Natural resource management projects, for example, attack poverty by increasing access to resources (such as formerly waste and forest lands) by groups of poor and landless. Some 100 million poor, including more than half of India's 70 million tribals, rely on forests as their main source of livelihood. Projects such as the planned community forestry projects in Andhra Pradesh and Madhya Pradesh will also deliver important environmental goals, such as land reclamation, forest regeneration and bio-diversity protection. 100. The key question concerning rural development projects is not their potential impact on poverty, which is enormous, but whether these projects can be successfully delivered by an ailing public sector. The Mid-Term Appraisal of the Ninth Plan has noted the need for more effective anti-poverty programs (para. 41). Given the need for selectivity, the key role the Bank can play in this huge area, in which government spending dwarves that of the Bank, is to pilot new approaches, and help scale up those which have proved themselves to be effective. A programmatic approach is thus key. This enables the Bank to tailor projects to the particular circumstances and needs of individual states, learning and adjusting as it goes, India: Country Assistance Strategy Page 31 and scale up as successes are identified. 101. Deepening the rural asset base through rural infrastructure projects is closely linked to the complementary goal of strengthening the rural safety net. Increasing the level of social protection for India's poor is of critical importance since they are extremely vulnerable to external shocks, such as droughts, floods and illnesses. The provision of assets is itself a risk-reduction strategy, as is the development of social capital, and the spread of micro-credit. Besides piloting effective projects that deliver these goals, the Bank also has an active dialogue on food subsidies, which could be part of an effective safety net, but are currently large and poorly targeted, and badly in need of reform, both to help liberalize rural grain markets and to better serve the poor. 102. While specific rural development sub-sectors (forestry, watershed, etc.) demand specific solutions, the Bank's work will also be governed by a number of cross-cutting principles: * First is the emphasis given to beneficiary involvement and empowerment that is and will continue to be an integral aspect of the Bank's rural sector projects. The Bank is now moving on to another phase in its participatory work, with the new District Poverty Initiative Projects (DPIPs) in several states. These provide community groups with greater choice in their selection of investments. * A second emphasis is the use of non-govermnent organizations and alternative service delivery providers. * Institutional reforms and capacity building are critical at both the state and local government and community levels to promote transparency, reduce establishment costs, and cut down on corruption. • Cost recovery. There is a widening consensus that user charges should at least cover operational costs, but the institutional arrangements are often not in place to translate this principle into practice. A precedent in this regard is being set in Uttar Pradesh, where a water regulatory authority is being established to set, among other things, irrigation tariffs. - Targeting. To intensify their pro-poor focus, these rural programs all need to be carefully targeted both at the poorest areas and, wherever possible, at the most vulnerable groups, women, scheduled castes and scheduled tribes, and the landless. 103. Community-driven development in urban areas. Although the Bank's main focus is on rural poverty, it recognizes that urban poverty will become an increasingly important problem with a higher rate of urban growth and faster expansion of large urban areas projected for the next decade. Most of the Bank's work in urban areas will be focused on strengthening local urban governments and expanding opportunities for private sector infrastructure investments. Unlike in rural areas, the Bank's work in community-driven development and social protection in urban areas is just starting. Other funding agencies have taken the lead in this regard, especially DFID and UNICEF, and the Bank will work closely with them. The Bank will also learn from the experience of strong urban women's groups in states such as Kerala and Andhra Pradesh. This will include exploring sustainable financing mechanisms to enhance access of the poor to financial services, including credit for housing and community infrastructure. India: Country Assistance Strategy Page 32 IV. BANK GROUP OPERATIONS A. WORLD BANK PORTFOLIO AND ASSISTANCE PROGRAM PORTFOLIO MANAGEMENT 104. Portfolio performance. T he India portfolio is the largest in the Bank, comprising in February 2001, 73 projects with a commitment of US$12.1 billion, net of cancellations (Table 4). The undisbursed balance was US$7.6 billion at the start of FY01. The disbursement ratio remains low compared to some of the other large borrowers (e.g., it is more than 20% in the case of China, Mexico and Indonesia), but is increasing and is likely to exceed 18% this fiscal year. 1996 1997 1998 1999 2000 2001.' Number of Projects at end of year 77 77 74 70 79 73 Net Commitments, end of FY (US$m)* IDA 7,285 7,355 7,555 7,163 7,273 6,817 IBRD 6,858 6,114 5,724 5,103 5,527 5,250 Total 14,142 13,469 13,280 12,266 12,800 12,067 Opening Undisbursed Balance at start of FY (US$m) IDA 4,937 5,063 4,735 4,701 4,410 4,220 IBRD 4,018 4,000 3,189 3,590 3,445 3,392 Total 8,955 9,063 7,923 8,291 7,855 7,612 Disbursements (US$ million) 1,319 1,501 1,367 1,398 1,701 1,016 Disbursement Ratio (%)** 14.1 % 16.1 % 16.1 % 16.2 % 17.9 % 12.8 % - Cumulative commitments less cancellations as at the end of FY ** Percentage of undisbursed balance at start of FY, excluding adjustment operations *** Except for opening undisbursed balance, FY01 data is as of end-February 2001 105. Portfolio performance has been average by the Bank's standards of the 1990s. Improved portfolio performance in the second half of the 1990s is also reflected in the declining ratio of problem projects, which fell from 20% in FY96 to 7% in FY00 (Table 5). However, the last year saw a deterioration in quality with the percentage at the start of FY0 1 rising to 13%. This reversal was in part due to serious and unexpected fiscal problems in a number of states, which led to substantial interruptions in the flow of funds and significant inaction in filling vacant posts. Other persisting problems that have affected project quality include frequent changes of senior counterpart staff, inability of governments to comply with covenants related to increased cost recovery, and weak capacity for procurement and financial rnanagement. These problems are now being addressed and as of January 1, 2001, the India portfolio had only 4 (6%) problem projects. This improvement needs to be sustained to confirm the turn-around in portfolio perfornance. ttUL'taV0Table 5: Problem P:rojl*P4ets at Star of ica Year00 t 1996 1997 1998 1999 2000 2001 Jan 01 ProblemProjects 18 12 11 8 5 10 4 % of Total 20 14 13 10 7 13 6 106. The Bank's portfolio management plan focuses on three main components. First, it includes supervision strategies for each sector, specific short-term actions on those projects India: Country Assistance Strategy Page 33 considered at risk, and closer monitoring of supervision reports and portfolio indicators. The aim is to improve implementation by early identification of problems and timely restructuring, with cancellation being the measure of last resort. Second, to improve future project performance, design and implementation readiness will be reviewed even more carefully, with increased attention on mobilization of user groups, up-front institutional actions, and procurement readiness. Finally, to tackle the underlying problems, of which poor project performance is a symptom, the plan includes broad-based actions jointly with government on three critical areas: * Flow of funds: innovative approaches include thorough fiscal assessments in focus states and a pilot trial of direct flow of funds to project entities without routing through state governments; * Staffing: project supervision efforts are responding more quickly to restructure project activities with persistent staffing problems, while deep-seated institutional personnel practices are being addressed through broad-based dialogue on civil service reform; and * Procurement: time limits on bid validity are being more rigorously monitored to weed out extreme examples of procurement inefficiency. This has been complemented by in- depth reviews of procurement practices and problems at national and state levels, development of improved procedures, and training. LENDING PROGRAM 107. Outcomes from the last CAS. The last CAS was discussed by the Board in January 1998 and a progress report was reviewed in February 1999. The last CAS set out two lending scenarios: (i) a base case scenario of US$3 billion a year (US$2.1 billion IBRD, US$0.9 billion IDA), driven primarily by the Government's request to increase IBRD lending in support of India's program of accelerated growth and poverty reduction; and (ii) a low case of US$1.2-2 billion with a 50/50 IBRD/IDA blend, that would have reflected a significant deterioration in macroeconomic conditions. As a consequence of the nuclear tests conducted by India in May 1998, Board consideration of four projects, for a total of US$1.2 billion of IBRD/IDA lending was postponed indefinitely at the request of several Board members, and with the concurrence of the Indian authorities. Until April 2000, no India project in infrastructure and energy (other than one for power sector reforms) was approved by the Board. Actual lending over the last three years has therefore averaged only US$780 million for IBRD and US$870 million for IDA, below the average level for the preceding three years. 108. Lending scenarios. Given its poverty and size, India is under-served by the global aid community; in fact, the overall aid budget to India has been declining in absolute terms. However, a number of bilateral agencies are currently expanding activities in India, in recognition of India's importance to meeting global poverty targets (UK, Netherlands). DFID (UK), for example, is planning to at least double disbursements to India over the next three years. 109. Since the last CAS, there has been increased demand for Bank lending from the new reformning states and sectors. The Indian authorities have recently requested a significant increase in the Bank program to US$4 billion a year, with US$2.5-2.8 billion IBRD and US$1.2-1.5 billion IDA. Clearly, both demand and need for Bank financing currently far exceed our maximum possible response level. Given the current project pipeline, it is highly unlikely that more than about US$3 billion IBRD/IDA lending per year will be achieved in the immediate future. For these reasons, and to ensure prudent medium-term exposure India: Country Assistance Strategy Page 34 management, for the coming CAS period, the same base case lending of US$3 billion per year (about US$2.15 billion IBRD; US$850 million IDA for FY02-04) is planned as in the last CAS, as well as low case lending levels of about US$ 1.5-2.0 billion per year (about US$1.0-1.5 billion IBRD, and a core IDA program of US$400-500 million). A base case lending program is attached as Annex B3. The total volume of IBRD/IDA lending in recent years and during the coming CAS period is presented in Figure 2. The Bank's proposed response to the recent Gujarat earthquake, currently under preparation (para. 87), would be additional. Figure 2: India Lending Program, FY97-04 (US$ million) *IBRD OIDA 2,500 2,000 1,500 1,000 '500- 1 Soo 0 FY 97 FY 98 FY 99 FY 00 FY 01 (P) FY 02 (P) FY 03 (P) FY 04 (P) --------------Base Case ---------------- * Includes loans/ credits which had been negotiated but for which Board consideration was postponed indefinitely due to sanctions. 110. Triggers. The planned lending program will be regulated by two sets of trigger: (i) self-activating triggers linked to structural and state reforns; and (ii) global triggers linked to overall macroeconomic performance. Tae 6:i Self-activating Thiggers: Implications for the FY02-O4 ase; Case Annual Average Annual Average Lending Reduction in Lending (US$ m) from Base Case(US$ m) Scenario/Trigger IBRD IDA Total IBRD IDA Total State power reform off track 1,770 850 2,620 370 0 370 State power & fiscal reform off track 1,410 490 1,900 725 360 1,085 State power, fiscal and other sectoral reforms off track 1,220 430 1,650 915 420 1,335 111. Self-activating triggers. Since a significant volume of the Bank's lending program is linked to basic structural reform, if states are unable to sustain fiscal reform, or carry through with power sector reforms, for example, the Bank lending program will automatically shrink. The self-activating triggers which will govern the Bank's program in areas such as power India: Country Assistance Strategy Page 35 sector, fiscal and governance reforms, are quantified in Table 6, which shows the extent to which lending will fall if various reforms do not proceed. If power reforms do not materialize, for example, lending will automatically fall by US$370 million a year on average over the next three years, as five new policy-based power sector projects get put on hold. If, in addition, fiscal reforms go off track, an additional US$700 million of lending will be affected, as some seven adjustment loans will have to be put on hold. The combined effect would be a reduction of some US$ 1.1 billion from the base case scenario, with both EBRD and IDA well below their base case levels. Table 7 below summarizes the base and low case annual lending scenarios that would result from the application of these state triggers. Table 7: Lending Scenarios: Base and Low Case - FY02-04 (us$ 1000) FY02 FY03 FY04 BASE CASE IBRD Investment 1,850 1,775 1,700 Adjustment 250 375 450 Subtotal 2,100 2,150 2,150 IDA Investment 600 475 400 Adjustment 250 375 450 Subtotal 850 850 850 Total Z950 3,000 3,000 Low CASE IBRD Investment 1,450 1,150 1,050 Adjustment 0 0 0 Subtotal 1,450 1,150 1,050 IDA Investment 490 400 400 Adjustment 0 0 0 Subtotal 490 400 400 Total 1,940 1,550 1,450 112. Global triggers. In addition to these self-activating triggers, which will automatically shift India between the base case and the low case, India's fiscal and external situation, progress in national reforms as well as performance of the portfolio, will also be monitored in deciding overall lending volumes. Key indicators in this regard will include: * Improvement in the fiscal balance (as indicated by consolidated public sector debt below 85% of GDP, and a decline in the General Government deficit) and absence of serious external deterioration (as indicated by net international reserves below 50 % of the money base). * Progress in national reforms as indicated by advances in: trade (elimination of quantitative restrictions and reduction in average tariffs), banking (reduction in govemment's stake in the stock of public banks), deregulation of the economy (gradual exemption of the small-scale reservation limit in export-oriented activities, and deregulation of agriculture), and privatization of public enterprises. * Maintenance of an acceptable level of portfolio performnance: percentage of problem projects not to rise above 15% and disbursement ratio not to fall below 17%. India: Country Assistance Strategy Page 36 113. The self-activating and global triggers highlighted above are of course interrelated. If India is unable to reduce power sector subsidies or advance state-level fiscal reforms, it will not be possible for the country to sustain improvements in its basic macro indicators. Successful execution of the Bank Group base case program is thus expected to assist India in realization of its basic macroeconomic as well as developmental goals, even though the results in terms of macro indicators may only be apparent with a lag. Should a case arise in which the self-activating triggers are satisfied, but not the global triggers, then the Bank will proceed with its support for structural and state reforms, but cut back on the planned lending for infrastructure projects, especially roads. 114. IDA allocation and blend. India's low per capita income of US$440 falls well below the IDA cut-off of US$885. More importantly, India is clearly central to achievement of the IDA mission of poverty reduction. As Box 1 shows, the international goals for poverty reduction cannot be achieved without significant improvements in India. The current IDA allocation to India is, however, only about US$850 million a year. At about 80 US cents per capita per year, it compares very poorly with the average of about US$7.6 per capita for most other IDA recipients, and US$10 for countries with country performance ranked equal to that of India (i.e., ranked in the upper performance quintile). India's use of IDA is directed towards achievement of the international development goals, mainly for education, health and anti-poverty or social protection projects, largely in rural areas. In the base case, the Bank will also use about one-third of IDA for blending programmatic adjustment lending to improve the enabling environment, without which sustained advances in poverty reduction will be impossible. The Bank's work in all of these areas was regarded as satisfactory by the recent CAE. Finally, to preserve India's creditworthiness and ensure prudent IBRD exposure management, IBRD lending cannot much exceed US$2 billion. A substantial IDA allocation is therefore crucial to enabling the Bank Group to achieve the base case lending scenario of US$3 billion. A further increase to US$4 billion, as desired by Government of India, would require an even larger allocation than assumed in this document. For these reasons, a continued level of substantial IDA resources, at least at the current levels, is well justified. 115. As shown in Table 6 above, IDA lending will be linked to structural reforms and unsatisfactory progress in reforms will lead to a substantial reduction of IDA lending, though a core IDA program of about US$400-500 million for the social sectors and direct poverty alleviation projects is expected to be maintained. In the base case, the IBRD/IDA blend will harden to 70:30, with the absolute IDA volume maintained at the current level. However, subject to overall resource availability and needs, India's allocation could be increased given the country's importance for global poverty reduction. NON-LENDING SERVICES 117. Non-lending services will be used in three different ways (for details, see Annex B4): To meet the Bank's due diligence requirements at both the national and the state level. Over the last CAS period, heavy investments were made in the area of due diligence AAA, including: Completion of two nationwide poverty assessments, and work on a number of state- level poverty assessments/notes. Completion of a comprehensive, poverty-focused Structural and Social Policy Review. Completion of a Financial Sector Assessment Program (FSAP) jointly with the IMF, and a banking report. Completion of public expenditure reviews for the 5 states in which the Bank is active. India: Country Assistance Strategy Page 37 Drafting of a national procurement assessment, now under discussion with Government, and being followed up by state-level assessments. Initiation of work on financial accountability. During the coming CAS period, it is planned to update the set of due diligence AAA. * Second, in conjunction with lending, to bolster the effectiveness of Bank support - for example, at the state-level, regular public expenditure reviews and analyses of growth, poverty, service delivery, financial accountability, etc. * Third, to promote capacity building and knowledge sharing, in cases where it is important to open the dialogue on development and poverty reduction challenges, e.g., in poor non-reforming states, or where policy reforms are required without a corresponding need for financial assistance (e.g., financial sector, macroeconomnic dialogue with Gol). The Bank Group will employ various tools to develop and disseminate knowledge: from short pieces of sector work to formal pieces of analytical and advisory work, technical assistance, conferences and workshops. Workshops and conferences, to be organized in collaboration with the World Bank Institute, will be used to facilitate the national debate on economic reform and to disseminate domestic and international experience. B. IFC PORTFOLIO AND PROGRAM 118. India is IFC's 5th largest exposure. As of January 31, 2001, IFC's held portfolio in India consisted of investments in 68 companies, with total exposure of US$668 million for IFC's own account and US$100 million for B-loan participants. The current interest collection rate on the loan portfolio is 82%. Total arrears are currently some US$67 million. Loan loss reserves represent 16% of the disbursed loan portfolio. Equity loss reserves represent 29% of the disbursed equity portfolio. This below-average portfolio quality is due to the poor performance of four companies in steel and textiles. Despite the potential losses from these four investments, EFC's overall equity performance in India has been strong, with unrealized capital gains currently forecast at US$84 million. 119. With improvements in the business climate, progress on policy issues, and easing of the lending restrictions imposed after India's nuclear tests, IFC has begun to reverse the trend of under-investment in India. On current trends, IFC approvals are expected to total around US$1.0-1.5 billion over the next three years compared to approximately US$300 million in the period FY98-00. However, future investment volumes depend upon further progress in key policy reforms, particularly to open up opportunities for private investment in infrastructure, and continued liberalization of the investment and trade regime. 120. IFC investments will mainly be concentrated in infrastructure, the financial sector (including wholesaling of funds to SMEs) and mid-size manufacturing and service companies. As IFC's experience in the social sectors builds up, it also plans to invest more in health and education. There is a strong demand for equity, particularly from mid-size companies and financial institutions where IFC has an important structuring role. However, demand for foreign-currency loans is limited. For this reason, IFC has recently arranged a first swap facility which will support up to US $300 million of local currency products, and plans to replicate this facility with other counterparts. With these facilities in place, local currency products are expected to account for a significant proportion of new IFC lending. IFC will also make greater use of guarantee products, which help mobilize resources from local capital markets, thus contributing both to capital market development and to direct project financing. India: Country Assistance Strategy Page 38 C. MIGA PROGRAM 121. At present, MIGA has no exposure in India. In an effort to increase MIGA's exposure in India, and to facilitate potential foreign direct investments, both inwards and outwards, MIGA conducted an extensive marketing tour of four cities in India in FY2000. This effort will be followed up with more visits in which relevant public and private sector institutions will be targeted. MIGA expects high demand for its guarantee activities once infrastructure sectors, such as energy, telecommunication, transportation and water, have been restructured. MIGA's per-project limit of up to US$200 million, its ability to syndicate additional insurance on the private market, as well as providing guarantees against Breach of Contract, position the Agency very well to facilitate infrastructure investments into India. D. OPERATIONAL DECENTRALIZATION 122. Implementation of the CAS since 1997 has necessitated a major decentralization of operations. In 1997, decentralization of the World Bank India program was initiated by the transfer of country management to the Delhi office, and the gradual delegation of operational responsibilities to an expanded team based in Delhi. As shown in Table 8 below, there has been a substantial increase in the lending projects and supervision projects handled by national staff over the last three years. This is the result of the hiring of younger national staff from world class organizations who are more client-focussed, cost-conscious, adaptable, and have brought in fresh ideas which have resulted in significant changes in the work culture. In terms of diversity, the present male/female ratio in staff level E and above is 2:1 as compared to a ratio of 6:1 in 1996. Tal :Pro-et aaedby taff oif the New Delbi Oftice NO FY97 FYOO HQ Staff National Staff Total HO Staff at Natfonal Total at NDO at NDO NDO Staff at NDO Projects under Preparation 14 0 14 13 39 52 Projects under Supervision 18 8 26 6 53 59 123. A parallel decentralization of operations was implemented in IFC over the same period, with the aim to combine IFC's global knowledge with improved understanding of the local environment and client needs. To this end, a regional hub office was opened in Delhi in 1992 to serve India, Bangladesh, Maldives, Nepal and Sri Lanka. In 1996, responsibility for processing and supervision of IFC investments in the region was partly decentralized to the hub. The Regional Director relocated from Washington, and staff numbers and skill profiles were enhanced through local recruitment; about 40% of EFC's South Asia region staff are now based in India. As a result, there has been a significant increase in the number of projects which are task managed from the Delhi and Mumbai offices of IFC. As against 4 projects in FY96, projects managed from India have gone up to 16 in FY01. India: Country Assistance Strategy Page 39 E. RISK MANAGEMENT POLITICAL AND PROGRAM RISKS 124. The main risk associated with the CAS is the risk of reform derailment, which could lead to a growth slowdown. Many of the reforms the Bank Group is supporting, especially at the state level, have short term social costs and are politically controversial (para. 47). Although there is clearly a growing momentum for comprehensive fiscal and sectoral reforms to address the growing economic and fiscal crisis at the state level that seems irreversible over the longer term, a return to the competitive populism that was the major factor leading to the current crisis in the short run is not impossible. Even if the reform programs continue, there may be political opposition to the Bank's involvement. 125. There are a number of measures which will mitigate these risks. The program of support to the focus states is self-adjusting to this risk: substantial lending to the focus states will continue only as long as the reforms do (para. 111). To encourage strong local ownership and political support, governments in reforming states are tabling policy papers which outline their reform programs for debate and consensus building at the local assembly before they are proposed to the Bank for support. The Bank will advise and support clients to improve their communication strategies with the general population to gain popular support for the reforms. These mitigating factors notwithstanding, the risk of reform derailment remains a serious one. 126. Success in a few states can also bring about increased disparity among the states, or within states, which may be unacceptable in the country, especially with its strong tradition of egalitarianism. Consistent with our overarching objective of poverty reduction, the Bank Group is mnitigating this risk by giving priority to the poorer states in our assistance. While this is consistent with the Bank Group's overall objective in the country, it should be recognized that this element of the strategy increases the risk of poor performance, as many of the poorest states suffer from the most serious problems of governance and mismanagement. 127. There are also portfolio risks in this CAS period. First, there is the risk that the recent fiscal deterioration will go unchecked, and lead to even worse project disbursement and performance, even though a program has been initiated to improve the performance of the portfolio (para. 106). Second, the effectiveness of community-based rural interventions after project closure remains unproven. Do community groups continue to meet, to save, and to maintain newly-created assets, or is the social capital created quickly dissipated once the flow of funds dries up? This issue is already the subject of sector work, and it will require more attention in the coming years. Third, some projects carry with them social and environmental risks. Projects in India come under very close scrutiny from civil society (domestic and international) and the media. The Bank Group's objective is to help its clients not only comply with the Bank Group's safeguard directives, but also develop the necessary regulations and institutions to improve the social and environmental compliance performance of all projects (para. 69). In addition, the Bank Group's communications strategy aims to improve the information flow about compliance issues, and to tackle misunderstandings which often arise in respect of contentious projects. 128. Finally, the Bank Group faces a common risk in all large countries like India, and that is the risk of becoming less relevant. This is clearly not the situation at present. India: Country Assistance Strategy Page 40 Feedback indicates that India, at all levels of the government, private sector and civil society, considers the Bank Group to be a major player in the country's effort to reduce poverty. But as the OED's Country Assistance Evaluation concluded, the Bank only played a marginal role in this important country over much of the past decade, and probably much before that as well. The risk of becoming less relevant remains real. Basing the Bank Group's assistance strategy on the governrment's own poverty reduction strategy helps mitigate this risk, as does the use of extensive consultations in the preparation of this CAS. CREDIT AND EXPOSURE RISKS 129. India's credit risks are fairly small, in spite of its large fiscal deficit. This assessment is based on the experience of the past decade, on the growing consensus to introduce measures to strengthen the independence of the monetary authority and on the gradual strengthening of the domestic banking system. All of India's governments after 1991 have been consistent in their efforts at reducing the size of the public sector external debt, increasing the maturity structure of the external debt, increasing the level of foreign international reserves (Table 2), and maintaining a relatively flexible management of the exchange rate. As a result, India's external position is strong and most creditworthiness indicators are trending in the right direction. The resilience of India's economic growth and its external position in the face of both the East Asia crisis and the recent steep oil price hike suggests that the country is able to absorb external shocks. In addition, a draft Fiscal Responsibility Act is pending, which will increase the independence of the Reserve Bank of India (RBI). At the same time, the supervisory capacity of the RBI over the banking system is improving, banking regulation is following international standards and the government's stake in commercial banking is falling. Therefore, it is likely that India's external position will remain strong and creditworthiness high. This is consistent with the international capital markets' perception of India's credit risks; bonds of top grade Indian corporates (which in the absence of any sovereign papers serve as sovereign proxy) are trading at spreads over U.S. Treasuries close to investment grade bonds. 130. The main macroeconomic risk stems from weak political consensus to introduce expenditure reducing reforms and tax revenue collection increasing measures so as to gradually reduce the fiscal deficit and curb the increasing trend in the consolidated public sector debt to GDP ratio. If such scenario unfolds, an increase in the average rate of inflation and a transitory fall in the rate of economic growth is likely. However, the probability of a balance of payments crisis is small. Should a scenario of slow pace in structural reform and continuation of high fiscal deficits occur, the triggers identified in para. 111 are comprehensive enough to allow a reassessment and mitigate possible risks. 131. As of December 31, 2000 IBRD exposure to India was US$7.2 billion, its sixth largest, and 5.9 percent of the total IBRD portfolio. Under the base case scenario outlined in para. 109, India's IBRD exposure is projected to increase to US$9.2 billion at end-FY04 and annual net flows (disbursements less repayment of principals) would average about US$660 million over this period: this would reverse the pattern of the last five years of negative net flows. Despite a projected increase in exposure, IBRD debt service as a share of exports of goods and non-factor services and as a share of total public debt service is projected to remain within EBRD's prudential guidelines. Preferred creditor debt service as a share of total public debt service is also projected to remain within IBRD's guidelines. India: Country Assistance Strategy Page 41 Figure 3: India IBRID Exposure Scenarios: 2001-2020 14000 13000 IBRD Single Borrower Eposure limit 12000 -. a11000 a loooo A > 9000 \ Debt 0 nhdiig 8000 f 7000 6000 Note: The full line illustrates the Base Case (comnmitments for FY02-06 of about US$2 billion; FY07-09 between US$1.3 and US$15 billion thereafter) under the assumptions described in Annex 7. 132. At the end of the CAS period, IBRD exposure to India would remain well below EBRD's single borrower exposure guideline of US$13.5 billion. However, to ensure that this guideline does not become a binding constraint on IBIRD assistance to India in the future it would be necessary to manage exposure carefully. Exposure projections show that keeping IBRD annual commitments at about US$2 billion over the period FY02-06 would require a cutback in conmmitments thereafter to prevent breaching the exposure guideline. For example, under the scenario shown in Figure 3, IBRD annual commitments would have to be reduced from US$2 billion in FY06 to US$1.2 billion in FY10 to keep exposure below the guideline and leave some headroom to assist in the event of a crisis. 133. Alternative disbursement and cancellation assumptions were used to produce an upper and a lower bound (dotted lines in Fig. 3) to the base case projection. As the dotted lines indicates, the cutback in lending may not be as severe if disbursements are slower than projected, or cancellations are larger. Conversely, faster disbursements and smaller cancellations could result in a faster buildup of exposure and require a larger cutback in lending past FY06. These projections are also sensitive to the composition of adjustment and investment lending, and to the currency composition of India's IBRD debt. Commitments are also dependent on policy reforms and satisfactory project performance. During the current CAS period, Operations and Finance will continuously monitor implementation of the lending program. James D. Wolfensohn President By: Shengman Zhang Peter Woicke Washington, D.C. June 27, 2001 India: Country Assistance Strategy Annex I Page ] of I Listening to India's Poor Voices of the Poor, the Bank-sponsored multi-country exercise of listening to the poor, was undertaken in India by PRAXIS -(Institution for Participatory Practices) in the two states of Bihar and Andhra Pradesh. What follows below highlights a few points from PRAXIS' summary of findings. For the full text, see www.worldbank.org/poverty. Defining Poverty & Trends * The poor define well-being primarily using four criteria: livelihood security, food security, ownership characteristics and value/respect in society. * There appear to be improvements in the overall well-being of poor households and individuals, with a higher concentration of resources in the hands of the better off. Opportunity & Security * Lack of education and employment opportunities were cited as common causes of poverty in nearly all villages visited. More and more of India's poor see education as an important prerequisite for better employment opportunities. * Many respondents cited concerns with the quality and regularity of teaching in public elementary schools. In fact, in nearly all villages surveyed, the key concern raised by poor respondents had to do with education services provided by the Government. * Health expenditures were cited as a major cause of poverty, and these expenditures kept many of the poor essentially trapped below the poverty line. * Health services were inaccessible and of low quality in most locations, particularly in remote tribal areas. This explains the popularity of traditional healers and birth attendants in the remote villages. * Single women, in particular widows, were identified to be the most vulnerable people in a community. Empowerment * The interventions of non-government organizations have made a significant difference to the lives of the poor in extending services towards meeting basic needs like health, education and savings. * Although the government services were recognized as very important, they were criticized as well for inefficiency. * Women who work outside the household are still responsible for looking after their own household and extensive domestic responsibilities, reaffirming the "double burden". In many of the sites visited, the level of domestic violence was believed to have decreased over the years. India: Country Assistance Strategy Annex 2 Page I of 10 India: Reducing Poverty, Accelerating Development Structural & Social Policy Review (SSPR)1 Executive Summary This Report is a pilot in the World Bank's new approach to country economic reports, embodying the Bank's Comprehensive Development Framework. Experience worldwide indicates that poverty reduction and sustainable development require sound macroeconomic policies, open trade relations, and increases in human and physical capital. But sustained development also requires a comprehensive framework that includes 1) good governance; 2) sound legal, incentive, and regulatory frameworks that protect property rights, enforce contracts and stimulate competitive markets, 3) a sound financial sector, adequately regulated and supervised with a basis in internationally accepted accounting and auditing standards; 4) health, education and social services that reach the poor, women and girls effectively; 5) quality infrastructure and public services to promote rural development and livable cities; and 6) policies to promote environmental and human sustainability (J. D. Wolfensohn, Address to the 1998 World Bank-IMF Annual Meetings). The World Bank's new approach to economic reports provides a medium-term perspective on these elements and on the economy's potential vulnerabilities, including those in the short-run. Given the framework's breadth, this Report's coverage is limited to the most important issues. In other areas, it points out directions for further analysis. The Report begins with a chapter on reducing poverty - the yardstick against which development is measured and the World Bank's principal concern. It is followed by a chapter on human development, which is both an indicator of poverty reduction and a way out of poverty. Chapter 3 focuses on the Indian states, which are key actors in human development and infrastructure provision, as well as in regulation and governance. Chapter 4 deals with governance issues, a major concern of the World Bank because of its links to poverty reduction and development. The next three chapters deal with ways to increase growth and its poverty reducing content through improvements in a) infrastructure; b) the incentive and regulatory framework to encourage efficiency and labor demand - a key element in poverty reduction; and c) the financial system and corporate governance. Chapter 8 deals with recent developments, the sustainability of growth and ways to reduce vulnerability to macroeconomic crises that hurt the poor. Finally, Chapter 9 provides a brief forecast of India's prospects and sumrmarizes policies that would accelerate poverty reduction and sustained development. The Report's discussion of agriculture (in Chapter 6) - a sector critical for poverty reduction that is still of major importance for the economy - summarizes the extensive analysis in the World Bank report India: Towards Rural Development and Poverty Reduction. The unifying theme for this Report is thus accelerating poverty reduction and sustained development. Progress and Problems in Poverty Reduction Steady Progress since Independence. India is an ancient civilization with a proud history. It is one of the world's largest and most heterogeneous countries. Prior to Independence, India suffered from frequent, devastating famines and secular stagnation. Hence, poverty reduction and agriculture were central themes of India's founding fathers. Uplifting the poor and integrating them into the mainstream is a recurrent theme of India's Five Year Plans. Universal access to education is enshrined in the Constitution. India has established a wide array of anti-poverty programs and much of India's thinking on poverty has been mainstreamed internationally. India has successfully eliminated famines and severe epidemics. It has made progress in reducing poverty and in its social indicators, which at the time of Independence in 1947 ' World Bank (2000). India: Reducing Poverty, Accelerating Development, World Bank, Washington, DC. India: Country Assistance Strategy Annex 2 Page 2 of 10 were among the world's worst. Its vibrant democracy and free press have been major factors in these achievements. Poverty incidence began to decline steadily in the mid-1970s, which roughly coincided with a rise in growth in GDP and agriculture. Since 1980, India's 5.8% p.a. trend GDP growth is the highest among large countries outside East Asia. Empirical analyses suggest that agricultural growth and human development were key factors in the decline in poverty across states (Chapter 1). However, the development strategy of the 1970s and 1980s, based on an extensive system of protection, regulation, and public sector presence in the economy, and on worsening fiscal deficits in the 1980s, proved unsustainable. Quick Recovery from 1991 Crisis. The 1991 balance of payments and fiscal crisis was met by stabilization and reforms that opened-up the economy, reduced the public sector's role, and liberalized and strengthened the financial sector over the next few years. The policies generated a surprisingly quick recovery and then an unprecedented three consecutive years of 7.7% p.a. average growth, led by increases in productivity at the macroeconomic level and a booming private sector. The 3.3% p.a. agricultural growth during the 1990s has been about the same as in the 1980s and much higher than the declining rate of population growth, currently estimated at about 1.6% p.a. (Chapter 8). Improvement in social indicators, including gender related indicators, has continued in the 1990s. For example, literacy rates continue to rise and infant mortality rates continue to fall. Life expectancy at birth has increased, as have school enrollments. Gaps between male and female access to social services are diminishing. Sluggish Poverty Reduction in Recent Years. Despite the improvements in human development and the higher GDP growth in the mid-1990s, India's household sample surveys suggest that poverty reduction has been sluggish recently. In the early 1990s, poverty worsened following the stabilization (correction) of the unsustainable policies of the 1980s, a poor harvest and a decline in food availability (Tendulkar). Soon, poverty began to fall again and by 1993-94 was somewhat below the 1987 level. However, from 1993-94 until 1997 (the last available survey), improvement has been limited in the rural areas which contain over 70% of the poor. Moreover, analysis suggests that the large poor states in the north and east, containing 40% of India's population, have lagged in reducing poverty since the late 1970s (Chapters 1 and 3). The estimated slowdown in the overall reduction of poverty may merely reflect one of India's many statistical inconsistencies - the estimates of consumption and foodgrains consumption in the national accounts suggest much faster consumption growth than the sample surveys, while the surveys suggest little worsening of distribution. The need to improve the consistency and quality of these, and other statistics, in order to provide a firmer basis for policy-making, is a major recommendation of this Report. Despite Achievements, Significant Challenges Ahead. More worrisome is the possibility that growth became less potent in reducing poverty in the 1990s. Further work is needed on this complex issue. Nonetheless, the characteristics of agricultural growth in the 1990s; the slowdown of growth in the poor states; and the problems of infrastructure, social services and poverty programs, especially in the poorer states which are linked to their increasing fiscal problems, poor incentive frameworks and weaknesses in governance and institutions, are all problems that may explain the lack of progress in reducing rural poverty (Chapters 1, 2, 3 and 8. Note that statements made regarding individual states or the states' GDP as a group refer to the old (1980-81 based) GDP accounts; once they are re-based, like national GDP, to the new (1993-94 based) accounts, the growth rates of states could be different from what the old accounts show, since the new GDP accounts include a much higher estimate of national agricultural output.). Agriculture's average growth has remained roughly constant since 1980 according to the new series of GDP. However, productivity growth in the sector seems to be slowing, even in the Punjab and Haryana, where some analysts suggest that environmental issues are a concern. Further, agricultural growth in some India: Country Assistance Strategy Annex 2 Page 3 of 10 of the poorer states seems to have lagged. Public spending on agriculture has focused on subsidies, which lead to inefficiencies and environmental problems and at best have limited impact on poverty. The implicit and explicit subsidies have crowded-out public investment and social spending in Governments' budgets and substantially worsened the fiscal problems of states. While private investment in agriculture has increased, to some extent this reflects inefficiencies and distortions that are partly related to the subsidies, such as the purchase of pumps to reach deep aquifers and generator sets to run them when free, low quality power fails. Moreover, the limited growth in agricultural productivity may also reflect the limited deregulation, which has left many distortions in the sector. For example, the restrictions on domestic and international agricultural trade contribute to occasional, sharp transitory increases in prices, which hurt the poor (Chapters 3, 6, and 8). The poorer states have lower GDP growth, not just weak agricultural growth. Partly, of course, this reflects their structure - agriculture is a large percentage of their GDP. However, the poor states' lower growth also reflects differences in initial conditions and state-level policies. The poorer states' problems in infrastructure, human development, and, in some cases, governance, have limited their ability to take full advantage of the post-1991 reforms. Moreover, catching-up is a problem because of their increasingly severe fiscal problems - in the late 1980s the states began unsustainable increases in spending and large untargeted subsidies (explicit and implicit) that have never been adjusted, which has led to a large, costly debt build-up. Indian states are constitutionally prevented from external borrowing and limited in their domestic borrowing by the Central Government. Nonetheless, several states, including some of the poorest, now face unsustainable debt service obligations, mainly to the Central Government, which in turn had borrowed to fund these loans. Infrastructure and social spending have slowed in most states as a consequence of the high debt service particularly in the highly indebted and poorer states. The states' problems have worsened in the last two years, with the cascading down of the excessive central public sector wage settlement of 1997. (Chapters 2 and 3). Institutional weaknesses and governance issues exacerbate the lack of funds (Chapters 2 and 4). For example, not only are teacher-pupil ratios very low, teachers' absenteeism is common. Numbers working in employment programs or attending school appear to be much less in surveys than in official statistics - for example, in 1995-96, the NSS showed gross attendance ratios of 85% versus the Department of Education's gross enrolment ratio of 104%. Large fractions of the poverty funds go to administrative costs or are diverted, leaving less for the poor. For example, a study in UP suggests that under the new, targeted public distribution system much of the grain that reached the public distribution centers went to the poor, but that there was a 40% shortfall between off-take and what reached the distribution centers. (Kriesel and Zaidi). Thus despite its many achievements, India faces significant challenges and needs to take some difficult political decisions to realize its potential. Concerted policy action is needed to lift the more than 300 million poor, 34% of the population and increasingly concentrated in the poorer states, out of poverty. Better and more education and health spending is needed to provide better access for the poor, females, and other disadvantaged groups and improve basic services across the board. For example, major challenges in reducing poverty and getting India's population ready for the demands of the 21St century, are raising the literacy rate from the current 62% (50% for females); enrolling the over 30 million children, mostly poor, who are out of school; and increasing the overall average years of quality schooling. In addition, inequalities faced by women in participating fully in the political, legal and economic systems need to be addressed. The decline in infrastructure spending needs to be reversed, to increase the rate and spread of growth and to meet urban needs that will rise as the 73% of the population that still live in rural areas shift to the cities. Improvements at the state-level, particularly improved service delivery in the poorest states, will be critical in meeting these challenges. At the national level, implementation of the often discussed second phase of reforms, to complete the external and internal deregulation of goods and factor markets, will speed the growth of better paying jobs. India: Country Assistance Strategy Annex 2 Page 4 of 10 The East Asian countries, despite the recent crisis, still have a much lower poverty incidence and better social indicators than India. For example, Indonesia, which in the mid-1960s had a similar per capita income to India and which was the hardest hit by the East Asian crisis, has a literacy rate of 80% and less than 20% of its population were below the poverty line in 1998 (World Bank 1999a). Moreover, except for Indonesia, the crisis countries are rebounding surprisingly rapidly, reflecting their strong underlying base of infrastructure and human development. Potential Problems in Accelerating Poverty Reduction, Sustaining Growth The East Asian experience of the 1970s and 1980s, and the differential experience of India's states, suggest that India needs to get back to a higher growth path, which is also more effective at reducing poverty through improved public spending and a strengthening of incentives, institutions and governance, particularly in the poorer states. To make a significant dent in poverty, growth needs to be at least maintained in India's high growth states and increased significantly in the poorer states. India's Future Growth and Poverty Reduction. India's growth of 6% in 1998-99 was one of world's best. However, it mainly reflected good harvests; all major non-agricultural sectors grew less than in 1997-98 when overall GDP growth was 5%. The reversion back to the average post-1980 growth trend during the last two years may partly reflect a sluggishness related to the shake-out of excess capacity and partly the slowing world economy. However, another important factor in slowing growth is probably the slowing of reforms, along with a worsening of the fiscal deficit and rises in tariffs - reforms that had earlier contributed to higher productivity, a higher share of world trade, and rapid growth (Chapters 6 and 8 and Annex 8.1). Also, the delivery of social services and anti-poverty programs, necessary to include India's poor in the growth process and largely a state function, would have benefited not only from higher funding but improved institutions and governance. Indeed these and other issues raised above raise concerns about maintaining even the current pace of development. Current rates of investment have supported GDP growth 5-6% p.a. in the last two years, but can continue to do so provided the productivity of resources continues to increase in the macroeconomic sense. However, the deterioration of infrastructure (Chapter 5); the slower pace of reforms (Chapters 6, 8) and the resulting uncertainty for investors; the lack of agricultural deregulation (Chapter 6); the still-low indicators of human development; and the governance and institutional issues, particularly in the social sectors (Chapters 2, 4), all pose potential problems for the growth of productivity in an economy-wide sense. Large Central and State Deficits, related to Large Explicit and Implicit Subsidies. Another major issue for sustained development is the large General Government (consolidated Central and State) deficit. India's fiscal deficit has been among the world's largest and in 1998-99 it deteriorated by roughly 2% of GDP. The consolidated public sector deficit of 9.6% of GDP in 1998-99 was not much lower than the peak of 10.9% registered in the crisis year of 1990-91. The Center's deficit deteriorated by 0.8% of GDP to 6.5% of GDP in 1998-99 (including net loans to the states) and was far higher than the 5.3% budgeted figure (all figures exclude disinvestment revenues). The current (revenue) deficit increased to 4% of GDP, the highest in the decade, meaning India is increasingly borrowing to finance current expenditure. Meanwhile, the states' combined deficit rose to 4.2% of GDP, the worst deficit ever of the states. (Chapter 8). Reflecting the recent fiscal deterioration, the ratio of Central Government debt to GDP, which fell in the mid-1990s, has now risen to about 60% of GDP, and has led to comment from the RBI (Report on Currency and Finance 1998-99, pp. V-12 to V-17). The large and rising fiscal deficit and the large public sector debt (mostly internal) raises investors' concerns about macroeconomic instability and inflation (which would hurt the poor), and crowds-out private credit in the banking system. India: Country Assistance Strategy Annex 2 Page 5 of 10 The 1999-2000 Union Budget projected a cut in the central deficit of 0.9% of GDP. Achieving this target depends on a substantial rise in tax revenue, and containing revenue expenditure growth to only 9%. Preliminary data from the first seven months of 1999-2000 suggest taxes are growing slower than projected and expenditure faster, partly because of support for and lending to the states to finance their high deficits. The Union Budget also changed the accounting treatment of the growing small saving funding of the states deficit from a Central Government loan to an item in the "National Small Savings Fund" in the Center's Public Accounts. This accounting change reduces the Center's deficit figures by about 1.3% of GDP but leaves the (consolidated) General Government fiscal deficit unchanged. It will be important to pay close attention to the policy on small savings, as the Center sets the rates and implicitly guarantees the deposits. A positive fiscal development was the sharp upward adjustment of domestic diesel prices in October 1999, an attempt to correct for the potential deficit in the oil pool; it also maintained the liberalization of the sector. The states' and the Public Enterprises' deficits are likely to suffer continued pressure from the cascading effect of the excessive central wage settlement of 1997 on wages and pensions. As noted, the interest costs of the debt have increasingly crowded-out infrastructure, maintenance, and social spending in central and state budgets. Implicit and explicit subsidies at the Center and, especially, the state levels are a major factor in the deficit. The Ministry of Finance estimated these subsidies at over 14% of GDP in 1994-95. In addition to increasing the deficit, they are distortionary, non-transparent, and at best have uncertain equity consequences, at worst they are anti-equity. While the states are directly responsible for many of the subsidies, the Center's funding of the states supports them indirectly. Another structural factor in the deficit is the tax system, with central taxes declining by over 1.5% of GDP over 1991-98. The growing services sector is inadequately taxed and agriculture, part of the state tax base, remains outside the system. The tax base has been widened recently, but nonetheless remains fairly narrow, with under 15 million tax payers. As various experts have noted, the approach to sharing of taxation revenues, the lack of a full fledged VAT (including services), and the failure of the states to tax agriculture have complicated fiscal decentralization and generated tax-based inefficiencies (Chapters 3 and 4). Expenditure management and efficiency could be improved, as recognized in the last two finance ministers' calls for an Expenditure Reforms Commission. The civil service is large. Many public enterprises continue to operate at low efficiency in areas where the private sector could function more effectively and generate more taxable revenues. Comfortable BOP but Domestic Policies Continue to Constrain Competitiveness. In contrast to the fiscal situation, India's balance of payments (BOP) remains comfortable. In 1998-99, the balance of payments strengthened substantially, with the current account deficit improving to 1% of GDP. This improvement reflected the low oil prices that prevailed for much of the year and a $4 billion drop in non-customs imports that reduced imports by over 7%. However exports also declined, by 4% in dollar terms, reflecting not only weak markets but a loss of share of world markets for the second consecutive year. Regarding the capital account, the Resurgent India Bond raised $4.2 billion despite the turmoil in international markets. However, foreign direct investment declined and portfolio flows turned negative. The net impact of these developments was a rise of about $3.9 billion in international reserves (including SDRs and IMF reserves but not gold), to a comfortable end-fiscal year level of $30.2 billion (7.6 months of imports, and comfortably larger than potential short term claims). The projection for 1999-2000 is a slight widening of the current account deficit, to 1.4% of GDP, reflecting continued high oil prices. On the capital account, increases in portfolio investment (despite the continued low levels of private capital flows worldwide) and "other" capital inflows which appear strong thus far in 1999, will offset a decline in net long-term borrowings after the one-time Resurgent India Bond issue in 1998-99. These inflows will finance much of the larger deficit and permit some increase in reserves, although the reserve cover is likely to decline marginally to 7.2 months of imports (Chapters 8 and 9). The external debt situation remains comfortable, and the external debt to GDP ratio as well as the debt to current receipts ratio have fallen steadily since 1992-93. A large proportion of external debt is to multilateral and bilateral lenders and/or is long-term. Careful monitoring by the Government and changes in the underlying economic factors have led to a India: Country Assistance Strategy Annex 2 Page 6 of JO substantial fall in short-term debt, from over $8.5 billion (10% of external debt) in 1991 to an estimated $4.3 billion (4.4%) in March 1999. The fundamentals of India's slow export growth lie in the lack of further tariff reform, high infrastructure and transactions costs, and continued domestic regulations such as small-scale sector reservation and labor laws that reduce India's comparative advantage in labor intensive products and, consequently, the demand for labor. As a result, India may find it difficult to take advantage of the next upsurge in world trade and the international agreement to phase out textile and garment quotas by 2005, and is not well-prepared for greater competition that will arise from the elimination of remaining quantitative restrictions on imports no later than April 2001 (of which half, mainly the special import license restrictions, are due to go by April 2000). Indeed, India already faces growing competition from a recovering East Asia. A bright spot in the current account is the rapid growth of computer service exports, which do not suffer from the anti-export biases mentioned above, but even they may be hurt if telecom infrastructure lags. Financial System Remains a Concern. The public sector-dominated financial system is another major issue impinging on sustained growth and, indirectly, poverty reduction. The financial sector mobilizes substantial resources but still invests a large part of them in the government debt, in the case of banks about 40% of deposits. This pattern of asset holding by the financial sector does reduce India's susceptibility to financial crises but it also reduces credit availability to the private sector. From a macro-economic standpoint, these large holdings levels of debt are simply the reflection of the long history of high fiscal deficits and the need for someone to hold the resulting debt; funds can be made available to the private sector at reasonable cost only as the public debt declines relative to GDP. A second factor raising the cost of private sector credit is non-performing assets. Non-performing assets are a low fraction of total bank assets (3% net of provisions) or GDP (under 2%), but are large relative to lending to the private sector (or to bank capital). The large NPAs in turn require large provisions, another factor pushing up real lending rates. Regulation and supervision have improved substantially since the 1980s and are largely up to international standards, but they remain well below the steady evolution of international best practices. The payments system continues to lag international standards, according to participants in the sector. The capital markets are deep for a low-income country and improvements have been made - notably the set up of the electronic National Stock Exchange and the creation of a depository that has reduced transactions costs by dematerializing an increasing number of shares. Nonetheless, transparency needs improvement, notably in the activities of the dominant Unit Trust of India and in settlements, to help avoid payments crises such as hit the Bombay Stock Exchange in June 1998. More fundamentally, accounting, auditing, and corporate governance also could benefit from improvement to make India a more attractive to domestic and foreign investors (Chapter 7). Legal and Environmental Issues. Enforcement of property rights and contracts are increasingly identified by analysts as critical institutional elements in development. Clarity and security of property and land rights and timely recourse to an efficient legal system are important not only to investors but to sustainable increases in living standards for the poor. Surveys indicate a respect for India's adherence to the rule of law and the independence and quality of the judiciary. However, the appellation "justice delayed is justice denied" is a critical concern, particularly for the poor. The enormous case backlog and the legal processes can delay decisions 10-20 years. These delays add to the problems of the poor in obtaining protection from the legal system. All these problems, as well as the bankruptcy and liquidation processes, raise credit costs, increase non-performing assets (Chapters 4 and 7), hinder good credit allocation and limit the ability of the poor to use their limited real assets effectively. Finally, the environmental dimension needs to be kept in mind. The Finance Ministry's 1998-99 Economic Survey farsightedly included a chapter on environment, which points out the disproportionate burden of environmental and resource degradation on the poor, a concern which this Report shares. As noted above, environmental degradation and unsustainable usage of resources, encouraged by subsidies and unclear India: Country Assistance Strategy Annex 2 Page 7 of 10 property rights, may be a factor in slowing agricultural growth in some states and a limitation on improvements in the quality of life generally. Often the poor suffer from the environmental problems associated with unclear allocation of property rights to clean air, water, etc. The human sustainability of the cities is threatened by water and air pollution, which partly reflects distortionary pricing and partly lack of funding for public infrastructure (Chapter 8 and Annex 8.2). A Second Wave of Reforms to Reduce Poverty Faster All recent Governments have discussed the need for a second wave of reforms to launch India onto a higher growth path that reduces poverty faster. However, as noted, reforms have slowed, creating some uncertainty among investors. Many excellent suggestions for reform are contained in such reports as the Hussain Committee on Small-scale Sector Reservation, the Rakesh Mohan Committee on Infrastructure, the Tenth Finance Commission on intergovernmental finances, the Fifth Pay Commission on downsizing the civil service, the Tarapore Conmnittee on the capital account and its implications for the macroeconomic framework, the Narasimnham Committees on the financial sector, the Disinvestment Commission reports, recent Economic Surveys, RBI Annual Reports, and the 1999 Export-Import Policy. In addition to these contributions, the comprehensive framework outlined above may provide some assistance. While a basic consensus on the need for the Second Wave of Reforms has emerged, for example in the programs of the two major political parties, it needs to be translated into substantive action. Broadly speaking the reforms would be most effective to the extent they reduce the risk of macroeconomic instability, increase the access of the poor to human development, improve governance and reduce distortions and improve the demand for labor. Poorer states in particular will need to enact these reforms to overcome the initial lags and accelerate development. Perhaps the most effective, cross-cutting reform would be cuts in the explicit and implicit subsidies together with privatization in power to raise the current low collections of user charges (that represents a major part of the implicit subsidies). Cutting the subsidies would cut the fiscal deficit and thereby reduce risks of macroeconomic instability and the crowding-out of private borrowers; it would free up public funds for social and infrastructure spending to help the poor and speed growth; it would encourage private sector interest in infrastructure; it would reduce distortions and environmental degradation; and it would probably improve equity (Box 5.2 and Chapter 8). In the petroleum sector, the link that was established between domestic and international prices with the September 1997 liberalization has been an important factor in cutting subsidies, and needs to be sustained. Another policy to reduce subsidies that could be enhanced further is the increasing use of cesses on fuels to fund road infrastructure. Obviously, state governments will play a major part in cutting power and irrigation subsidies. There have been welcome movements toward reform in some states, including some of the poorer states such as Andhra Pradesh, Haryana, Orissa and UP. However, state governments are not always prepared to embark on the reform path. In this context, increasing emphasis on states' performance in Central Government transfers, increasing the proportion that states borrow directly from markets, and without central guarantees (and reducing State borrowings from the Center), and limiting the states' ability to ease their hard budget constraint, such as reducing access to high cost small-savings and limiting guarantees, would provide important incentives for reform. A welcome development along these lines is the recent use of Memorandums of Understanding to encourage fiscal discipline between the Ministry of Finance and states that receive extraordinary financing to ease the impact of the recent hefty pay revision. And, issues of links between Center-State finance and state performance appropriately form part of the Eleventh Finance Commission's terms of reference. Realigning Central and State Governments to focus on core public activities would have high social payoffs. Basic education and health and infrastructure need better and more public spending to reduce poverty and speed growth. Withdrawal of Government from non-core activities through faster privatization (not just sales of minority shares) in manufacturing and service sectors, e.g. airlines and hotels, and India: Country Assistance Strategy Annex 2 Page 8 of 10 increased private sector participation in infrastructure, would permit a downsizing, upgrading and focusing of Government and the civil service on truly public sector activities. It would also increase the current low returns on capital invested in these areas and raise taxable revenues. It also is worth noting that the current lack of attention and investment in these sectors is reducing their salability. The improvements in the budgets from reduced explicit and implicit subsidies and higher taxes from the formerly public enterprises would permit much needed increases in spending on infrastructure and basic human development at the Center and state level. At the state-level, the states mentioned above are embarking on much needed realignments of Government in varying degrees and sectors. Better and more spending on health and education. Faster poverty reduction cannot be accomplished without improving the delivery of health and education services. This will involve more effective spending on elementary education and basic health systems, with better targeting on improving the quality and quantity of services to the poor and with more public funding to address the unfinished agenda. The effectiveness of public education and health services in poverty reduction can be improved by focussing on meeting consumer needs and the holistic needs of children, realigning the role of the state toward primary education and health, and making efforts to encourage improvements in and better use of private education and health services. Governance could be improved in a variety of ways. In the public sector, tax structure and collection, and expenditure management would benefit from improvement. Effective decentralization - including improving of state and local institutional capacity and greater "voice", a more efficient sharing of the tax base across different levels of government, and closer links of costs, revenues and service delivery - would improve governance, outcomes and inclusion of the poor (Chapter 4). This is particularly the case in primary health and education delivery that impacts heavily on the opportunities for the poor to escape poverty. In this regard, it is worth noting that India's decentralization to the third tier of rural and urban local bodies already has a firm legal basis in the 73rd and 74h Constitutional Amendments (1992). Effective decentralization and greater deregulation would help to reduce corruption, a. mounting concern of Central and state governments, as would improving public administration and procedures, incentives and disincentives, and accountability (Chapter 6). The legal system would benefit from a reduction in delays and disincentives to frivolous litigation and appeals, which would make legal remedies more accessible to the poor and help reduce the non-performing assets that burden the financial system and drive up borrowing costs. The state governments also need to enforce property rights and law and order, to provide an attractive environment for investment. Completion of the deregulation of goods and factor markets, notably through deregulation of agriculture, articulation of a time-bound tariff-reduction program, completion of the WTO commitments, and development of a less negotiated/more rules-based treatment of foreign direct investment, would stimulate poverty reduction through higher, more labor using growth. It would also help get India ready to take advantage of the pickup in the world economy and the increased competition, domestic and international that is developing. Further deregulation of labor markets and the small scale sector would increase the demand for labor (Chapter 6). In thefinancial system, India needs to speed up judicial resolution of cases and debt recovery and improve the bankruptcy and liquidation procedures. Accounting and auditing and financial system regulation and supervision, though much improved since the 1980s, need to move much closer to the steadily improving best international practices, especially as the financial system becomes more privatized and links increase with the international economy (Chapter 7). The RBI also needs to deal more rapidly with weak banks and prevent their non-performing assets from increasing. Lending to the private sector needs to improve, which will depend on a reduced fiscal deficit (to reduce crowding out) and better incentives to lend and collect, including privatization of banks. The payments system lags improvements elsewhere in the financial sector and would benefit from some quick improvements. Finally, more transparency , such as making the India: Country Assistance Strategy Annex 2 Page 9 of 10 massive Unit Trust of India's activities more transparent, reducing settlement times in the capital market, and improving accounting, auditing and corporate governance, as laid out in the draft Companies Bill, 1998, would help reduce vulnerability and improve the allocation of scarce capital. (Chapter 7). Improved infrastructure provision, both public andprivate, would help accelerate growth. The currently inadequate provision of high quality, reliable, and reasonably priced infrastructure services represents a major barrier to continued growth of the economy and services to the poor, and to the diffusion of the benefits of liberalization. The development of infrastructure needs an effective delineation of responsibilities between the regulator and the policy-maker, and the creation of independent regulators within a broader restructuring of the sectors. In many sectors, privatization and greater reliance on competition could improve service delivery in many areas. Above all, infrastructure improvement will depend on the removal of the implicit and explicit subsidies and a move to remunerative user charges (Chapter 5). Circumstances Propitious for Reformns and Acceleration of Growth Events at the end of 1999 seem favorable to the initiation of the second wave of reforms. The Central Government that took office in October 1999 has already made progress by passing legislation to open up insurance (the Insurance Regulatory and Development Authority Bill), liberalizing foreign exchange regulation (the Foreign Exchange Management Bill), allowing trading in derivatives (the Securities Contract Regulation (Amendment) Bill), and protecting trade marks (the Trademarks Bill). The Government enjoys a more comfortable majority than the previous one which will permit it to move forward more easily on subsidy-cuts (as it demonstrated by implementing a 40% diesel price hike in October, in spite of pressures for rollback), government realignment, and reform. At the state-level, reforming governments received electoral support and non-reforming governments seem to have lost support. Some of the poorer and most indebted state governments - such as Uttar Pradesh - are embarking on a path of comprehensive reforms, similar to the economic restructuring launched by the Government of Andhra Pradesh (that was re-elected in October 1999). These reform efforts are aimed at (a) restructuring state-level expenditure and improving governance so as to maximize the outcomes achieved by public spending and private investments in the state; and (b) enhancing the revenue base through tax policy and administrative reforms and improved cost recovery from publicly provided non-merit goods and services. These developments suggest that the chances of real reform happening are much brighter than they have been in the past; if these do occur, then, as this Report suggests, growth could accelerate to the 7.5% and higher levels of the mid 1990s. India would then have a real opportunity to reduce poverty substantially in the new millennium. Issues for Further Analysis In several places in the Report, gaps in the knowledge base and in country experience have been identified as issues deserving further analysis and research. Work on these and related issues will be important to reducing poverty in India. Some of the issues are fundamental and involve cross-cutting work in various areas, and often these are the most important issues. These include: * improving the delivery of social services to the poor; * the links between growth, poverty reduction, and governance, especially at the state-level; * the nature, causes and cures of urban poverty; Other issues involve examination and comparison of policy options, based on experience within India and internationally. These include: India: Country Assistance Strategy Annex 2 Page 10 of 10 * possible policy paths for deeper restructuring of government at all levels, to help "right-structure and, as necessary, right-size" the state in India; * decentralization experiences that will be most effective in improving the quality and effectiveness of the decentralization process in the Indian context (including studies of states' devolution of revenue and taxing powers to local governments to decentralize services); * possible paths to fiscal adjustment at the central and state level, taking into account the linkage between fiscal deficits, growth, and poverty reduction, and drawing on international experiences; * approaches to corporate restructuring, public and private, and the constraints imposed by the labor market, drawing on international experience; * possible paths to privatization of banks, while decreasing the vulnerability of the banking system through regulation and supervision that approaches best practices and improvements in accounting, auditing and corporate governance; * further ways to strengthen institutions and modalities for delivery and repayments of micro-credits and agricultural loans; * options before India in the next round of trade negotiations; * linkages between trade, growth, employment and education. Finally, as noted in various places in the Report, a key issue for policy-making is improvement in the quality and consistency of various statistics. India: Country Assistance Strategy Annex 3 Page 1 of I India Country Assistance Evaluation Management Action Record CAE Recommendations Management Response 1. To enhance the effectiveness of its assistance, the Bank should: * Link the overall lending volumes to fiscal discipline We agree with and have benefited from the emphasis the CAE at the federal level and to progress in structural places on rural development. We are now giving agricultural reforms in agriculture and the implementation of an policies greater prominence in our dialogue with Gol as well as effective rural development strategy, as progress in in our state assistance strategies in our focus states. Our rural these areas is crucial for rural poverty reduction. development work is expanding, our policy dialogue is intensifying, including through rural policy reviews at the state level - completed in one state, under preparation in another - which allow us to link rural issues to our overall state-level dialogue. At the national level, we are stressing simple but critical cross- cutting, easily-monitored and verifiable triggers (such as the fiscal policies, external balance and portfolio performance) as well as progress on structural reforms, including deregulation of agriculture. * Further concentrate new lending in reforming states, Agree. Our policy-based state focus has already been a core where an assistance strategy has been agreed with element of our country assistance strategy. The next CAS, the state government. Similarly, sectoral lending currently under preparation, reaffirms this strategic priority volumes should be linked to agreements on sector- unambiguously. Likewise, our sectoral lending has been specific policies and institutional frameworks. essentially policy-based; lending volumes will continue to depend on pursuance of reforms in individual sectors. 2. The Bank should systematically monitor the poverty Agree. Gol's Economic Survey for FY2001 will contain for the and gender impacts of Bank-assisted projects and first time a separate chapter on gender, which will focus on the programs. It should also assist government agencies to do status of women and the extent to which women's empowerment the same for the overall public expenditure programs. has translated into budgetary commitments. As part of our state focus, we encourage the states to establish an extensive poverty monitoring system to track the impact of reforms on the poor and we design our state assistance strategies with a view to improving growth prospects -- hence opportunities for the poor -- and increasing the quality and quantity of social spending and other development spending that benefit the poor. Gender considerations are integral to all our work. To promote gender equality, we are targeting women in several of our social sector programs (e.g., education, health), promoting women's empowerment through our rural development activities, particularly community empowerment, but also increasingly through our rural policy reviews, for example, to remove discrimination against women in respect of property rights. Finally, we are using gender-desegregated M&E. However more still remains to be done. 3. The Bank should strengthen aid coordination on As the CAE notes, most development agencies look to the country assistance strategies and on critical sector Government of India and state govemments for aid coordination, strategies (e.g., agriculture and rural development). as would be expected under a comprehensive development Greater coordination would enhance the effectiveness of framework. However, we agree with the goal of greater external assistance, and would enable greater selectivity selectivity, and are increasingly working in partnership with in the Bank's own programs. other aid agencies to follow shared principles and identify areas in which the Bank has a comparative advantage and areas in which we do not. India: Country Assistance Strategy Annex 4 Page I of I A Snapshot of the CAS Consultations It is difficult to do justice to the richness of the observations which emerged from the India CAS consultations. Summaries of individual consultations have been prepared and placed on the India CAS web site - www.worldbank.org/indiacas. Rather than trying to summarize these summaries here, our aim is simply to give a flavor of the comments and reactions, as well as an idea of how sorne of the input we received has in fact found its way into the CAS. The focus here is on some of the cross-cutting issues raised, rather than the very many interesting and useful comments received on specific projects and sectors. Alignment of Bank with Gol strategy. This comment was made repeatedly, and especially in the context of consideration of the Bank's legitimacy. In a vibrant democracy such as India, the Bank's legitimacy can only derive from its acting in support of Government policies. Partly as a result of these comments, we have made, in this CAS, a strong effort to align our strategy with the Government's Ninth Five Year Plan and the Mid-Term Appraisal of the same. More transparency refocus state selection. Most though not all participants supported the Bank's focus state strategy (some thought it would punish the country's poorer states). But there was certainly agreement that the Bank should be more forthcoming as to the criteria by which its focus states are selected. We have tried to respond to that in this CAS. What to do about poor, non-reforming states? Even supporters of a focus-state strategy for the Bank raised the question of how to provide effective assistance to poor, non-reforming states. This question was particularly acute in the social sectors, where it was felt that assistance should not be withheld to the poor on account of the poor performance of their government. No consensus was reached on this issue. Governance as a priority area. Bank involvement in so-called "governance areas" in India is sometimes seen as overly intrusive. But participants at the CAS consultations stressed the need for the Bank to be active in these areas if its funds were to be put to good use. Project governance. It was noted that the Bank preaches good governance, but doesn't necessarily practice it in the projects it finances. Participants reported that these are, at least sometimes, prepared without adequate consultations, and it can be difficult to get information about Bank projects, whether at the national, state or local level. Improving project governance is a challenge taken on in this CAS as part of our effort to better integrate our projects with our policies. Selectivity? There was often agreement that the Bank needed to be more selective, 'but very little agreement as to which sectors we should focus on. In a country as large as India, the best way to achieve selectivity would seem to be through a focus on a few states. There was, however, considerable demand for the Bank to reenter the urban development sector in a significant manner. Far, but not far enough, in social, gender, environment. In the workshops on these topics, there was a recognition that the Bank had made progress in these areas, but also impatience that it had not gone far enough, and sometimes frustration that lip-service and tokenism were masquerading for progress. This CAS responds to the challenge by calling for a mainstreaming of environmental, social and gender concerns into the overall strategy, rather than their treatment, as in earlier CASs, as add-ons. Transparency and dissemination. The consultations were universally well-attended and warmly welcomed. But there were calls not to treat consultation like a tap which is turned on and off at will, but for the Bank to be constantly open to outsider opinion. There were also complaints that Bank reports, while of high quality, are difficult to get hold of, even for government officials. Improving transparency, including through better dissemination of our reports, is part of the communication strategy fcr the coming CAS period. India: Country Assistance Strategy Annex 5 Page I of I Examples of Bank Partnerships with Bilateral and Multilateral Agencies Power reform: We have been working in a full partnership since 1994 with DFID in what is arguably India's most important sectoral reform - the privatization of the power sector. DFID is an active financier of reform in three of the states in which we are active, Orissa, AP and Haryana. State reform: Most funding agencies are now following a state-focused approach. Joint presence in a single state provides many opportunities for partnerships, and state governments are increasingly taking the lead in bringing funding agencies together. Gender equality: Gender equality is the first of two themes adopted by the UN in India as part of the UN Development Assistance Framework (UNDAF) for the country. To operationalize the theme, an Inter Agency Working Group has been established. The group is mainly active in the areas of violence against women and gender sensitization. The Bank and [FAD co-finance the Rural Women's Development and Empowerment Project. Decentralization: Decentralization is the second UNDAF theme, and also has its own inter-agency group. The Bank, UNDP, SDC and the Planning Commission co-sponsored a national workshop on decentralization in December 2000. Child labor: A third UN inter-agency group spearheads the international effort against child labor in India. This group is chaired by ILO, which takes a leadership role on child labor issues. Other UN agencies active in the group and on child-labor issues include UNICEF, UNDP, UNIFEM, UNESCO, UNFPA and UNDCP. Current plans of the group center around an advocacy campaign against the worst forms of child labor. The Bank is represented on the group by its child labor focal point. Poverty reduction: We have co-sponsored two conferences on poverty reduction with UNDP. The Dutch Government has also funded Bank research projects to deepen our understanding of poverty in India, for example, by combining quantitative and qualitative analysis. Infrastructure: The Japanese government has supported our work in infrastructure, by co-financing for example the 1998 Paris conference on private infrastructure opportunities in India, and by co-financing several large infrastructure projects. Both Japanese and British governments plan to support an innovative project for market-based financing systems for community infrastructure for poor and low-income communities, in partnership with domestic commercial financial institutions and multilateral development institutions. The Bank and ADB have just completed a joint road sector strategy paper, that provides a clear vision for what we are trying to achieve in India and how we are proposing to work together. WatershedDevelopment: The Bank is chairing an inter-agency working group on which Gol is also represented, to harrnonize funding agency guidelines for watershed development. Rural water supply: The Water and Sanitation Program (WSP), supported by 15 bilateral and multilateral donors, actively collaborates with the Bank in developing and supporting sectoral reforms as well as in knowledge sharing. The national sector reforms underway are built upon the pioneering pilot and demonstration projects supported by the Bank, DANIDA, DFID and the Dutch government as well as the sector work supported by DANIDA and the Bank. Irrigation: The Bank and ADB are pooling resources to assist the state of Madhya Pradesh develop its water resources management strategy, the implementation of which we may later support. Education: The District Primary Education Program is supported by 5 different funding agencies, all of whom jointly supervise, with the Government of India, a common program. Health: To combat HIV/AIDS, we have partnered with UNAIDS, USAID, DFID, AusAID and CIDA. The anti-leprosy and TB programs are jointly implemented with WHO, DANIDA, and ILEP (a group of international NGOs). Renewable Energy: KfW has taken over from the Bank the preparation of a solar thermal power generation project in Rajasthan, to be funded by GEF as a complement to the state's power sector reforms. India: Country Assistance Strategy Annex 6 Page I of 4 Procurement and Financial Management: Fiduciary Issues The Risks to Bank Funds 1. Significant misuse of Bank funds has not been an identified feature of the investment portfolio in India. Use of mandatory bidding/contract documents and oversight at all phases by IBRD/IDA have brought relatively high discipline into procurement on Bank-financed projects. However, analysis of audit and procurement compliance in the IBRD/IDA portfolio indicates that there are some outstanding issues, where improvements are required: * Delays occur in submission of audit reports for many projects in the IBRD/IDA portfolio, in some cases leading to discontinuance or suspension of disbursements. The main reason for the delays is the inability of most project entities to prepare the financial accounts in line with requirements of the external auditors in a timely fashion, or delays in timely completion of the audits. Disallowances for ineligible expenditures are regularly reported by auditors, requiring recoveries by the Bank. Project audits, which are mostly carried out by staff of the Comptroller & Auditor General of India, have tended to focus mainly on assessing transactional compliance rather than the adequacy of systems of internal control. Most annual audits have not adequately included assessment of procurement procedures, nor involved any substantial physical inspection of assets. * Government accounting systems have not been structured, through their charts of account, to provide information in classifications and levels of detail meaningful for IBRD/IDA project management. * The major concerns for procurement in the IBRD/IDA portfolio relate to: unduly long processing times; the need to revise the outdated data books in the Irrigation and Public Works Departments which lead to frequent rejection of bids; the need for preparing a common handbook on standard technical specifications for equipment procured under Health, Nutrition and Population projects; and the need to better enforce Bank guidelines for procurement of goods, works and services below prior review thresholds. * Funds flow procedures between the Government of India and the states, and between state governments and implementing agencies, have been consistently delaying the process of putting project funds in the hands of implementing agencies. The procedures have scattered responsibilities and fragmented accountability, and have led to cash flow problems and inefficiencies in project financial management. 2. Relevant diagnostic work so far completed (a Country Profile of Financial Accountability in FY99, financial management/governance assessments for the Uttar Pradesh Fiscal Reform and Public Sector Restructuring Loan/Credit and proposed programmatic structural adjustment loans to Karnataka and Andhra Pradesh, and the first phase of a Country Procurement Assessment Report (CPAR)) indicate both strengths and weaknesses in existing public financial accountability systems at central and state levels. Principal findings from this work include the following: * The role of the legislatures as principal watchdogs over public finances is well accepted and has a firm legal basis. However, stakeholders within India recognize the need for improved effectiveness in practice of oversight functions. In some states, Public Accounts Committees (PAC) have been dormant. Holding hearings in private and delay in discussions by financial committees of budgets and audit reports, and lack of an effective system of follow up on corrective actions to address significant audit findings are areas that have been identified as needing greater attention. In UP, there has been some early progress in this area. The PAC, for example, has been revived after a long period of inactivity, and is now examining current audit reports. India: Country Assistance Strategy Annex 6 Page 2 of 4 * The independence of the Controller & Auditor General (C&AG) from the executive is well established in a fornal sense and the C&AG's mandate is broad. However the continued responsibility of the C&AG to undertake accounting functions in the states impairs the states' capacity for and ownership of financial management and reporting. There is also a need to improve audit capacity including in the area of value for money auditing. The C&AG and Bank are discussing the provision of assistance to undertake capacity assessment and strategy development in FYO 1-02 that will involve external as well as internal stakeholders. * The media plays an active role in India in discussions on public financial accountability. There are divergent views within India as to their effectiveness and role, particularly with regard to whether public accounts committee deliberations should be opened to the media. * Many of the sectors within government suffer from common problems (over-staffing, corruption, poor budgetary management, lack of accountability, weak monitoring and evaluation). Internal control procedures focus on procedural compliance over transactions, particularly concerning budget adherence, but not effective financial and procurement management. The ownership of accountability for effective resource management and reporting within the bureaucracy is not strong. * By and large, procurement by central government works satisfactorily if compared to public procurement in other developing countries. The system is not without weaknesses, however. Delays in tender processing, lack of transparency in tendering, lack of adequate bidder appeal mechanisms, poor quality of tender documents, lack of public procurement laws, and insufficient training of procurement staff and auditors are areas which need attention. P Financial information on such aspects as public debt, guarantees, loans and investments is reported with varying quality along with revenues and expenditures at central and state levels. Detailed guidelines for budgeting and monitoring of the use of public funds exist but are not always observed for lack of enforcement and accountability. Addressing the Risks 3. The response to addressing fiduciary risk in IBRD/IDA investment projects in the India portfolio has been, in some cases, to "ring fence" project management. This includes establishing project accounting systems operating in parallel with government or entity accounting systems. This has occurred primarily to meet requirements of project implementing agencies to produce, for all new investment operations appraised since July 1998, project management reports (combining financial, procurement and physical progress indicators) in the formats currently required under the Loan Administration Change Initiative (LACI). Mainstream government accounting systems have not been adequate for this purpose. 4. Annual financial audits of IBRD/IDA projects have been supplemented in certain cases with internal audit and technical audit requirements. In addition, the Bank has engaged its own staff and consultants to conduct ex post reviews of: (a) procurement below prior review thresholds and (b) expenditures which have been reimbursed by the Bank on the basis of Statements of Expenditures rather than full documentation. 5. "Ring fenced" approaches to procurement, accounting, and auditing are not applicable to programmatic adjustment lending, where general budgetary support is envisaged. Fiduciary risk reduction strategies for these operations require mainstreaming of public financial accountability systems to move to internationally accepted levels of performance and transparency. At the same time, improvements in mainstream systems can lessen (and eventually eliminate) the requirements for "ring fencing" on investment projects. The emerging programmatic approach in India provides the Bank with an incentive and a basis to engage with the central and focus state governments on strengthening their general public sector procurement, financial management and accountability systems. India: Country Assistance Strategy Annex 6 Page 3 of 4 6. A fiduciary risk mitigation and capacity building strategy is therefore proposed for FY02-04, which will substantially increase the level of analytical work and technical assistance by the Bank in this area. In terms of analytical work, the following is proposed: * Completion in FY02 of the CPAR to extend analysis already completed for central government procurement functions to selected states (Karnataka, Tamil Nadu and Uttar Pradesh) and central/state public sector undertakings; * Completion in FY02 of a first Country Financial Accountability Assessment (CFAA) covering key components of public financial accountability in the central government; public financial accountability systems in selected focus states where programmatic adjustment lending is currently underway or planned; and local government governance/financial accountability systems in those states where the Bank will be active at the local government level. State Financial Accountability Assessments will be completed for those states where programmatic adjustment loans are being prepared. The CFAA work will be undertaken in partnership with other interested donors (DFID, the Netherlands, Canada, USAID, and ADB have expressed interest in working closely with the Bank on the CFAA work). * Annual public expenditure work in the focus states will evaluate: (i) key expenditure priorities in the government's budget supported by Bank lending; and (ii) progress in strengthening public expenditure management to better achieve aggregate fiscal discipline, prioritize spending and improve accountability for the use of fiscal resources. * Increased use of institutional assessments at the sectoral level to mainstream governance concerns in the design of sectoral operations and strengthen government effectiveness on a sector-by-sector basis. Examples include institutional assessments in the highway, education and health sectors, examining accountability arrangements for better performance and service delivery. * Possible inclusion in the CFAA of an analysis of India's private sector accounting and auditing practices and corporate governance framework, against international benchmarks, This will be done in partnership with IFC and other interested bilateral/multilateral donors and will utilize ROSC methodology. 7. Technical assistance will be provided through sectoral dialogue, as well as provision of IDF and Bank-administered trust fund grants, to build capacity of key public accountability oversight institutions. The Bank will support locally-led efforts to strengthen central and state legislative oversight of public finances, and public sector audit functions of the Comptroller & Auditor General of India at central and state levels. Technical assistance will also be provided in parallel with programmatic adjustment lending, to address known weaknesses in budgeting, accounting, reporting and internal control systems. 8. Programmatic adjustment operations supporting governance reforms. Fiduciary risk is credibly mitigated when government-wide systems are reformed to enhance transparency and accountability for the use of fiscal resources. To this end and as discussed in the main text of the CAS, governance reforms constitute a critical component of our programmnatic adjustment loans to the focus states. Among other things, the governance reform programs include measures to: (i) strengthen public financial accountability (e.g., establishment of controller's office to lead government's financial management reforms; reduced lags in government's response to audit reports, placement of monthly financial accounts on the internet; (ii) enhance transparency and competition in public procurement (e.g., legislation for transparency in tenders and procurement, placement of tender bulletins on the internet); and (iii) foster greater public oversight through published surveys on corruption, citizen charters and freedom of information legislation. 9. Portfolio Management Activities. We plan an in-depth review, during FYC1-02, of the implementation of project management reporting requirements, and related computerized accounting systems. This will include identifying, with Gol and central and state implementing agencies: (a) the extent to which mainstream government systems can meet project management reporting requirements; (b) the India: Country Assistance Strategy Annex 6 Page 4 of 4 scope for applying project investments in financial management systems to building long term capacity within implementing agencies; and (c) interim solutions such as the use of generic project accounting software across projects, that will reduce the need for specific project investments while government systems are being reformed and upgraded. We will also follow up, during FY01-02, the steps agreed with Gol to address project funds flow problems, and identify further strategies to streamline disbursement processing, including electronic submission of withdrawal applications. India: Country Assistance Strategy Annex 7 Page 1 of 2 Lending Exposure Table Al: India - Simulated IBRD Lending Sceelario (LIS5 million) IBRD Single Borrower Ex posure Limit Debt OutsAding Commitments 01w adjustment Disbursement Historical Data FY91 7590 FY92 8944 FY93 9326 FY94 10123 FY95 11244 FY96 9598 FY97 8883 FY98 7869 FY99 7819 7509 Base Case FY00 13500 7509 934 126 749 FYO1 13500 7413 1431 100 813 FY02 13500 7694 2050 250 1035 FY03 13500 8282 2100 375 1324 FY04 13500 9004 2200 450 1507 FY05 13500 9820 2200 450 1593 FY06 13500 10243 2000 (' 1207 FY07 13500 10741 1500 0 1305 FY08 13500 11192 1400 0 1279 FY09 13500 11589 1300 0 1239 FYI0 13500 11903 1200 0 1189 FYII 13500 12118 1200 0 1132 FY12 13500 12282 1200 0 1089 FY13 13500 12426 1200 0 1057 FY14 13500 12530 1200 () 1033 FY15 13500 12562 1200 0 1014 FY16 13500 12543 1200 0 1001 FY17 13500 12586 1200 0 1091 FY18 13500 12508 1200 C) 983 FY19 13500 12426 1200 0 977 FY20 13500 12343 1200 0 973 Assumptions 1. Commitments aue as shown in the table. 2. Cancellations = 5 % annually 3. Disbursement ratio on investment lending is 20% 4. All adjustment loans are single tranche India: Country Assistance Strategy Annex 7 Page2of2 Figure Al: India IBRD Exposure 2000 to 2020 16000 .. . ....... .-.- . 4 IBRD) Sibgie Borrower Exposure Liniit 12000- : I)~~~~~ebt O)utstinding US0000: Mi 8000 n 6000X 4000 lisbursements 2000}\ Commnitments IFY'FY'YFY' FY'FY'FY' IY _ IY Y FY FY FY FY FY . 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 India: Country Assistance Strategy Annex Bl Page 1 of 2 India at a Glance POVERTY and SOCIAL South Low- India Asia Income Development diamond' 1999 Population, mid-year (millions) 997-5 1.329 2,417 Life expectancy GNP per capita (Atas method, USS) 440 440 410 GNP (Atlas method, USS billions) 441.4 581 988 T Average annual growth, 1993-99 Population (%) 1.7 1.9 1'9 Labor force (%) 2.2 2.3 2.3 GNP I Gross per - , primary Most recent estimate (latest year available, 1993-99) capita . enrollment Poverty '% of population below national poverty line) 36 Urban population (% of total population) 28 28 31 Life expectancy at birth (years) 63 62 60 Infant mortality (per 1,000 live births) 71 75 77 Child malnutrition (% of children under 5) 45 51 43 Access to safe water Access to improved water source 1% of population) 81 77 64 Illiteracy (% of population ae 15+) 38 46 39 Gross primary enrollment (% of school-ae populatbon) 100 1 96 -- India Low-income group Male 109 110 102 Female 90 90 86 1- KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1979 1989 1998 1999 Economic ratios* GDP (USS billions) 150.1 290.5 419.1 447,3 Gross domestic investmentGDP 22.8 24,1 21.8 22.9 Trade Exportsofgoodsandservices/GDP 6.7 7.3 11.3 12.1 Gross domestic savings/GDP 20.7 21.8 19.2 19.9 Gross national savings/GDP 22.2 21.4 20.8 21.9 Current account balance/GDP -05 -1.8 -0.8 -1.0 .oesi Interest payments/GDP 0.3 1.1 1.1 1.2 Domestic Investment Total debt/GDP 12.0 26.0 23.3 22.0 Savings Total debt service/exports 10.3 28.6 20.6 22.8 l Present value of debt/GDP .. .. 20.1 Present value of debt/exports .. .. 143.3 Indebtedness 1979-89 1989-99 1998 1999 1999-03 (real average annual growth) GOP 5.7 5.8 6.8 6.5 6.2 Ilndia Low-income group GNP per capita 3.3 3.9 -4.9 4.8 4.5 Exports of goods and services 4.9 1 1.9 12.5 3.6 10.1 STRUCTURE of the ECONOMY 1979 1989 1998 1999 Growth of Investment and GDP (%) (% of GDP) 30 Agriculture 36.8 31.6 29.1 27.7 . Industry 25.0 27.6 25.7 26.3 ! 201 Manufacturing 17.4 17.4 15.6 15.9 |0 Services 38.3 40.8 45.2 46.0 |10 Private consumption 69.2 66.1 68.6 68.1 -201 General government consumption 10.0 12.2 12.3 12.0 _ GDI 0 GDP Imports of goods and services 8.7 9.6 14.0 15.0 | (real average annual growth) 1979-89 1989-99 1998 1999 Growth of exports and imports (%h) Agriculture 3.4 3.3 7.2 1.3 40 Industry 6.6 6.5 4.0 8.8 30- Manufacturing 7.0 7.0 3.6 8.5 20 Services 6.7 7.5 8.3 7.9 Private consumption 5.5 5.2 3.2 2.8 General government consumption 7.8 5.9 14.5 10.3 9 95 96 97 31 Gross domestic investment 5.7 6.2 4.3 11.5 .10 Imports of goods and services 6.5 8.9 -2.5 -1.8 --Exports O0Imports Gross national product 5.5 5.8 6.7 6.7 L- Note: 1999 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. India: Country Assistance Strategy Annex Bl Page 2 of 2 India PRICES and GOVERNMENT FINANCE Domestic prices 1979 1989 1998 1999 Inflation (°h) (% change) 15. Consumer prices .. 6.2 12.7 3.4 10 Implicit GDP deflator 15.8 8.3 8.9 3.3 s ..'.:. Govemment finance (% of GDP, inclurdes current grants) o - l Current revenue .. 23.5 22.3 23.6 94 9s 96 97 98 99 Current budget balance .. 0.4 -1.2 -1.9 v ''GDp deflator 401CPI Overall surplus/deficit .. -12.5 -9.9 -11.3 TRADE 1979 1989 1998 1999 Export and import levels (USS mill.) (US$ millions) Total exports (fob) .. 16,955 34,298 38,285 60.000 Tea .. 550 547 569 50s000 Iron 57 380 374 400 it| Manufactures .. 12,730 26,870 31 ,321 40,000 Total imports (cif) 24,411 47,544 55,383 20000 Food .. 714 2,54 2,450 20,000 i iiII Fuel and energy 3,768 6,435 10,682 10000 Capital goods .. 5,288 9,122 9,912 9394 ss 97 rs 99 Export price index (1995--100) .. 113 94 90 Import price index (1995=100) .. 89 92 88 E3 Exports * Imports Terms of trade (1995=100) .. 128 102 102 BALANCE of PAYMENTS (UJS$ millions) 1979 1989 1998 1999 Current account balance to GDP (°h) Exports of goods and services 9,980 21,201 47,484 54,006 0 .:9 t:.:3 Imports of goods and services 13,120 27,934 58,565 67,248 Resource balance -3,140 -6,733 -11,081 -13,242 Net income 527 -798 -2,955 -3,566 Net current transfers 1,852 2,281 10,587 12,256 . i Current account balance -761 -5,249 -3,449 -4,552 Financing items (net) 985 4,400 7,382 10,340 Changes in net reserves -224 850 -3,933 -5,788 2 . Memo: Reserves including gold (US$ millions) 7,581 4,582 33,584 38,150 Conversion rate (DEC, local/US$) 8.1 16.7 42.1 43.3 EXTERNAL DEBT and RESOURCE FLOWS 1979 1989 1998 1999 (US$ millions) Composition of 1999 debt (USS mill.) Total debt outstanding and disbursed 18,009 75,407 97,639 98,434 IBRD 728 6,615 7,990 7,816 0: 4.043 A 7,816 IDA 4,505 12,521 18,562 18,930 Total debt service 1,303 6,955 12,094 15,313 1 B: 1, I IBRD 127 881 1,378 1,600 lDA 43 188 423 1,432 Composition of net resource flows F: 3,33B0 Official grants 717 698 307 382 ::::7:.:. 2 Official creditors 650 2,489 1,002 -1,088 D: 4,619 Private creditors 13 2,870 3,175 2,245 Foreign direct investment .. 350 2,462 2,155 Portfolio equity 0 0 -61 3,026 E: 24,664 World Bank program Commitments 766 2,987 1,543 727 A - IBRD E - Bilaleral Disbursements 695 2,011 1,421 1,461 B - IDA D - Other multilateral F - Pnvate Principal repayments 77 450 1,130 2,286 C - IMF G - Short-term Net flows 619 1,561 292 -825 1 _ Interest payments 93 619 671 746 Net transfers 525 942 -379 -1,571 Development Economics India: Country Assistance Strategy Annex B2 Page 1 of I Selected Indicators of Bank Portfolio Performance and Management (As of February 28,2001) Indicator FY98 FY99 FY00 FY01 Portfolio Assessment Number of Projects Under Implementation a. 74 70 79 (est.) 79 Average Implementation Period (years) b. 3.9 3.9 3.9 3.8 Percent of Problem Projects by Number a., c. 12.2 7.1 12.7 5.7 Percent of Problem Projects by Amount a., c. 8.7 8.8 12.5 6.9 Percent of Projects at Risk by Number a., d. 14.9 11.4 25.3 8.6 Percent of Projects at Risk by Amount a., d 10.1 15.4 28.9 8.0 Disbursement Ratio (%) e. 16.1 16.2 17.9 12.8 Porfolio Management CPPR during the year (yes/no) Yes Yes Yes Yes Supervision Resources (total in US$000)f 10,660 11,560 9,254 (est.) 9,102 Average Supervision (US$000/Project) f 121 126 104 (est.) 101 Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 237 38 Proj Eval by OED by Amt (US$ millions) 28035.5 5671.7 % of OED Projects Rated U or HU by Number 29.2 31.6 % of OED Projects Rated U or HU by Amt 27.3 26.1 a. Includes only the active portfolio at end-year, as shown in the Annual Report on Portfolio Performance (ARPP); FY01 is the expected number of projects in the portfolio at end-June. b. Average age of projects in the active country portfolio. c. Percent of projects rated unsatisfactory (U) or highly unsatisfactory (HU) on development objectives (DO) or implementation progress (IP). d. As defined by the Bank's Quality Assurance Group (QAG): Percent of projects in problem status (see c. above) or with three or more risk flags. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. f. Includes portfolio management activities and resources to supervise projects that have closed during the year (hence not in the ARPP portfolio); Indirect mark-up rates differ across years; FY00 and FYOlaverage supervision costs include preparation of Implementation Completion Reports. India: Country Assistance Strategy Annex B3 (IBRDI/DA) Page I of 2 Proposed IBRD/IDA Base-Case Lending Program a. (As of March 12, 2001) Fiscal US$(M) Strategic Rewards Implementation Risks Year Project IBRD IDA (H/M/L) b. (HIM/L) b. 2001 c. Technician Education 111 0 65 M L c. Gujarat State Highways 381 0 M M c. MP District Poverty Initiatives 0 110 H M c. Kerala RWS 0 66 H L c. Rajasthan Power 180 0 M M Rajasthan DPEP II 0 85 H L Rajasthan WSRP 0 140 H H Karnataka Watershed Development 0 95 M M Karnataka SAL I 100 100 H H c. Leprosy Control 11 0 30 M L Karnataka Highways 320 0 M M PowerGrid II 450 0 H H Total 1,431 691 2002 Karnataka Water & Urban Management 100 0 H M Karnataka Community-Based Tank Mgt. 50 75 M M Karnataka Rural Water Supply & Sanitation 11 0 150 H L Andhra Pradesh SAL I 125 125 H H Andhra Pradesh Power APL II 250 0 H H Andlra Pradesh Community Forestry 0 115 M L Uttar Pradesh Fiscal & Public Sector Restr. II 125 125 H H Uttar Pradesh Water Sector Restructuring 0 110 H H Uttar Pradesh Power APL I 150 0 H H Disease Surveillance 0 150 M L Grand Trunk Roads 500 0 M M Kerala Transport 250 0 M M Mumbai Urban Transport 550 0 M M Total 2,100 850 a. This list is indicative; it includes projects which have not yet been approved by, or in some cases proposed to, the Government of India, and is not meant to exclude other projects that could emerge from the CAS strategy. It also does not include the Gujarat Earthquake Reconstruction Operation under preparation. b. Indicates whether Strategic Rewards and Implementation Risks are expected to be High (H), Moderate (M), or Low (L). c. Operations already approved in FY01, except for Leprosy II which is scheduled for Board discussion at end-March. India: Country Assistance Strategy Annex B3 (IBRD/IDA) Page 2 of 2 Proposed IBRDI1DA Base-Case Lending Program a (As of March 12, 2001) Fiscal US$(M) Strategic Rewards Implementation Risks Year Project IBRD IDA (HlM/L) b. (HIM/L) b. 2003 Andhra Pradesh SAL 11 150 150 H H Andhra Pradesh Rural Poverty 0 100 H M Karnataka SAL II 150 150 H H Karnataka Health Systems 75 75 M L Gujarat Urban Reform 200 0 H M Orissa SAL I 75 75 H H Maharashtra Rural Water Supply & Sanitation 150 50 H L Madhya Pradesh Water Sector Restructuring 150 0 H H Madhya Pradesh Forestry If 0 100 M L Elementary Education 1 0 100 H L Technical Education Sub-Sector 200 50 M M Uttar Pradesh Roads 400 0 M M Grand Trunk Roads Il 400 0 M M Rajasthan Power 11 200 0 H H Total 2,150 850 2004 Uttar Pradesh Fiscal & Public Sector Restr. III 150 150 H H Karnataka SAL III 150 150 H H Andhra Pradesh SAL III 150 150 H H Andhra Pradesh Urban Poverty Reduction 100 100 H M Rajasthan Health Systems 200 0 M L Health Capacity Building 50 50 M L Elementary Education 11 0 100 H L Rural Decentralization 100 50 H M State (tbd) Rural Water Supply Project 200 0 H L Chattisgarh District Poverty Initiatives Project 0 100 H M Karnataka Municipal Capacity Bldg. 200 0 M M Tanil Nadu Roads Sector 350 0 M M AP Power Reform APL III 250 0 H H UP Power Reform APL II 250 0 H H Total 2,150 850 TOTAL CAS PERIOD (FY02-04) 6,400 2,550 TOTAL IBRDADA, FY02-04 8,950 India: Country Assistance Strategy Annex B3 (IFC and MIGA) Page I of I IFC and MIGA Program, FY 1998-2001 (As of February 28, 2001) 1998 1999 2000 2001 IFC approvals (US$m) 54.1 72.2 167.7 259.6 Sector (%) Chemicals & Petrochems Financial Services 90.3 38.8 35.6 Food & Agro Processing Infrastructure 37.5 33.5 Manufacturing 8.2 51.5 23.7 27.4 Mining & Minerals 48.5 Motor Vehicle & Parts Oil Refining 1.5 3.5 Education Total 100 100 100 100 Investment Instrument (%) Loans 9 80 25 18 Equity 76 20 25 14 Quasi-Equity 15 3 7 Other 47 61 Total 100 100 100 100 1998 1999 2000 2001 MIGA guarantees (US$m) 0.0 0.0 0.0 0.0 India: Country Assistance Strategy Annex B4 Page I of 2 Summary of Nonlending Services (As of March 9,2001) Completion Product FY Cost (US$000) Audience a. Objective b. Recent completions Actual Costs Formal Reports Technical & Scientific Manpower FY00 103 G, PD, B KG, PD Upper Primary Education FY00 167 G, B, D KG, PS Environment Issues in the Power Sector (Phase II) FY00 212 G, PD KG, PD Public-Private Partnerships in Health Care (Phase 1) FY00 712 G, B KG, PS Banking Sector Report FY00 227 G, B KG, PS Trade Patterns & Resources FY00 93 (,, PD KG Rajasthan Economic Update FYOO 207 G, B, D KG, PD, PS Food Security and Nutrition FY00 123 G, B KG Rural Decentralization (Phase I) FY01 230 B,G,PD KG,PD State Power Sector Reform: A Review of the Orissa Experience FY01 255 G, B KG, PS Informal Reports Education Finance FY00 21 B KG Urban Water Sector Strategy Paper FY00 295 G, B PS Urban Sector Operational Strategy FY00 27 G, B PS Infrastructure Finance Policy Notes FY00 146 B PS Review of Centrally Sponsored Schemes in the Health Sector FY01 56 B KG Andhra Pradesh Rural Poverty Reduction Strategy FY00 40 G KG, PS Empirical Studies on Poverty in India FY00 149 G, B KG, PS Andhra Pradesh: Water, Household Environment, and Health FY00 257 G,PD,B,D KG, PD Karnataka Economic Restructuring FY01 138 G, PD, B, D PD, PS Workshops/Conferences/Technical Assistance India Development Forum FY00 121 C;, B, D PS Solid Waste Management Roadshow FY00 43 G, B KG India States' Reform Forum FY01 173 G, B, PD, D KG, PD Poverty Monitoring & Evaluation Workshop FY00 43 G, B, D KG India Construction Industry Workshop FY01 36 G,P,PD PD, PS Private Sector Participation in Water Supply Workshop FY00 74 G, PD PD, PS Post Green Revolution Issues FY01 27 G, PD KG, PD Governance and Public Sector Reform in Andhra Pradesh FY01 164 B KG,PS Underway/Nearing Completion Planned Costs Formal Reports The Role and Provision of Private Education FY01 41 G, B KG, PS Public and Private Partnerships in Health Care (Phase 11) FY01 300 G, B KG, PD Uttar Pradesh Poverty Assessment FY01 282 G, PD KG, PD Pension Study FY01 228 G, PD KG, PD,PS Microfinance Review FY01 152 (J, B, D KG, PD, PS Power Supply to Agriculture FY01 320 G, B, PD KG, PD, PS Rural Energy FY01 297 G, B KG, PS Long-term Issues in Transport FY01 135 PD KG, PS Karnataka Rural Policy Review FY01 45 G, B KG Procurement Assessment FY02 191 G, B KG, PS Household Energy, Air Pollution and Health FY02 145 G, B, PD, D KG, PD Improving the Investment Climate FY02 225 G, B, PD, D KG, PD, PS India: Country Assistance Strategy Annex B4 Page 2 of 2 Summary of Nonlending Services (As of March 9, 2001) Completion Product FY Cost (US$000) Audience a. Objective b. Informal Reports Local (inclusive) Institutions FY01 98 PD PS Users' Group Study FY01 110 G, PD, B KG, PD India Gender Strategy FY01 99 G, B KG, PS Andhra Pradesh Urban Poverty Reduction Strategy FY01 33 G, B, D KG, PS Financial Sector Strategy FY01 36 B KG, PS Forestry Institutional & Policy Study FY01 54 G, PD KG, PS Andhra Pradesh Fiscal Sustainability FY01 130 G PS Macro/States Economic Policy Notes FY01 264 G KG, PS Poverty Policy Notes FY01 154 G KG, PS Karnataka Notes on Education/Economic Restructuring FY01 166 G, B KG, PS Workshops/Conferences/Technical Assistance Fiscal Policies to Accelerate Economic Growth FY01 165 G,PD,D KG,PD Global Experiences in Privatization FY01 50 G, PD KG UP Environmental Management Framework FY01 100 G, B, PD, D KG, PD Client Social Policy & Capacity Building FY01 331 PD KG, PD, PS Non-Farm Employment in Rural Areas FY01 18 G, B, D KG Poverty & Social Monitoring FY01 192 G, B, PD, D KG Governance & Public Sector Reform in Andhra Pradesh FY01 164 G, B, PD, D KG, PS Planned c. Formal Reports Country Financial Accountability Assessment FY02 150 G, B KG, PS Review of the Integrated Child Development Program FY02 100 G, B, PD, D KG, PD, PS Rural Decentralization (Phase II) FY02 100 G, B, PD, D KG, PD, PS India Labor Markets FY02 200 G, B KG Natural Resources and Poverty Linkages FY02 225 B, PD KG, PD Financial Restructuring of Reforming State Power Utilities FY02 65 G, B KG, PS Power Sector Reform -- The Impact on the Poor FY02 75 G, B, PD, D KG, PD, PS Public Expenditure Review FY02 200 G, B, PD, D KG, PS Selected Issues in Governance Reform FY03 350 G, B, PD, D KG, PS Poverty Assessment FY03 400 G, B, PD, D KG, PD, PS Secondary Education FY03 100 G,B KG, PS Structural and Social Policy Review FY03 500 G, B, PD, D KG, PD, PS a. Government (G), Donor (D), Bank (B), Public Dissemination (PD) b. Knowledge Generation (KG), Public Debate (PD), Problem-Solving (PS) c. This list reflects indicative areas of assistance for the AAA program and is not meant to exclude other possibilities that could emerge, and are reflected in the strategy discussion in the text of the CAS. Only formal reports are covered. India: Country Assistance Strategy Annex B5 Page I of I India Social Indicators Latest single year Same region/income group Low- 1970-75 1980-85 1993-98 South Asia income POPULATION Total population, mid-year (millions) 613.5 765.1 979.7 1,304.6 3,536.4 Growth rate (% annual average) 2.3 2.1 1.4 1.5 1.4 Urban population (% of population) 21.3 24.3 27.8 27.7 30.5 Total fertility rate (births per woman) 5.6 4.8 3.2 3.4 3.1 POVERTY (% of population) National headcount index .. .. 35.0 Urban headcount index .. 30.5 Ruim headcount index .. .. 36.7 INCOME GNP per capita (US$) 190 300 440 430 520 Consumer price index (1995=100) 21 41 132 131 136 Food price index (1995=100) 38 132 INCOME/CONSUMPTION DISTRIBUTION Gini index .. .. 37.8 Lowest quintile (% of income or consumption) 5.9 .. 8.1 Highest quintile (% of income or consumption) 49.4 .. 46.1 SOCLAL INDICATORS Public expenditure Health (% of GDP) .. .. 0.6 0.8 1.3 Education (% of GNP) 2.7 3.5 3.2 3.1 3.2 Social security and welfare (% of GDP) .. .. Net primary school enrollment rate (% of age group) Total 60 75 77 77 86 Male 72 85 83 83 89 Female 48 64 71 70 82 Access to safe water (% of population) Total .. 54 81 77 Urban .. 80 85 83 Rural .. 47 79 75 Immunization rate (% under 12 months) Measles .. 1 81 81 80 DPT .. 41 90 87 82 Child malnutrition (% under 5 years) .. .. 53 53 Life expectancy at birth (years) Total 50 55 63 62 63 Male 51 56 62 62 62 Female 49 55 64 63 64 Mortality Infant (per thousand live births) 132 97 71 75 68 Under 5 (per thousand live births) 206 177 95 89 92 Adult (15-59) Male (per 1,000 population) 324 261 215 220 235 Female (per 1,000 population) 353 279 204 213 208 Matemal (per 100,000 live births) .. .. 410 2000 World Development Indicators CD-ROM, World Bank India: Country Assistance Strategy Annex B6 Page ] of 2 India Key Economic Indicators Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 National accounts (as % of GDP) Gross domestic product a. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 29.3 28.0 29.1 27.7 26.7 25.8 24.9 24.0 Tndustry 27.1 27.1 25.7 26.3 26.3 26.5 26.9 27.4 Services 43.6 44.9 45.2 46.0 47.0 47.6 48.2 48.6 Total Consumption 81.8 80.1 80.8 80.1 79.0 78.6 78.5 78.2 Gross domestic fixed investment 23.0 22.7 21.4 22.0 23.5 23.8 24.0 24.3 Government investment 6.9 6.5 6.5 6.6 7.7 7.2 7.4 7.4 Private investment 16.1 16.2 14.9 15.4 15.7 16.6 16.6 16.9 Exports (GNFS) b. 10.8 11.1 11.3 12.1 13.1 13.7 14.2 14.6 Inports (GNFS) b. 14.5 14.5 14.0 15.0 16.5 17.1 17.7 18.1 Gross domestic savings 18.2 19.9 19.2 19.9 21.0 21.4 21.5 21.8 Gross national savings c. 20.5 22.0 20.8 21.9 23.2 23.6 23.6 23.7 Memorandum items Gross domesticproduct 383640 407889 419070 447292 477417 514073 553699 597502 (US$ rnillion at current prices) GNP per capita (US$, Atlas method) 410 420 420 440 490 510 530 560 Real annual growth rates (%, calculated from 1993 prices) Gross domestic product at market prices 7.0 4.6 6.8 6.5 5.8 6.0 6.3 6.5 Gross Dornestic Income 6.9 5.3 5.7 5.9 4.8 6.5 6.7 6.6 Real annual per capita growth rates (%, calculated from 1993 prices) Grossdomesticproductat marketprices 5.1 2.7 4.9 4.6 3.9 4.3 4.8 5.1 Total consumption 11.7 1.2 3.0 2.2 0.9 4.4 5.0 4.9 Private consurnption 13.3 0.1 1.4 1.0 -0.3 5.3 7.2 5.9 Balance of Paynents (US$ millions) Exports (GNFS) b. 41607 45109 47484 54006 62699 70567 78846 87497 Merchandise FOB 34133 35680 34298 38285 45817 52588 59894 67553 Imports (GNFS) b. 55696 59297 58565 67248 78727 88087 98003 108331 Merchandise FOB 48948 51187 47544 55383 64531 74023 83763 94201 Resource balance -14089 -14188 -11081 -13242 -16028 -17521 -19157 -20834 Net current transfers 12367 12209 10587 12256 12747 13820 14512 15238 Current account balance -5578 -5145 -3449 -4552 -5497 -6169 -7595 -9335 Net private foreign direct investment 2821 3557 2462 2155 2500 4000 4500 4500 Long-termloans (net) 3424 1816 5918 4781 8133 4124 7250 4368 Official 221 -398 1002 -1088 -1191 1037 961 1050 Private 3203 2213 4917 5869 9324 3086 6289 3318 Other capital (neri incl errors & onmuissions) 4560 3368 -998 3404 -300 -300 -300 -300 Change in reserves d. -5227 -3596 -3933 -5788 -4836 -1655 -3855 766 Memorandum items Resource balance (% of GDP) -3.7 -3.5 -2.6 -3.0 -3.4 -3.4 -3.5 -3.5 Real annual growth rates ( YR93 prices) Merchandise exports (FOB) 7.4 2.5 2.8 16.7 20.9 10.7 9.9 10.0 Primary -33.7 4.0 42.7 6.4 4.9 4.6 4.7 4.8 Manufactures 10.1 6.2 1.9 19.2 24.9 11.9 11.0 11.0 Merchandise imports (CIF) 8.0 11.3 3.1 12.7 10.6 17.2 13.2 11.2 India: Country Assistance Strategy Annex B6 Page 2 of 2 India Key Economic Indicators Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 Public finance (as % of GDP at market prices) e. Current revenues 21.7 22.8 22.3 23.6 24.3 244 24.5 24.6 Current expenditures 21.3 22.7 23.5 25.5 26.1 25 7 25.2 24.7 Current account surplus (+) or deficit (-) 0.4 0.1 -1.2 -1.9 -1.8 -1 3 -0.6 -0.1 Capital expenditure 9.0 7.8 8.7 9.1 9.2 9.2 9.4 9.4 Foreign financing 0.3 0.4 0.3 0.8 0.4 -0.1 0.0 -0.7 Monetary indicators M2/GDP 51.5 54.2 55.5 55.5 56.7 57.7 59.2 60.7 Growth of M2 (%) 16.2 17.0 19.2 9.9 15.6 15.0 15.6 15.7 Private sector credit growth / 50.7 57.6 52.2 25.7 61.9 53.6 73.0 57.1 total credit growth (%) Price indices( YR93 =100) Merchandise export price index 99.7 101.7 95.2 92.7 91.8 95.2 98.7 101.2 Merchandise import price index 110.9 105.7 103.5 121.4 127.9 125.1 125.1 126.5 Merchandise terms of trade index 89.8 96.3 92.0 76.4 71.8 76.1 78.9 80.0 Real exchange rate (US$/LCU)f 72.3 76.6 72.4 72.4 69.1 70.5 71.9 72.6 Consumner price index (% change) 9.4 7.2 12.7 3.4 7.0 6.5 6.0 6.0 GDP deflator (% change) 7.7 6.4 8.9 3.3 7.0 6.5 6.0 6.0 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services.' c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMP resources. e. Consolidated Non-financial public sector. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. India: Country Assistance Strategy Annex B7 Page ] of I India Key Exposure Indicators Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 Total debt outstanding and 93470 94320 97639 98434 106333 107457 111204 112074 disbursed (TDO) (IJS$m) a. Net disbursements (US$m) a. 778 -1602 3069 1312 4366 1787 4793 2157 Total debt service (TDS) (US$m) a. 11982 12415 12094 15313 13552 11042 12019 15801 Debt and debt service indicators (%) TDO/XGS b. 171.9 161.6 166.0 146.7 137.7 124.5 116.6 106.9 TDO/GDP 24.4 23.1 23.3 22.0 22.3 20.9 20.1 18.8 TDS/XGS b. 22.0 21.3 20.6 22.8 17.6 12.8 12.6 15.1 Concessional/TDO 43.7 41.2 41.1 45.4 41.3 41.0 39.2 38.2 IBRD exposure indicators (%) IBRD DSIpublic DS 13.7 12.2 12.5 12.2 11.4 12.5 11.6 8.9 PreferredcreditorDS/public 29.4 24.0 23.6 31.6 31.3 26.8 25.1 19.3 DS (%) IBRD DS/XGS 2.8 2.4 2.3 2.4 1.8 1.4 1.3 1.3 IBRD TDO (US$m) c. 8768 8138 7990 7816 7216 7376 7892 8773 Share of IBRD portfolio(%) 7.9 6.8 6.5 6.4 5.8 5.7 6.0 6.8 IDATDO(US$m)c. 17616 17912 18562 18930 20044 20813 21179 21252 IFC (US$m) 835.8 855.4 801.7 686.3 677.7 Loans 654.9 662.8 569.1 436.0 411.9 Equity and quasi-equity d. 180.9 192.6 232.6 250.3 265.8 MIGA MIGA guarantees (US$m) Note: IBRD Data in this table differs from other annexes because this table is done based on the Indian FY. a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMP credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Includes present value of guarantees. d. Includes equity and quasi-equity types of both loan and equity instruments. India: Country Assistance Strategy Annex B8 (IBRD and IDA) Status of Bank Group Operations (Operations Portfolio) Page I of 2 (As of February 28, 2001) (351 PROJECTS CLOSED) ACTIVE PROJECTS Difference Between Last PSR Expected and Actual Supervision Rating Original Amount in US$ Millions Disbursements Project ID Project Name Developnent Implementation Fiscal Year IBRD EDA GRANT Cancel. Undish. Orig. Frm Rev'd Ob_ectives Progress I P045051 2ND NATL IHlV/AIDS CO S S 1999 0 191 0 0 148.8 1.6 0 2 P049301 A.P. EMERG. CYCLONE S S 1997 50 100 0 0 85.5 98.7 0 3 P010503 AGRIC HUMAN RES DEVT S S 1995 0 59.5 0 0 9.9 18.6 0 4 P010489 AP IST REF. HEALTH S S S 1995 0 133 0 0 36.8 26.2 0 5 P045049 APDPIP S S 2000 0 111 0 0 103.4 -3.7 0 6 P049385 APECONRESTRUCTURIN S S 1998 301.3 241.9 0 0 346.1 123 0 7 P035158 APIRRIGATION Il S S 1997 175 150 0 0 214.4 93.5 0 8 P049537 AP POWER APL I S S 1999 210 0 0 0 116.4 54 0 9 P010522 ASSAM RURAL INFRA S S 1995 0 126 0 0 64 42.3 15.5 10 P010455 BLINDNESS CONTROL S S 1994 0 117.8 0 10 53.3 55.5 0 11 P010480 BOMBAY SEW DISPOSAL S S 1996 167 25 0 10 88.2 94.7 7.4 12 P069376 CFC PRODTN SECTOR CLOSURE ODS I S S 2000 0 0 80.8 0 60.3 -8.4 0 13 P043310 COAL.ENV&SOCIALMMGATION S S 1996 0 63 0 0 31 26.7 0 14 P009979 COAL SECTOR REHAB U U 1998 530 2 0 268.7 28.1 164.7 164.7 15 P009870 CONTAINER TRANSPORT S S 1994 94 0 0 15 34.3 52.3 52.3 16 P010464 DISTRICTPRIMARYED S S 1995 0 260.3 0 0 82 69.3 0 17 P035821 DPEP 11 S S 1996 0 425.2 0 0 168.7 28.9 0 18 P038021 DPEP DI (BIHAR) S S 1998 0 152 0 0 120.2 70.9 0 19 P036062 ECODEVELOPMENT S S 1997 0 28 0 0 16.5 11.4 0 20 P009584 ECODEVELOPMENT S S 1997 0 0 20 0 9.8 8.6 0 21 P055906 ENERGY EFFICIENCY S S 2000 0 0 5 0 0 0 0 22 P043728 ENVCAPACITYBLDGTA S S 1997 0 50 0 0 38.3 27.4 0 23 P010563 FINANCtAL SECTOR DEV PROJ. (FSDP) S S 1995 700 0 0 301.3 29.8 0 0 24 P010448 FORESTRY RESEARCH ED S S 1994 0 47 0 0 7.1 30 2.8 25 P010566 GUJARATHIWYS S HS 2001 381 0 0 0 366 22 0 26 P009964 HARYANA WRCP U S 1994 0 258 0 0 87.8 0 27 P010485 HYDROLOGY PROJECT S S 1996 0 142 0 19.6 45 76.3 9.7 28 P009977 ICDSI (BIHAR&MP) S S 1993 0 194 0 0 62.5 99.6 99.6 29 P039935 ILPS-INFRAS FINANCE S S 1996 200 5 0 0 178.6 179.2 0 30 P067330 IMMUNIZATION STRENGTHENING PR( S S 2000 0 142.6 0 0 109.6 0 0 31 P010463 INDUS POLLUTION PREV U S 1995 143 25 0 65.8 74.6 134.4 6.3 32 P049477 KERALA FORESTRY S S 1998 0 39 0 0 25.3 2.1 0 33 P055454 KERALA RWSS s S 2001 0 65 5 0 0 64.8 0 0 34 P010461 MADRAS WATSUPHI S S 1995 275.8 0 0 189.3 24.7 213.7 6.9 35 P050651 MAHARASHI HEALTH SYS S S 1999 0 134 0 0 123.2 129.9 0 36 P010511 MALARIA CONTROL S S 1997 0 164.8 0 0 122.2 70.8 0 37 P059242 MPDPEP NA NA 2001 0 110.1 0 0 110.3 0 0 38 P009946 NAT. HIGHWAYS If S S 1992 153 153 0 0 55.8 50.6 28.2 39 P009869 NATHPA JHAKRI HYDRO S S 1989 485 0 0 0 72.2 73.2 27.6 40 P009972 NATIONALHIGHWAYSEPROJECT S S 2000 516 0 0 0 485.8 0 0 41 P010561 NATL AGRTECHNOLOGY S S 1998 96.8 100 0 0 162.3 69.3 0 42 P031829 ODS n - Consumption Phase Out S S 1995 0 0 50 0 30.5 -2.8 0 43 P010496 ORISSA HEALTH SYS S S 1998 0 76.4 0 0 67.4 21.8 0 44 P035170 ORISSA POWER SECTOR S S 1996 350 0 0 0 234 165.9 0 45 P010529 ORISSA WRCP S S 1996 0 290.9 0 0 99.6 47.9 0 46 P010457 POPULATION IX S S 1994 0 88.6 0 0 35.5 31 0 India: Country Assistance Strategy Annex B8 (IBRD and IDA) Page 2 of2 ACTIVE PROJECTS Difference Between Lagt PSR Expected and Actnal Supervison Rating Oridnal A _oun in US$ Mfiio Disbirsnm ts' Project ID Project NamD I 1eeFlsnaI Year IBIlD IDA GRANT CanceL Undlsb. Orig. Frm Rev'd OkilI roZa.t 47 P009963 POPULATION VIm s s 1992 0 79 0 0 37.4 39.9 0 48 P045050 RAJASTHANDPEP S S 1999 0 85.7 0 0 78.1 23.5 0 49 P010505 RAJASTHAN DPIP S S 2000 0 100.5 0 0 93.3 -1.7 0 50 P038334 RAJASTHANPOWERI NA NA 2001 180 0 0 0 180 0 0 51 P049770 REN EGY n s s 2000 80 50 0 0 128 0 0 52 P010410 RENEWABLERESOURCES S S 1993 75 115 0 0 47.2 86.9 0 53 P010531 REPRODUCTIVEHEALTHI S S 1997 0 248.3 0 0 158.1 99.3 51.8 54 P044449 RURAL WOMEN'SDEVELOPMENT S 5 1997 0 19.5 0 0 15.4 13.2 0 55 P035825 STATEHEALTHSYSII S S 1996 0 350 0 0 156.9 162 0 56 P009995 STATE HIGHWAYS I(AP) HS S 1997 350 0 0 0 241 78.7 0 57 P045600 TA STS RD IIFRA DEV HS S 1997 51.5 0 0 0 14.2 16.3 16.3 58 P059501 TA for Econ Reform Project S S 2000 0 45 0 0 41.6 0 0 59 P010476 TAMILNADUWRCP 5 5 1995 0 282.9 0 0 121.8 116.5 15.7 60 P050658 TECHN EDIUC I s s 2001 0 64.9 0 0 60.7 0 0 61 P050637 TN URBAN DEV n s s 1999 105 0 0 0 52.4 5.9 0 62 P010473 TUBERCULOSIS CONTROL U U 1997 0 142.4 0 0 106.4 81.7 0 63 P055456 Telecoimununications Sector Reform TA S 5 2000 62 0 0 0 58.4 1.4 0 64 P035824 UP DIV AGRC SUPPORT S S 1998 79.9 50 0 0 110.4 53.1 0 65 P050667 UPDPEP I S S 2000 0 182.4 0 0 153.4 28.2 0 66 P035169 UPFORESTRY S S 1998 0 52.9 0 0 31.1 12 0 67 P050657 UPHealthlSysteinsDevelopmientProject S S 2000 0 110 0 0 103.2 1.1 0 68 P035172 UPPOWERSECTORRESTRUCTURING S S 2000 150 0 0 0 138.9 11.9 0 69 P010484 UP RURAL WATER S S 1996 59.6 0 0 7.2 32.7 27.1 7.8 70 P050646 UPSODICLANDSII 5 5 1999 0 194.1 0 0 162.1 40 0 71 P009961 UP SODIC LANDS RECLAMATION S 5 1993 0 54.7 0 0 0.03 0 0 72 P035827 WOMEN & CHILD DEVLPM U U 1998 0 300 0 0 267.7 26.5 0 73 P041264 WTRSHDM MTHGlHSII S S 1999 85 50 0 0 110.1 5.6 0 TOTAL 6,105.9 6,8489 1S5.8 886.9 7,231.1 3,400.2 512.8 As of February 28, 2001 US$ Millions Total disbursed (IBRD & IDA) 39,839.7 Of which has been repaid: 12,948.8 Total now held by IBRD & IDA: 33,973.7 Anmount Sold: 133.8 Of whch has been repaid: 133.8 Total undisbursed: 7,231.1 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. India: Country Assistance Strategy Annex B8 (IFC) Page I of 2 Statement of IFC's Held and Disbursed Portfolio as of January 31, 2001 (US$ Millions) Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1989 AEC 5.90 0.00 0.00 0.00 5.90 0 00 0.00 0.00 1994 Ambuja Cement 2.67 4.94 0.00 0.00 2.67 4.94 0.00 0.00 1992/93 Arvind Mills 0.00 14.75 0.00 0.00 0.00 14.75 0.00 0.00 1997 Asian Electronic 0.00 5.50 0.00 0.00 0.00 5.50 0.00 0.00 2001 Basix Ltd. 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 1984/91 Bihar Sponge 10.58 0.68 0.00 0.00 10.58 0.68 0.00 0.00 1997 CEAT 19.80 0.00 0.00 0.00 19.80 0.00 0.00 0.00 1995 Centurion Bank 7.00 4.67 0.00 0.00 7.00 4.67 0.00 0.00 1990192/96 CESC 32.33 0.00 0.00 43.55 32.33 0.00 0.00 43.55 2000 Chinai 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 Chowgule 11.71 4.58 0.00 17.97 11.71 4.58 0.00 17.97 1997 Duncan Hospital 7.00 0.00 0.00 0.00 7.00 0.00 0.00 0.00 1997 EEPL 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1986 EXB-City Mills 0.48 0.00 0.00 0.00 0.48 (.00 0.00 0.00 1986 EXB-STG 0.31 0.00 0.00 0.00 0.31 (.00 0.00 0.00 1995 EXIMBANK 9.10 0.00 0.00 0.00 9.10 0.00 0.00 0.00 1995 GE Capital 5.00 4.39 0.00 0.00 5.00 4.39 0.00 0.00 1986/92/93/94 GESCO 0.00 10.62 0.00 0.00 0.00 10.62 0.00 0.00 1988/94 GKN Driveshafts 0.00 1.40 0.00 0.00 0.00 1.40 0.00 0.00 1994/98/00/01 Global Trust 25.00 13.18 0.00 0.00 5.00 10.96 0.00 0.00 1994 Gujarat Ambuja 0.00 7.31 0.00 0.00 0.00 7.31 0.00 0.00 1994/97 GVK 21.66 7.45 0.00 19.62 21.66 7.45 0.00 19.62 1978/87/91/93 HDFC 40.00 0.80 0.00 0.00 40.00 0.80 0.00 0.00 1990 HOEL 0.00 0.28 0.00 0.00 0.00 0.28 0.00 0.00 1998 IAAF 0.00 2.30 0.00 0.00 0.00 1.37 0.00 0.00 1990/94 ICICI-IFGL 0.00 0.30 0.00 0.00 0.00 0.30 0.00 0.00 1990/95/00 ICICI-SPIC Fine 0.00 4.67 0.00 0.00 0.00 4.67 0.00 0.00 1998 IDFC 0.00 15.46 0.00 0.00 0.00 15.46 0.00 0.00 1990/93/94/98 IL & FS 9.75 6.23 1.81 2.00 9.75 6.23 1.81 2.00 1992/95 IL&FS Venture 0.00 1.05 0.00 0.00 0.00 1.05 0.00 0.00 1996 India Direct Fnd 0.00 7.47 0.00 0.00 0.00 6.61 0.00 0.00 1985/90/94 India Lease 0.00 0.86 0.00 0.00 0.00 0.86 0.00 0.00 1993/94/96 Indo Rama 18.75 11.98 0.00 7.50 18.75 11.98 0.00 7.50 1996 Indus 11 0.00 5,00 0.00 0.00 0.00 5.00 0.00 0.00 1992 Indus VC Mgt Co 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1992 Indus VCF 0.00 0.92 0.00 0.00 0.00 0.92 0.00 0.00 1992 Info Tech Fund 0.00 0.64 0.00 0.00 0.00 0.64 0.00 0.00 1992/94/97 Ispat Industries 30.35 15.41 0.00 0.00 30.35 15.41 0.00 0.00 1981 /86/91 /93/96 ITW Signode 0.00 1.02 0.00 0.00 0.00 1.02 0.00 0.00 1989/95 JSB India 0.00 1.21 0.00 0.00 0.00 1.21 0.00 0.00 2001 Learning Universe 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.00 1981 /90/93 M&M 0.00 4.56 0.00 0.00 0.00 4.56 0.00 0.00 1996/99/00 Moser Baer 38.35 24.93 0.00 0.00 15.38 24.93 0.00 0.00 1992/96/97 NICCO-UCO 5.44 0.49 0.00 0.00 3.44 0.49 0.00 0.00 1997 Owens Coming 25.00 0.00 0.00 0.00 25.00 0.00 0.00 0.00 1981 Pennar Steel 0.00 0.07 0.00 0.00 0.00 0.07 0.00 0.00 1995 Prism Cement 13.13 5.02 0.00 9.00 13.13 5.02 0.00 9.00 India: Country Assistance Strategy Annex B8 (IFC) Page 2 of 2 1995198 Rain Calcining 17.78 5.46 0.00 0.00 17.78 5.46 0.00 0.00 1995/98 RCHL 0.00 11.25 0.00 0.00 0.00 11.25 0.00 0.00 - 397 SAPL 0.00 0.07 0.00 0.00 0.00 0.07 0.00 0.00 1995 Sara Fund 0.00 5.94 0.00 0.00 0.00 4.33 0.00 0.00 2001 Spryance.com 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 1997/00 SREI 15.00 3.00 5.00 0.00 15.00 3.00 5.00 0.00 1983/93/94/95 Sundaram Finance 0.16 0.00 0.00 0.40 0.16 0.00 0.00 0.40 2000 Sundaram Home 0.00 2.22 0.00 0.00 0.00 1.15 0.00 0.00 2000 Tanflora Park 0.00 0.51 0.00 0.00 0.00 0.00 0.00 0.00 1989/90/94 Tata Electric 19.23 0.00 0.00 0.00 19.23 0.00 0.00 0.00 1994 Taurus Starshare 0.00 2.53 0.00 0.00 0.00 2.53 0.00 0.00 1998 TCW/ICICI 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 1990 TDICI-VECAUS I 0.00 0.67 0.00 0.00 0.00 0.67 0.00 0.00 1981/86/89/92/94 TISCO 0.00 15.37 0.00 0.00 0.00 15.37 0.00 0.00 1987/88/90/93 Titan Industries 0.00 1.03 0.00 0.00 0.00 1.03 0.00 0.00 1989 UCAL 0.00 0.54 0.00 0.00 0.00 0.54 0.00 0.00 1996 United Riceland 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991/93/96 VARUN 0.00 1.35 0.00 0.00 0.00 1.35 0.00 0.00 1997 Walden-Mgt India 0.00 0.02 0.00 0.00 0.00 0.02 0.00 0.00 1997 WIV 0.00 5.00 0.00 0.00 0.00 2.40 0.00 0.00 Total Portfolio: 402.48 258.39 6.81 100.04 346.52 247.59 6.81 100.04 Approvals Pending Commitment FY Approval Project Name Loan Equity Quasi Partic 2000 APCL 7.10 1.90 0.00 0.00 2001 Bharati Telecom 0.00 20.00 0.00 0.00 1999 Carraro 10.00 0.00 0.00 0.00 2001 GTF Fact 10.00 2.41 0.00 0.00 2000 IndAsia 0.00 15.00 0.00 0.00 2001 India Seamless 10.70 0.70 0.00 0.00 2001 Internet Express 0.00 5.00 0.00 0.00 1999 Sarshatali Coal 30.00 5.00 0.00 0.00 2000 SRE1 1I 10.00 0.00 0.00 0.00 Total Pending: 77.80 50.01 0.00 0.00 Note: Values do not reflect off-balance sheet items such as guarantee and risk management products. India: Country Assistance Strategy Annex B9 Page 1 of 8 India Country Program Matrix (FY02-04) INDIA'S POVERTY REDUCTION STRATEGY WORLB BANK GROUP ASSISTANCE Development Progress Strategic Diagnostic Strategies and Measures Ba Group Partners indiators/Beneharks Objective _ J l_i A. STRENGTHENING THE ENABLING ENVIRONMENT FOR DEVELOPMENT AND GROWTH Al. Improving Government Effectiveness Ala Fiscal * High deficits * Improve fiscal * Work closely with * Ongoing portfolio of fiscal * IMF (national * Significant state Reform * Deteriorating discipline at central and state refonssing states to support adjustment'restructuring operations in AP and UP, issues) reform efforts and composition of expenditure levels via consensus building comprehensive economic and and TA credit to support economic reforms * ADB (active on reduced fiscal deficits Improved * Tax revenue-to-GDP and incentives for reform fiscal reform programs * New programnmatIc adjustment support and fiscal issues in Gujarat, * Pall over ime in fiscal falling: cost recovery is (e.g. fiscal responsibilty * Provide TA for reform technical assistance for reform programs in MP, Kerala) consolidated public management low legislation, link of additional implementation and budget Kamataka, UP, AP and possibly other states * UK DFID (TA for sector debtVGDP ratio is critical to * Many states face high Gol financing to state support towards the short term * AAA to help institutionalize medium-term economic and fiscal * Improved providing indebtedness and a implementation of reforms) costs of reform fiscal frameworks and good public expenditure reforms, including expenditure mix, government lquidity crisis - * Improve the expenditure * Intensify dialogue on the management in reforming states collaboration with the emphasizing high- with the undem-ining their mix to link fiscal polcies complex fiscal issues facing the * Public Expenditure Review to address national Bank in AP and Orissa) priority development financial developmental with growth and poverty central govemment issues * AusAID (possible expenditures means to effcotiveness reduction * Policy dialogue, workshops and conferences at Kamataka TA support) * Higher tax/GDP fulJdil its * Reduce subsidies at state and national levels ratio and more efficient development both central (food, fertilizers) tax system, including role. and state (power, irrigation) VAT implementation levels * Better cost * Implement tax reform, recovery for service including broadening of the provision tax base Alb * Govemments over- * Rationalize and * Work closely with * Ongoing and future * CIDA * Reorientation of Governance stretched and failing to streamline organizational refomiing states to support adjustment/restructuring operations and policy * UK DFID the state away from areas Reform provide services structures and business govemance and public dialogue in focus states to address cross-cutting * USAID (urban where credible private effectively; characterized processes managcment reform in the context governance reforms decentralization and sector altematives exist The success by cumbersome structures, * Improve human of broader structural adjustment * Institutional issues will also remain central to govemance) * Improvements in offiscal excessive regulations and resource management and * Closely integrate reforms in sectoral investment operations and dialogue (e.g. * ADB service delivery in adjustment red tape development core systems and procedures with environmental governance issues in UP) * Ford Foundation critical areas (e.g. depends on * Poor expenditure * Improve the quality of institutional development * AAA: National Public Expenditure Review, education, power, health) improving management leading to public expenditure initiatives at the sector level (e.g. proposed work on govemance issues, procurement v Improved public sector fiscal deficits, improper programming and financiai iis environmental monitonn & assessment, financial accountability assessment transparency and public effectiveness allocation of scarce management compliance) * Focused policy dialogue and TA proposed as disclosure, e.g. via and overall resources and waste * Eneonrage strengthened * Provide information about support to Gol freedom of information governance. * Too many staff in legislative oversight and promising examples of public * WBI: Support in reaching out to all levels of legislation, e- positions with limited greater participation/oversight sector reform in India and abroad govemment governance, pubhc value-added of civil society * Provide high qualty * IFC: Support to efficient private sector disclosure of pollutants) * Bureaucracy * Develop and implement technical and analytical support to involvement and pioneering investments in states v Improvements in increasingly subject to monitorable indicators for broaden the public debate on willing to undertake the necessary steps toward civil service efficiency poltical interference, measuring govemment governance reform issues privatization and productivity including frequent effectiveness * Assist reforming state * Strengthened transfers of officials * Strengthen governments with public expenditure * Need for greater accountability and restructuringtprivatization of programming and public financial responsiveness at local levels, public enterprises; bring in financial management India: Country Assistance Strategy Annex B9 Page 2 of 8 Country Program Matrix (FY02-04) INDiA Ss PoVERTY REDUCTION STRATEGY WORlD BANK GROUP ASSISTANCE Developnent Progress __ __ _ _: ......... . . i : :, __ .... ~~~~~~~~ ~ ~~~~~~~~~~~~~Partners IndicatorslBenchmarks Strategic Diagnostic Strategies and Measures Bank Group Role Instruments Objective accountability, while enhancing local lessons from international and accountability transparency, and integrity autonomy experience * Improved public * Public enterprises are * Accelerate privatization perceptions of the often a fiscal burden and or disinvestment from current probity and integrity of inefficient slow pace the civil service Alc * While accountable * Strengthen local * Work with interested states * In urban, ongoing portfolio is minimal, with no * United Nations * Improved local 'Decentral- local governments can govemment, in both financial to strengthen urban and rural current operations to strengthen local government; Agencies service delivery ization improve service delivery, and administrative respects, decentralization and improving Portfolio to be strengthened by TA for (decentralization is a * Increased financial most local governments as a key aspect of improving local governance and policy/institutional reforms, proposed Gujurat, Al' key theme of UNDAF and administrative Decentraliz- lack the capacity to assume service delivery and management and Kamataka urban projects framework) autonomy of local ation to local an expanded role accountability * Support effective and * Analytical work on AP urban poverty reduction * DFID governments governments * Enhance the livability of inclusive decentralization by strategy and decentralization for the urban sector * The Netherlands * Enhanced represents a citics through strengthened empowering local communities, * TA to assist with design of conducive financing participation, powerful decentralization and well- especially in rural areas arrangements and expand use of City Development transparency and opportunity to managed urban governments * Undertake analytical work Strategies in selected states accountability in urban improve * Improve effectiveness to deepen our understanding in * In rural, ongoing portfolio includes government service of rural local governments' selected states, share lessons decentralization and capacity building initiatives at delivery, delivery of anti-poverty across states, and bring in lessons local levels, (e.g. District Poverty Initiative Projects responsive- programs and other services of international experience. Key (DPIPs) in MP, AP and Rajasthan). Future support to ness and * Introduice performance- issues include: roles and include open-ended and single-sector community- accountability based funding for urban and functions of the 3 levels of rural based rural projects (e.g. state forestry, rural water rural local governments local governments; roles and supply projects, AP Rural Poverty Reduction functions of local governments Project); also possible project aitned directly at vis-a-vis line agencies and user strengthening rural decentralization group; improve local taxation and * Dialogue in selected states, including as part of cost recovery; improve fiscal/governance reforms accountability to local * Analytical work in interested states to further constituents decentralization and address key issues WBI: training and institutional capacity building to faciltate decentralization to local govemments A2. Promoting Private Sector Led Growth A2a Provision * Deficiencies and * Expand capacity and * Finance the preparation & * Ongoing: Third National Highway Project, AP * ADB * Better maintained of High deterioration of India's improve serviceability of implementation of national and Gujarat state highway projects and State Road * Confederation of national highways and Quality road network national highways and state highways and state road projects Infrastructure Development TA Indian Industries road network in selected Infrastructure * Poor performance of roads in selected states * New lending support of about one natonal * JBIC states public road agencies * Implement insitutional * Support development of highway project and one to two state road projects per * State Chambers of * Greater emphasis In transport, * Inefficient multi- reform in national and state long term strategy for transport year Comrnerce and Industry on performance-based the public modal integration of road agencies sector * AAA, including workshops on institutional * State trucking and management and sector needs transport system * Better integrate the * Promote institutional development and promotion of the construction bus operator accountability to road more * Poor performance transport system reforms identified in institutional industry associations users resources and and inadequate capacity of * Promote the private action plans for NHAI and * IFC: Finance pioneering investments whenever * About 1500 km of to play its role domestic construction sector construction industry selected state PWDs, and promote the enabling environment is adequate national highways more , ind,-tmv .. nrnd mint, invesrment and nnvate cector involvement . iTnroved to 4-lane India: Country Assistance Strategy Annex B9 Page 3 of 8 Country Program Matrix (FY02-04) INDAI'S POVERTY REDUCTIoN STRATEGY WORID BANK GROUP ASSISTANCE Development Progress . l ! | ~~~~~~~~ ~ ~~~~~~~~~~~~~~~Partners Indch-alors/tflnc arks Strategic Diagnostic Stratgies and Measres Bank Group Role Instrurnnts Objective _ _ efficiently, industry and private investment and private sector involvement improved to 4-lane operations in the sector * Provide strategic advice and standards encourage knowledge sharing * Aboat 2000 km of * Encourage policy reforms state roads improved to that remove impediments to 2-lane standards development of construction * Reduced travel industry, and appropriate time and transport costs, formnulation/use of contract sizing improved road safety and selection critera * Itnplementation of institutional development action plans in NHAI & selected state PWDs * Improved cost effectiveness of road agency investments and greater participation of the private sector Power * Deep power sector * Unbundling of State * Support power sector reform * Ongoing portfolio of power sector operations * PPILAF (multi- * Reduced fiscal crisis, with state utfilites at Electricity Boards (SEBs) in comiitted states in Orissa, Haryana, AP, UP and Rajasthan and donor facility) drain of the power sector rn power, bankruptcy (separating generation, * Assist in establishing strong renewable energy assistance financed by GEF * DFID * Better cost urban * High transmission transmission and distribution) regulatory frarneworks where * Support for sector reforms and pre-privati7ation * ADB recovery for power via infrastructure and distributon losses underway in many states as a prices reflect costs more closely investments in Karnataka and other selected states, appropriate tariff and water * High subsidies to step towards private sector and agricultural power subsidies and for national transmission grid. * CIDA schedules, lower supply, and agriculture sector involvement, in particular are paid by government * Complementary rural power/infrastructure * KfW subsidies and reversal in telecom- * Low access and privatization of distribution to * Finance transmission and investments to mitigate the cost of power reforms on * USAID culture of non-payment munications, considerable bottlenecks bring down theft and losses critical pre-privatization farming communities . SDC . Irnproved quantity aproper throughout India * Orissa is the first state distribution investments * AAA and policy advice for financial . GEF and quality of supply of environment * Profitable industrial to actually privatize its entire * Support to the national restructuring, to prepare for private investment, help * DANIDA power in reforming for private demand constrained as distribution sector transmission company, and tailor reforms to state circumstances and assess the states investment many clients opt for * Establishment of development of national power effeets of power reform on poor and rural * Reduced and captive generation independent regulatory market communities transmission and management bodies-now established in * Provide IFC support to * IFC: selected investments in reforming states, distribution losses in is needed nearly all major states pioneering private investments in with high priority on supporting newly privatized reforning states states with strong commitment to distribution companies (as in Osissa) * Ceation of the sector reformis * Additional investment support to captive, co- enabling environment for * Promote environmental generation. renewable energy, energy-efficient power private sector investment benefits e.g. from feasible projects and other private projects selling power to * Substantial renewable energy altematives third parties distribution privatization in reforming states India: Country Assistance Strategy Annex B9 Page4of8 Country Program Matrix (FY02-04) INDIA'S PoVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress ... , . _ _ u : .... ~~~~~~~~~~~~~~~~~~~~~~Partners I ndlieatordtBenchmsarkss Strategic Diagnostic Strategies and NMeasures Bastk Group Role Instruments Objective L X_ Urban water * Urban water supply * Separate urban water * Bring in intemational * Ongoing portfolio of urban water sector * ADB * Greater private supply and and sanitation in crisis, policy and service provision experience about urban reforms operations in Maharashtra and Tamil Nadu * Multi-donor Water sector participation in infrastructure with state and local utilities functions and private sector participation in * New lending/credit support for Karnataka and Sanitation Program urban services, at bankruptcy * Reduce dependence of urban water Water, Gujarat Urban, Kamataka Urban Capacity * USAID especially water, leading * Inadequate water sector on state subsidies and * Finance advisory services Building and Mumbai Urban Transport Project * UK DFID to reduced fiscal burden service coverage & poor establish independent for design of PSP transactions * AAA: Dissemination, consensus building and * ADB and increased coverage water quality regulatory framework for * Seek up-front agreement on distance learning activities to help reforming urban * AusAID and quahty * Weak regulatory water tariff setting key policy and institutional bodies to implement private sector solutions * SPARC (Society * Improved service framework and water * Reform institutional reforms to ensure sustainability * IFC: Equity participaton/guarantees in for Promotion of Area delivery and access to resources management framework by restructuring (e.g., cost recovery) reforming states, local currency financing Resources Centres) urban infrastructure for practices public entities and creating * Assist with urban reforms * Provide TA to prepare disaster all, especially the poor * Cities characterized commercially viable water and provide large-scale financing recovery/mitigation strategies and investments * Bankable cities, by overcrowding and utilities to urban sector reformers * IFC: Guarantee facility as part of ongoing with increased linkages pollution * Repeal Urban Land * Finance the preparation of IL&FS project, with future financing of to conunercial financial * Gap between demand Ceiling Act and improve integrated urban transport systems demonstration projects systems and supply of basic urban functioning of urban land * Support resettlement and * Improved urban services has widened markets and property rehabilitation of project affected transport infrastructure * Lack of bankable regulation people and the development of projects and inappropriate * Strengthen greater local capacity to handle borrowing facilities for creditworthiness of ULBs safeguard issues infrastructure services * Develop conducive * Urban local bodies framework for local not creditworthy borrowing and techniques for * Poor urban transport credit enhancement systems and facilities * Improve capacity for found in most major cities preparing bankable urban service investments attractive to the private sector * Develop integrated urban transport systems Telecommun- * Low * Introduce competition * Support development of * Ongoing Telecommunication Sector Refomi * CIDA (Telecom * Pro-competitive ications telecommunications into long distance and regulatory framework, including TA Project Project funding work on policies coverage intemational voice services spectrum management * AAA, including policy notes on private sector policy options for * Spectrum * Limited success in * Privatize public sector * Selected investments in participation and regulation expansion of rural frequencies assigned mobilzing privately companies private sector service providers to * IiFC: Investments in cellular and fixed-line networks) within 15 days funded network expansion * Mobilize full potential address problems of limited last- telephones, intemational gateway operators and * Teledensity of 17% * No competition for of the private sector mile access, and poor domestic domestic fibre optic backbone infrastructure by 2005; Rural most telecom services and intemational bandwidth teledensity of 4% by 2010 * Connections in all villages; telephones on demand by 2002 India: Country Assistance Strategy Annex B9 Page 5Sof 8 Country Program Matrix (FY02-04) INDIA'S POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE DevelopnIt Progress Strategic Diagnostic Strategies and Measures Bank Group Role Instruments Partner l,sdiaosasrls Objective A2b * Never regulated to * Rural deregulation to * Promote competitive and * Ongoing Portfolio includes multi-state * ADB * Increased rural Accelerated the extent of industry, but raise agricultural productivity efficient agricultural markets watershed project, National Agriculture Technology * DFID income and reduction of Rural Growth agriculture still suffers and rural incomes. Review * Emphasize the crucial nature Project and UP Diversified Agricultural Support * Multi-donor Water rural poverty in selected from a plethora of and elimination of controls in of agricultural technology Project; water resource consolidation projects in and Sanitation Program states Is criticalfor regulations the domestic market for generation Haryana, Orissa and Tamil Nadu; irrigation and road * The Netherlands * Increased area reducing * Agricultural growth agricultural produce * Build consensus on key projects/components in AP and UP under irrigation, and India's high in the 90s was about 3%, * Expand rural policy and institutional reforms * New lending/eredit support to Kamataka and productivity per unit of level of rural similar to that in the 80s, infrastructure through * Fund poverty-targeted AP watershed projects; Karnataka Tank irrigation water poverty. but below govemment increased public investments investments in rural infrastructure project; UP, Rajasthan and MP Water Sector * Improved cost target of 4% and reforms. (irrigation, drinking water supply Restructuring recovery for operation * There is a surplus of * Other rural development and sanitation, natural resource * AAA: State rural policy reviews; studies of and maintenance of grains: public storage refornns cover rural credit, management and agricultural rural non-farm economy, and legal and regulatory irrigation systems levels are well above land reforms, development of support services) linked to frameworks for land; policy dialogue and workshops * Increased water buffer requirements rain-fed areas and reforms in service delivery to support reform dialogue and implementation at the supply and sanitation * Input subsidies to exploitation of groundwater * Support agricultural growth national level, and in states, communities and coverage in rural areas agriculture (fertilizer, potential, agricultural support with emphasis on holistic watershed basins * Policy on rural power, water) are services development of rainfed areas, * IFC: Possible investments in key agribusiness road development unsustainable * Improve inter-sectoral using watersheds as the basis activities, where the private sector has played a formulated * Augmenting the water resources planning, * Help to raise productivity limited role (e.g. food supply chains, warehouse * Improved rural stock of rural infrastructure allocation and regulation, and and sustainability of water industry) road financing and is key for acceleratng rural sustainable delivery and use resource use, including cost maintenance growth. of water for irrigation recovery * Low rural non-farm * Insprove surface employment drainage and flood * Increasingly scarce management water resources A2c * India more integrated * Bring trade barriers * Engage with central * IFC: Investments in the fmancial restructuring * Private sector * Lower trade Competitive- into the world economy, down to East Asian levels govemment on national issues of selected second-tier manufacturing and service companies, industry barriers ness in but FDI levels low and * Further domestic (e.g. trade liberalization and companies; investments will often be in local associations and * Increased levels of Industry and trade harriers high liberalization, including: (i) deregulation, labor markets) currency, using guarantee of loans from domestic financial sector FDI Services * India has benefited abolition of small-scale * Work with selected state financial institutions or using swap arrangements institutions * Increased speed of from reduction in licensing reservations in critical export govemments on improving * Facilities to be established with financial * DFID, CIDA, clearances by state Sustained and regulation, but areas and phasing out in other incentive regimes and business institutions to provide long term financing and access SDC, GTZ supported govemments growth in business environment still areas; (ii) deregulaton in envirownent to export finance technical education * Improved feedback private unpredictable, lahntir markets: (iii) * Assist second-tier * InfoDev support for various IT applications for programs during 1990s on business environment industry and discretionary and completion of dismantling of companies to modernize and the poor * Partnership with from surveys services wiUl burdensome administrative prices; (i) become intemationally * Ongoing Portfolio of Third Technician Montreal Protocol: * Higher placement be critical to * 90s saw expanded reduction of clearance delays competitive Education Project; Industrial Pollution Prevention, world's second largest levels and shorter lead reducing role for the private sector; and harassment of businesses * Support the financial Energy Efficiency. program to eliminate times in placement for poverty. Though some parts of the by excessive inspection restructuring of fundamentally * Future lending/credit support for a Subsector production and use of technical education economy are booming (e.g. requirements - actions by viable companies in partnership Program in Technical Education ozone-depleting graduates, and higher IT), many sectors have both central and state with local institutions * AAA: Policy notes, including work on business substances enrolbments from women excess capacity and many governments required * Facilitate greater access to environment/investment climate for selected states; and members of firms are over-leveraged * Encourage growth finance by SMEs Economic Updates; Labor Market study; policy disadvantaged groups * Limited access to opportunities in knowledge- * Promote policy and dialogue on reforms in technical education business development and based industries (e.g. institutional reforms in technical * TA/dialogue with interested states on improving fihancial services for information technology, education, including greater environmental monitoring and compliance. India: Country Assistance Strategy Annex B9 Page 6 of 8 Country Program Matrix (FY02-04) INDiA 'S POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Developnsent Progs Strategic Diagnostic Strategies and Measures ak Group Role n ts Partners Indlcators/Bessclhmarks Objecetivel SMEs biotechnology) mobilization of resources from the * India has large stock * Improve quality and private sector, and more of skilled labour, but relevance of technical participabon of women and quality of technical education by better disadvantaged groups training below the first tier networking, institutional * Support for innovative is poor reform, and extra-budgetary applications of information and * Industrial pollution is resource mobilization conmmunication technologies to increasing. * Improve environmental help the poor compliance. * Bring in intemational experience with environmental monitoring and comphance. A2d * Banking: 40% of * Reduce fiscal deficit to * Support gradual * IFC: Investments in private banks and financial * IMF * Gradual fall of Financial deposits invested in reduce crowding out of disinvestment of government and institutions; support for the use of innovative market * ADB government stake in Sector govemment debt leading to private sector removal of constraints to private instruments; selective credit enhancements to * Financial sector commercial banking Development crowding out of private * Improve legal and investment in banking promote market acceptance of longer-term debt companies and industry * Reduction in non- sector judicial framework to reduce * Help restore soundness of * Investments in housing finance companies and associations performing assets Although * High non-performing NPAs state financial institutions aiid pilot securitization of mortgages to assist in the * Grass-root micro- * Strengthened India's assets (NPAs) relative to * Isprove mobilization of strengthen regulatory and creation of a secondary mortgage market finance providers and capacity of financial financial lending to private sector long-term finance for private supervisory capacity * Investments and TA for commercially community-based institutions to extend sector is well- * State financial sector development * Support debt market sustainable microfinance providers financial institutions financial services developed, a institutions and * Upgrade quality of development * Ongoing portfolio of projects to help rural self- * Creation of difficult and cooperatives are drain oni commercial banking services * Promote the growth of help groups to utilize rural banking (e.g. AP DPIP) secondary mortgage unfinished state budgets * Increase the outreach of housing finance industry * Future lending/credit support to a pilot market agenda * Debt recovery is credit and financial services * Support private contractual project to enhance access to credit for community * Improved credit remains difficult due to poorly to the poor savings institutions infrastructure through community-based financial access for the poor functioning legal systems * Scale-up successful * Assist initiatives to reform institutions * Capital Markets: small grass-root micro- financial cooperatives and * AAA: Monitoring of sector, analytical advice Long term debt market finance providers broaden the provision of financial (e.g. on improving pension systems) and TA to under-developed services to the poor, primarily governments and regulatory institutions * Development of micro-insurance, payments and secondary debt market pensions constrained by existing * Test innovative concepts taxes and regulations and products in provision of * Housing finance microfinance underdeveloped * Lack of contractual savings institutions * Microfrnance: Outreach still embryonic India: Country Assistance Strategy Annex B9 Page 7 of 8 Country Program Matrix (FY02-04) INDIA'S POVERTY REDUCTION STRATEGY WORLD BANK GRoup ASSISTANCE Development Progress Strategic Diagnostic Strategies and Measures Bank Group Role |Itl rments Partners IndicatorslStenchmarks Objective i | i B. SUPPORTING CRITICAL PRO-POOR INTERVENTIONS Bl. Promoting Education and Health for All Bla * Enrollment rates are . Support for universal * Support efforts to improve * Ongoing Portfolio of 6 DPEP projects covering * The Netherlands * Implementation of Elementary rising for elementary elementary education as a education quality and access 15 states; * UK DFID new generation of Bank Education education and the gender fundamental right * Reduce out-of-school * New lending/credit support. Second * EU projects to support gap is falling. But even . Decentralize planning, children, particularly girls and DPEPproject in Rajasthan, for elementary education. * UNICEF universal education. Subsidies to today only 79% of India's supervision and management children from socially Modes of subsequent support will depend on reaching * New state primary elementary school age- through local bodies disadvantaged groups, and agreement on support for Gol's new Education for education strategies, education are group (age 6-14) are . Mobilize local encourage innovations to attract All program and on the Bank role in interacting with possibly supported by as pro-poor as enrolled. With literacy at communities, and use working children to school state govemments in education the Bank. the best of the just above 60%, there is a advocacy and media * Encourage a shift in * AAA: work on selected state education sectors, * By 2004, 90% programs long way to go. campaigns composition of public evaluation of the inipact of DPEP, secondary school enrollment of 6-14 age directed * Education resources * Build stronger expenditures towards elementary issues, continuing analyses of private education group; gender gap explicitly at and performance partnerships with NGOs education (especially aided schools), early childhood halved to 4.5 percentage fighting inadequate * Provide new * Gol has decided to end development and possibly on information technology points. poverty. * State governments opportunites for the poor and District Primary Education in education * Higher Grade 5 and are main financiers of disadvantaged Program (DPEP) and to launch a * IFC: Possible investments in private 8 completion rates and education, but state-level * Provide options to bigger program of Education for educational institutions achievement scores education strategies are attract working children All building on its success * Increased share of weak public expenditures to elementary education Bib Health * Discase burden and * Integrate different * Focus on health issues of * Ongoing portfolio of state health systems * WHO * Restructuring of nutritional problems health and nutrition services; priority to the poor, including projects in Orissa, West Bengal, Punjab, Maharashtra, * UNICEF centrally sponsored Health and remain high better utilize existing child health, reproductive health Andhra Pradesh, Kamataka and UP; central * UNAIDS schemes/projects to nutrition * TB is on the rise; the facilities and communicable disease govemment programs to combat HlV/AIDs, TB, * USAID promote decentralization indicators in spread of HlV/AIDs could * Decentrahzed planning control, especially new tbreats malaria, leprosy, bhndness and under-nutrition. * EU * Increased India are low, become a threat to India's and program implementation (HIV/AIDS) * New lending/credit support to finance state * UK DFID integration between with future * Special attention on . Assist in developing health systems in Karnataka and Rajasthan; central * DANIDA various health and enormous * Substantial variations HIV/AIDS capacity to manage public health government projects on integrated disease * AusAID nutrition programs in gaps between in health care services programs effectively (e.g. in surveillance and health capacity building (food and * CIDA AP, Karnataka and UP. the poor and across the population surveillance and food and drug drug control); cross-sectoral interventions for * ILEP * Comprehensive the better-off: contiol) at central and state levels improving health and livelihoods of the poor (e.g. state health and nutribon * Aid in developing more maximizing health benefits in state water and policies in states covered efficient, effective and sustainable sanitation projects) by new health systems health systems at the state level * AAA: Completion and dissemination of major projects * Continue to focus on women sector work on public/private roles in health, and * By 2004: (i) reduce and other vulnerable groups household energy, air pollution and health study, to under-5 mortality rate to * Increased focus on: (i) support policy dialogue with both the center and 80 per 1000; (ii) reduce decentralization; (ii) public/ selected states maternal mortality rate private partnerships in health; (iii) * IFC: Possible investments in private healthcare to 400 per 100,000 live enviromnental health issues companies births; and (iii) increase access of eligible couples to contraceptive services to 64% India: Country Assistance Strategy Annex B9 Page 8 of 8 Country Program Matrix (FY02-04) INDIA'S POVFRTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress Strategic Diagnstic T Strategies and Measures Bank Group Role Instruments I Partners Indicators/Benchmarks Objective I I_ _ _ _ __ _ _ _ I B2. Accelerating Pro-Poor Rural Development Directly * About 75% of the * Strengthen rural * Support innovative projects * Ongoing portfolio of DPIP projects in AP, * DANIDA * Increase in income attack rural poor are in rural areas infrastructure and expand which can, by their demonstration Madhya Pradesh and Rajasthan; Sodic land * DFID of the poor poverty and * The poor in general access to basic services (such effect, help improve the design reclamation project in UJP; AP, Kerala and UP * GEF * Increased cost enhance have little or no access to as water supply and and implementation of Gol and forestry projects plus Forestry Research Education * EU effectiveness and social assets and are dependent sanitation) in a manner which state-sponsored anti-poverty and Extension Project; multi-state watershed * JBIC improved targeting of protection in on wage labor. benefits the poor. Anti- schemes, and thus improve the development and Eco-Development projects; Rural * SIDA programs rural areas * Specific groups are poverty projects need to be rural safety-net Women's Development and Empowerment Project; * UN Agencies * Greater capacity of through particularly vulnerable: restructured to provide an * Various sectoral and multi- Gender-thematic supervision to be undertaken for * The Netherlands rural communities to innovative, there are both gender and effective safety net, with sectoral approaches can be rural development portfolio * SDC plan and implement community- caste based disparities in increased local participation, adopted, but with common . New lending/credit support includes AP Rural I mntemational sustainable activities based rural access to economic social mobilization, and principles: (i) often a Poverty, Madhya Pradesh and other state forestry * Increased initiatives. resources and services transparency programmatic approach will be projects, Kamataka Watershed Project, and possible NGOs, including parfiipabon of women * India spends heavily * Improved and most useful; (ii) involve and future DPIP initiatives Action Aid Save the and the disadvantaged in on anti-poverty programs sustainable natural resource empower beneficiaries under a * AAA: Analysis in selected states on: anti- Children, Ford and decision making and in rural areas, but the management is key, since so decentralized approach; (iii) use poverty programs, decentratization, and natural MacArthur Foundations, attaining benefits efficiency and efficacy of many of the poor are NCGOs and altemative service resource-poverty linkages. Periodic survey-based WWF * Greater land these programs are dependent on forests and providers; (iv) support reviews of the effectiveness and inclusiveness of * MYRADA reclamation, forest questioned. waste lands complementary institutional and project-based user-groups. SEWA, and numerous regeneration and * Target initiatives to policy reforms; (v) promote cost * Collaborative rural poverty reduction strategies other NGOs biodiversity protection women and other recovery; (vi) target to the poorest disadvantaged groups areas and most vulnerable groups; (vii) integrate interventions for maximum impact * Integrate environmental, social and gender consideratbons into project design and policy analysis B3. Community Driven Urban Development Initiate work * Urban poverty * Adapt community-based * Promote demand-driven and * Future lending/credit support for AP Urban * ADB * Increased scale for in increasingly important, as approach which has been very community led development of Poverty Reduction * AusAID successful community- community- urban areas projected to successful in rural areas to urban services * Analytical work on AP urban poverty * UK DEID based urban initiatives driven grow more quickly work in urban areas * Learn from what has worked reduction strategy * Netherlands development * More than 20% of and scale it up (experienec in * USAID in urban urban dwellers live in other donor-backed projects; * India Housing areas. slums, with higher strong urban women community Development Finance numbers in largest cities groups in some states) Corporation (HDFC) * Explore sustainable financing mechanisms, including credit for community .__ _ _ _ _ _ _ _ _ _ __ infrastructure India: Country Assistance Strategy .nnex 12 Page Ilfl Summary of Development Priorities Network Area Country Major Issue b. Country Bank Reconciliation of Country and Bank Priorities d. Perfornance a. Priority c. Priority c. Poverty Reduction & Economic Management Poverty reduction Fair Lagging states, rural poverty; delivery of basic High High ... services; ineffective anti-poverty proganms. Economic policy Good Fiscal deficits; public debt. High High --- Public sector Fair Insufficient accountability; poor service delivery, High High --- particularly among the poor; complex regulatory environment and excessive red tape; corruption; need for greater mnanagezial flexibility and results orientation. Gender Poor Economic, cultural & social incentives to invest in Moderate High Bank plans to give more focus to gender issues in conming CAS period. and value daughters. Human Development Education Fair Political and financial commoitment. Moderate High Bank involvement has helped to increase priority placed on education. Health, nutrition & Fair Service quality; program nmanagement; regulatory Moderate High Bank involvement has helped to emnphasize the need for policy reforms, population framework for private sector participation. capacity building and prioritizing in the sector. Social protection Fair Multiple sources of vulnerability in rural areas and High High --- urban slums; large number of safety-net projects, but nany ineffective; disaster msanagement inadequate Environmentally & Socially Sustainable Development Rural developnent Fair Agricultural deregulation; price supports; input High High subsidies; public investments; rural non-farm enmploynent Environment Fair Enforcement of regulations; use of economic Moderate Moderate instruments: access to natural resources. Social developrnent Fair Empowering vulnerable secfions of society. Moderate Moderate Finance, Private Sector & Infrastructure Financiai sector Fail Staie dominatior of ban`g sysc . . Moderate Moderate --- Private sector Fair/Good Business environment; regulatory franmeworks. Moderate Moderate --- Energy & mining Fair Energy subsidies; slow progress of reforms. Iligh High --- Infrastructure Poor Insufficient capacity (road network); need for High High institutional reforms (road arenciesl. a. Use "excellent," "good," fair,' or "poor." b. Tndicate pnncipal country-specific problems (e.g., for poverty reduction, "mral poverty;" for educaton, "femate secondary comrpletion;" for environment, "urban air pollutioni") c. To indicate priority, use "tow," "moderate," or "higli." d. Gtve explanation, if pnorifies do not agree; for example. anodier MT)B may have the lead on the issue, or there may be ongoing dualogue