Document o f The World Baiik FOR OFFICIAL USE ONLY Report No. 29374-IN INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL FINANCE CORPORATION COUNTRY STRATEGY FOR INDIA September 15,2004 IndiaCountry Management Unit, South Asia Region Intemational Finance Corporation, South Asia Department CURRENCY EQUIVALENTS US$1 = Rupees (Rs.) 45.98 as o f June 30, 2004 GOVERNMENT FISCAL YEAR April 1- March 31 WORLD BANK FISCAL YEAR July 1- June 30 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities JSDF Japan Social Development Fund ADB Asian Development Bank MDG Millennium Development Goal AP Andhra Pradesh MIGA Multilateral Investment Guarantee ARF'P Annual Report on Portfolio Agency Performance MP Madhya Pradesh ART Anti-retroviral Therapy MTFRP Medium Term Fiscal Reforni AUSAID Australian Aid Agency Program CIDA Canadian International Development NACO National AIDS Control Organization Agency NGO Non-Governmental Organization CDC Commonwealth Development NFHS National Family Health Survey Corporation NHAI National Highway Authority of India CDD Community Driven Development NLTA Non-lendingTechnical Assistance CISFAA CountryIState Financial N S S National Statistical Suivey Accountability Assessment O&M Operations and Maintenancc CISPAR CountryIState Procurement PCF Prototype Carbon Fund Assessment Review PHRD Japan Policy and Human Resource CISPPR Country/Sector Portfolio Delelopinent Fund Performance Review PIC Public Infoimation Center CAS Country Strategy PMGSY Pradhan Mantri Grain Sadalc Yojana DEA Department of Economic Affairs (Prime Minister's Riiial Roads DEG German Development Finance Program) Group PPIAF Public-Private Infrastructui e DFID United Kingdom Department for Advisory Facility International Development PPP Public-Private Partnership DPEP District Primary Education Program PRI Panchayati Raj Institution DPIP District Po\ erty Initiatives Project PSU Public Sector Undertaking DPR Development Policy Review RCH Reproductive and Child Health EC European Coniinission RWSS Rural Water Supply aiid Sanitation FY World Bank Fiscal Year SACS State AIDS Conti01 Societies FDI Foreign Direct Investment SAL Structuial Adjustment Loan FMO Dutch Development Agency SCIST Scheduled CasteISchedtiled FSAP Financial Sector Assessment Tiibe Progiam SEB State Electricity Board GDP Gross Domestic Product SME Small aiid Mediuin Enterpiise GEF Global Environmental Facility SSA Sal\ a Shiksha Abhiyan (Education Go1 Government of India for All initiative) GP Gram Panchayat (local rural SWAp Sector Wide Approach government) TA Technical Assistance GTZ Gerniaii Development Corporation ULB Urban Local Body IBRD International Bank for LNAIDS Joint United \ations Piogiain on Reconstruction and Development HIVIAIDS ICA Investment Climate Assessment UNDP United Nations Development IDA International Development Program Association UP Uttar Piadesh IDF Institutional Development Fund LSAID U S Agency for International IFC International Finance Corporation De\elopineiit IMF Inteinational Monetary Fund ULVSS Uiban 11atei Supply and Sdnitatioii IMR Infant Moltality Rate Seivices ILO Inteinational Laboi Organization VAT Value Added Tax IPP Independent Power Producer WBI World Bank Institute IT InformatIon TechnoIogy WDR World Development Repoit I< fw Gciman Development Baiik WHO Woi Id Hcalth 01gaiiizatioii JBIC Japan Bank for International Cooperation ACKNOWLEDGEMENTS The World Bank Group greatly appreciates the collaboration and contributions o f the Government of India in the preparation o f this Country Strategy paper. Inparticular, officials o f the Ministry o f Finance provided extensive review o f drafts and important guidance as to where Bank assistance might be helpful to India. W e would also like to thank the many (several hundred) interested persons in India who gave o f their time to participate in the consultation process o f the Country Strategy. The contributions o f this very large and diverse group -state government officials, external financing agencies, the private sector, non-governmental organizations, representatives o f academic institutions, members o f the media and other development partners -have proven to be valuable in thinking through the constraints to and opportunities for poverty reduction in India, as well as formulating the approaches described in this paper. Within the World Bank Group, the Country Strategy was preparedby the 'India Country Strategy Team', comprised o f more than 25 staff and managers across the South Asia regional units o f IBRDIIDA and IFC. The extended India team also participated actively, providing very useful advice and ideas during several brainstorming sessions held inN e w Delhi, and by videoconference to the Washington offices. The World Bank Vice President, South Asia Region Mr.PrafulPate1 Country Director, India Mr.MichaelF.Carter Task Manager Ms.Eliza Winters The InternationalFinance Corporation Vice President, Operations Mr.Assaad J. Jabre Director, South Asia Department M r . Dimitris Tsitsiragos Task Manager M r . N e i l Gregory TABLE OF CONTENTS EXECUTIVESUMMARY................................................................................. i I. Background and Recent Developments.. ......................................................... .2 11. The TenthPlan-India's Poverty Reduction Strategy............... ....................... 8 111. The India and World Bank Group Partnership.,............................................... . l O IV. World Bank Group Program Priorities.......................................................... .19 V. Lending, Exposure and Risks.,..................................................................... 42 VI. Implementation and Monitoring .................................................................. .44 VII. Concluding Remarks. ............................................................................. .46 Boxes Box 1 Why do Infants and Young Children Die inIndia?............................................ ..4 Box 2 Summary o f India's Priority Reforms.. .......................................................... .9 Box 3 Supporting ImprovedFiduciary and Safeguard Systems. ..................................... 14 Box 4 Leveraging Bank Support through SWAPS..................................................... .16 Box 5 Bank Group Program Priorities and the MDGs................................................ .21 Box 6 HIV/AIDS inIndia. ................................................................................ .29 Tables Table 1 Progress on Social Indicators, 1980-2000........................................................ .3 Table 2 Concentration o f Poverty inIndia., ............................................................... .5 Figures Figure 1 The Challenge o f Meeting the MDGs.,.......................................................... .6 Figure2 Diagram o f the Country Strategy., ................................................................ 20 Annexes Annex 1 The MillenniumDevelopment Goals and India's Tenth Five-Year Plan Annex 2 Implementation o f the FY02-04 Country Assistance Strategy Annex 3 Summary o f the Consultation Process Annex 4 FY05-08 Country Strategy Outcomes Matrix Annex 5 Guidelines for Bank Lending in K e y Sectors Annex 6 Selected MDGIndicators for India's States Annex 7 Private Sector Strategy for the World Bank Group Annex 8 Portfolio Improvement Strategy Annex B1 India At-a-Glance Annex B 2 Selected Indicators o f Bank Portfolio Performance & Management Annex B 3 IBRD/IDA OperationalProgram; IFC and MIGA Program Annex B 4 Analytical and Advisory Activities Annex B5 Social Indicators Annex B 6 Key Economic Indicators Annex B 7 Key Exposure Indicators Annex B 8 IBFWIDA and IFC Portfolios EXECUTIVE SUMMARY 1. This Country Strategy (CAS) sets out how the World Bank Group proposes to builda growing partnership with the Government o f India (GoI) duringFY05-08- a critical period inthe pledge to help our clients meet the global Millennium Development Goals (MDGs),including halving poverty, by 20 15. With over one-quarter o fthe world's poor (some 260-290 million people) inIndia, our efforts to assist India with best practice knowledge and financing for development are central to the World Bank Group's mission to help reduce global poverty. The overarching clzallenge of this new strategy will be how we can mnxiniize and leverage the diverse resources of the Bank Grotip'to dranzatically scale tip our impact, help to improve the quality of lyefor some of the world'spoorest citizens and help Iridin inove closer to achieving the MDGs. 2. In order to achieve this enhanced impact, three Strategic Principles will underpin the Bank Group's work: (i)focusing on outcomes, to ensure that all o f the work o f the Bank Group i s explicitly geared towards supporting India's achievement o f its development goals; (ii) applying selectivity, to target limitedresources to activities where assistance is welcomed and where contributions can also be the most effective; and (iii) expanding the Bank Group role as apolitically realistic knowledgeprovider and generator. 3. Inapplying these Strategic Principles,the Bank is seeking a substantial increase inits volume of lendingto India. Given the enormous needs, the expansion will primarily be in(i) infrastructure (roads, transport, power, water supply and sanitation, irrigation and urban development - to underpin both accelerated growth and improved service delivery); (ii) huniari development (education, health, social protection - priorities to support specific MDGs); and (iii)rural livelihoods (with an emphasis on community-driven approaches). 4. Scaling up will require a strengthened program at the Center, including more national level lending as well as lending to the states compared to recent years. An important shift envisioned for FY05-08is the use o fnew approaches, includingco-financing with other development partners under common arrangements, for national programs inthe areas most critical to meeting the MDGs. Usingsuch means, including `sector-wide approaches' or SWAps where appropriate, the Bank will seek to step up its national level engagement and work closely with partners that canjoin the Bank inproviding substantial assistance. 5. Some important shifts are also being implemented in the approach to India's states. Since 1997, the CAS has included a focus on states undertaking comprehensive reforms, inorder to support the leaders o f change and serve as a catalyst to the state-level reform process. With the widening gulf between faster and slower growing states in India, leading to a concentration o f poverty and poor social indicators injust a few states, some shifts inthis approach are warranted. Though the strategy will retain an essentially reform and performance-based approach to the states, it will also change in ways that are intended to go as far as possible in opening up new opportunities for engagement with these largest and poorest states: First,inconsultation with Go1and other partners, the Bank will seek to ensure that all o f the largest and poorest states o f India that so wish are engaged in a dialogue on cross-cutting reforms (fiscal management, governance, service delivery, the power sector and the investment climate) ' Inthis report, the "Bank Group" refers to IBRD, IDA, IFC and MICA; and the "Bank" refers to IBRDiID.4 1 Secondly, the Bank will work proactively to try to build a productive development relationship with four states where poverty i s increasingly concentrated in India and where public institutions are considered to be at their weakest - Bihar, Jharkhand, Orissa and UP. This support could go beyond the basic dialogue on cross-cutting reforms noted above. Thirdly, state-level adjustment lendingoperations aimed at supporting achievement o fthe MDGs, are also expected to remain an important part o f the Bank program. Inaddition to supporting state government efforts to reduce fiscal deficits, reform the power sector, strengthen governance and implementa range o f actions to improve the investmentclimate -this lending would support cross- cutting actions to improve service delivery. Fourthly, there i s no longer an upfront decision to concentrate substantial state-level investment lending on `focus states' that are also receiving adjustment lending in support o f cross-cutting reforms. Instead, investment lendingwill be channeled more broadly to states that are able to comply with new `guidelines for engagement' for the relevant sector. These guidelines attempt to clearly set out the sector-specific conditions that experience has shown to be necessary for project success. As described further in the CAS, in implementing these guidelines the Bank will also seek, when possible, to provide its investment lending to the states that have the greatest number o f poor citizens, or weakest indicators, in order to maximize its impact. The overall impact o f these changes i s likely to be a progressive shift in the share o f lending that goes to the poorest states, though dependent on the extent to which basic conditions for these projects can be met by those states. 6. Despite these shifts in the way that the Bank partners with both the Center and the states, the Bank Group's Program Priorities will retain considerable continuity with the FY02-04 CAS. The emphasis on: Improving Government Effectiveness; Investing in People and Einpowesing Coininztnities; and Promoting Private-Sector Led Growthremains relevant to India's own priorities and development goals. The stepped up program will provide increased opportunity for collaboration across the Bank Group to promote innovative public-private partnerships for infrastructure development. The Private Sector Development Strategy attached to this paper provides detail on how this collaboration can be further developed. 7. Within the Program Priorities, IFC will continue to provide equity and loan financing and guarantees to supplement what i s available from Indian financial institutions or capital markets, and will help to mobilize financing from both domestic and international sources. This will include pioneering investments in infrastructure where innovative structures and long tenors are required; and investments in projects which are constrainedby limited risk appetite o f other investors, including medium-sized manufacturing companies, agribusiness companies and companies entering new markets domestically and internationally. 8. For the Bank, global knowledge support -policy dialogue, analysis, technical assistance and advisory services - will be re-focused to better support the Program Priorities. The strategy calls for enhanced focus on major analytical work on emerging issues o f national interest, as well as strengthening the demand-driven nature o f the Bank's advisory work. 9 The CAS notes that, based on country performance ratings and India's absorpti\ e capacit), a substantially higher level o f IDA resources could effectively be utilized by India Particularly in human development and rural livelihoods, increased lending will depend on availability o f IDA resources, \\hose expansion would bejustified by the opportunity to contribute to achieving the MDGs Beyond any ceilings that are imposed by the IDA Deputies, the CAS will not place additional constraints on India's 11 IDAresources unless a dramatic unforeseen deteriorationinperformance warrants a review of the overall strategy. 10. The CAS also proposes a new way o f looking at IBRD lending. Rather than establishing low or base case scenarios for Bank lending, and structuring triggers to shift from one case to another, the Bank program will fall within a range limited by an upper bound for IBRD lending (US$2.15 billion per year on average) to support India's achievement o f MDGs. Getting to this upper bound will require strong reform performance as well as a strengthened pace of project preparation. 11. As is currently the case, the level of IBRDinvestment lending to the states will depend on the pace o f reform implementation and application o f `self-regulating' triggers. Unlike the recent past, however, the guidelines for engagement will increase the transparency o f the triggers for state level investment lending and open up opportunities for an increased number o f states to engage with the Bank. These guidelines also specify new triggers for investment lending with the Center. ... 111 FY05-08 WORLD BANK GROUP COUNTRY STRATEGY FORINDIA Introduction 1. Supported by wide-ranging reforms, India has experienced rapid growth by most standards over the past decade (averaging about 6 percentper year between 1992/3 and 20031'4). The external position o f India's economy has also improved dramatically. The rapid growth o f information technology (IT) service exports and highremittances have resulted in current account surpluses. Together with modest capital inflows, this has generated a substantial increase inexternal reserves, which now exceed US$lOO billion. L o w levels o f short-term external debt give the country a further cushion to counter any speculative attack. 2. Inparallel with this faster growth, Indiahas made impressive progress towards reducing income poverty, an important element o f the MDGs. Continued progress has also been made on many social indicators, particularly literacy, which rose from 52 percent in 1991 to 65 percent in 2001'. These improvements are both real achievements for India - and achievements o f global significance. 3. However, while India's economic and social performance has been impressiveon many accounts, it has also beenuneven and has fallen behindthe performance o f a number o f countries inEast Asia. Despite the emergence o f tens o f millions from poverty duringthe 199Os, average incomes across India remain l o w and there has been little movement on some critical social indicators. A great concern i s that both maternal and under-five mortality have hardly improved. In addition, HIViAIDS i s spreading quickly, with risk factors that put the country indanger o f a growing epidemic. Though Go1and U N A I D S estimate that less than one percent o f the adult population i s currently infected with HIV - with a population o f more than one billion people, India will soon have more people infected with HIV than any other country in the world. HIV/AIDS clearly has the potential to upset much o f the good progress that India has made. 4. InIndia today, there also remains a substantial andpersistent disparity o f opportunity, particularly inthe education, health andeconomic prospects ofwomen and other vulnerable groups such as the Scheduled Caste/Scheduled Tribe (SC/ ST) populations. A symptom o f this disparity i s the strikingly l o w ratio o f girls to boys, which, rather than improving with India's development progress, appears to be worsening. A growing gulf has emerged as well in growth between the richer and poorer states within the country - with the result that poverty i s increasingly geographically concentrated. Today, almost half o f India's poor, approximately 133 million people, live in Uttar Pradesh (UP), Bihar 01-Madhya Pradesh (MP). Over three quarters o f the poor live inrural areas. 5. Giventhese disparities, and the increasing concentration o fpoverty by region and by state, it can be said that India occupies two worlds simultaneously. The first, where economic reform and social changes, such as improved education for girls, have begun to take hold and where growth has had an impact on people's lives and opportunities - and the other, where citizens appear almost completely left behindby public services, employment opportunities and brighter prospects Bridging the gap between these two worlds i s perhaps the greatest challenge faced by Go1today. 6 Doing so will require continued high economic growth to underpinincreased inconies into the future. It will also require greater focus on ensuring that the fruits o f growth are shared more evenly. Sustaining the growth o f the recent past and India's progress inpoverty reduction will also require dramatic improvements inbasic infrastructure and the investment cliiiiate Major changes will need to be 'National Statistical Suivey (NSS), Office o f the Registrar General, India made to ensure effective delivery o f basic services, such as improved health and education, to all o f India's citizens. And these improvements will needto be achieved within the context o f the longer-term strategic challenges that India faces: ensuringenvironmental sustainability inthe context o f diminishing water availability, increasing pollution and global climate change; the demographics o f continued, albeit slower, population growth; a reduced girl/boy ratio; and the possible course o f HIV/AIDS. I. BACKGROUNDANDRECENTDEVELOPMENTS The Country Context 7. While the country context for the FY02-04strategy period was marked by the political stability of a 24-party federal coalition, it has also been notable for economic policy, particularly refonii initiatives, being pursued at an uneven pace. A few important underlyingtrends have impacted on India's refonn progress, and progress towards meeting the MDGs, inrecent years. 8. The first o f these trends has been the urban elite's growing confidence about India's place on the world stage. This confidence has been fueled by several factors: the growth inthe last decade o f a vibrant middle-class with spending power; highrecent economic growth and India's strong external position; the IT boom inwhich India is emerging as a global leader; the achievements o fthe Indian diaspora; improved relations with all major world powers; and the readiness o f a new generation o f industrialists and entrepreneurs to compete globally. With its influence magnified by an expanding print and electronic media, this class o f urban elite has become the key driver o f India's liberalizing agenda. 9. A second trend, relatedto the first, i s the slow but growing assertiveness of less privileged sections o f Indian society. Through the 1990s, this was seen inthe rise o f political parties largely representing the less privileged and regional aspirations and their influence on the federal polity. Multiple-party governments at the Center and some o f the major states based on miniinuiiicommon agendas and pragmatic power-sharing have resulted ingreater durability o f coalition govei-nments. This democratic assertion and sharing of political power has had the positive effect o f increasing empowerment o f historically weaker sections, but the quality o f governance and the delivery o f services remain uneven. 10. Finally, increasingly politically-articulated aspirations for jobs, infrastructure and health, education and sanitation services, have highlighted the necessity o f institutional and policy refonn, decentralization, and employment-friendly growth policies. The forthcoming CAS period will see an intensification o f the struggle to match these needs with short-term political demands. Inparticular, creating incentives to improve service delivery to the poor will remain a challenge. 11. This new Bank Group CAS coincides with a fresh goveming cycle at the Center and inmajor states. Inelections held inA p r i l M a y 2004, the government at the Center and in the states o f Andhra Pradesh (AP) and Kamatalta were voted out. Inan earlier set o f state elections in late-2003, governments were also voted out inthe states o f Rajasthan, MP and Chhattisgarh. The new government at the Center, which i s a coalition led by the Congress party (which initiated the process o f economic reforms and liberalization inthe early 1990s) i s now supported by leftist parties. The ruling alliance has agreed on a Common MinimumProgram as its policy agenda, which retains the broadly liberal economic policy thrust o f the last decade but with a strengthened emphasis on social programs and benefits to low income groups, especially inrural areas. 2 12. With the completion o f elections, the new governments at the Center and these states face the challenge o f protecting vulnerable sections and investingin infrastructure and rural development, while facing up to the prime necessity o f fiscal and power reform and creating conditions that would encourage private investors and employment-oriented growth. During the forthcoming strategy period, states will be faced with decisions on contentious issues such as rationalizing power and water subsidies,partnering with the private sector to deliver basic services, and giving further impetus to decentralization. Many o f these decisions will be hotly contested, which should place development issues into the center o f the political agenda. Recent Social Progress and Outlook 13. By many measures, India has made good progress inreducing poverty and improvingthe welfare of its citizens inrecent years. The Bank's 2003 Development Policy Review "India: Szwtaiiziug - Refom, Reducing Poverty" (DPR)provides a detailed discussion. Official estimates show a decline in poverty from 36 percent inthe early 1990s to 26.1 percent in 1999-2000, but attempts to adjust the household survey underlying the 1999-2000 figures to make it comparable with earlier surveys result in a smaller degree of poverty reduction; how much smaller i s a matter o f considerable debate and estimates vary widely. 3 Table 1. Progress on Social Indicators, 1980-2000 Reported data Indicator 1980s 1990s 2000 Poverty Poverty incidence (%) 44.5 36 0 26.I Demographics Population (millions) 685 846 1,027 Population growth (%) 2.2 1 9 1.6 Overall sex ratio, ages 0-6 (females per 1,000 males) 978 955 927 Education Overall literacy rate: 7-7 years (%) 44 52 65 Female literacy rate as percent o f male literacy (%) 53 61 71 Net enrollment rate (NER):grades 1-5 (%) 47 51 77 Female NER as a percent o f male: grades 1-5 (%) 70 80 S I Health Life expectancy at birth (year) 56 60 61 Infant mortality rate, 0-12 months (per 1000 live births) 115 79 68 Under-five mortality rate (per 100,000 li\e births) 152 94 95 Malnourished children, ages 0-3 (%) n.a. 53 47 Matei nal mortality rate (per 100,000) n.a. 424 540 Picvalence o f HIV (innillion people) i7.a. 3 5 4.0 Environmental Sustainability One set of alternative estimates, developed by Angus Deaton of Princeton University(see "Adjusted Poveity Estimates in 1999- 2000", 2001) estimates a poverty incidence of 28 6% in2000 This is the estimate used in the World Dcbelopment Indicators, but other plausible estimates show higher poverty in 2000, and the issue of how much poverty fell in the 1990s eniains Liniesohed I By using the internationally comparable standard of the proportion o f people living on less than S I a day, the po\erty rate foi India \\as 39% in 1999/2000 3 Access to improved water source (%) n.a. 68 78 Households with toilet facility (%) n.a. 30 36 Forest area (% of total land area) n.a. 21.4 21.G Notes:Povertyestimates are for 1983, 1993194and 1999l2000. They are official estimates, which are not comparable betwecn 1993194 and 199912000due to changes in the 1999/00survey. For further discussion, see paragraph 13. Denlographics and literacy rates are for 1981, 1991, and 2001. Enrollmentrates are for 1981, 1991, and 2000. Healthand sanitationdata are for 1992/93 and 1998l99.HIV prevalenceis for 1998 and 2001. Improvedwater resourcesdefined as access to piped drinkingwater and hand pumps. Table taken primarily froni the IndiaDPR. Data Sources:Poverty-India,PlanningCommissionbased on National Statistical S w e y ; Deaton 2002. Deniograpliics-liidia,Office of the RegistrarGeneral 1981, 1991,2001. Education-Satiollal Statistical Survey; India, Office oftlie Registrar General 1981, 1991, 2001; India, Department o f Education.Health-India, Office of the Registrar General 1981, 1991, 2001; National Faniily Healthy Survey, Sample Registration System(for a discussion of maternalmortalitydata, see paragraph 15). HIV-NationalAIDS Control Organization. Sanitation-India,Office of the Registrar General 1981, 19912001; and National Family Health Survey. 14. Inaddition to the reductioninpoverty incidence, educationindicatorshave improvedmarkedly. For the first time since independence, the absolute number o f illiterate citizens inIndia declined between 1991 and 2001. Literacy rates rose particularly for women. Enrollment rates o f primary-aged children also increased, and the gap between enrollment ratios for boys and girls declined. 15. However, against these achievements, progress in improving health indicators in India has been mixed. Reductions inthe infant mortality rate (IMR) slowed duringthe previous decade and higher IMRs have persisted among disadvantaged groups such as the SC/ST population (Box 1provides additional context to this problem). Progress inaddressing malnutrition has been minimal. Based on existing data, the maternal mortality rate has worsened; however there are problems with the data for this indicator in Box 1:Why do infants and young children die in India? India has achieved reniarltable progress in reducing infant and child (under 5) mortality in tlic past 25 years, nearly halving the nation-wide IMR froni 1975 to 2000. However, much of this success took place in the 19&Os, while there \vas a sharp slowdown in improving this critical indicator in the 1990s-the average reduction in IMR per year slowed from 3.5 perccnt in 1981-1990 to 1.8 percent in 1991-2000.At tlie same time, many other countries in South and East Asia, including ticighboring Sri Lanka and Bangladesh, have managedto maintain an IMRreduction of 3 percent or more annually. Even more worrisonie, India's under-5 mortality rate hardly improved in the 1990s,remaining more than 2.5 times higher than in China. Inorder for India to achieve a reduction in IMR from 68 infant deaths per 1000 live births in 2000 to 45 by 2007 and to 28 by 2012, as targeted in the Tenth Plan, the annual decline shouldjump to nearly 5 percent, which is a very tough challenge. Tnter- state disparities imply that the challenge i s even tougher than the national data suggests, since the poorer, lagging states will have to achieve much greater reductions. What are the main factors contributing to infant and child mortality in India? According to India's National Faniily Hcaltli Surveys (NFHS), for every 68 infant deaths, 43 ofthese happen during the neonatal period (first 28 days). Since a large nuniber of these deaths take placc at home, global studies indicate that improving home based behaviors rclatcd to brcast- feeding, oral rehydration and newborn temperature management, can have a strong impact on child survival. Increasing the `birth spacing', or interval before the next child in the family can also impact child survival. This is an important issue for India, where permanent methods of family planning are predominantly used. Recent studies also highlight the importance of focusing on a range o f socio-economic parameters and cultural issucs in addition to better health care. Girls are at a greater risk o f dying before the ages of land 5 than boys, rcflecting better care for boys. Correcting for this gender inequality in child-care would improve o\erall survival rates. One of the most significant positive effects, emerging consistently from various studies, is a literate mother, reinforcingthe utniost iniportance of girls' education. Household wealth also clearly matters, and so - and independently from wealth - do basic infrastructure serviccs that help to keep the household and community environments clean. Different studies suggest strong links bctwccti reductions in infant/child mortality and increased sanitation coverage, improved water supply and tlie use o f cooking fucls and practices that produce less sniolte. Given that acute respiratory illness, which is associated \\#it11solid fuel sniolte by a scries o f studics, and diarrhea, which is linked to tlie lack o f sanitation and hygiene, are the t\$,o top "killers" o f children iiiider 5 in India, this is hardly surprising. Access to electricity has also been shown to correlate with reductions in infant and child morality in several studies, although corroborating epidemiological evidence is lacking. Substantial differences in the impact of thcsc infrastructure variables have been observed between urban and rural areas, as well as between better-off and poorcr states. Sources: M. Claesoii, er 01. 1999, Reducing Child Mortalit)' iii India, World Boiik; L. Woiig niid B. Klnoliiij, 2004, Cliilri .Moi./n/i/j,111Riii.ii1 fiidia, World Bank; World Bonk 2004. Atfniiiiiig the MDGs in India: G.Hughes, er 01, 2001, EiiVii~oiiiiieliifl/Henlili ir7 Iiidin, IWoi.lt1Rnirk; IVHO 2002. World Health Report 2002: NFHS 1998-99. 4 some o f the largest states that raise questions regarding data at the national level. I t appears that, at the very least, the maternal mortality rate has not improved significantly. Other worrisome trends are an accelerating rate o f infection by HIV/AIDS and deterioration in the overall sex ratio for children under four. These trends have continued despite an increase inpublic expenditures on health in the 1990s - and partly because public expenditures on health remain low by intemational standards. 16. Furthermore, the aggregate indicators mask widening divergence in GSDP per capita and other indicators o f well being between the richer and poorer states. While poverty declined inboth, the rate of progress has been greater inthe richer states. In 1999/2000,76 T a b l e 2 : C o n c e n t r a t i o n o f P o v e r t y in I n d i a percent of India's poor lived in o f Lotai inumber o f poor 1 9 8 3 3 9 8 7 1 8 8 1 9 9 3 1 9 4 I 9 9 9 / 0 0 states with per capita GSDP Poorer s t a t e s * 7 0 7 0 7 1 7 6 lower than the all-India average" 2 7 2 8 2 6 2 2 (Table 2). Generally, the 0thers 3 2 3 3 poorest states also lagged 100 1 0 0 IO0 100 behind in social indicators, *includes AP, Assam, Biliar, Kerala, M P , Orissa, Rajasthan, U P . aiid \ V e s l Beiignl the ranking is different **includes Gujarat, Haryana, Karnataka, Maliaraslitra. Puiijab. and Taiiiil Kadii In this table, the classification ofpoorer aiid richer states i s based 011G S D P per than that by per capita GSDP, capita rather than poverty headcount. For example, Assain has the S o u r c e : I n d i n D P R :Staff c n lr;r in l i o n s , b n sed o n P Inti ii iirg Coin 11; iss io II highest percent o f population that i s calorie-deficient, reflecting extreme hunger poverty; Orissa, MI' and UP have the highest infant and child mortalityrates; and UP shows the lowest primary school enrollnient rate. Access to reliable water supply and electricity, which i s important to both economic and human development, i s also very uneven across states, as well as significantly lower inrural areas where the vast majority o f India's poor live. 17. Performance on environmental issues, particularly related to environmental health, also reflects some growing disparities. While urban air pollution in Delhi and other metro-cities has stabilized and/or shown some decline - largely thanks to mounting pressure to act from environmental activists and NGOs representing the urban elite - efforts to reduce indoor air pollution from use o f traditional biomass fLiels have suffered froin inconsistent policies and lack o f recognition o f the issue. For the poor, it i s often this indoor air pollution that constitutes a larger risk to health, disproportionately affects women and young children and contributes to highinfant/child morality rates. Inother areas o f environmental sustainability, the story i s mixed. For instance, deforestation appears to have been reversed on a national scale, which i s a considerable achievement. At the same time consumption o f fuel wood has increased, suggesting continuedpressures on forests. The worsening availability and quality o f water, particularly through ground water depletion, has emerged as the major concern threatening livelihoods and development prospects in many areas. 18 The issue o f whether India will be able to reach its MDG targets by 2015 reinaiiis a focus o f much research and debate. The recently completed Bank report "Attnmuzg tlze Mzl/ei?uzu/nDe\e l o p o i / Goals iiz India'I4has focused on the major human development-relatedMDGs (e.g , child and infant mortality, child malnutrition, schooling enrollment and completion, gender disparities in schooling and hunger poverty), disaggregated by sub-national unitsinIndia. Inits analysis o f the progress and prospects for achieving the MDGs at the state level, the report asserts that India cannot hope to attain the MDGs without significant improvement in the poorest states, which will account for an even larger share o f the country's population in 2015. The study concludes that achieving these goals will be very challeiiging in the poorest states -particularly for the goal o f 100percent net primary enrollment and 100 percent primary completion o f education. A useful illustration o f the increased rate o f progress that will be needed on average across India i s provided inFigure 1 World Bank, 2004 "Attaining the Millennium Dehelopment Goals in India" South Asia Region Human Deielopnienr Lnit 5 Figure 1: The Challenge of Meeting the MDGs (selected indicators, annual percentage point change) I I 3 0 3 0 2 6 B 0 2 0 0 2 n. 1 0 0 0 Total Enrollment Boy's Enrollment Girl's Enrollment Infant Mortaliiy Rate Proportion of Rate Rate Rate Attended Deliveries 0 Rateof progressin 1990s 1 Rate of progress required to achieve MDGs (late 1990s to ~ . I Taken from the World Bank Group India CAS Progress Report, December 2002; Source: h'SS 50'" and 55'" Itound, Schedule 10 for enrollment estimates; NFHS-1 (1992/93) and NFHS-2 (1 998199) for IMRs and attended birth estimaks -The rate of poverty decline in the 1990s in India i s a subject of considerabledebate (see paragraph 13). EconomicDevelopments and Outlook 19. India's ambitious program o f economic reforms, underway since 1991, can be credited for the overall good progress inincreasing incomes and improving living standards. After the setback associated with the 1991balance-of-paymentscrisis, economic growth, supportedby wide-ranging reforms to open and deregulate the economy, picked up significantly. Reforms included abolition o f all quantitative restrictions on non-consumer goods, reduction intariffs, unification o f the exchange rates, adoption o f more liberal rules for foreign direct investment, and the introduction o f current account convertibility. 20. Even though the pace o f reform has been uneven since the mid-l990s, cumulative changes so far have been substantial. Many sectors have opened up to private activity, trade policy and the exchange rate regime have been further liberalized, and the reform o f capital markets has started, leading to an improved investment climate. Some positive reform developments have taken place recently: after several years o f at best slow.decline, tariffs were significantly reduced in January 2004 - the average un-weighted tariff was cut from 33 percent to 22 percent; there are initial signs o f fiscal adjustment at the Center and in some states; and important reform legislation has been passed by both central and several state goveminents inrecent years, including in the areas o f power sector reform: fiscal responsibility, and debt recovery. 21. Growth was rapid inthe inid-1990s: the EighthPlan Period (1992/93-1996/97) showed an annual average o f 6.7 percent growth. Overall growth then dropped during the Ninth Plan Period (1997198- 2001/02) to 5.5 percent due to a significant slow-down inindustrial growth. Growth slowed further in 2002103 to an estimated4 percent due in large part to the impact o f poor rains on agricultural output. But 2002/03 also saw the beginning o f an industrial recovery and increased investment ininfrastructure. Growth performance in 2003/04 was excellent, with an estimated growth rate o f around 8 percent following a good monsoon and a rebound froin the 2002 drought, continued strong service sector performance and further recovery in the industrial sector. 6 22. However, the fiscal stance since the mid-1990s has not been conducive to long-run growth and poverty reduction. The general govemment (Center and states) fiscal deficit has averaged around 10 percent inrecent years. These high fiscal deficits have been accompanied by poor composition o f expenditure with wages, pension, interest and subsidy crowding out capital spending and maintenance, and leading to slow real growth in social sector spending. 23. The fiscal deficits have also been largely financed by borrowings, with a strategic shift towards long-term rupee debt after the 1991 crisis. General government debt rose from 58 percent o f GDP at end- March 1986 to 85 percent o f GDP by end-March 2003. Includingthe debt o f public enterprises, total public debt i s now 95 .percent o f GDP, with contingent liabilities from loss-making public enterprises adding another 12 percent o f GDP. Despite the apparent ease with which the fiscal deficit i s being financed, a large part o f household savings i s being usedto finance the gap between public sector investment and savings. However, the risk o f crisis inIndia today i s mitigated by public control o f much o f the banking sector, as well as by the strong extemal position. Rising external reserves and low levels o f short-term extemal debt give the country a very comfortable cushion to counter any speculative attack. The risk is further reducedby limited capital account convertibility, and a flexible exchange rate. 24. Moreover, at the Center, there are early signs that the fiscal and revenue deficits may be falling below their peak o f 2001/02, and that central debt i s stabilizing. Preliminary estimates indicate a Central Govemment fiscal deficit o f 4.8 percent o f GDP for 2003/04 - significantly lower than the budgeted number o f 5.6 percent o f GDP. The passage o fthe Fiscal Responsibility and Budget Management Act, which mandates elimination o f the current account deficit o f the central govemiiient by March 3 1, 2008, i s also an encouraging development. Nevertheless, further efforts will be needed to address fiscal imbalances at the Center and especially in the states, which account for about 40 percent o f the general government fiscal deficit, where, while some states have made good progress, there i s so far little by way o f aggregate fiscal adjustment. The low interest rate regime observed today may also not remain forever and as long as debt remains highthe sustainability o f the fiscal stance i s extremely vulnerable to an increase in interest rates. Major fiscal reforms are needed to reduce central and state fiscal deficits, to reorient public spending towards public investment and non-wage operations and maintenance, to improve the quality and efficiency o f government spending, and to increase revenue iiiobilization (simplifyingtax structures, eliminating exemptions, bringing services into the tax net, implementing a VAT). 25. Medium-termprospects for growth depend critically on the pace o f structural reform as well as fiscal consolidation. An aggressive reform effort by the govemnient will be required to encourage the private investment needed to achieve higher sustained growth. Key areas for growth promoting structural r e f o r m are the power sector, agriculture and factor markets, especially labor and land (for details on the required reforms, see the discussion o f GoI's poverty reduction strategy in the next section) 26. The DPR developed two growth scenarios: a slow reform sceizurzo in which growth would slow to 5 percent, and afast reform sceizano in which growth would progressively accelerate to S percent'. Currently, India appears to be inbetween these two scenarios. Medium-temi growth prospects have definitely improved over the last year with faster industrial and services growth already in evidence. and with considerable reform progress inthe last year or so. While India is currently on an underlying growth path o f around 6 percent, i t is clearly possible for Go1and the states to set growth on a highei path and achieve 8 percent in the coining years, providedreforms are further broadened and accelerated World Bank, 2003. "India: SustainingReform, ReducingPoverty". South Asia Region Poverty Reduction and Economic Management Unit. ' 7 T I . THE TENTH PLAN-INDIA'S POVERTYREDCC STRATEGY 27. These economic and social developments provide the challenging context for implenientation o f the Government's poverty reduction strategy, embodied inIndia's TenthFive-Year Plan. The Tenth Plan covers 200213 to 200617 and was prepared over a two-year period involving an extensive process o f consultation and consensus building. It lays out even more ambitious goals than the MDGs and acknowledges that a higher level o f performance will require some radical departures from existing practices in India. 28. The essence o f the TenthPlan i s to change the role and improve the effectiveness o f government, so as to better support the private sector and ensure widespread improvements inwell-being. The strategy has four core components. First, govemance and service delivery are to be improved. Greater reliance i s to be placed on the private sector and on public sector reforms to deliver accountability, reduce opportunities for corruption and improve the speed and effectiveness o f government at all levels. Second, poverty i s to be reduced, particularly inthe lagging states, through the implenientation o f policies that encourage growth, employment generation and access to elementary education (especially for girls) and to primary health care (especially for women). Third, the growth rate i s to be increased, including through greater public investments. As outlined inthe Tenth Plan, this requires fiscal adjustment at both the central and state levels, as well as reform o f the financial system, and trade liberalization. Finally, improvements ininfrastructure and the productive base are at the heart o f the Tenth Plan. 29. The Tenth Plan targets an average growth rate o f 8 percent per year and rapid progress across a wide range o f social indicators, spurred by an ambitious policy reform agenda. As mentioned in paragraph 26 above, while currently the likely medium term outlook for growth i s about 6 percent a yeai. i t is clearly possible for Go1and the states to set growth on a higher path and move towards the Tenth Plan growth target o f 8 percent a year by the end o f the Plan period (tlzefast refu7w sce/imo) provided comprehensive reforms are adopted. 30. Inafast reform sce7?ario,measures to reduce fiscal deficits, at the Center and inthe states, would reduce crowding out and pressures for exchange rate appreciation, and create space for increased private investment. Improvements in the management and composition o f public expenditures, with a lower share spent on civil servants' wages, pensions and interest, and on covering power sector losses, and a higher share spent on operations and maintenance (O&M) and investments inkey infrastructure, would further "crowd in" private investment. Improvements inthe investment climate, through the reinoval of bottlenecks inproduct and factor markets and key infrastructure, would increase the productivity o f both public and private investment across the economy, including in India's poor rural areas. An increase i n FDIwould contribute technology transfer and increase output. 3 1, Accelerating growth towards 8 percent a year also depends greatly on changes taking place in India's lagging states. Ifthe trends o f the past few years continue, Le., if growth continues to be divergent across states (with poorer states growing no faster than 5 percent per year or only slightly better than in 1997-2002),then richer states would have to grow at near 10 percent per year on average to reach an all- India average o f 6.5 percent per year over the Tenth Plan period. Since this i s unlikely, implicit in projections o f rapid aggregate growth i s an acceleration o f growth in the lagging states. To achieve this, major policy and governance reforms will be needed in the poorer states. The role o f the Center in both catalyzing and setting the pace for reforms at the state level will be critical. 8 32. Since poverty i s also primarily a rural phenomenon in India, policies to increase the productivity o f agriculture, which declined between the 1980s and 1990s, will also be o f particular importance for poverty reduction and increased rural incomes. Inthe short run, the removal o f subsidies to food grains could reduce agricultural output inthe few states that benefit the most from these subsidies. In the mediumterm, these are also states where significant agricultural diversification can take place. More importantly, this reform agenda would help increase incomes inpoor states that do not benefit from subsidies, and release resources for rural infrastructure, such as research and extension, rural electrification, and rural roads - key inputsto achieving faster progress on the MDGs. Simultaneously, faster growth in industry and continued rapid growth in services could providejobs for the labor force released from agriculture. 33. It i s also important to note that a number o f factors weaken the link between India's economic growth and poverty reduction. These factors range from the skewed ownership of, and access to, productive assets (e.g., land, credit) and ineffective delivery o f government programs, to restrictive social groupings that cause exclusion (e.g., caste, kinship) and systems o f patronage. InIndia, social processes can still work to exclude, deprive or discriminate against large population groups on the basis o f their caste, ethnicity, religion and gender. Bias against women compounds other types of exclusion. The groups excluded, the way they are affected and the effectiveness o f policies against exclusion varies significantly between urban-rural areas and regions. In general however, all these forms o f exclusion block mobility and reduce opportunities for involvement ineconomic and political life. None are conducive to achieving the targets set out in the MDGs. Measures aimed at empowering poor people, both as economic agents and as service users, therefore appear to be vital for success in sustained poverty reduction. 34. As highlighted inthe 2004 World Development Report (2004 WDR), ``MakingServices Workfor Poor People ", more effective delivery o f health and education services and provision of social safety nets, would help to empower India's citizens to both contribute to, and benefit from, strong economic growth. Effective service delivery will in turn depend on measures that increase the accountability o f the public sector and private service providers to all Indian citizens, including the poorest and most vulnerable. This suggests a need for greater progress on shifting the role o f government, decentralizing services and strengtheninglocal government capacity across India, in order to tighten the linkages between politicians, service providers and poor citizens. The most vulnerable segments o f the population -namelywomenandgirlsandthe SC/STs-cannotbeleftoutofthisequation. 35. Insummary, thefast refoim scenario will needto be comprehensive, notjust to accelerate growth, but also to rapidly improve social indicators, during and beyond the Tenth Plan period. Some of the most important elements ofthe refomi agenda that would comprise the fast reform scenario -most of which are embodied in the Tenth Plan, are outlined inB o x 2. Box 2: Summary of India's Priority Reforms Fiscal Policy Progressively reduce the primary deficit at the Center and in states by completing tax reforms (eliminating exemptions. bringing services into the tax net, implementing a uniform state VAT and reforming tax administration), reducing power sector losses, and phasing out petroleum subsidies. Reduce financial sector risks by implementing the new securitization law, linking returns on provident funds and small savings to market benchmarks, and establishing a clear frameworlt for managing statc governnient guarantees. Improve fiscal management by imposing greater fiscal discipline on state borrowing and transfers, breaking down artificial distinction between plan and non-planexpenditures, and consolidating Centrally Sponsored Schemes. Improve the composition o f public expenditures, by reducing the share spent on wages, pensions, interest payments, and agricultural subsidies, and increasing investment and O&M for priority social; InfrastrtictLire and agriculture programs. 9 I Delivery of Public Services Reduce administrative fragmentation and reform civil service pay policy and pensions. Improve thc performance o f thc civil service and quality of service delivery by improving public access to information, strengthening accountability, and reducing political interference. Refocus health, education and social safety net programs on outcomes. The central government can play an important role as an independent source for measuringprogress towards agreed goals. Improve the private market for health care through training, public information and accreditation. Priorities for public funds are to provide clean water and sanitation, and to combat communicable diseases (including HIVIAIDS prevention). Ensure increasedpublic resourcesand improved resource use in elementary education. Schools should be more accountable to communities, with more local autonomy to find the best solutions. Develop a well-designed fiscal framework for local governments, which would guarantee their autonomy and accountability. Flows of funds from the Center and states should be dependent on good local fiscal perforniance and resourcemobilization. Investment Climate for Industry and Services Speed up trade reform by reducing average import tariffs and phase out tariff exemptions, specific tariffs and anti- dumping duties. Remove other product market distortions by, implementing a full and uniforni VAT, phasing out remaining FDI restrictions, eliminating preferential policies for small-scale firms, price and marlteting reforms for agricultural and agro-basedproducts, and streamlining business entry and regulation procedures. Reduce inefficiencies in factor markets by easing restrictions on hiring and firing of workers, enhance the capacity o f the financial system to mobilize longer-termresources and allocate finance more efficiently towards productive sectors, thereby enhancing access by underserved segments (SMEs, micro enterprises, infrastructure), address problcms in the use and transfer of land, and enhance bankruptcy procedures. Ensure access to reliable power at reasonable costs by rationalizing power tariffs and improving the financial and operational performance of State Electricity Boards. Address capacity and quality constraints in the transport sector by improving public sector performance (for roads and rail), mobilizing private sector investment (including better cost recovery for roads), phasing out price distortions (for rail), and improving the efficiency o f existing capacity (for ports). Agricultural Policy and Rural Development Put in place a market-based food grain policy that protects the poor through targeted safety nets, while mitigating drastic supply shocks through a cost effective and well-managed price stabilization mechanism Reduce input subsidies that are fiscally unsustainable and distorting input use. Savings should be used to fund more productive investments in agricultural research and extension, rural roads, and rural electrification. Reduce regulation of domestic trading activities for major agricultural coniniodities and eliminate rcmaining trade policy distortions, including subsidized exports o f rice and wheat. Improve access to land by revisiting current legislation on land tenancy, and building oil successftil initiati\,es to improve land administration. Devise market-based solutions to improve rural access to a larger range of financial services, at lower cost. I ! Source: TheIndia Developiiierzt Policy Review. June 2003 with updates from World Barzlc staff I 111. THE INDIAAND WORLD BAN Reviewing Our Assistance 36. Giventhe vast development challenges, and the modest size o f Bank Group programs relative to the population and economy o f India, the Bank Group cannot support India inevery effort toward achieving its Tenth Plan goals and the MDGs. Instead, since 1997 Bank Group strategy has been to engage selectively in India and primarily at the state level, with knowledge resources and financing geared towards reform. The main thrust o f the strategy has been to support the programs o f leading reform states in order to create demonstration effects that might stimulate reforms across other states. or 10 inother sectors of areformingstate. The focus ofIFC activity has been on investments in manufacturing, financial services and infrastructure. 37. IndevelopingthisCAS,theBankGroup countryteamundertookaself-assessment ofitsFY02- FY04 support to India to supplement the CAS Progress Report o f December 2002. A note on this review i s attached as Annex 2. The assessment concludes that, by focusing on key aspects o f the reforin agenda and working inpartnership with GoI, reforming states and others, the Bank Group has been able to have considerable positive impact. Recent Bank Group programs have been ambitious in their efforts to catalyze and expand the state reform process in areas that are central to reducing poverty in India - and when progress inreforms was slower than expected, Bank strategy was also well structured to deal with the slowdown inreform implementation that took place in several states. While concluding that the FY02-04 strategy was broadly appropriate, the review points to some lessons o f experience which suggest an evolution (rather than a fundamental rethink) o f the strategy going forward. These include: the need to address growing disparities in state development performance, especially given the importance o f the poorest states for achievement o f the MDGs; the importance o f long-term engagement with states on cross-cutting reform issues; and the disadvantages o f concentrating investment lending in states that are recipients o f adjustment lending. Further detail on implementation o f the FY02-04 CAS i s provided in the note and a brief summary o f progress for some o f the main product lines o f the Bank follows below. 38. For the Bank's oizgoirzgportjiolio,India's portfolio perfonnance declined in FY03 after five years o f sustained improvement inmost quality indicators, and showed mixedresults inFY04 after a number o f improvement actions were taken on projects that were either slow disbursingor closing with large undisbursedbalances. These actions resulted inan improvement in disbursement performance, but also in an increase inthe riskiness rating o f the portfolio. The disbursement ratio reached 19.9 percent at end- FY04, which i s slightly below the Bank average o f 21.4 percent and ratios for other large Borrowers such as China (22 percent) and Indonesia (27.2 percent). The percentage o f projects-at-risk increased to 16 percent inFY04 compared to 11percent inFY03 and the Bank-wide average o f 16 percent. Many o f these projects had clearly not been ready for implementation at approval, and hence suffered one or two years at the outset in which little was disbursed. At current implementation and disbursement rates, none o f the ongoing projects inthe portfolio can be completed within the 5-year implementation period which has been the business standard for Bank projects inthe South Asia region. 39. The causes o f slow disbursement included a weakening o f project readiness for implenientation and a weakening o f follow-up and proactive actions to address slow disbursingprojects. The increase in the portfolio riskiness rating results from more candid reporting and proactive portfolio management, which i s reflected in the end-FYO4 realism and proactivity indices o f 90 percent and 83 percent, respectively. In order to improve portfolio performance and support the strategy for scaling up Bank support to India, the Bank and Go1engaged in intensive dialogue during FY04 on ways to improve the portfolio and agreed on a Portfolio Improvement Strategy. Iinplementatioii o f this strategy (attached as Annex 8) began in mid-FY04 and i s expected to continue into FY05 and beyond. 40. For new Bank lending, commitments fell short o f the base case o f the CAS during FY03 and FY04 and below the program envisioned at the time o f the Progress Report. Reasons for this include delays inboth adjustment and investment lending due to a slower than expected pace o f reform implementation in some states. Consistent with the `self-activating triggers` o f the FY02-04 CAS: the Bank's lending volumes have been reduced when states have slowed in their implementation of fiscal, goiw-name and power reforms. The investment pipeline was also affected by preparation delays. Despite this, IDA resources, which are constrained at low levels relative to India`s size and absorptive capacity, are likely to be fully utilized duringIDA-13. 11 41. By contrast, while the slowdown in some state reforms reducedBank financing, dui-ingFY03 and FY04 the AAA progrniiz o f the Bank was stepped up. The country team continued a dialogue on reforms and provided non-lending technical assistance in UP when further adjustment lending was put on hold as the state's reform process faltered. Substantial policy advice and non-lending technical assistance have also beenprovided in states where adjustment lending has beenunder preparation, namely AP, Kamatalta. Tamil Nadu and Orissa. Important analytic work on the investment climate and fiscal, governance and power sector reform was also initiated in states where the Bank had not previously been engaged in these areas, includingMaharashtra, Bihar and Punjab. 42. Inaddition to the expansion of state level policy dialogue and non-lending TA, the country team focused on major studies such as the D P R and an AP Growth Study in order to disseminate key messages more widely across India. A Country Procurement Assessment Review (CPAR). several State Financial Accountability Assessments (SFAAs) and numerous sectoral policy notes, workshops and dissemination activities were also delivered to bolster the reform process at both the federal and state levels 43. For IFCprograms, cominitments inIndia grew strongly over the CAS period, albeit with considerable variation inresponse to changing market and regulatory conditions. Over the last two years IFC achieved record comniitments inIndia, nearly doubling its portfolio, improving profitability and investing inhighimpact projects, making India IFC's second largest exposure. InFY03, IFC committed a record US$348 million and in FY04 commitments were USS290 million, with a concentration in iiiaiiufacturing, as well as investments in agribusiness, power, oil and gas, finance and healthcare. The expansion was mainly in long-tenn debt, aided by the introduction (in FY02) o f local currency lending, which i s better suited to sectors such as infrastructure, housing finance and healthcare that do not generate foreign exchange. Scaling Up 44. The country team's review o f Bank Group assistance (paragraph 37) reconfirmed the positive impact that the Bank Group can have when focusing on supporting key aspects o f the reforiii agenda and working inpartnership with GoI, the states and others. The Bank Group offers a number o f strengths. Firstamong these is the Bank Group's ability to gather and share global knowledge and experiences with Go1and other important audiences in India. Secondly, the Bank Group has a broad array o f tools that it can offer to help mobilize private financing and foster greater private sector participation in India's development. Thirdly, through lending and investments, the Bank Group can help catalyze greater effectiveness and more efficient spending o f others (e.g., state level governments), towards the ultimate goal o f reducing poverty and encouraging India's sustainable development. I n lookiizg nlzend, tlie core inessageof this CAS is to build on these strengths while engaging in new ways with Indin to nclrieve n iiiqjor step-up in Bank Group impact mid delivery 45. To achieve this enhanced impact, three Strategic Principles will underpinthe Bank Gro~ip ' s work: Focusing on outcomes, to ensure that all o f the work o f the Bank Group IS explicitly geared tobbards supporting India's achievement o f its development goals. Annex 4 provides a CAS Outcoines ,\/Iatrix for FY05-08. The Bank Group will support achievement o f these outcoines with all o f its financc and knowledge resources in India; the outcomes will inturn serve as tlie goal posts to ineasure the effectiveness o f Bank Group support over the medium term tiiiiefraine o f tlie assistance strategq DuringFY05-08 the Bank Group will also seek to support or develop a stronger focus on results and an `outcomes orientation' within the programs o f Go1and the states, emphasizing impact monitoring 12 and evaluation and improved service delivery for some o f the most far-reaching programs o f government. Due to the complexity o f India's development challenges, Bank Group programs will necessarily span a wide range o f sectors and types o f interventions. Nevertheless, selectivity will b e applied, to target limited resources to activities where assistance i s welcomed and where contributions can also be the most effective. An important element o fthis is working closely with the major donor and financing partners remaining in India, (paragraphs 62-66) taking their programs into account and seeking to work together for co-financing o f country-led programs under cominon fiduciary and safeguard arrangements. Lending selectivity will also be exercised by choosing projects in a way that seeks to maximize their impact. DuringFYOS-08,this means focusing adjustment lending on states undertaking comprehensive reforms, as i s currently the case, and applying 'guidelines for engagement' for investment lending (paragraph 60). Evenwith scaled-up lending, gross disbursements will be very small inrelation to the size o f India's economy - less than 0.2 percent o f GDP. Selectivity therefore also means a greater emphasis on projects that either pilotldemonstrate new approaches for possible scaling up later, projects that move from successful pilots to larger scale interventions, and projects that support expansion o f proven government programs on a sector-wide basis. 0 The Bank will also aim to substantially expand its role as a politically realistic knowledge provider and generator. To achieve this shift, changes are envisioned on a number o f fronts, including: (i) strengthening Bank capacity to act as a channel for ideas and lessons o f international experience (paragraphs 173-179); (iijplacing greater emphasis on understandingthe motivations of interest groups and different stakeholders inthe reform process; (iiijhelpingclients to better coniniuiiicate the potential benefits o f their reform program; and (iv) operating in a inore strategic and integrated fashion across different organizational units o fthe Bank to leverage knowledge resources inore effectively. Given the modest scale o f Bank Group financing, to help realize its role as a full development partner, an important part o f its knowledge function will be directed to supporting better delivery and effectiveness o f government programs, with the aim o f leveraging rather small knowledge-based interventions into significant impacts on development outcomes. 46. Applying these StmtegicPrirzciyles, theBank will seek n siibstaittial increase in its volunie of leizdiizg to India. GivenIndia's enormous needs, the expansionwill primarily be in (i)infrastructure (roads, transport, power, water supply and sanitation, irrigation and urban developiiient -to undei-pinboth accelerated growth and improved service delivery); (ii) human development (education, health, social protection priorities to support specific MDGs); and (iii) - rurallivelihoods(with an emphasis on community-driven approaches). Cross-cutting reforms at the state level will also remain an important focus. Expansion inlending for human development and rural livelihoods will depend critically on availability o f IDA resources, whose expansion would bejustified by the opportunity to contribute to achieving the MDGs. 47. The steppedup program will provide increased opportunity for collaboration across the Bank Group to promote innovative Public-PrivatePartnerships (PPPs) for infrastructure de\,elopnient - particularly inpower and transport. The Private Sector Development Strategy (attached as Annex 7 ) suggests some areas where this collaboration mightbe developed. The basic principle guiding the division o f labor i s for the Bank to support activities that warrant public support, while IFC and MIGA assistance will encompass activities that fall within the private sector`s role. 48. IFC will continue to provide equity and loan financing and guarantees to supplement nhat is available from Indian financial institutions or capital markets, and will help to mobilize financing from 13 both domestic and international sources. This will include pioneering investments in infrastructure \\here innovative structures and long tenors are required; and investments in projects which are constrained by limited risk appetite o f other investors, including medium-sized manufacturing companies. agribusiness companies and companies entering new markets domestically and internationally. IFC wilI add value to the projects it invests in by mobilizing finance from other sources (especially foreign investment), advising on structuring, acting as an honest broker between various project parties and facilitating international partnership, particularly with other developing countries. 49. In its lending and investments, the Bank Group will focus 011adding value through advice on environmental and social sustainability, public and corporate governance and the transfer o f global knowledge and best practices. In doing so, IFC will promote higher corporate standards o f social and en\ ironmental responsibility and the Bank will work to improve iiiiplementation o f environmental and social frameworks and strengthen the national and state-level frameworks for procurement and financial management. This will be reinforced by efforts to change the way that the Bank does business in India - seeking to harinonize Bank safeguard and fiduciary requirements, as well as those o f other donors, as far as is possible around the policies adopted by Go1and state governments (Box 3). This harmonization withgoveriiinent systems will be inanaged carefully, focusing during the CAS period on sectors in which its benefits are clearly greater than risks (Le., large numbers o f small, relatively low risk investments as in education, reproductive and child health, rural water and rural roads). Additionally, Country Financing Parameters, which will allow increased flexibility in the type of expendituresthat are eligible for Bank financing in India, are also being developed. While the new financing parameters are not like14 to lead to a significant change in demand for Bank financing, they can simplify procedures and reduce the transaction costs o f Bank finance for GoI. Box 3: Supporting Improved Fiduciary and Safeguard Systems The Bank i s seeking new opportunities to strengthenand, where possible, use Indian government systems to satisfy its fiduciary and safeguard requirements- and inthe process seeking to change the way that it does business inIndia. One way it will do so is by working closely with other development partners for co-financing of country-led programs under common fiduciary and safeguard arrangements. A sector-\\ ide approach is also one of the vehicles for implementingthis new business strategy (see Box 4). For the Bank and other development agencies to place reliance on government systems, they need to have a detailed understanding of their design and operational performance. With respect tofidziciayy reqztirements, the Bank uses standardtools for assessingthese systems and determining the level o f fiduciary risk - Country/State FinancialAccountability Assessinelits and Country/State Procurement Assessment Reviews. Where weaknesses indesign or performance are identified, this neednot preclude use of government systems, providedthat appropriate steps are taken to mitigate the risks and strengthen capacity in the medium term. The Bank will continue analytical work and intensify its technical support for governments' efforts to strengthen financial management and procurement practices in the public sector. With respect to safeguard requirements. the new approach would also require an early integration of social and environmental considerations into prqject preparation in line with Bank policy. This would be based on an assessment by the Bank o f the effectiveness o f existing practices and procedures in the sector and the sector's capacity to implement and monitor solutions. From this assessment, the Bank and client teams then work to build into project design any specific measures neededto manageunresolved risks.As agreements on managementof environmental and social risks are reached, the dialogue can increasingly shift to improving implementation performance and accountability for results. This basic approach could be adaptedto other sectors where the safeguard risks are considered to be low. 50. Inorder to also scale up the impact o fthe Bank Group's global knowledge resources in India. the AAA program i s being reshaped to focus on (i)preparation and dissemination o f a limited number o f major reports on key issues in India's development, either required for fiduciary reasons. or focused on 14 topics on which a public exposition o f Bank views would be helpful to advancing the development debate (Annex B4); and (ii)`just-in-time' activities (including reports, policy dialogue, worltshops, etc.) primarily inresponse to Go1requests. The Bank Group will seek an increasing array o f partnerships with local research institutions and interested organizations inboth developing its analytic work and disseminating important findings. An enhanced program o f support from WBI will be an integral part o f the reshaped AAA program, with WBI focusing on five o f the areas where capacity-building efforts can be most beneficial. These five thematic areas - HIV/AIDS control, urban development, local government capacity building, improving the investment climate and strengthening fiscal management - will guide WBI support, along with a particular focus on four o f the poorest states with the greatest capacity building needs (paragraphs 56-57). 51. Since India has underutilized trust fund and grant programs offered through tlie Bank Group in the past, at the request o f GoI, greater effort will be made to enhance participation with these programs in the coming strategy period. Inparticular, Go1and the Bankwill seek to help strengthen project readiness via upfront analytical work and strengthenimplementation capacity or the capacity o f key institutions (e.g., through Japan Policy and Human Resource Development (PHRD) and Institutional De\relopment Fund(IDF) grants). Working at the NationalLevel 52. Scaling up will require expanded Bank support at the national level. A large part o f this expansion will be inthe form o f A A A : for instance the series o f major reports will primarily address issues o f national consequence, Some o f these issues are expected to be: the Implications o f India's Gender Imbalance, Employment Issues (especially for young people), the Long-term Economic Impacts o f HIV/AIDS, Building India's Knowledge Economy, India's Adaptation to Climate Change and a review o f Disability Issues and Impacts. A full listing o f the proposed program for FY05-FY06 i s attached in Annex B4; the midternireview o f the CAS will address the program anticipated for the latter half of tlie strategy period. With the recent DPR serving as a model, the Bank will work to bring a multi-sectoral perspective to these studies and seek broad dissemination o f their messages across India. 53. The increase in overall lending will also involve more national level lending (for roads: power, education, HIV/AIDS, etc.) Compared to recent years. An important shift envisioned for FY05-08i s the use o f new approaches, including co-financing with other development partners under coiiinioii arrangements, for national programs inthe areas most critical to meeting the MDGs. Using such approaches, the Bank will seek to step up its national level engagement and work closely with partners that canjoin the Bank inproviding substantial assistance. Such operations are already beginning to materialize, with the first being a major new sector-wide approach (Swap) supporting GoI's national elementary education program - Sarva Shiksha Abhiyan (SSA) - approved by the Board in April 2004. As highlighted inBox 4, Operations such as this can be expectedto pave tlie way for a stronger and inore effective partnership between the Bank and Go1into the future. 15 Box 4: Leveraging Bank Support through SWAps SWAps offer the possibility o f an enhanced inipact o f Bank lending, a strengthened focus on monitoring outcomes inkey sectors and an effective vehicle to help strengthen fiduciary and safeguard capacity. Go1and the Bank recently agreed to initiate experiences with this approach through a first SWAP in support o f India`s national elementary education program (SSA). SSA i s designed for a large federal system, with a decentralized framework for service delivery and a built-in accountability mechanism at the school and community levels. IDA, the EC and DFIDare pooling their funds with Go1to support the program. The SWAP mechanism will enable the external partners to work towards improving institutional capacity inthe course o f program implementation. SSA has a results-based framework through i t s funding arrangements, rewarding implementation at the districtlsub-district levels. External contributions are designed to maximize central-level support, which in turn i s designed to leverage state-level support - all with the goal that development assistance complements, rather than substitutes for, local efforts. Followingfrom the experience o f SSA, a SWAP to support the national Repioductive and Child Health (RCH) program i s also under preparation This second RCHproject for the Bank would facilitate pooling o f both Bank and DFID funds and a stronger performance orientationtowards the program's key objectives Based on the implementation experience o f these operations and lessons learned, Go1and the Bank could explore the possibility o f using SWAps in other sectors and in states having the right conditions for such wider engagement. Workingwith the States 54. Some important shifts are also being implemented inthe Bank Group approach to the states. Since 1997, the CAS has included a focus on states undertaking comprehensive refomis, in order to support the leaders o f change and serve as a catalyst to the state-level refomi process. With the widening gulfbetweenthe reforming and non-reforming states inIndia, leading to a concentration of poverty and poor social indicators injust a few states, some shifts in this approach are warranted. Though the Barik Group strategy will retain an essentially reform aiidperforiiiaizce-based approach to the states, it will also cltange in ways that are intended to go asfar aspossible in opening up new opportirriities.for engagenzeiit with these largest andpoorest states. 55. A number of steps are envisaged. First,in consultation with GoI, the Bank i s seeking inthis CAS to ensure that all o f the largest and poorest states o f India that so wish are engaged in a dialogue on cross-cuttingreforms that are the focus o f adjustment lending (fiscal management, governance, service delivery, the powersector and the investment climate), regardless o f their eligibility for adjustment lending. Either the Bank or ADB would take the lead inoffering support through dialogue on cross- cutting reforms in each o f the major states. Twelve o f India's 28 states - AP, Assam, Bihar, Jharldiand, Kamatalta, MP, Maharashtra, Orissa, Rajasthan, Tamil Nadu, UP and West Bengal - account for over 90 percent o f India's poor. The Bank i s currently actively engaged in dialogue with Karnataka: Orissa (in collaboration with DFID), AP (in collaboration with DFID),UP and Tamil Nadu and would seek a similar dialogue with Bihar, Maharashtra, Rajasthan and Jharkhand. ADB i s engaged in dialogue with M P (incollaboration with DFID) and Assam. ADB has also had a longstanding engagement with West Bengal. 56. Secondly, the Bank will work proactively to try to build a productive development relationship with four states where poverty i s increasingly concentrated in India and where public institutions are considered to be at their weakest - Bihar, Jharkhand, Orissa and UP. This support could go beyond rile basic dialogue on cross-cutting reforms noted above. 16 57. The expanded support to these four states could take several forms during the strategy period. The Bank would seek to mobilize limited grant fundingresources (e.g., from the IDF or Japan Social Development Fund(JSDF)) to finance innovative governmental and non-governmental activity targeted to poverty reduction and progress towards the MDGs. A good example o f this kind o f work i s the recent approval o f a JSDF seed grant for the Orissa Fundfor Development Initiatives. The Bank would also work to help these states meet `guidelines for engagement' for investment lending (paragraph 54) in support o f critical poverty-focusedprojects. At this time the most promising candidates are the IDA- financed projects that rely on community driven approaches to improve rural livelihoods, watershed management and/or rural water supply and sanitation. The country program and WBI will also seek avenues for focused knowledge support and capacity building inthese states, taking into account experiences innon-lending TA within the India program (e.g., ongoing work inUP) and the learning gained elsewhere (e.g., programs designed for `low income countries under stress'). 58. Thirdly, state-level adjustment lending operations (SALs), aimed at supporting achievement o f the MDGs, are also expected to remain an important part o f the Bank program-up to 15 percent of total lending. While in the initial phase such lendingwas limited to three states (UP, AF' and Karnataka), Go1 has adopted guidelines for untied official external financing o f state budgets which provide transparent criteria for such support and have opened the way for additional states to receive such funding on a performance basis. Inaddition to supporting state government efforts to reduce fiscal deficits, reform the power sector, strengthen governance and implement a range o f actions to improve the investment climate -allofwhichhavebeencoveredbytheinitialstateSALs-thislendingwouldsupport cross-cutting actions to improve service delivery. Any such lendingwould be precededby in-depthanalytic work; and the Bank would provide technical assistance to help states as they implement their Comprehensive reform programs. 59. GoI's guidelines for state adjustment lendingwill be the subject o f ongoing discussion between Go1and the Bank to adapt to evolving circumstances, However, the most recent guidelines emphasize that external support be designed so that: any state that i s consideredto be implementing a comprehensive reforin effort would be eligible for adjustment lending. Similarly, any previously reforming state that discontiiiues comprehensive reform implementation would no longer be eligible for adjustment lending for as long as it remains o f f track; adjustment lending to the states would be set ina medium-termframework o f about five years, consisting of a medium-tenn refonnprogram and associated external financing; progressive deficit reduction, power sector reform, improved governance, the investment climate and improved service delivery would be elements o f all programs, with the basic design principle being to focus on key actions within the state's control that would promote poverty reduction most effectively; and extemal financing would not be an addition to overall financing for a state (since it would be in the context o f declining state budget deficits) and i s therefore to be seen as refinancing or substituting for higher-cost debt. Inthis context, states with both serious debt sustainability issues and solid reform programs would be the best candidates for adjustment lending. As in the case o f investment lending (paragraph 61), on-lending terms for adjustment lending would be kept under review, bearing in mind their basic role as an incentive for reformimplementation. 60. Fourthly,there is no longer an upfront decision to concentrate substantial state-level investment lendingon `focus states' that are also receiving adjustment lendingin support o f cross-cuttingreforms. 17 Instead, investment lending will be channeled more broadly to states that are able to comply with new `guidelines for engagement' for the relevant sector. These guidelines attempt to set out the sector-specific conditions that experience has shown to be necessary for project success. Annex 5 suiiiiiiai-izes the guidelines for both Center and state level investment lending broadly agreed with GoI. They would be amended as necessary during the CAS period in light o f evolving experience. Given the small size o f Bank resources relative to the vast needs across India's states -and the prospect that more states will take up sector reforms duringthe period - it is likely that demand for Bank support could outstrip its capacity to respond at the same time within a sector. Where this i s the case, the Bank would engage first with the states with the greatest number o f poor citizens, or weakest indicators, in order to maximize its impact. Annex 6 provides the status o f MDGindicators by state and some background as to how these choices would be made. The Fiscal Context for InvestmentLending 61. An important concern for investment lendingwill be to ensure that it is consistent with the GoI's goal o f progressive fiscal adjustment, both at the Center and state levels. Accordingly: the framework for lending for which Go1is the beneficiary is provided by the Medium Tei-inFiscal Framework recently adopted by GoI; investment lending for which public sector undertakings (PSUs) are the beneficiary would be based on the creditworthiness o f the PSU concerned. Discussions are underway with Go1to determine on- lending terms insuch cases, which could range from budget transfers for non-revenue generating activities (e.g., rail safety or non-revenue generatingroads) to a full pass through o f IBRD terms for commercial activities (e.g., power generation or transmission); and investment lending for which a state or states would be the beneficiary would only take place wth1n the context o f a MediuiiiTerm Fiscal Reform Program (MTFRP) agreed between the state and Go1 The on-lending ternis for BanldIDA investment lending to states \vi11 be kept underreview. WorkingWith ExternalPartners 62. The context for development assistance to India has changed during the last year. In September 2003, Go1announced new guidelines for development cooperation with bilateral partners. As per the new guidelines, India will receive direct bilateral assistance only from Japan, the United Kingdom, Germany, the United States o f America, the European Commission and the Russian Federation. All other bilateral assistance would be routed either through multilateral organizations or for projects o f econoiiiic and social importance directly to universities, NGOs or autonomous bodies registered under the Foreign Contribution (Regulation) Act. 63. The work o f the Bank Group has been coordinated or leveragedwith that o f external partners in most sectors, including energy (ADB, JBIC, DFID, USAID, K W , CIDA), education (EC, DFID), health and nutrition (USAID, WHO, EC, DFID.concerned UNAgencies, CDC, AUSAID, ILO. and other institutions including the Gates Foundation), and small and medium enterprises financing (DFID, KtX', and GTZ). IFC has co-financed investments with ADB, DEG and FMO and has partiiered with ADB. CIDA, DFID,the EC, the Netherlands and Norway in Small and MediuiiiEnteiyrise (WE) developiiiciit technical assistance in North-East India Since India participates inroutine Article IV coiisultations nith the IMF,Bank economists work closely with IMF staff, particularly on fiscal and niacroecononiic issues. The last IMFArticle IV discussions for India took place on July 18, 2003. 64. Generally, coordination has worked well through informal communications at the project team level, complemented by periodic overview discussions with the various partners, usually in Delhi. During the FY05-08strategy periodthe Bank group would continue to proactively look for opportunities to ensure coordination and cooperation with external partners in this way. Inaddition, inthe changed donor landscape, a particular focus in our coordination with the largest external financing sources (ADB, EC, DFID,Japan, Germany) will be on efforts to develop common, harmonized financing approaches that are based on Go1fiduciary and safeguard arrangements, within the constraints o f evolving Bank policy. 65. There are considerable overlaps inthe areas of activity between the Bank aiid ADB inIndia - both institutions have a substantial and growing involvement in infrastructure and in energy, and are also engaged inadjustment lending to states. Frequent interactionsbetween Bank and ADB staff, generally through their N e w Delhi offices, have beeneffective inensuring strong coordination and an open exchange o f information, to make our activities complementary and mutually reinforcing. The possibility o f both institutions supporting the national rural roads program through co-financing i s being r e v i e n d . A coordinated assistance strategy for national roads wasjointly developed by ADB, the Bank and GoI, is now under implementation and will be updated shortly, The Bank Group and ADB also coordinate in other sectors, including urbaii development and energy. 66. A t the suggestion o f DFID, the Bank and DFID India entered into a strategic partnership agreement inApril 2004 that will provide a broad context to the institutions' cooperation in support o f the GoI's development efforts. DFID and the Bank have worked together on direct budgetary support and power sector reform inAP and Orissa, and also co-finance (with other agencies) GoI's centrally sponsored RCH and education programs. Coinplementary support i s also provided in rural and urban development and power sector reform. IV. WORLD BANK GROUP PROGRA lORLTlE 67. Despite the shifts inthe way that the Bank partners with both the Center and the states, the Bank Group's ProgramPriorities will retain considerable continuity with the FY02-04 CAS. The emphasis on: Iiiiproving Government Effectiverzess; Investing iii People aiid Elitpowering Coiiini uirities; and Promoting Private-Sector Led Growth remains relevant to India's own priorities and developiiient goals. As part o f these countiy Program Priorities, the Bank will also seek to expand assistance on issues related to the global commons, such as inpartnership with the GEF, Montreal Protocol and Prototype Carboii Fund(PCF). The Program Priorities and their relationship with India's poverty reduction strategy and development goals are set out inthe diagram on the next page. 19 I .- L ci 68. T h e agenda for action to achieve India's goals and the MDGs i s a complex one, involving many inter-relationships. Refining understanding of this agenda is an importantarea for further study. Butexperience inIndia andelsewhere suggests that the ProgramPriorities are important and necessary buildingblocks for accelerating progress towards India's development goals (Box 5 illustrates some of the k e y linkages). The remaining pages of this section explain the m a i n issues and constraints in the areas of each Program Priority and how the B a n k Group would w o r k to assist India in tacltling these constraints duringFY05-08- while focusing on an oiitcoiizes orieiztntioiz, selectivity and slinring global k~ioivledge. I Box 5: Bank Group Program Priorities and the MDGs Inorder to achieve the principal national goal o f eradicating extreme poverty andhunger (Goal 1):pi`o.ere.ssiii each of the Bunk's Pro~ranzPrioritv areas will be important. Similarly, Goal 4 (reducing child and infant mortality - see B o x l), i s an aggregate indicator o f the level o f economic, social and human development; in addition to health care, a range o f socio-economic factors, such as household income and/or assets, the mother's education and access to basic infrastructure services, have a direct impact on child survival rates. Most o f India's poor live inrural areas and studies consistently show that agricultural growth and improved marketing, expanding opportunities for farm and non-farm employment, developing physical (roads, water, electricity) and social (schools, health centers) infrastructure and empowering the poorest citizens to access services, are essential for rural poverty reduction, including hunger-poverty. For the urban poor, a good investment climate, including adequate infrastructure, a vibrant financial sector and competitive markets are critical for creating jobs and improving the quality o f life. The enoi-mous needs in infrastructure and social services inboth urban and rural areas cannot be met without substantial private sector involvement. As the 2004 WDR amply demonstrates, for the benefits o f growthand infrastructure provision to reach the poor and disadvantaged segments o f society, significant improvements in the accountability and performance o f public iiistitutions and more effective public expenditure management, are essential. These are all at the core o f Bank Group support. The ProgramPriorities also directly support Goals 2 and 3 (universal primary education and gender equality). Given the importance of educational achievement, particularly for girls, for all other measures o f development (a strong positive impact o f female literacy on several MDG indicators is coiisistently reported by a large number o f studies), Bank support to education will remain an important line o f business during FYO5-OS. Goals 5 (improving maternal health) and 6 (combating infectious disease) -will require a consolidated effort froiii the health, education and infrastructure sectors, as broadly supported b y Bank Priority interventions. Finally, ensuring environmental sustainability (Goal 7) in India i s central to the lasting success o f the country's development efforts, particularly inthe context o f accelerating growth and expanding infrastructure. Environmental management is supported by Bank efforts to promote better governance and more effective public institutions. To the extent that improving fiscal management, one of the Program Priorities. is consistent with reducing or rationalizing poorly targeted subsidies (such as subsidies for power, water, fertilizer, pesticides), the environment will benefit. A substantial portion o f environmental investment should also come from regulated industry, corporations and other polluters. Inthis respect, the development o f a vibrant and completive private sector, often inplace o f former public enterprises, i s expected to significantly improve environmental performance (provided the regulatory framework i s strong). Finally, Bank assistance can contribute to environmeiital sustainability through reducing vulnerabilities o f poor coiimunities and the population at large - to air pollution, dirty water or the risk o f livelihood loss due to natural resource (rvater: forests, land) degradation. 21 ImprovingGovernment Effectiveness 69. Strengtheriing Fiscnl Mnizngeiiierit and Realloentirig Public Resources to Priority Areas for the Poor. As noted in Section I, highfiscal deficits are not conducive to growth and poverty India's reduction over the long run. Deficits at both the federal and state levels have been accompanied by poor composition o f expenditures, with wages, pensions, interest and subsidies crowding out capital spending and maintenance, and leading to constraints on social sector and infrastructure spending. State govemments are currently borrowing to finance current spending, leaving very little room for capital spending. There i s an urgent need for expenditure restructuring to free up fiscal resources: for reforms to improve the quality o f spending, and for increased spending inpriority areas. There is scope for savings ina number o f areas (including on the salary bill, subsidies, public enterprises, and interest payments). The quality o f spending i s undermined by various problems, including: skewed composition o f spending towards salaries; a regressive distribution o f benefits; unevenproductivity inthe civil service; cases o f corruption; an ineffective spread o f funds across too many projects; and duplication o f services provided by the private sector. 70. An important emphasis o fBank support will continue to be improved fiscal and public expenditure management that enables state and local govemments to maintain or increase public resource allocation towards highpriority areas - such as social protection programs and basic service provision. 111 continuation with the FY02-04 CAS, this Program Priority i s an explicit focus o f Bank adjustment lending support to states engaged incomprehensive reform programs (paragraphs 58-59). SALs would helpbolster reformprograms centered aroundrevenue mobilization and expenditurereprioritizatioii, set within the context o f a medium-term fiscal-deficit reducing framework. Improved fiscal management will also constitute an important part o f the knowledge support -bothpolicy dialogue and TA offered- to other states engaged with the Bank, especially those with large numbers o f poor citizens (paragraph 55). Capacity building for fiscal management will be an important thematic area o f WBI support, particularly in Orissa, UP, Jharkhand and Bihar, duringFYOS-08 (paragraphs 56-5 7). 71, The AAA program will continue to include state and local level Financial Accountability Assessments to underpin any new SALs. Inaddition, a country level assessment (CFAA), would aim at helping to strengthen financial management systems and outcomes. 72. Iinprovilzg Goverrzniice and Service Delivery. Simply improving fiscal maiiagenient or the allocation o f expenditures i s not sufficient to achieve the desired result o f improved service delivery, particularly for the poor. Reforms to reduce administrative fragmentation, reform civil service pay and pensions and improve the performance o f the civil service through (i) increased public access to information; (ii) strengthened accountability; and (iii) reduced political interference, are also essential (Box 2), as are steps to increase the voice o f the poor (paragraph 76) and strengthen decentralization (paragraph 79). In soiiie states, goveiiiance concerns go beyond this list to issues o f physical security, law and order, social conflict, breakdown in administrative capacity and delays in the resolution o f legal disputes - all o f which compromise service delivery. Support for governance reforms will remain an integral part o f the Bank's work to assist Go1in strengthening overall government effectiveness in India. Through state level adjustment lending conducted inpartnership with Go1 (paragraphs 5 8-59), a large part o f the Bank's investment lending (paragraph 60), as well as through policy advice and technical assistance, the Bank will continue to assist interested states inaddressing such broad governance issues. 73. Information technology also opens new possibilities for low cost ways to eiiabIe ordinary people. including the very poor, to access basic services and improve the o ~ e r a lquality o f services, l 111 partby reducing opportunities for con-uption. There have already been very impressive exaiiiples o f this piloted in India (e g ,the Bhoonii program o f coinputenzed land records inKamataka, citizen utility senices L la the E-seva program and agricultural property registration via CARD in AP, and Telemedicine senices 22 offered by public health centers in Maharashtra). Some o f the new programs have already been supported by the Bank. An important issue now i s how to scale up the various successful initiatives, buildingon lessons learned. There is the possibility o f substantial Bank financing support for this via an E-governance project duringthe CAS period. 74. The need to massively strengthen service delivery to ordinary people -with particular attention to rural areas and programs for health, education and social safety nets - i s an issue that impacts on almost all o f India's development goals. India's 73th and 74th Constitutional Amendments mandate greater decentralization o f services across India and offer important opportunities to increase accountability o f institutions to voters. The amendments create reserved seats for women and scheduled castes and tribes, and thus give the most excluded groups inIndia society a place inthe fomial government structure. The 73rdAmendment created a new institution, the Gram Sabha, as the forum for participation o f villagers in local govemiiient decisions. As a result o f the amendments, electioiis are held regularly and urban and rural local bodies have become an essential part o f India's institutional landscape. Implementation o f decentralization - that i s o f its sectoral, fiscal and administrative aspects -has been left to the states. However, as set out in the Constitutional Amendments, they are progressing at different speeds. B y and large implementation i s far from complete and local bodies, urban and rural, have not been able to reach their potential as effective instrumentso fdevelopment. Local bodies tend to either have few resources, or limited functions or insufficient powers over staff. 75. To help India realize the potential o f the constitutional amendments, support to decentralization will be an increasingly important focus o f Bank work with the Center and the states - to ensure that Bank programs are both consistent with and supportive o f a progressive shift to decentralized government. Duringthe past four years, the Bank has supported a rich set o f analytical work on rural decentralization; the Bank will seek to engage with India in a manner that incorporates the key lessons leained from that effort. Looking ahead, the Bank's support will take a number o f forms, including: (i) continued knowledge support on key aspects o f the decentralization agenda (e.g., fiscal decentralization, aspects o f voice, accountability and participation and civil service reform related to local governments); (ii)ensuring that the design o f lending operations i s consistent with the development o f decentralized goveinmeiit at its various levels; (iii) scaling up o f community-driven development (CDD) approaches with an expanded lendingprogram for rural livelihoodprojects (paragraphs 76-85) to increase the voice of the poor in their interactions with local government; and (iv) offering financing at the state level to pilot support for decentralized institutions at the lowest levels in those states willing to deepen the decentralization reform agenda. Investingin People and EmpoweringCommunities 76. Fostering Empowerment and Rural Livelihoods. A clear lesson o f Bank experience across South Asia and elsewhere i s that poor people need to have a strong voice In the identification. design and implementation o f the programs that affect them. Centralized top-down approaches have generally failed and have left behindlarge bureaucracies, resistant to change and with little accountability to the clients they serve. Empowerment o f communities and groups, with a special focus on women and other excluded segments o f the community, i s an effective vehicle for greater accountability o f goveinment prograiiis and services. 77. A second lesson, arising from considerable Bank experience inIndia, is that a purely conservationist approach to natural resources, including forestry, i s not likely to work. Finding win-win combinations for conservation and poverty reduction i s at the heart o f sustainable natural resources management. Gradual devolution o f responsibility and rights to local coiiiiiiuiiities i s critical to both long teriii conservation and development. 23 78. Thirdly, it is not sufficient to address the voice or demand side o fthe interactionbetween communities and government. It i s also necessary to make governments more responsive to people's voices. Inthe 73rd Constitutional Amendment, the mandate for states to decentralize services from a comprehensive list o f 29 subjects to district, block and village level governments (the Panchayati Raj Institutions or PRIs), creates an untapped potential to improve service delivery outcomes. Reserved seats in these local bodies also ensure that more than one millionelected representatives are themselves fi-om excluded groups, namely women and SC/ST populations. As a result, Panchayats are one o f the most promising voice mechanisms in India today for these groups. 79. A hallmark of most Bank interventions inthe rural sector inrecent years is that they have been built on the principle of community empowerment, or CDD, as a major contribution to addressing the difficult social issues referred to inparagraph 33 -with the aim o f improving the status o f women and vulnerable populations within their communities and with both public and private service providers. CDDhas proven to be an important tool inbuildingthe platform for better accountability meclianisms and improving local governance. Whether through community `self-help groups', village committees, water user's associations, drinking water supply groups, forest users associations or savings and loan groups, the Bank's interventions are focused on the need to build social capital in the poorest areas and promote productive investments, income generating activities and natural resources management. SO. Based on this experience, the Bank i s now seeking to progressively scale up its support to improved rural livelihoods, particularly through state level interactions. The Bank would be prepared to engage particularly with the poorest states - particularly Bihar, Orissa, Jharkhand and UP (paragraph 57) -indevelopinginvestmentoperationsusingaCDDapproach. BankTAandinvestmentlendingwill translate into social mobilization and empowerment activities targeted to the poorest and most ~~ilnerable segments o f a state's population, while ensuring that investments are also consistent \vith fiscal and administrative decentralization. Complementary analytical work offered by the Bank can also help to clarify issues surrounding property rights (e.g., land reform and administration), an important aspect o f addressing the economic prospects o f rural communities. 8 1. Some emerging lessons from the projects supporting rural livelihoods are that (i) considerable upfront investment in both social and economic mobilization and group organization (building social capital) i s required to ensure that new livelihood opportunities and community infi-astructure investments yield econoinic returns and are sustained over the long run; (ii)demand driven investments can help poor communities to demonstrate their credit worthiness to financial institutions and other public and private institutions; (iii)livelihood promotion should include both farm and non-farm options, including nritliin agriculture a focus on value addition and technology introduction; (iv) the community should be enabled to access a good mix o f public and private service providers; and (v) special efforts need to be made to organize and provide social and livelihood support services to the most vulnerable groups, such as disabled persons. Infurther scaling upBank support for rural livelihoods itwill be important to have a strong feedback loop to buildlessons learned into the design o f new projects. The Bank i s currently conducting a detailed impact evaluation o f existing projects, together with a review o f similar projects financed by government, in collaboration with GoI's Planning Commission. 82. Particularly in rainfed areas, the Bank will also aim to support better management of` watersheds, while enhancing the livelihood opportunities o f the rural poor. Because o f the high concentration o f India's poor inrainfed areas, finding solutions to the agricultural production risks o f variable rainfall i s essential to ensuring that growth i s pro-poor. Where physically and economically feasible, investment in irrigation i s an obvious solution to eliminate rainfall-related risks. But where irrigation i s not feasible, other measures such as crop diversification and soil and water conservation. can 24 help to mitigate risks for those employed inagriculture, Bank projects would also support increased diversification o f household employment and income towards non-fann options. 83. Inforestry,given the complexity ofthe issues and the diversity of India's forest areas, the Bank has proposed a long term dialogue with Go1to foster common understanding o f the constraints to, and opportunities for, poverty reduction in and around the forest areas. An important part o f the Bank contribution to this dialogue i s its ability to draw lessons from international experience- on aspects such as: (i) and legislation affecting people who live in and around forest areas; (ii)organizational policy arrangements, includingthe role o f local governments, forest departments, coinniunities and NGOs; (iii) improving livelihood opportunities for tribal populations; (iv) marketing o f forest products; (1.)incentives for conservation and sustainable use; and (vi) land use policy from an economic, social, environmental and legal perspective. 84. To supplement this dialogue at the Center, the Bank can offer significant up-front analytic work and/or piloting o f approaches to states that are interested in partnering with the Bank on forestry issues as outlined by the guidelines for engagement (Annex 5). The basic premise o f Bank support at the state level i s that lending would be for projects, or project components, that have CDD at their core. The fundamental objective o f such projects i s the improvement o f incomes and welfare o f poor coniniunities, through integrated rural development, with a focus on sustainable use o f forest resources and appropriate conferral o f rights. Work i s currently underway to prepare projects along these lines in Jharkliand and across several states. 85. Insome cases, the Bank's state forestry lending will be focused on initial pilot activities (for which trust fund or grant resources may be obtained). Inothers, large-scale interventions, including those based on pilots funded by others, may be appropriate. As successful experiences are accumulated, scaling up o f this program could be considered. The Bank will seek to work with Go1in sharingknon,ledge and lessons leamed across states, and informing the debate on sector-wide policy issues at the Center. A major report on the State Forestry Sector i s already underway, for completion in FY0.5. In addition: IFC will explore further opportunities for supporting sustainable commercial forestry and wood-using industries,following on from recent investments inthe paper and pulp industry. 86. IncreasingEducationalAttainment for All, India's progress ineducation is evidenced by both increased literacy, considerable increases inboth gross and net enrollments and reductions in the gender gap for education (Table 1). Despite the accomplishments, however: India still accounts for one-quarter o f the world's 104million out-of-school children. Importantly inrelation to many o f the MDGs, girls, children from the SC/ST populations and children with disabilities have much less access to all levels o f education; they also have lower completion rates and transition rates to the next cycle. The quality o f education i s a big concern, with widespread teacher vacancies and teacher absenteeism, high dropout rates, inadequate teaching and learning materials and uneven levels o f learning achievement. 87. GoI's leadership commitment to increasing educational attainment i s strong. In2002, the Constitution was amended to make elementaryeducation a fundamental right o f every child. IDA support to India's national elementary education program (SSA), will assist with: (i)increasing enrollment and reducing out-of-school children by a further 9 million; (ii) narrowing the remaining gender gap, and narrowing the social gaps affecting the SCiST population and other groups (including children with disability); and (iii) enhancing the quality o f education for all elementary school students. The program i s ambitious as it seeks to exceed the goals and time frame o f the MDGs. I t s success u.ould be a major contribution to meeting both GoI's development goals and the ivIDGs for education on a global scale. For this reason, support to elementary education will be the principle focus o f the Bank in the educationsector. 25 88. As a SWAp (Box 4), SSA will be supported by the Bank inthe coming years with intensive supervision, dialogue and advisory services. The Bank's focus will be very much on helping to improve the outcoines orientation o f the elementary education system, by strengthening:(i) government capacity for continuous review, monitoring and evaluation; (ii) important areas such as student assessment, financial management, procurement, tribal development planning and environmental management; and (iii)mechanisms for cross-state and cross-district learning. Inaddition, the Bank and its external financing partners can draw attention to national and international best practice in elementary education program design and implementation. With good progress, additional financing i s possible. 89. With elementary education enrollments and completionrates increasing, a growing number of children will want to access post-elementary education - whichhas high social and private returns: including a positive impact on maternal and child health (through its effects on delayed marriage, reduced fertility and safer birthpractices) and strong links as well to the labor market. Inan increasingly globalized economy drivenby knowledge and technology, the ability to use and adapt to technology needs a minimumthreshold level o f skills beyond elementary education. A larger pool o f n.orlters n.ith vocational, secondary and higher education i s indispensable to attracting imports o f technologically advanced goods and foreign direct investment, as well as export o f goods and services. During the CAS period, the Bank will also look to provide significant support for improving the performance and reach o f India's vocational education and training system. This support would be initiated with analytical work to underpin new Bank lending for vocational education and training during FYOS-08. 90. Beyond vocational education and training, policy makers will need to determine [he extent to which the increased demand for secondary and higher education will be met mainly from the public sector or through partnerships with the private sector. The Bank can assist in this by helping to lay the analytical groundwork for improving the provision and quality o f secondary education - with a special emphasis on increasing the participation o f girls. Since life-long learning and tertiary education are also areas o f considerable importance, the Bank will seek to provide knowledge support in this area, primarily tlu-ough AAA focused on better aligning the educational systemwith the knowledge economy (paragraph 150). Given the need for selectivity, no Bank financing for secondary or tertiary education i s proposed. 91. Reducing the Health Risks of the Poor. Achieving progress in health- and inparticular for maternal and child health - has been much more difficult than for other aspects o f India's development (Table 1). At the same time an increasing array o f studies and Bank-financed projects (e.g., the state- wide AP Rural Poverty Reductionproject), point to health risks as being perhaps the greatest concern o f India's poor. There are a range o f health sector interventions and services that are critical for the welfare o f poor households but reinain woefully inadequate for their needs. These include accessible and good quality facilities for safe delivery, care for acute respiratory infections and diarrhea in young cliildren and effective health and nutrition promotion. Improving health outcomes for the poor will require a concerted effort to improve both the overall health system o f the states - the public and private sector combined - while ensuring a special focus on the access to, and quality of, health services for the poor. 92 Though the Bank i s already assisting several states with improving their public health systems, i t i s clear that a shift in Bank support, to focus on the sector as a whole, i s in order. Recent and ongoing analytical work - includingpolicy notes on AP's health, nutrition and population strategy and on the health systems o f West Bengal and Assam, are supporting this shift. New lending support specific to the health sector includes the recently approved RajasthanHealth Systems Project State health system projects are also currently under preparation inTamil Nadu, Karnatalta, and Kerala Folio\\ ing from the guidelines for Bank engagement in this sector (Annex 5), the n e w projects in these states and in otheis important to achieving the MDGs will seek to break new ground in forging public-private partnerships (including through progressive separation o f public health financmg from provision). strengthening oversight o f private providers, increasing public expenditure on health. reorienting health facilities to 26 ensure service for the poor and reducing vulnerability through creation o f health insurance schemes. There i s also opportunity for increased IFC investment in and technical assistance for private health care and ancillary service providers. 93. Undertaking the system refomis required to improve long term development outcomes for maternal and infant and child health i s essential. Bank support in the health sector at both the state and national level will be focused on these long term goals. Inaddition to the state health systeiiis projects, at the Center the Bank would continue to assist with issues o f family planning, birthspacing and maternal and child health through its lending operations for reproductive and child health. 94. Reducing the health risks o f the poor, and particularly o f women and children, will also depend heavily on complementary interventions in areas outside the health sector. Several recent Bank studies have demonstrated strong effects on infant and child mortality from improved maternal education and basic infrastructure services, such as access to sanitation, piped water, clean cooking fuels and electricity. The impact o f infrastructure appears to be particularly significant in the poorer states. Additional research has shown that one-fifth o f India's national disease burden can be attributed to eiiviroiiiiiental causes - with the largest environinental risks to health coming from the lack o f access to safe water and sanitation? and cooking with traditional biomass fuels resulting in high levels o f indoor air pollution. These risk factors contribute to the stubbomly highinfant and child mortality rates - and directly impact on India's potential for achieving its development goals for these indicators, as well as the MDGs inore broadly. Given the importance o f these concems, the Bank i s in discussion with Go1and some states on how i t might, along with the GEF and/or the PCF, support programs which can substantially reduce the impact o f indoor air pollution by creating a coiiiiiiercial market for clean household energy products and services inrural areas. To further strengthen understandingo fhealth issues related to water supply, a major Bank study to measure the health impact o f iiiiproved rural water supply i s also underway and \vi11 be completed in FY06. In addition, projects beyond the health sector will focus more directly on reducing the healthriskso f the poor - for example, inthe transport sector, where inclusion o f components on road safety can have a significant impact on health. 95. The Bank has engaged actively inthe ruralwater supply and sanitation (RWSS) sector in India since 1991. Bank support has helped to pilot and begin to scale up a refonii program for RWSS delivery across several states - targeting over seventeen niillionrural beneficiaries to date. There ha\.e been some important lessons froin the Bank engagement. Foremost among these i s that sustainability i s a major challenge - which i s best addressed by involving coiiiniunities inthe design, construction and operation o f schemes, includingthrough their contribution to capital costs and their financing o f operations and maintenance costs. Given these lessons, it i s clear that GoUstate investment and Bank support to RWSS would best emphasize beneficiary involveinent and empowerment; institutional reform and capacity building o f state/local governments and communities; the active participation o f NGOs; promotion o f cost recovery; and targeting o f services to the poorest areas and vulnerable groups (Annes 5 ) . 96. Though official statistics indicate good progress across India, direct observation suggests that the data substantially overstates access to safe drinking water and sanitation. An ongoing national le\ le\\ should help to clarify the status across India, as well as help identify which states have the eakest coverage in this area. It IS clear that large investments remain to be made if the MDG for access to safe water i s to be achieved, and therefore the main challenge i s to roll out the lessons leamed on a inuch larger scale. DuringFY05-08the Bank would be ready to support this objective by lending to states that decide to adopt a participatory approach to RWSS statewide 97. To complement support to the states, the Bank could also offer support to Go1(both directly and through the donor funded Water and Sanitation Program), to assist in: (i) establishing a good nationwide 27 monitoring and evaluation system which updates baseline data for RWSS; (ii)developing national policy analysis capacity; and (iii) building the Rajiv Gandhi Mission`s capacity inreformmanagement. Go1also provides considerable funding for RWSS through centrally sponsored programs. Tlie Bank stands ready to work with Go1on steps towards focusing all central funds on state schemes that meet the reform criteria; this could open the way to substantial national level financing o f rural water supply by the Bank. 98. Controlling Infectious Disease. While the control o f infectious disease i s an increasingly important global concern, it i s o f critical iinportance for the poor - who tend to be affected disproportionately by such diseases. Given this fact, the Bank will continue to support India's efforts to control diseases such as tuberculosis and malaria, as well as eradicate leprosy and polio. A project to strengthen India's disease surveillance system i s about to commence and would provide the instruments to inonitor the effectiveness o f disease control programs more broadly. Future Bank support for disease control i s also focused on integrating programs at the state level, reorienting public sector interventions towards priority outcomes and expanding on opportunities for public-private partnerships. For example, since most tuberculosis cases are seen by private medical doctors or other private practitioners, there are important potential benefits to reorienting the state public health system to work more closely with the private sector. Inpreparing a possible tuberculosis follow on project, the Bank strategy i s to encourage an expansion o f private participation in the program, as well as emphasize the links between tuberculosis and HIV/AIDS. The Bank i s the Local FundAgent for a tuberculosis-relatedgrant from the Global Fundto FightAIDS, TB and Malaria. 99. Inclose cooperation with the World Health Organization (WHO), the Bank supports GoI's p i i o eipadication campaign. After much progress towards fully eradicating polio inIndia, the campaign suffered a setback in 2002 with a resurgence o f polio cases in several states. Tlie campaign is now in the process o f being intensified with help from the recently approved supplemental credit for Immunization Strengthening. Additional resources might come from IDA through reallocation from ongoiiig projects in the health sector, and, possibly, additional supplementary financing. Through the Ininiuiiization StrengtheningProject, as w e l l as through RCH, the Bank i s seeking to assist Go1with its routine immunization program for children and pregnant women: aiming to prevent measles, tetanus, whooping cough, diphtheria, and childhood tuberculosis in addition to polio. Go1and the Bank are exploring ways to revitalize routine immunization programs in some states where they have been stagnant or even declining. 100. IFC will also continue to pursue investments inpharmaceutical and biotech companies, either directly or through investment funds. This may include investments 111 companies that are developing new products or cheaper production processes which can assist in the control o f infectious diseases 101. I t i s evident that the HIV/AIDS epidemic i s spreading inIndia (Box 6). The presence o f a n increasingnumber o f large donors with differing priorities also has implications for the Bank's assistance strategy. While many donors are focusing on highprevalence areas, virtually only the National Aids Control Organization (NACO), with IDA assistance, i s working in low and medium prevalence states. Highprevalence states, inaddition to havinggreater donor assistance, also have relatively higher implementation capacity, and thus have different needs from other states. Thus, the Bank's strategy is to address the states differentially, taking into account existing capacity as well as the role o f other donors. 28 Box 6: HIV/AIDS inIndia Go1estimates that about 5.1 million individuals were infected with HIV in2003. The virus can no\v be found in all states and union territories and NACO confirms that the epidemic has now spread beyond high-risk groups to the community at large in six states which account for 30 percent o f the total population - AP, Karnataka; Maharashtra, Manipur, Nagaland, and Tamil Nadu. HIV i s spread primarily though sex, accounting for 84% of reported AIDS cases in India. Major contributing factors to HIV infection include the fact that male mobility is high, paying for sex i s common and condom use i s low. The high level o f stigma attached to the disease, and to some o f the groups engaging inhigh-risk behavior, further complicates efforts to reach these populations and to tackle the epidemic. India's national HIV/AIDS control program was established in 1986, soon after the first case o f AIDS was reported. The achievements o f India's response to the epidemic have been supported through increased financing by GoI, two credits from IDA (AIDS Iand II), and financial and technical support from a growing field o fdonors. The WHO, nine UNagencies, as well as their cosponsored program, LTAIDs and bilateral donors such as USAID,the CIDA and DFID have actively supported Go1and the states for over a decade. Programs inrecent years have placed greater emphasis o n high impact interventions (prevention among high- riskpopulations) and on fostering a multi-sector response, by increasing the involvement o f line ministries other than health, NGOs and the private sector. However, NGO-led interventions for prevention are still limited in view o f the size o f the problem. Programs were also partially decentralized to the state level, giving states greater involvement in the definition o f their operational plans, and establishing State A I D S Control Societies (SACS) outside o f the health sector administration to ease the flow o f funds to the states. The capacity o f SACS to manage state level programs was significantly strengthened. The number o f major financers and the amount o f funding available has increased significantly in the last year. The Gates Foundation has pledged US$200 inillion for the next 5 years; the Global Fund approved USS26 111. for prevention o f mother-to-child transmission, DFID has increased its financing (close to LSS200 111.) and the U.S. goveinment i s considering the inclusion o f Tiidia as its 15"' priority country for HIV/AIDS support. IVhile financing has increased, many o f the donors are focusing o n a subset o f high prevalence states and thematic areas rather than on the program as a whole, which has important iinplications for SAC0 and the SACS as they work to ensure that important areas are covered, and that there is no fragmentation in the combined response. 102. Although a great deal has been achieved by Go1and the states, it i s clear that important challenges remain in improving the effectiveness o f GoI's response both nationally and at the state level. Iftheevolutioii of theepidemicanditsconsequencesinother coiiirtries isnguide,HIV/AIDScouldDe a major inipedimerit to Iiidia's social nrid ecoriomic developmelit. At the present rate o f infection, it IS estimatedthat about 300.000 to 400,000 n e w cases are occurring each year, and this level i s likely to increase. This level o f infection could turn back human development gains, exacerbate pox el-t) . overwhelm already weak health care systeiiis and impede econoiiiic growth 103. An important priority for the Bank Group duringthe next few years i s to help improve and expand HIV/AIDSprevention inIndia. The focus of Bank Group support would be to increase laowledge with respect to HIV/AIDS in India, assist Go1inreviewing and updating its strategy to combat the epidemic and strengthen implementation o f the strategy. While ensuring a continued focus 011 prevention, the Bank Group could also provide assistance to Go1in monitoring provision of anti-retroLiral therapy (ART) and measuring its inipact as the treatment program i s rolled out. Assistance to cost out a manageable program could also be provided. 104. Given the size o f the challenge. during this CAS period the Bank Group \ b i l lseek a major step up inits support. Dueto the variation inthe stage ofthe epidemic and capacities to respond across states. the 29 Bank could provide direct financing support to highprevalence and higher capacity states, combined with financing for lower prevalence and lower capacity states channeled through NACO HIViAIDS control will also be a principle focus o f the capacity buildingwork o f WBI The emphasis will be in four priority areas: 0 Fostering a committed leadership and increased awareness in fighting the epidemic. In this area, the Bank can gather global experiences on HIViAIDS prevention and offer ltnowledge services to public leaders inIndia. A major study on the long term economic impact o f the epidemic i s planned, and exercises on optimizing resource allocation for various interventions are already underway. The Bank could help to engage officials inpolicy discussions and exchange visits with leaders o f other countries and encourage innovative media approaches usingnational icons to talk about HIV. IFC's contribution will be to work with business associations and client companies to support HIV prevention programs among their worltforces. 0 Improving institutional arrangements and functions of the program nationally and at tlie state level. The Bank could focus on conducting a functional and institutional analysis of NACO/SACS and the role and relationship with the health sector, provide support to introduce the necessary changes (through AIDS I11preparation and implementation), and develop the necessary instruments to support the new structure. 0 Improving the overall management of the programby supporting results-oriented management practices, linking finance to performance, encouraging systematic monitoring and evaluation and use o f information for management, strengthening epidemiological and behavioral surveillance capacity, and improved resource allocation, and 0 Strengthening capacity for implementation of executing entities through improved technical and managerial training, logistics systems, equipment and infrastructure, and technical assistance. 105. Through its interventions, the Bank Group will also seek to build a multi-sectoral response for prevention o f HIVIAIDS. While some efforts are already underway in the transport sector and in rural livelihoods projects (which are building awareness and providing support services to HIViAIDS affected households), greater attention will need to be placed on finding opportunities to address I-IIVIAIDS in connection with Bank and IFC projects across the portfolio. Promoting Private Sector-Led Growth 106. Indianpolicy makers recognize that a vibrant private sector - withfirms investing, creating jobs, and improving productivity - i s central to promoting growth and expanding opportunities for poor people. Intemational comparisons indicate that India has intrinsic advantages, such as macroeconomic stability, a large and rapidly growing local market, a large and relatively low-cost labor force, a critical mass o f well-educated workers, and abundant raw materials, that should allow it to attract and sustain much higher levels o f private investment,domestic and foreign. At the same time, recent studies sho\v that the private sector inIndia continues to be constrained by a number o f factors. The most important constraints concern market distortions arising from policies on tariffs and domestic taxes, liiiiits on foreign direct investment (FDI); other product market distortions arising from industrial policy, particularly related to small enterprises, and the pricing and marketing o f agricultural products; government interference inbusiness entry and operations; impediments to the functioning of land and labor markets; financial sector inefficiencies which impede access to capital, for productive private 30 investment, including SMEs; severe infrastructure bottlenecks; and dominance o f state-owned enterprises. Inaddition, insome states, basic issues of maintaining law and order are constraints identified by the private sector. The success in achieving the ambitious targets set by the Tenth Plan will depend crucially on progress in these areas. Inparticular, a key challenge i s how to make growth iiiore effective in generating employment opportunities, especially for young people. 107. While the best Indianmanufacturing and service companies have established leadingpositions internationally, demonstrating the potential o f Indian industry, the industrial sector as a whole i s still in the early stages o f adjusting to the pressures o f international competition. The Bank Group has a role to play inhelping Indian companies restructure and investto achieve global standards o f competitiveness, as well as corporate governance and environmental and social sustainability. Inaddition, the inyestment climate remains weak inmany areas (Annex 7) and will hamper private sector growth without concerted efforts to build institutions and reform policies and regulations. 108. The Bank Group will offer support for addressing the key constraints to private sector-led growth and competition, Giventhe respective mandates o f the Bank Group institutions, IBRDiIDA will focus on helping to strengthen an enabling policy and institutional environment for private sector development at both the Center and state levels and financing the public part o f PPP transactions. IFC will mainly provide financing and technical assistance to the private sector, focused on supporting competitive industryand services and private investmentininfrastructure. Incollaboration with the Bank, IFC wilf also provide targeted technical assistance to governments in specific areas, such as promoting FDIand the business climate for SMEs. The Bank and IFC will look to work together closely to support PPP in infrastructure, health and education and SME development, where a mix o f public sector interventions and investment and technical assistance to private companies i s required. 109. Provision of Adequnte Iitfinstiwctrire. India's infrastructure needs are massive, beyond the capacity o f the public sector to meet, but significant policy and regulatory barriers remain to greater private sector participation. The Bank Group will focus on addressing the policy and regulatory issues as well as financing public investment, private investment and PPPs inthe sectors where reforms have advanced sufficiently to make the necessary larger-scale public investments effective and to attract private investment. While the Bank Group role inhelping India to address cross-border issues in infrastructure development (e.g., inwater, power and gas) i s currently limited, during the strategy period the Bank Group would stand ready to expand its support for regional cooperation initiatives at the request o f GoI. 110. Telecoms was the first sub-sector o f infrastructure where GoI's implementation o f reforms reached a critical point at which large scale private investment has taken off, resulting in 115 percent growth in cellular service users over the past year. These reforins were supported during the previous CAS periodby a Bank Telecommunication Sector Reform loan; in exercising selectivity, the Rank will phase out o f lending in this sub-sector. However, IFC has a continuing role to help private companies mobilize the large amounts o f investment required to raise telecommunications coverage from the current very low levels, especially inrural areas. As o f March2004, fixed line connectivity stood at approximately 4.6 percent o f the population, while mobile connectivity stood at an estimated 3.1 percent. Other sub-sectors where Go1actions to improve the policy and regulatory environment could realistically lead to significant private investment inthe near term are power, roads, ports and airports. Preliminary data for 2003 (World Bank PPIProject Database) suggests that new legislation has initiated an increase in private investment in the power sector, with an almost 250 percentjump from 2002 levels. Private investment in roads has increased sharply since 1998, with investment in 2002 o f USS339 million - more than five times the average for the 1990s. 31 111. The power sector continues to be one o f the greatest constraints to maintaining growth and further reducingpoverty inIndia. Much of the population remains unconnectedto the public power system, and those who are connected often receive infrequent and unreliable service, making power supply a brake on private sector development and economic growth. Operating performance is well below commercial standards. Tariffs are seriously distorted with an unsustainably highdegree o f cross subsidy, and on average do not come close to covering the costs o f service provision. Low tariffs do not, however, benefit most o f the poor who largely lack access, especially inrural areas. The power sector's claim on government financial resources i s so large that reform o f the sector i s critical to India's fiscal adjustment and growth prospects - financial losses o f the sector are runningat 1.5 percent o f GDP. Weak intemal management in the state electricity boards (SEBs) and poor public govemance result in an abnormally highlevel o f theft, leakages and losses that tariffs cannot absorb fully. Technical and commercial losses amount to between 40-50 percent o f electricity generated in some Indian states. As governments ultimately become liable for the losses o f their utilities, this has exacerbated the fiscal deterioration inmany states. 112. Reform o f power distribution i s the first priority for improving the commercial performance and financial viability o f the power sector. At the same time, even if the current level o f losses was reduced dramatically, large investments in additional generating capacity will still be essential if p o n w availability i s not to constrain India's capacity for rapid growth. 113. Inrecent years a number o f states have worked to improve the commercial perforinaiice o f their state utilities, unbundling state entities, creating more independent regulatory systems, and putting in place measures to control losses and theft, However, progress has been difficult, and slower than many originally hoped, reflecting the great challenge o f overcoming entrenched political opposition to reform and the complexity o f the pre-conditions for commercial viability. The Bank Group has advocated complementary strategies for the state power sector as follows: 0 Facilitating serious, long-term; private sector involvement in improving and expanding services, which in the next few years means: (i) focusing on the steps which would eventually allow the relatively commercially viable segments o f the distribution network to be privatized successfully; (ii)increasingprivateinvestmentintransmission; andinparallel; (iii)developinga1temative strategies for improving services and targeting subsidies inrural areas. 0 Improving SEB performance, pending privatization, particularly through: (i) advancing SEB unbundling, includinginitiatives to implement open access to transmission and distribution networks and the establishment o f capable and independent regulatory agencies; (ii)ensuring that subsidy delivery mechanisms are explicit and transparent; (iii) strengthening payment discipline; (iv) independent audit o f power company accounts prepared to international accounting standards, and improving management information systems; and (v) improving the management and accountability o f utility staff for commercial perfomiance. 114. Learning from experience, Bank engagement in the power sector at the state level i s premised on the view that, while its knowledge resources and advisory support have potential to add value throughout a state's reform process, its lending, to be o f value inimproving services, must be linked to real progress inreform-both interms ofimprovedfinancial performance, and intenns of irreversible structural and govemance changes. O n this basis, Bank financing support in this sector can be provided on a selective basis, with differing types o f support to the states contingent on where they are in the reform process and the level o f political commitment to reforms (Annex 5). Where a state government is indicating a serious interest in pursuingreforms, the Bank could, either directly or through Go1programs, provide technical assistance in the shaping o f refomi strategies. In states that are following through with strong initial reform actions, Bank investment lending would be focused on areas that directly support reform - for 32 example metering, transformer replacement or voluntary retirement schemes Eventually, in states that move forward with well-designed privatization transactions and the facilitation o f n e w entry - the Bank Group would be able to offer a hariety o f forms o f support, dependingon local needs and conditions. and the response o f prnate investors.These could include credit enhancement instruments such as partial risk guarantees. 115. At the national level, recent reformprogress inthe form o ftlie passage o fthe Electricity Act 2003 has opened the way for competition inpower transmission and distribution, power trading and market development, and new providers o f power supply inrural areas. In addition, tlie GoI-led initiative o f securitization o fpast dues o f the central power utilities has improved the collection o f state power dues and commercialization o f the sector. These reforms have encouraged greater private investor interest in power projects and provide the basis for a new partnership with tlie Center and the Bank Group to s~ipport ti~aiisiizission,distribution and ge17erationin India. 116. For transmission, the Bank Group could support investments inPowergrid to strengthen the national transmission network, and raise the inter-regional power transfer capacity. Investiiients would be aimed at improving the outcomes-orientation and service delivery o f Powergrid, by: (i) facilitating inore economic use of generationresources; (ii) providing greater grid stability; (iii) establishing tlie open access regime mandatedinthe new Electricity Act; and (iv) facilitating development o f a power trading market within the country and with India's neighbors. IFC could mobilize private financing for transmission, building on the successful model o f the Tala transmission line, which was financed as a joint venture between Go1and Tata Power with IFC support. 117. For generation, there i s potential for private sector development and financing in theriizal power generation during the CAS period. The Bank would also offer investmentsin Izydi~oelectricgeiiei'atioi? capacity that can be developed with limited social and environmental impacts. The key objectives for Bank involvement would be to (i)help increase generating capacity in tandem with other Go1prograiiis to improve performance o f the distribution and transmission sectors; and (ii) help the sector to coiisolidate recent improvements and move towards iiitemational best practice for environmental and social safeguards. While for many years the hydropower business in India had a poor reputation, soiiie major actors (including the NHPC) have started to improve their environmental and social safeguards practices. Giventhis, during FYO5-08, the Bank will work with Go1and its PSUs to seek possible new avenues for support on a modest scale for hydropower development. IFC will also continue to invest in generating capacity, mainly through captive power plants, especially cogenerationplants which bring environmental benefits, in independent power producers (IPPs) with creditworthy off-takers (e.g., power trading entities or industrial users) and inmerchant plants. (See paragraphs 143-144 for a discussion o f Rural Electricity) 118. Similar to power, water i s key to both growth and poverty alleviation in India - yet despite large investmentsover decades, India remains quite poorly endowed with water infrastrrrcti~rc Tlie pievalence o f poverty i s three times higher innon-irrigated districts Tlie provision o f reliable watei supply greatly benefits the poor because o f the substantial health benefits - witli \\omen and girls in riiia1 areas especially benefiting because o f the burden and wasted time o f fetching water over long distances. 119. Like most other countries, India has not managed either water services - hydropower (paragiapli 117), irrigation (paragraphs 138-139), municipal and industrial water supply (paragraphs 128-132) and rural water supply (paragraphs 95-97) - or the resource itself well. There are f e w mechanisms for ensuring that water i s allocated to the highest-value uses and that reallocation can take place as societal needs change. And there are few incentives for using water efficiently, and for internalizing the environmental costs o f inefficient use With this, an important focus o f Bank support i s to help Go1 and the states in improving the allocation and manageinent o f water resources in support o f po\ erty reduction 33 120. India faces a host o f water resource management challenges. While resources are finite, deniands are increasing continuously. Inmany areas demands are already outstripping supply, with resulting serious impacts on stream flow and aquatic ecosystems, and, most strikingly, on groundwater. At the same time there i s insufficient infrastructure and institutional capacity to address recurrent drought and flood challenges. And in many areas, water quality concerns are just as important as quantity problems. Addressing these challenges is, first and foremost, an institutional and instrument issue. The overwhelming necessity i s to introduce greater flexibility in allocation, and to sharply increase incenti\.es for more efficient use o f water and reductions inpollution. But it i s also a technical challenge and problem that will require large investments in infrastructure (for flood control, drainage, storage, sanitation, wastewater treatment, etc.) 121. Inhelping Indiato address its broadwater challenges, the Bank is engaging with its investment lending primarily at the state level - via project components that are focused on strengthening the policy framework and institutional capacity for overall water resources management. At the Center, the Bank i s mainly providing policy advice and analysis, including through a inajor study, now being prepared: on India's strategic water challenges. The highest returns o f water resource management lie in rehabilitation and upgrading o f existing infrastructure. Go1i s looking at different approaches to address major water constraints and the Bank i s assisting Go1in its study o f some o f the issues by sharing international experience inthis area. There may also be a role for IFC financing to bring inprivate investment in water infrastructure and IFC advisory services to bringinprivate management o f water utilities as part of public-private partnerships. 122. While the Bank Group's engagement intransport mainly supports India's growth agenda, it will also contribute to empowerment o f the poor and vulnerable groups by helping improve access to markets. jobs and services. India's transport sector investment needs are enonnous, and, in any scenario, meeting them will require substantial increases inpublic investment-a major challenge given India`s current fiscal constraints. Clearly, a strong focus on better allocation and use o f public expenditures, greater resource mobilization from users and efforts to leverage scarce public funds with private fiinding will also be o f critical importance. Inpursuingthese goals, the Bank's contribution would be to help close the implementation gap that currently exists between Go1policies and current sector practice on the ground. 123. Inrecent years, the Bank's transport assistance has focused on a large program o f investment lending for izatioizal and state Izig1zwaj)s. At the national level, recent Bank support has focused on supporting the National Highways Development Program (the Golden Quadrilateral). While some furlher support to this program- including finance o f a critical link between the states o f UP and Bihar - i s expected, it i s likely to be the last operation given the availability o f alternative finance. The Bank may also support upgrading o f investmentsin the most heavily trafficked sections o f the national highways managedby the Ministry o f Road Transport and Highways, as well as support that Ministry's reform agenda. The mandate o f NHAIhas recently been expanded to include improvement o f a fiirther 1O:OOO kilometers o f national highways, to be implemented as a network-wide PPP. Substantial Bank as well as IFC support for this new program i s envisaged. Further, the Bank will engage and provide an advisory role in Go1efforts to prepare an expressway system, possibly leading to financial engagement after the Tenth Plan period. Instate Iziglzways,the Bank will selectively engage new states on the basis of guidelines for engagement set out in Annex 5. IFC would offer financing for private road construction and maintenance contracts that transfer significant commercial risk to the private sector. (See paragraphs 140-142 for a discussion o f RuralRoads) 124. Urban Transport i s a high-risksub-sector with fragmented responsibilities, weak fiscal and implementation capacities o f local bodies, and complex safeguard issues. It i s also potentially high- return, especially if an emphasis on management improvements and traffic engineering helps defer high 34 cost investments inmass transit and flyovers. Given the risks and competing demands on Bank resources, Bank lending support will be through pilots incorporated into operations to support broader municipal reforms. This engagement will be selective, focusing first on investments that have short paybacks, such as traffic engineering and management, busways, and slum accessibility. Drawing lessons from these pilot engagements, the Bank will thereafter seek opportunities for scaling up. IFC may also provide support inthis area by investing in infrastructure development companies that are constructing and operating urban transport infrastructure. 125. There i s strong demand froin Go1for the Bank to help modeiiiize raihvays in India. While there i s some limited scope for private investment inrail spurs or rolling stock services which IFC could finance, the main requirement i s for substantial investment in the public systemrun by Indian Railn.ays if it i s to compete with other transport modes effectively. IndianRailways has suffered operating losses due to unfundedpublic service obligations and increased competition from road transport, and there are growing concerns on the safety o f its operations. Bank involvement can help to improve the quality o f public expenditure, ease critical capacity constraints and improve safety outcomes. However, with 1.5 million employees and a very traditional approach to the railway business, reforming the railways i s a high-riskproposition, requiring a mix o f analytical work and a staged financial engagement commensurate with reform progress. The Bank i s proposing some financial commitment in the near term to support safety related investment as well as capacity expansion. The Bank will consider supporting a major investment program provided that the investment i s economic and consistent with Indian Railway's reform agenda of moving towards becoming a commercialIy viable entity. 126. Although there has recently been some limited improvement in the operational efficiency of some o f the major ports inIndia, and a growing number of private ports, much still remains to be done to address this significant constraint on India's growth. India, as with the rest o f the region, lags the world inport system management - leading to long cargo clearance times and associated costs to the economy. There i s still huge scope for refomi inports and logistics. A major Ports Bill that has recently been tabled inParliament may provide the impetus and direction for further reform, including in the areas of customs, business process simplification and greater competition. InFY05-08, initial engagement by the Bank could be through an analysis o f port operations to help identify priorities for investment and policy reform. This may lead to a project for priority port investments late in the strategy period. IFC will offer financing to foreign and domestic port operators and logistics companies investing inprivate ports and associated infrastructure and equipment. IFC could also help to mobilize financing for coniniercially viable privately-owned Special Economic Zones, which combine transport, power and water infrastructure to create attractive locations for private investment. 127. Finally, the Bank could provide limited TA inthe civil aviatioii sub-sector to help formulate improved regulation that could encourage greater private sector involvements in airports. IFC i s iii discussion with major private sector players who are potential concessionaires in the sector, with a view to playing an advisory or financing role. In order to help demonstrate best practice, the Bank might consider providing support to a private sector-led airport project, in conjunction with IFC, by helping to fund a public contribution. 128. India's urban areas are home to 25 percent o f the country's poor. Today, the typical urban resident in India has an almost one-in-four chance o f living in a slum compared to 20 years ago when the probability was only about one-in-six. This rapid growth o f slums i s a reflection o f the rapid influx to urban areas, combined with poorly performing urban real estates markets, weak property rights and the inability of cities to finance and deliver services on a sustainable basis. The current urban population of 300 million residents i s expected to double over the next 25 years, creating new demands for services in addition to the backlog to meet today's needs - the needs o f one o f the most extensive systems o f cities withthe world's largest concentrationo f slumdwellers. For India, accommodatingthe needs o fits 35 growing urban populations i s now and will continue to be a strategic policy issue for many years to come India's cities could contribute to the country's economic growth, and poverty reduction, if they did not suffer so severely from infrastructure bottlenecks, service deficiencies, poor local governance and distortions in land and factor markets. With over half o f GDP produced in urban areas, achieving meaningful urban reform i s a GO1priority for reaching and sustaining the national growth rates o f 8 percent. 129. Within this context, there i s a convergence o f views on the role that India's cities needto play in promotingeconomic development and poverty reduction. The Bank strategy i s to support the urban reform agenda o f the Tenth Plan to empower citizens and improve property rights; liberalize land markets; improve the governance, incentives and financing capacity o f urban local governments and their service providers; encourage improvements in local finances and revenue mobilization making cities less dependent on state and central flows and enabling them to gradually access sustainable forms o f finance; and facilitate private sector participation. 130. At this early stage o fthe reformprocess, the focus is on supporting investments in service delivery inthe context o f a broader institutional and policy reform framework, without which the sustainability o f investments cannot be assured; and on exploring ways in which low-income groups can improve their living conditions, includingthrough improved security o f tenure. Knowledge activities would form a basis for the dialogue with stakeholders at the central, state and local levels and capacity building for municipal reform would be offered by WBI. Possible issues for study and engagement include: (a) public-private options in service delivery and barriers to PPP; (b) a review o f subsidies in the urban sector; (c) urban poverty; (d) urban land; (e) a Water and Sanitation MDG Action Plan (already underway); and (0 monitoring and evaluation in the Urban Water and Sanitation Sector (UWSS). 131. At the national level, the Bank would through AAA and/or lending activity support (1)the design and implementation o f incentive based programs, such as the Urban Reform Incentive Fund (URIF),that reward state-level urban reform aimed at creating an enabling environment for urban local go\ ei-nnients to improve service delivery and the functioning o f real estate markets; (11)the introduction of greater efficiency in centrally funded/sponsored financing schemes and their alignment nfitlicentia1 reform initiatives; and (111)assistance to weaker states to improve performance and meet conditions o f entry for central incentive schemes. 132. At the state level, investment lendingwould be to reforming states that are: (i) committed to creating a better enabling environment for cities and urban service providers to deliver services at scale and in a sustainable manner; and (ii)substantially improving citizen empowerment, access to land rights and land market functioning. Projects could include: (i) investmentscovering a range o f urban services with competitive access for Urban Local Bodies to credit, similar to the approach already being taken in Tamil Nadu; and (ii)programmatic lending covering a range o f sub-sectors or a sub-sector (e.&. s l u m upgrading, solid waste) focused on decentralized delivery. Recognizing the weak performance in the UWSS, the Bank would place special emphasis on this sector through :(i) loans in states that are willing to develop statewide programs aimed at improved govemance, increased efficiency and cost recovery, and an appropriate regulatory framework to encourage sustainable delivery and private sector participation inUWSS; and (ii) investments for pilot programs that provide a deiiioiistratioii effect to gain more widespread support for reform o f UWSS. At the level of India's nzegucities, lending would be in sub-sectors (e.g., transport, UWSS, solid waste slum upgrading) aimed at supporting key sub-sector reforms, with selection o f the cities and sub-sectors driven by demand. IFC i s also exploring the provision o f municipal financing to support urban infrastructure investments. 36 133, Accelerating Rural Growth. As highlighted in "India: Re-energiziizg the Agriczilfui.al Seclor fo Sustain Growth and Reduce Povevty"6,India has made significant advances towards achieving its goals o f rapid agricultural growth, improving food security and reducing rural poverty during the last four decades. Sustained foodgrain (rice and wheat) production growth that exceeded the population growth rate eliminated the threat o f famines and acute starvation in the country. Go1investments in agricultural research and extension, irrigation and other rural infrastructure - complemented by subsidies for key inputs such as fertilizer, water and improved seeds -launchedthe country into the "Green Revolution" from which it continues to benefit today. However, the slow-down in agricultural growth in the 1990s i s a major concem. Agriculture employs about 60 percent o f the labor force in India and about 80 percent of India's poor live inrural areas, many o f whom depend upon agriculture for their livelihoods. Most o f the rural poor are small farmers with low land and labor productivity at the edge o f survival, and landless people seeking to sell their labor. Giventhis, the Tenth Plan has placed highpriority on raising agricultural productivity to achieve an annual agricultural gromYh rate o f 4 percent. 134. As noted inboth Box 2 andparagraph32, some o f India's most important remaining reforms are inthe agricultural sector. The current policy regime, which is founded on achieving foodgrain self- sufficiency through highprice support and large input subsidies (fertilizer, irrigation and power) i s not compatible with the changed environment o f the twenty-first century. Indeed, India i s faced with problems o f plenty with respect to foodgrains, while at the same time agricultural policies are discouraging farmers from diversifying to other, higher value crops that could potentially be an important source o f growth. In addition, ago-industry, which i s composed largely o f micro- and small enterprises, has the potential to foster greater value addition in India's agriculture and generate employment in rural areas. Bold action from policymalters will be required to move away from the existing subsidy-based regime and instead invest in building a solid foundation for an internationally competitive agricultural sector. 135, Increasing agricultural productivity and diversification to higher value products, including crops, livestock and fisheries, will be instrumental to re-energizing the agricultural sector to achieve higher growth. T o achieve these goals, it will be essential to foster broad-based availability and adoption o f improved agricultural technologies and practices by farmers and closer integration o f farmers with inputand output markets. Through AAA, lendingand TA, the Bank will assist instrengthening the agricultural research and extension system at the national and state levels, with efforts to promote demand-driven, decentralized public agricultural research and extension systems, greater public-private partnerships, and closer linkages with various domestic and international sources o f technologies and knowledge. The Bank will also assist states in facilitating access by farmers to markets through improved rural infrastructure and market services (e.g., via support for rural roads). 136. IFC will offer financing and technical assistance to companies in agriculture, agro-processing and agricultural input supply that expand their operations and iiiiprove their productive efficiencies as a result o f the ongoing deregulation o f agricultural markets. Priorities will be on projects that: (i)improve the efficiency o f food supply chains, (ii) a broader development impact by providing quality inputs and have services or integrating the production o f local farmers into commercial supply chains; and (iii)introduce resource-saving technologies. Such support may involve technical assistance or mobilization o f financing: as well as community development activities. This will strengthen the competitive position o f the processing firms. 137. Bringingnew lands under irrigation has, along with Green Revolutiontechnologies, beencentral to India's success in food grain self-sufficiency. It has also had a powerful impact on urban poverty (by 6 World Bank, 2004. "India, Re-energizingthe Agricultural Sector to Sustain Growth and ReducePoverty". South Asia Region Agriculture and Rural DevelopmentUnit. 37 keeping food prices down) and rural poverty (primarily through creation o f a demand for labor). But it is clear that dark clouds are on the horizon - productivity gains are falling and there are major environmental problems due to inefficient use o f water, with groundwater mining an especially troubling reality. There is, accordingly, a need to reexamine the issue o f water productivity. 138. Hence, for irrigation and drainage infrastructure, Bank programs will focus on helping to improve the productivity of water and the poverty impact o f investments. The Bank strategy is to facilitate state irrigation and drainage reforms and help create, modernize, and improve the management o f these assets. Bank lending to a state will be within the context o f a state's long term program, allowing time for reform concepts to become firmly rooted. Lending would need to be based upon a shared vision for: (i) de-linking water resource management from irrigation; (ii) strengthening cost recovery; (iii) beneficiary participation; and (iv) focusing on investments with the highest returns: for iiiiproved irrigation and drainage service delivery and increased productivity o f water. This programmatic approach i s based on the fact that reforms at the state level are going to take at least a decade to be fully implemented and a flexible response within a vision covering the long-term time horizon i s needed. Bank support will also entail luiowledge-based services to assist reforming states, including niobiliziiig global experience, TA and advice, and preparing policy notes and options papers. Finally, the Bank could help to transfer knowledge and experiences across states and assist inbuilding consensus and commitment for effective irrigation strategies. 139. Better planning, deployment and management o f irrigation and drainage infrastructure i s particularly important inKarnataka, AP, Tamil Nadu, Orissa, MP, Maharashtra, Gujarat, UP, Bihar, Rajasthan, Punjab and Haryana - all o f which have major existing infrastructure and considerable additional potential to be developed. Of these, Bihar, U P and MP have the greatest nuinber o f rural poor who could benefit from iinprovenients inthe sub-sector. Inorder to focus its support most effectively, the Bank will seek to intensify its relationship with those states that are willing to adopt or coininit to the basic buildingblocks o f successful projects inthe sub-sector. These building blocks have been shown by experience to include unbundlingo f water resource management, improved businessprocesses in irrigation and drainage institutions, a greater focus on service delivery and improving the revenue base and collections. Importantly, decentralized service delivery mechanisms, such as water users associations and publidprivate partnerships, including concessions for management o f infrastructure, will continue to be emphasized. Other key aspects o f the guidelines for Bank engagement inthe sub-sector are outlined in Annex 5. 140. Inrural transport, an estimated 330,000 habitations out of the 825,000 habitations in India are without all weather road access. Connectivity levels vary greatly between and within states. As detailed inthe DPR,mucho f the ruralroadnetwork is poorly maintained and severely deteriorated- impeding access to services for citizens o f rural areas and creating a major constraint on India's development. Villages are often cut o f f from the outside world for long periods during monsoons and it i s estimated that 20-30 percent o f agricultural, horticultural and forest produce i s wasted due to lack o f roads to carry produce to markets and processing centers. Given these problems, and the critical importance o f rural road networks inhelping to achieve MDG indicators (e.g., for education and health), an increasing part of Bank support going forward will be on supporting govemment's efforts in this area. 141 To address the poor rural accessibility ina inore systematic way, a centrally sponsoi ed scheme. the Prime Minister's Rural Road Program (PMGSY) was announced in late 2000 At a cost of approximately USS12 billion, the PMGSY seeks to achieve all weather access to every habitation with a population o f 500 or more by the end o f the Tenth Plan period This i s expected to make a significant contribution towards India's efforts to meet the MDGs, but will likely require substantial external fLinding to complete. 38 142. The Bank i s preparing the first in a series o f loansicredits to support the P,\/IGSY, uith an investmento f about US$400million focused on the most poorly connected districts within four o f the most poorly connected states (UP, Rajasthan, Jharkhand and Himachal Pradesh). ADB has already committed to, or intends to fund the other six most poorly connected states. Duringpreparation, the Bank i s working with the Ministry o f Rural Development to improve the effectiveness and sustainability o f Go1 and state expenditures by focusing on a core network, improving design and construction standards, and improving funding for maintenance and program delivery more generally. Beyond this initial project, the Bank will aim to scale up its support to rural roads by expanding the coverage o f its financing, jointly withADB, insupport to PMGSY. 143. The potential for rural electrification to contribute to economic development and poverty reduction has also not been fully realized in India. While some states have achieved 'village' electrification rates o f 90 percent or higher, others lag far behind- on average, electricity reaches only 44 percent o f rural households, Where service i s available, supply i s unreliable and poor in quality, imposing additional costs on households. Subsidizedprices are a serious financial burden on both the Center and state level governments, and when combined with the highcosts o f rural service, serve as a disincentive to invest inrural expansion. The rural tariff structure i s distorted and encourages inefficient use o f electricity. Technical and non-technical losses are excessive. These factors, combined with political interference and weak incentives for efficiency, have resultedin a rural systemthat i s not financially viable. 144. The 2003 Electricity Act enables entry of new providers of rural electricity services, such as user associations, co-operative societies, NGOs and franchisees. Inaddition, Go1has indicated its intention to move to a policy o f using transparent capital subsidies, where needed, to support the expansion o f rural access, but look for full recovery o f recurrent costs innew access projects. The states with the greatest need in this area (as measured by households with no access to electricity) currently include UP, Bihar, West Bengal, Orissa and AP. Inthis context, the Bank i s working with Go1on an initial engagement in rural electricity access focused on (i) provision o f advisory services, to support the design and iniplementation o f new institutional mechanisms to finance and provide business and technical support to n e w rural electricity service providers; and (ii) support for initiatives that deiiionstrate the potential o f new institutional arrangements to mobilize innovative technical and organizational options for the delivery o f sustainable rural electricity services. Through the project, the Bank i s seeking to provide impetus for renewable energy options. There may be potential to scale up Bank Group assistance (including IFC financing for PPPs) based on the experiences o f this operation during the latter part of'the CAS period. 145. Improved access to rural finance i s a key ingredient o f promoting rural growth and productivity and iinproving livelihoods. While India has a wide network o f rural finance institutions, as highlighted in the India DPR,many o f the rural poor remain underserved or completely left out o f the formal financial system. The rural non-fanii sector also faces constraints to getting finance. Various estimates suggest that India's rural poor rely almost entirely on informal sources (money lenders, traders, etc.) to meet their consumption credit needs - at annual interest rates ranging from 36 percent to 120 percent a year. Buildingon a recently completed AAA, a Bank-supported rural finance investment operation could emerge to help address critical gaps for which a public sector role i s important, capitalizing on the existing branch network o f rural banks and leveraging on innovative financial delivery models and practices that have evolved inthe private sector (including micro finance). Bank-supported rural livelihoods programs (paragraphs 76-85) will also continue to help improve access to finance I'or self-help groups o f women and vulnerable sections such as SC/ST and disabled persons. IFC will support financial institutions servingrural enteiyrises, including coiiiiiiercial microfinance institutions. 39 146. Fosteringthe Competitive Economy. Buildingon the considerable analytical work completed inanalyzing the investment climate across India's states, inthe coining years the Bank will use the survey results to help advise on critical reforms for improving the investment cliiiiate in states where the Bank i s most actively involved (paragraph 55) or about to be involved) and will offer technical assistance for implementation o f reforms to improve the investment climate, This will also be an important area for WBI capacity building efforts, particularly, ifthere is interest from the states, inUP,Bihar, Jharkhand and Orissa (paragraphs 56-57). The focus will be on streamlining and re-engineering businessentry and operation procedures, for example, through introducing "single window" and "deemed" clearances; improving the legal framework, for example labor laws and laws governing the sale and transfer o f land; and introducing VAT. 147. At the Center, the Bank could selectively use investment lending, coupled with AAA to foster competitiveness. ProposedBank support in this area could include lending to help improve access to finance by sinall and medium enterprises (SMEs) and address the broader financial sector and industrial policy issues that affect SME performance and competitiveness. The Bank could also offer its hhh to provide knowledge support to build consensus for key refomis, such as trade and tariff reforms, FDI regulations, improving corporate restructuring and bankruptcy procedures, SOE reform, and competition policy (through a recently approved IDF grant). IFC, through programs such as the South Asia Enterprise Development Facility (SEDF) and the Foreign InvestmentAdvisory Service, could provide technical assistance for more detailed diagnostic work, and to support implementation o f reforms aimed at improving the investment climate for foreign and domestic investors. 148. IFC will continue to investinmanufacturing companies that are: (a) developing new products and markets; (b) restructuring and modemizing to become internationally competitive; and (c) expanding and moving towards establishing a regional or global presence. IFC will focus on providing long-term debt and equity which may not be available fi-oin domestic financial markets, and would add value in the area o f global best practices; assistance in creating global partnerships and entering new markets, especially in developing countries, where IFC's global presence has an important role to play; and advice and technical assistance to companies to improve the environmental and social sustainability o f their businesses, and improve their corporate governance. 149. A key element o f fostering competitiveness is enhancing the capacity o f the financialsystcm to inobilize and allocate resources inore efficiently. To this end, in addition to the selected engagements highlighted inparagraphs 145 and 147, the Bank can offer knowledge resources that: (a) support improved financial regulation, supervision and legal enforcement; (b) help to develop capital niarltets: particularly debt markets, which are critical to mobilizing longer-term resources, particularly for infrastructure investment; (c) accelerate pension system reforms, which can play an important role not only inresource mobilization and providing longer term income security, but also, in expanding the institutional base for long-term savings instruments; (d) encourage the development and use of innovative financial products and instruments (such as insurance products, securitization, etc.) to iniprove access to finance for underserved segments and better manage risksrelated to natural disasters; and (e) together withthe IMF,helping to keep a watch on financial system stability and potential risks. IFC will continue to make investments and provide technical assistance to build capacity inprivate financial institutions that contribute to financial deepening and expansion o f financial services to underserved segments. IFC will also continue to support pioneering transactions, such as partial guarantees o f bond issues: ivhich will helpdevelop financial markets. IBRDand IFC may also issue Indianrupee bonds, which ~vould contribute to the development o f the long-term bond market. 150. Lastly, an important development for India's competitiveness i s how India i s emerging as a global knowledge economy,with great strengths inpharmaceuticals, medical sciences and information technology. H o w to buildon these strengths i s clearly a strategic challenge for India's future growth 40 The Bank and WBI are making a modest contribution on the subject through preparing a Knowledge Economy Assessment, which can help provide the basis for any additional future support from the Bank inthis area. Cross-CuttingEnvironmentalIssues 151. T o add to an already complex picture, India i s facing the challenge o f growing fast when it cannot afford to ignore global climate change and its implications. India i s one o f the world's lowest emitters of carbon dioxide (the main greenhouse gas) interms o f per-capita emissions. However, on an aggregate basis, with its large population, India i s the second highest in emissions amongst developing countries. The Bank continues to assist Go1on issues relating to climate change, including Montreal Protocol support to phase out production o f ozone-depleting substances, and a proposed major national level study on India's vulnerability and adaptation to climate change. The Bank Group will also seek Tvays to further expand its partnership with India on national and global issues through programs financed by the GEF, Montreal Protocol and PCF. The prospects for effective mobilization o f GEF support are stronger than in recent years, particularly in the area o f renewable energy, giventhe passage o f the 2003 Electricity Act and development of GoI's new policy on rural access. 152. India's economy i s also highly vulnerable to extreme climate events, such as flooding, droughts, forest fires and tropical cyclones - which appear to have increased in the magnitude o f losses in the last few decades and could increase in frequency as the climate changes. Already, along India's eastern coast, states are affected by 80 percent o f all cyclones in the region. More than half o f the country i s vulnerable to earthquakes. While naturalpropensity to hazards cannot be avoided, their disastrous consequences can be minimized through pro-active use o f a variety o f planning measures. Both at the national and state levels the need to build capacity for long term disaster management i s recognized. While public resources have traditionally and principally been usedfor relief activities, the disastrous losses o f the past several years have brought Go1to markedly revise the country's policy orientation towards natural hazards. From a mostly re-active stance inthe past, the Tenth Plan augurs the start of a newpro-active era, where "the development process needs to be sensitive towards disaster prevention and mitigation." With this, the Bank will continue to respond, as it has in the past (e.&., for the Gujarat earthquake and AP and Orissa cyclones), to requests for assistance it may receive in the aftermath o f any future natural disasters. The Bank i s also engaged in dialogue with Go1on disaster preparedness and would consider a selective lending engagement with the Center in this area on demand. 153. The broadenvironmentalagenda that the country needs to pursue, in order to be able to expand infrastructure, maintain highgrowth rates and improve the quality o f life in a sustainable fashion, i s overwhelming. Effectively addressing this agenda requires greater attention to balancing the costs and benefits and assessing the financial implications of particular initiatives. In addition, innovations in environmental management, includingregulatory reforms that increase the efficiency o f mechanisms for issuingpermits and monitoringcompliance, and promote public-private partnerships will be necessary. 154. Environmental and natural resource concerns essentially cut across all o f the Program Priorities o f the Bank. The Bank will need to partner with national, state and local governments - and through them with communities and private sector stakeholders in the follom.ing four strategic areas: (i) strengtheningpolicies and institutions for environmental management in order to make gro\vtli more environmentally sustainable; (ii)improving environmental health and overall environmental quality oC life, particularly for the poorer segments o f the population, focusing on significant risk factors for child mortality and communicable diseases; (iii)improving livelihoods and reducing the vulnerability o f the poor, as relates to natural resources and events; and (iv) addressing longer-term concerns to environmental sustainability o f global and regional scale (the `global commons' agenda) in a manner that also produces immediate and tangible local benefits. 41 V. LENDING,EXPOSUREAND RISKS 155. Three important developments have led to shifts inthe CAS lending volumes and triggers for FY05-08. Foremost among these i s the international development assistance compact reached at Monterrey in 2002, and its promise to substantially increase development assistance focused on achieving the MDGs-with recognition that India's performanceis central to achieving these globally. In addition, inFY03 and FY04, Go1made substantial pre-payments o f IBRDcurrency pool loans, as well as pre- payments to ADB and other creditors, which have clearly improved India's creditworthiness for IBRD borrowing'. Bank analysis also suggests that the immediate risk from sustained fiscal imbalances is an impediment to growth - which i s still very rapid by international standards - rather than a collapse o f growth or imminent crisis. 156. IBRD and IDA Lending. The impact o f first o fthese developments on India's overrrll IDA eizvelopewill be decided inthe context o f the ongoing discussions for IDA-14. However, it is evident that, based on country performance ratings and India's absorptive capacity, a substantially higher level o f IDA couldbe effectively utilized by India. Beyond any ceilings that are imposed by the IDA Deputies, the CAS will not place additional constraints on India's IDAresources unless a dramatic unforeseen deterioration inperformance warrants a review o f the overall strategy. This represents a shift from the FY02-04 CAS and its designation o f a `core' IDA program for l o w case lending. 157. Go1has indicated that it prefers IDA-only fundingto be targeted to projects that directly address poverty and human development (e.g., rural poverty, education, priority health interventions, etc.) For adjustment lending, IDA resources will be blendedwith IBRD on a 1:2 basis during the new strategy period, compared to the 1:1ratio currently employed. 158. The factors enumerated above (paragraph 155) suggest n new waj*of lookirrg (it IBRD lerrdirrg Rather than the practice o f establishing low or base case scenarios for Bank lending, and structuring triggers to shift fioin one case to another, under this CAS the Bank program will fail \vithin a ange 1 limitedby an upper bound for IBRD lending to support India's achievement o f MDGs. Getting to this upper boundwill require strong reform performance as well as a strengthened pace o fproject preparation For FY05-08, the upper bound for IBRDlendingi s an average o f US$2.15 billion per year 159. As is currently the case, the level of IBRDinvestment lending to the states will depend on the pace o f reform implementation and applicationof `self-regulating'triggers. Unlike the recent past. however, the guidelines for engagement (paragraph 60) will increase the transparency o f the triggers for state level investment lending and open up opportunities for an increased number of states to engage nit11 the Bank. These guidelines also specify triggers for investment lending with the Center. Finally. GOT'S o n n guidelines for adjustinent lending will continue to serve as the primary trigger for state level ad]ustment lending. 160. While the menu o f projects currently under consideration for either IDA or IBRD funding i s attached as Annex B3, this `operations program' will be updated periodically in discussions between the Bank and Go1(see paragraph 169). Some operations will drop out and others that conform to the CAS framework - in particular the Strategic Principles set out inparagraph 45, and the efforts to engage uith the poorest states (paragraphs 55-57) - are expected to be added throughout the CAS period The le\ el of demand from the clients (both at the Center and in the states), the pace of project pieparation and application of the guidelines for engagement (paragraphs 59 and 60). n111determine the actual level o f Following pre-payments, India's IBRDdebt disbursed and outstanding (the Borrower's Obligatioii) was about USS4 3 billion on June 30, 2004 compared to USS7 3 billion at the end of FY02. 42 lendingachieved within the limit o f India's IDA allocation (paragraph 156) and the upper bound for IBRDlending (paragraph 158). 161. Giventhe view that there is no immediate threat to fiscal stability, this CAS, unlike its predecessor, does not suggest a specific fiscal policy trigger. Instead, the Bank will periodically, and at least annually, review India's macroeconomic situation and assess the outlook for stability. If such review points to a changed outlook and growing risk to macro-economic stability, the Bank would inalte a recommendation for reduced lendingat that time. Inaddition, the Bank will periodically review the evolving exposure situation with Go1in the light o f actual and projected IBRD lending experience. 162. Inthe case o fportfolio performance and monitoring, the focus will shift toward implementation o f portfolio iinprovement measures agreed with Go1during the FY04 CPPR. These measures include: (i) a detailed action plan for restructuring the transport, health and rural development portfolios, which are the main cause o f the recent deterioration o f the portfolio; and (ii)application o f filters for implementation readiness for new projects. The agreed readiness filters are detailed inthe Portfolio Iinprovement Strategy (Annex 8). The emphasis o f the CAS i s therefore on India's own pace o f reform implementation, as well as the pace o f project preparation, to determine lBRD lending volumes within the upperbound. 163. IBRDexposure to India is currently well below the current single country concentration limit of US$13.5 billion. Assuming that IBRD lendingreaches the upper bounds during FYO5-08.and stabilizes at about US$2 billion a year thereafter, India's exposure would cross this limit by FY11 hlternati~cly. if IBRDlending grows more slowly from application o fthe self-regulating triggers, and remains closer to about USS1.5 billion a year, exposure would cross the current single country limit only in FY13. 164. This suggests that the exposure implications o f the proposed lending scenarios are manageable over the medium term. However, inorder to ensure that the potential for breaching the concentration limit is considered well inadvance, the Bank will carefully review exposure issues duringthe mid-tenii review o f the strategy, taking into account the actual lending experience and prevailing policies on exposure. T o ensure that India's financing needs from the Bank can be accommodated into the fLiture, Bank management will also discuss options for long-term exposure management with Go1 165. Inrecent years, the Bank has steppedup efforts to better integrate financial products and instruments in delivering country assistance work inpartnership with client governments. Discussions are currently under way with Go1to explore working together more closely in this area, with the possibility o f Bank advisory services to Go1to ensure the better use o f the full range o f IBRD financial products for financing and hedging purposes, and also advisory services on domestic and exteiiial debt management. One possibility could be the use o f currency swaps to generate rupee financing, which could be an attractive instrument to eliminate currency risk for some lendingto states. 166 Tliree iiiaiii types of risk are seen for the Bankportfolio. These are (1) rislcs related to the effectiveness o f the Bank support and the possibility o f substantial IDNIBRD lending that does not translate into adequate development outcomes; (11)the potential for increased r i s k in the India portfolio as the Bank shifts towards a renewed emphasis on infrastructure, includingpossible engagement in controversial areas such as hydropower, and (in)the exposure risk to IBRD o f the proposed substantial increase in lending. 167. Considerable effort i s already being made to mitigate the first two o f these risks Activities include greater attention to quality at entry and close monitoring o f safeguards issues on any higher risk operations Riskswould also be mitigated by only considering support for hydropower in\ estment that has limited adverse social and environiiieiital iinpact. The guidelines for engagement foi- different 43 categories o f lending are also expected to help ensure that Bank resources are focused on projects that take into account the lessons leamed for successful implementation. Finally, as o f FY04, Go1and the Bank are engaging in ajoint quarterly portfolio monitoring exercise. 168. Regarding the exposure risk to IBRD, with regular monitoring o f the macro-economic situation and application o f the preconditions for the different categories o f lending, IBRD exposure nslcs are seen to be acceptable. As an illustration o f this, Annex B7 shows that Bank exposure indicators improve even ifIBRDlendingreaches the upper boundandthe economy performs below the fast reforiii scenario. A simulation based on the slow reform scenario also shows improvement. 169. An important part of achieving the expanded level o f lendingproposed inthe CAS will be streamlining project preparation. Over the past year, as an offshoot o f CAS preparation, a more disciplined system has been developed for adding new projects to the pipeline inaccordance with tlie emerging CAS and in agreement with GoI. Periodic monitoring, covering pipeline development as well as portfolio performance, has been initiated with Go1as a mechanism to resolve any problems more quickly and accelerate lending development, including early Go1approval o f new projects. This has already yielded a strengthened pipeline for FY05 (see Annex B 3 for the fLdl indicative operations program). 170. IFCExposureand Risks. India is IFC's second largest exposure. As o f June 30,2004, IFC's held portfolio in India consisted o f investments in 84 companies, with total exposure o f US$1.14 billion for IFC's own account and US$167 million for B-loan participants. IFC expects that investment volumes will continue to be in the range o f US$300-350 millionper year through the strategy period, which will lteep India within IFC`s exposure limits. 171. The main risk to the IFCportfolio would be the inipact o f major changes inmacroeconomic conditions, especially a sudden currency depreciation or sharp increase in interest rates. IFC reviews the potential impact o f such shocks in its investment decisions and requires clients to use r i s k mitigation techniques such as hedging and asset-liability management to reduce the vulnerability o f tlie portfolio to such shocks. 172. MIGA guarantees have facilitated approximately US$202.5 million o f FDIinto India since the country joined the agency in 1994. At present, MIGA has no exposure in India. However, investors are showing renewedappetite for projects in India, most o f which are in infrastructure (the power sector). All o f the power projects for which MIGA has been approached are renewable energy projects (including bioinass and wind farms). In addition, MIGA will continue to focus on India as a source o f outbound investments, as part o f its South-South strategy. VI. IMPLEMENTATIONAND MONTTO 173. Achieving the main objective o f this CAS - a major step up in the Bank's inipact and delivery in India - will pose many challenges in the years ahead. Actions are already underway to address these challenges by strengtheningthe organization and management o f the country program. Within tlie Soulh Asia RegionVice Presidency o f the Bank, management o f the India program i s being realigned to follo\v a different model than for smaller country programs. To enable the Bank to move to a higher level o f delivery and allow for close interaction with its clients, a cadre o f senior staff i s being positioned in the New Delhi office. Lead Specialist positions have been created inkey sectors and sub-sectors in order to strengthen team leadership and accountability inN e w Delhi, while also improving links to the networlcs. Inorder to provide coordinated support to the growing nuinber o f states where the Bank will engage, State Coordinators have also been designated. Strategic oversight and management o f the Bank's 44 growing program i s also being strengthened inthe Country Management Unit, including positioning o f a Senior Country Manager inWashington. 174. Thisrealignment is taking place within the context o f an already strong Bank teain that is highly decentralized. Since 1997, the India Country Director has been based inthe N e w Delhi office and operational responsibilities have been substantially delegated to an expanded team iiiIndia D~iriiigFY04. more than 44 percent o f all lending, AAA and TA activities were ledby Task Managers in India New Delhi i s increasingly used as a hub for regional operations o f the Bank and i s tlie operational base foi procurement. The present male/female ratio for staff level E and above i s 2: 1 compared to the ratio o f 6 1 in 1996. 175. IFC's activities in India are managed from a regional hub based in N e w Delhi, with a smaller office inMumbai. Together, they are responsible for business development inall sectors and portfolio supervision o f manufacturing, services and financial sector projects. To ensure that clients benefit from IFC's global expertise, country based staff and global staff based inWashington work closely together in project teams. In addition, some senior international staff are based in Delhi and Mumbai, while locally recruited staff are given extensive training at IFC headquarters as w e l l as opportunjties for international experience. To increase its presence in southern India, IFC intends to establish a small ol`fice in Chennai, co-located with the IBRD/IDAaccounting office and a small SEDF office in Guwahati, Assam for delivery o f SME programs inNorth-East India. 176. Communications and Outreach. As highlighted inthe results o f the FY04 India Client Survey (summarized in Annex 3), an increasingly important part o f program iinpleinentation i s the Bank's strategy for communications and outreach. The Bank has developed a multilayered strategy aiiiied at disseiiiinating global knowledge and improving the quality o f operations by explaining tlie challenges o f development to external audiences and gaining the cooperation o f stakeholders. The Bank will also continue to gather the lessons learned from Bank Group operations and focus during FYOS-OS on disseminating these lessons more broadly and on a regular basis. 177. The elements o f this strategy include active engagement with both national and state-level media and civil society; maintaining four country-specific websites in English,Hindi, Kannada and Telugu; providing translations in the relevant language o f all press releases, summaries o f most reports, and full text o f major reports where possible; maintaining a database o f more than 4,000 external contacts; and producing a quarterly newsletter and other print and electronic dissemination products. 178. A major current initiative is transforming the Public InforiiiationCenter (PIC) from a passive library into a center for discussion and debate on developiiient issues. This i s being done at three levels: conversion o f the N e w Delhi Office library and PIC into an audio-visual center with state o f the art presentationand conferencing equipment and a wealth o f electronic resources; establishing partnerships with other libraries and academic institutions outside Delhito disseminate works on development and conduct events for their own audiences; and activating the network o f depository libraries attached to the Office of the Publisher. When IFC opens its SEDF office in Assam, it will also likely combine a knowledge center for SMEs with a broader Bank Group PIC. 179. Aspects o f coiiiiiiunications are increasingly being mainstreaiiied into operations. R it11 coiiiiiiunication and luiowledge strategies now routinely part o f the upfront dialogue with borrowers and built into project design. Internally, management and staff are paying greater attention to understanding the motivations o f interest groups and the role o f infomial relationships and institutions through sector and state-specific political economy analyses that are helping improve the design and feasibility o f their interventions. 45 180. Monitoring the CAS. The appropriateness o f this strategy will ultimately be measured by the Bank Group contribution to India's achievement o f its development goals. Monitoring will tale placc both at the individual project and report level, and at the level o f the overall assistance program. Sonie o f the indicators that will be used to monitor the effectiveness o f the overall Bank Group contribution are provided inthe FY05-08 Country Strategy Outcomes Matrix (Annex 4). Management and staff \vi11 review progress against these proposed outcomes and indicators in a midtermreview o f the CAS, currently anticipated for discussion by the Board in early FY07. Inthe unlikely event that the Bank`s regular monitoring (paragraph 161) indicates a significant deterioration in India's macroeconomic stability or creditworthiness for Bank lending, management will directly advise the Board o f any shifts proposed for the India and World Bank partnership, including any reduction inthe ceiling for lending. VII. CONCLUDING KE 181. The overarching challenge o f this CAS i s to maximize and leverage the diverse resources o f the Bank Group to dramatically scale up our impact, help to improve the quality o f life for some o f the world's poorest citizens and help India move closer to achieving the MDGs. The Bank Group strategy i s to build a growing partnership with Go1during FY05-08- a critical period inthe pledge to help OUT clients meet the global MDGs, including halving poverty, by 2015. With over one-quarter o f the world`s poor in India, our efforts to assist India with best practice knowledge and financing for development are central to the Bank Group's mission to helpreduce global poverty. 46 v1 I L z 0 " S $ 13 r . w O CI N r. rc, S c! o\ m r. r. 3 - Implementationof the FY02-04 CAS Country:INDIA Dateof CAS: June 2001 Dateof ProgressReport(s): December 2002 PeriodCoveredby the CAS (andthis Note): July 2001 to June 2004 BACKGROUND 1. This Note assesses some o f the main elements o fthe Bank Group contribution to India's development during implementation o f the FY02-04 CAS (July 2001 to June 2004). The assessment has been completed as a self-evaluation by staff and management working on India operations ("the Country Team"), and i s intended to supplement the more detailed CAS Progress Report o f December 2002. The latest broad assessment o f India's development progress can be found inthe 2003 Development Policy Review (DPR). 2. Given that the India program i s one o f the largest and most diverse programs o f the Bank Group, it i s not possible to assess the full impact and delivery o f the entire programina short note; hence this review necessarily leaves a lot out inregard to the Bank's contribution, and focuses only on some o f the key aspects o f the strategy. 3. The FY02-04 CAS (hereinafter simply "the CAS") was set within the framework o f India's own strategy for poverty reduction, the fundamental elements o f which were contained inGoI's NinthFive- Year Plan (1997 to 2002) and reflected in GoI's Mid-Term Appraisal of October 2000. At the time o f the CAS Progress Report, a draft Tenth Five-Year Plan (2003-2008) was also under preparation by the Planning Commission. The CAS definedthe Bank Group's program o f assistance around the NinthPlan themes o f (i) strengthening the enabling environment for growth; and (ii) supporting critical interventions o f special benefit to the poor and disadvantaged. 4. Within these broadthemes, the CAS set out three StrategicPrinciplesthat were intended to guide Bank Group support - (i) exercising selectivity with Bank assistance; (ii)working increasingly throughpartizerslzips; and (iii) usingaprograinnzatic approach to maximize the impact o f Bank Group assistance for poverty reduction inIndia. These three Strategic Principles would cut across all o f Bank Group activities, regardless o f the sectors or program areas in which the Bank Group and Go1focused our engagement. In reviewing the CAS, this Note will use the three Strategic Principles as a lens through which to review Bank Group performance duringFY02-04. The next six sections o f the Note provide an assessment o f progress against each o f the Strategic Principles (Sections 1- 3), along with a discussion of the final outturn for the main aspects o f Bank Group support - the ongoing portfolio (Section 4), triggers, new lending and investments (Section 5) and AAA (Section 6). 1. SELECTIVITY 5. The CAS argued that selectivity i s especially important ina country as large and as fLll of potential as India: "There is a need tofocus, notjust on what is important, but also on where Bank Group assistance can have the greatest impact onpoverty reduction. " Inorder to maximize the impact of Bank assistance on India's efforts towards poverty reduction, selectivity would be exercised by: 0 Maintaining the emphasis on lfocus states'; Page I of 16 0 selective interventions in other, non-focus states; and 0 a strong but selective progyam of support at the Center The `focus state' experience 6. Since 1997, Bank Group strategy has been to engage primarily at the state level in India, with knowledge resources and financing geared towards reform-reflecting that many o f the structural and fiscal reforms required to accelerate India's growth and reduce poverty are in the domain o f the states and that a good half o f India's highfiscal deficits come from the states. An important thrust o f the Bank strategy has been to focus its support on India's leading reform states inorder to create demonstration effects that might stimulate reforms across other states. An important part o f the rationale for this approachwas a view that comprehensive support across key sectors was more likely to yield sustainable positive development outcomes than a more sector driven approach. 7. The Bank Group maintained an intensive engagement with three focus states - AF' (since 1997), UP (since 1998) and Kamataka (since 2000) -duringthe CAS period. With a combined population o f about 300 million, these three states account for 30 percent o f the poor and 29 percent o f out-of-school children in India. Adjustment and investment lending for these states was proposed to be about 40 percent o f new commitments over the CAS period (and a larger, but undefined share o f state-level lending, depending on the volume o f lending for central government projects). By building on a foundation o f dialogue and partnership with these states, the Bank offered adjustment lending support for comprehensive fiscal, governance and power sector reform programs, combined with investments in sectors that are critical to poverty reduction - such as forestry, infrastructure, water resource management and selected anti-poverty interventions (both rural and urban). By the end o f the period, actual lending for the three states was US$1.756 billion, or about 34 percent o f total lendingand 44 percent o f state level lending. 8. Ofthe lending that was approved for the three states, about 2/3 went to investment projects and 1/3 supported cross-cutting reforms through adjustment lending.Though an adjustment lending program o f up to US$2.150 billion inloansicredits had initially been considered for the three focus states plus the state o f Orissa during the CAS period, due to delays inreform implementation, often in the power sector (which has a strong impact on each state's fiscal outlook), only three operations totaling USS570 million were approved by the end o f FY04. 9. The Bank seems to have done well in sending a consistent signal on the link between adjustment lending and progress inreforms. Inparticular, when reforms went o f f track in UP early in the CAS period, in line with the strategy the Bank discontinued processing o f the state's second adjustment operation. Duringthe second half o f the CAS period, four important state adjustment operations (AP S A L 11,Kamataka Economic R e f o m Loan 111, Orissa S A L Iand Tamil Nadu S A L I), a planned with total value o f about US$850 million in loadcredits, were substantially completed but then delayed by weaknesses inreform implementation in each state. The A P S A L I1eventually moved forward and was approved in late-FY04; it i s still to be determined whether others will proceed in FY05. 10. It i s however, perhaps also the case that the Bank underestimatedthe volatility of the state level reform process in India, with often broad forward movement also marked by substantial policy delays and; sometimes, setbacks. Such volatility does not necessarily bring into question adjustment support to states that are undertaking comprehensive refomis (instead underlining the importance o f a clear link betweenlending and performance on reform implementation, and the need for a prudent approach in determining loan sizes, including back-loading o f successive loans.) It does, however, suggest a need to reconsider the rationale for concentrating slower-disbursing investment lending in such states, given the non-negligible risk that a comprehensive reform process can go off-track. While it i s natural that states Page 2 of 16 engaged in adjustment programs would also qualify under the entry criteria for investment lending. and there can be synergiesbetween the two, it can also be argued that, given the variable speed o f reform across states and sectors, the Bank should be more willing to support important sector reforms 111any state. 11. Investment lending to the three focus states ultimately accounted for about 35 percent o f total state level investment lending, and spanned several o f the key sectors o f the CAS. InUP, new lending had an infrastructure focus -with financing for a state roads project and a state water resources management project that also entails a substantial reform agenda. Lending to Kamataka was entirely in the water sector - rural water supply and sanitation, tank management and urban water supply and sanitation improvement. AP received investment financing for two projects targeting rural poverty - in community forestry and rural poverty reduction. Attachment 1 provides a summary o f the final FY02-04 lending program. 12. The picture i s more marked for the AAA program, which concentrated substantial resources in the three states, often in close partnership with the state government and other stakeholders. This included broad support for translating A P ' s "Vision 2020" planning exercise into implementation - including non-lending TA for improved poverty and social monitoring and environmental management, pluspreparation o f strategies for growth and for the health, nutrition and population sectors, among others. InKamataka, Bank advisory support was also extensive, comprising work in the education sector (e.g., on education financing), dialogue on power sector refomi and notes on rural policies and agricultural risk management. For UP, a limited dialogue on reform, and TA for poverty monitoring and social analysis, and for environmental management followed the withdrawal o f adjustment lending. Recently, the state has also indicated its interest inresuming a more intensive dialogue on cross-cutting reforms. An update to the AAA program listed inthe Progress Report i s provided in Attachment 2. 13. Interms o fthe outcomes achievedwith Bank support, the Progress Report notedthat the performance of the focus states, in terms o f various economic and social indicators, was encouraging. Growth prospects had improved, poverty levels had declined and key social indicators critical to India's attainment o f the MDGs had either improved or their deterioration has been arrested in all three states. However, it was also argued that i t would be presumptuous to assume that Bank programs could have a determinant impact on growth, poverty and the MDGs, given the long lead times for policies and programs to translate into outcomes, the relatively recent adoption o f the focus state approach, and the fact that Bank lending has been on average less than one percent o f the output o f the states. 14. For states that undertook adjustment programs, there has also been evidence o f progress in both fiscal and govemance aspects o f their reform programs. This includes a reduction inthe ratio o f consolidated deficit to Gross State Domestic Product inall S A L states, as well improvements in revenue generation. The benefits appear to have gone beyond fiscal adjustment, with S A L states ahead o f non- S A L states inprivatizing public enterprises and in elements o f power sector reform. Some evidence also points to higher credit ratings for S A L states and the beginnings o f improvement in service delivery. As noted inthe Progress Report, the sustainability o f fiscal and governance reforms may be key to further accelerating economic growth and reducing poverty inthese states. 15. The Bank's support to cross-cuttingreformprograms inthe focus states also generated a great deal o f interest from other states. Intwo cases (Orissa and Tamil Nadu), this interest led to agreement in principlewith Go1to move towards adjustment lendinginthese additional states. In other cases (Maharashtra, Punjab and Bihar), it was agreed instead that the Bank should provide analytical support for cross-cutting reforms. This was consistent with the CAS, which had envisaged the likelihood o f adding additional focus states. The Bank also played a role in mobilizing states to share and disseminate their reform experiences - although this i s an area where more still needs to be done. Page 3 of 16 flldln CAS Aii1ie.r 2 Selective Interventions in other states - Unusual sector merit 16. Besides the concentrated partnership with a relatively small number o f focus states, the CAS proposed support to other states for projects that demonstrated `unusual sector merit'. Activities would be justified by (i)having an unusually high development or demonstration impact due to their innovation or the importance o f the reform being supported; (ii) extending support to the social sectors in India's poorest states, as long as it could be used effectively; or (iii) beinginstates which are not focus states o f the Bank but are nevertheless reforming in a key sector. As defined, these categories created a fairly broad framework for considering whether a state proposal merited Bank support - with less guidance on how the Bank should narrow the choice o f operations and exercise selectivity in such states. 17. InFY02-04,operations inthis area ofthe strategy included: Three state road projects in Kerala, Tamil Nadu and Mizorain A large and innovative urban transport project inMuinbai (Maharashtra) Projects to restructure the water sector and reform the state health system in Rajasthan 0 A ruralpoverty project in Chhattisgarh Projects to improve rural water supply and sanitation in Maharastra and watershed management inthe new state ofUttaranchal; and A major Bank response to the Gujarat earthquake, withrestructuring o f existing projects and a new credit for relief and reconstruction (together amounting to U S 7 0 0 million o f IDA) 18. Many o f these operations, along with the in-depth assistance to the focus states, and additional AAA to the states and Go1(as described below), have contributed to the benchmarks and `progress indicators' that the Country Team had established at the outset o f the CAS period. The CAS Progress Report had provided a detailed status report on these benchmarks. Attachment 3 to this annex updates the information provided at that time and gives some indication as to where the Bank may have had an impact (albeit, with the same caveat o f the Progress Report that Bank support i s usually a very small part o f a state's economy). 19. Notably absent from the lendingoperations list, as well as the progress indicators, i s Bank investment lending to the power sector - which had been projected inthe CAS to account for up to USl.35billionof IBRDlending. Though the CAS hadproposed a strongprogram of support for reforming this critical sector at the state level, and a series o f state power sector reform loans- for Orissa, Haryana, AP Rajasthan and UP - had been developed, in the end, when the reforms were not realized, the Bank was forced to bring an end to this series. While illustrating the difficulties that reforms can face in India, this also shows that attention to selectivity, and the proposal o f the CAS to finance primarily the implementation of critical reforms (i.e. to apply `self-regulating triggers' as discussed in Section 5), was maintained. Through FY03 and FY04the Bank undertook a detailed analysis o f its early experience with supporting power reform attempts at the state level, and through dialogue with Go1and key states, has developed a new set o f guidelines for Bank engagement inthe sector which are reflected in the FYOS-08 CAS. 20 Reforms in the state urbaii sector were also slower than anticipated - leading to lower IBRD lending volumes given that several operations had initially been expected With the investment lending delays, the Bank has insteadbeen engaged in dialogue on regulatory reform o f land use, anal) sis of the GoI's reform instruments, notably the Urban Reform Incentive Fund. subsidiesto the poor in slum programs and an analysis o f various constraints and reform measures related to land markets. Pnge 4 oJ 16 21. Inaddition, preparationo fa new/second generation o fhealth systems projects that build on the lessons learned from the major health sector study completed in June 2001 (Section 6) have taken longer to reach fruition. Only the Rajasthan Health Systems project was approved duringFY02-04, although preparation i s now underway for other states. Support at the Center 22. The CAS recognized the need to balance the state focus with a strong but selective program of support at the Center. Interms o f Bank lending, this meant support for development o f a national highway system and for combating infectious disease, including HIVIAIDs. Non-lending support in the form o f TA, dissemination o f AAA and dialogue would be targeted towards (i) agriculture and rural development; (ii) fiscal and governance reforms; (iii) financial sector development; and (iv) health sector reforms at the national level. 23. InlinewiththeCAS, theBankfinanceddevelopmentofIndia's nationalhighwayswithanew lending operation for the Allahabad Bypass (a US$589 m. loan for Grand Trunk Roads, planned for FY02, was also advanced into FYO1, just prior to the CAS period.) The outcomes ofrefom-based lending inthis area have generally beenpositive, with much o f the work traditionally undertaken by the public sector now outsourced to the private sector, regardless o f the source o f funding. India has been able to attract a limited number o f international firms to compete for and take up large highway construction contracts and thereby help bridge the growing gap between demand and supply for construction industry capacity. However, recently some concerns have been raised about the efficiency and degree o f competition inhighways procurement; contract implementation and management in the road sector; these are currently beingjointly examined further by the Government, the state authorities and the Bank. The National Highways Authority o f India i s also puttingin place mechanisms such as user surveys and a stakeholder forum to provide a means for road users' views to be articulated. 24. The Bank also supported GoI's programs for combating infectious diseases, with implenientation o f the AIDS I1operation as well as a quick Bank response to the resurgence o f wild polio cases across several states in 2002 - inpart with a supplemental credit to finance polio vaccine and strengthen GoI's polio eradicationprogram. By contrast, the national level dialogue and TA that the CAS had envisaged, based on a major AAA completed on public and private roles in health care, did not materialize on a significant scale. Similarly, though IFC committed long term financing to a private health care provider to build the first integrated health care delivery network inNew Delhi, other investments to improve the quality o f private health care services were limited duringFY02-04. 25. As proposed, important analytical work andpolicy advice was providedinagriculture and rural development, with a major Agricultural Policy Review now completed and under discussion. In financial sector development, Bank Group assistance has clearly exceeded that envisioned at the outset o f the CAS. Considerable demand-driven non-lending support was provided, including a study on Impro\ing Access to Rural Finance; a series o f policy notes on capital markets, banking reforms, the management o f non- performing assets, revitalizing non-bank financial institutions and finance for small and medium enterprises; TA on pension reforms and a Corporate Governance ROSC. The second o f two high-level financial sector conferences, both o f which were co-sponsored by the Bank inpartnership with GoI, was also heldjust recently in New Delhi. 2. PARTNERSHIPS AAD OUTREACll 26. The CAS recognized that usingthe Bank Group's limited resources effectively and nith catalytic impact, requires partnership with Bank Group's clients and other donors and stakeholders, based on a Page 5 oJl6 shared vision and principles. While Go1i s the Bank Group's principal partner, additional partnerships were expected to be pursuedwith its support. The Progress Report had already found considerable success inbuilding partnerships with key players - from Go1and reforming state governments to the private sector, civil society, external donors and investors: Partnersliips with other official externalfinanciers 27. Partnerships have proven to be very valuable at the state level, particularly with agencies utilizing a similar state focus state approach as the Bank. For instance, inKarnataka the Bank worked closely with USAID. InAP and Orissa, the Bank and DFIDprovided complementary technical assistance and co- financed adjustment programs to support comprehensive fiscal, governance and power sector reforms. While the overall relationship with donors has been greatly strengthenedand deepened by such state level partnerships, this has not always meant full agreement (e.g., DFID and the Bank having different views on the likely pace o f Orissa's reform progress). 28. Inaddition, DFIDprovidedthe Bank with trust funds o f about US$5.8 million inan innovative partnership geared towards extending Bank support for state reforms that could lead to lasting poverty reduction. This trust fund enabled the Bank to not only intensifyits assistance to existing partner states, but expand its support to new states that were coming forward for a dialogue on the reform process (e.g., helping to finance Bank work in Orissa and Tamil Nadu). 29. More generally, at the sectoral level, partnering with other external financiers has also been beneficial. There has been close collaboration with donors inmost sectors including, energy (ADB, JBIC, DFID, USAID, KfW, CIDA), health and nutrition (namely USAID, WHO, EC, DFID, concerned UNAgencies, CDC, AUSAID, ILO, and other institutions including the Gates Foundation), and small and medium enterprises financing (DFID, KfW, GTZ and IFC). Inaddition: While Japan PHRD grants were a useful source o f support for preparation o f some projects, India perhaps underutilized PHRD grants relative to other countries and given the size o f its lending engagement with the Bank. InJune 2001, ADB, the Bank and Go1completed a Coordinated Assistance Strategy for roads, focusing on state and national highways. This assistance strategy has been under implementation, The Bank and ADB also coordinate inother sectors, including inland and coastal waterways and energy; potential areas for collaboration that are currently under discussion include rural roads and national highways financing. Inthe context ofthe donor funded Water and SanitationProgram, the Bank collaborates with DFID, SIDA, the Netherlands and other donors in a range o f activities including rural and urban water supply, with a formal partnership with the Rajiv Gandhi DrinkingWater Mission and decentralization activities such as the City Challenge Fund. More recently, at the suggestion o f DFID,the Bank and DFID India signed a strategic partnership agreement in April 2004, which will provide a broad context to the institutions' cooperation in India: in support o fthe GoI's development agenda. IFC developed close working relationships with donors investing inprivate sector projects. IFC co- invested with ADB inprivate health care and infrastructure projects and with DEG and FMO in the general manufacturing and infrastructure sectors. Page 6 oJI6 30. An important development duringthe CAS periodwas the Go1decision to discontinue receiving bilateral funds directly from all but six o f the major donor agencies. With this shift, the Bank has lost some valuable partners in India, with a result being that we have now fewer donor partners to work with. Another new development o f the CAS has been the possibility o f using sector-wide approaches (SWAps) as a way to work more closely with donors, by pooling our resources to help improve and strengthen existing government programs and systems. Partnershipsfor the GlobalEiivirorzmeiit 3 1. The Bank and India continued a partnership with the GEF and Montreal Protocol, including support on issues related to climate change and the world's second largest program to eliminate the production and use o f ozone-depleting substances. Duringthe CAS period, this included implementation o f two active projects and substantial development o f an additional operation for Montreal Protocol support to phasing out ozone-depleting substances. The outcomes o f this support to date include: i) phase-out o f over 5000 metric tons o f ozone-depleting substances, therefore allowing India to continue to meet its Montreal Protocol targets; ii)reduction in ODS production o f 40 percent when measured against the 1999 production baseline; and iii)mobilization o f an additional USSSO million for the phase-out o f carbon tetrachloride, another ODs, bringingthe total grant assistance to India on Montreal Protocol to about US$180 million. 32. The ongoing GEF portfolio has focused on expanding the Bank's ongoing experience and learning in community based biodiversity conservation and rural renewable energy. However, during the CAS period, only one new GEF operation - a US$lm. Bio-safety project (which i s expected to improve GoI's capacity to deal with bio-safety concerns) - was approved. Work with KfW on proposed GEF support for the Mathania solar thermal power generation has been less promising. Analysis o f the economics o f this project, incollaboration with KfW, has raised concerns about its econoniic viability and environmental benefits; discussions are ongoing. 33. Overall, while there were useful interventions by global environment programs during the CAS period, India's participation in these programs via the Bank has been quite l o w relative to other large countries. For potential GEF support to renewable energy programs, the broader policy environment in the power sector has historically not been conducive to efficient mobilization o f renewables, in particular for mobilizingrenewables to expand access in a sustainable way. Hence an interval o f re-evaluation and `scaling back' o f GEF initiatives in the power sector characterizedmuch o f the CAS period. With the passage o f the 2003 Electricity Act at the national level inIndia, and development o f GoI's new policy on rural access, the prospects for effective mobilization o f GEF support are looking better. Similarly, the lower level o f new Bank support to the forestry sector duringFY02-04 reduced the opportunity for mainstreaming global biodiversity programs within the Bank work in India. Finally, during FY02-04 analysis was initiated on the potential for use o f carbon finance. In each o f these areas, there appears to be greater potential for engagement inthe future. Scnling tip 34. The CAS recognized that 'scaling up' is essential for the Bank Group to have an impact in India. It emphasized that the Bank should work intandem with partners where possible, and look broadly for successful experiments, whether piloted by government, bilateral donors, multilateral agencies or others, and seek to use its resources to help scale up these successful initiatives. The Bank itself could pilot successful innovations, with the objective o f providing lessons that Go1could then scale up. 35. Overall, scaling up has continued to present a challenge for the Bank in India. Despite a fair amount o f progress in gathering lessons learned and defining sector strategies that can build on these Page 7 oJ 16 lessons, it i s too early to say that the Bank has successfully translated these strategies into a major scale up o f its work across even a few sectors. 36. A very good recent example o f scaling up, however, is support for GoI's national prograin to universalize elementary education. Following from a series o f primary education (District Primary Education Program, or DPEP) projects that were supported by the Bank and implemented during the CAS period, the CAS also highlighted the potential to buildon the design and success o f DPEP and support a major national scheme to cover the post-primary (elementary) stage o f education. As with DPEP, which had been supportedjointly by five donors, support inthis area could have greater reach and impact if provided in concert with other financiers. 37. While Bank and other donor support to the nationwide elementary education program (SSA) was delayed relative to the timing envisioned by the CAS, it was ultimately achieved in a very promising fashion, with a new vehicle for partnerships - the first SWAP inIndia - enabling the Bank, DFID and the European Commission to work in tandem to support this major initiative o f GoI. The SWAp, utilizing a USS500 m. IDA credit, has potentially set a path for further scaling up inthe next few years. Outreach to a broad range of stakeholders 38. Duringthe period, consultations outside of govemment circles on Bankpolicy grew in importance. To provide just a few examples: national and regional-level consultations were held on the revision o f the policy on indigenous peoples, The Bank also actively engaged civil society in preparation and implementation o f a broad spectrum o f projects-ne of the more interesting cases being the partnership with the Society for Promotion o f Area Resource Centers in ensuring the rights o f railway slumdwellers within the Mumbai UrbanTransport Project. NGOs and civil society organizations were closely integratedinto the implementation o f the Gujarat Earthquake Recovery Program, leading to the effective community participation and monitoring o f the reconstruction program. 39. Inaddition, the Bank Group has workedmuchmore closely withprivate sector associations and local policy and research institutions and 'think tanks' -partnering with the Confederation o f Indian Industryto analyze and disseminate information on improvingthe investmentclimate and brainstorm on the Bank Group strategy for private sector development; with the National Council for Applied Economic Research to undertake analytical work on access to rural finance and to examine labor adjustment issues inthe context o fprivatization; with the IndianCouncil for Researchon International Economic Relations and the National Institute o f Bank Management to organize the conferences on financial sector reforms mentioned inparagraph 25 above; and with the National Instituteo f Public Finance Policy on strengthening capacity for fiscal management. 40. The Bank Group also made a special effort to improve its outreach in the states in which it was most active, resulting inthe creation o f websites in Hindi, Kannada and Telugu, setting up satellite public information centers inpartnership with the BritishCouncil inAhmedabad, Hyderabad and Bangalore, increasing the volume o f its translated dissemination material, and enhancing its media and civil society contacts and level o f engagement with important states. The findings o f the recent Client Survey for India s t i l l point to a relatively low level o f familiarity for the Bank in India compared to other countries. While this is not surprisinggiven India's size and the Bank's relative place init, a strategy to build a network of public information centers and expand the Bank's outreach i s currently under implementation. 3. PROGRAMMATICAPPROACH 41. The CAS emphasized that the Bank should think o f its support and goals inIndia over the longer term, with change taking place over a period o f many years rather than ovemight. Increasingly, therefore, Page 8 oJI6 the Bank strategy was to take a Programmatic approach towards support to India, be it at the Center or in the states, usingdifferent instruments dependingon the nature and content o f the programs pursued: e Using Programmatic instruineizts -such as Programnzatic Structural Adjustment Loans (PSALsJ, Adaptable Program Loans (APLs) and a `programmatic approach' to investment leiiding; e Mainstreaming environmental and social considerations; and Strengtheningfiduciary safeguards. Using Programmatic Instrtimerzts 42. Adjustment lending instruments generally worked well at the state level, though formal PSALs were not used as planned inthe CAS, the model used was a single tranche SAL with a three year policy matrix and triggers identified upfront for the following SAL. SALs were designed and iinpleniented as somewhat flexible and adaptive approaches -though still requiringthat Bank support for reform fall within a long term time vision owned by the state. S A L s were offered to the states as a means o f providing predictable performance-based budget support, enabling states to restore their financial equilibrium while undertaking reforms. 43. APLs, which were seen at the outset o fthe CAS to be well-suited to support for power sector reforms inthe states (as had been the case inHaryana and Ap during the previous CAS period) were ultimately not followed through. For the two power APLs, it proved impossible to disburse beyond the first inthe series once the two states decidednot to follow through with privatization. More generally, giventhe fairly unpredictable policy environment, and the complex way in which policy and institutional reforms have played out in the sector, there has been concem about malting upfroiit judgments on the triggers that would be suitable for all o f the subsequent APLs. Standard sector investment loans have been seen to offer greater ability to adapt, without imposing substantially differentprocessing transaction costs. Mainstreaming eiavironmeiatnl niid social considerations 44 The CAS aimed to support the fundamental goals o f gender equity, social de\elopinent and environmental protection and improvement, by focusing on integrating actions in these areas with various sectoral programs. Some important work was done inthis area, paving the way for scaling up during the next CAS period. 45. T o better mainstream gender issues, Go1expanded piloting o f the Bank financed Rural Woinen's Development and Empowerment Project to a total o f 57 districts innine states and has begun assessing implementation in order to consider design options for future operations involving women's groups. Partner agencies are reviewing the effectiveness o f existing designs and identifying the factors that are critical for scaling up and sustainability. 46. For social risks and opportunities such as resettlement and tribal development, some basic common principles have also begun to emerge in India. Go1recently gazetted a National Resettlement & Rehabilitation policy (only the second country inthe region to adopt a resettlementpolicy, after Sri Lanka) and has released a draft national tribal policy for public comment. 47. As agreements on managing social (and environmental) risks are reached, the dialogue is increasingly shifting to improving accountability for results. For example, six Bank-supportedprojects are piloting participatory monitoring and learning, integrated with the existing monitoring systems, in order to achieve better accountability to the poor and more equitable management o f natural resources. The pilots are experimenting with alternative ways to improve the quality o f project implementation. One Page 9 os16 example i s the creation o f multi-stakeholder working groups that bring together, on a regular basis, project stakeholders with a diversity o f perspectives on project performance inorder to learn from each other's experiences. 48. Inmainstreamingenvironmental considerations, two projects to strengthen the performance of environmental institutions were completed, leading to visible improvements in the performance o f the state Pollution Control Boards and improved effectiveness o f the environmental clearance process. The Bank worked pro-actively with selected environmentally sensitive infrastructure sectors in which it i s engaged, to help integrate "best practices" in environmental due diligence, including the instrument o f strategic environmental assessment (SEA). The prime example i s the highway sector, but other examples are pilot SEASfor a river basin inTamil Nadu and the power sector inKarnataka. Studies o f long-term environmental issues inthe power sectors o f Kamataka and Rajasthan were also completed and advice was providedto the Ministry for Road Transport and Highways on developing an enhanced vehicular emissions inspectionprogram. Substantial analytical work has been undertaken to understandthe status and causes o f indoor and urban air pollution and identify the mix o f multi-sectoral interventions needed to address these issues. 49. At the state level, TA provided to Kamataka and UP focused on building state-level capacity to systematically collect and analyze environmental information, set priorities in a participatory manner and facilitate environmental reporting and action planning by various sectors. Karnataka's first State o f the Environment Report, supported by Bank TA, was released on International Environment Day (June 5) 2004. 50. IFC used its financing to help clients implement sustainable business practices through a range of iiistruinents/activities, including use o f carbon credits to reduce environmental impacts, development of fami forestry program and cogenerationplants, and investment in cominunity development. For example, the IFC-managed Carbon Facility finalized the terms for a contract with an existing IFC client - a sugar mill, to purchase carbon credits worth over US$9 million that will be generated by the company's use o f sugarcane waste to generate electricity for export to the grid. IFC investments intwo paper manufacturers were used to further the development o f the companies' farm forestry programs that in turn will have a positive impact on the welfare o f local communities and provide additional income for subsistence farmers. Inanother case, IFC advised the country's leading manufacturer o f specialized steel wires and ropes to set up a cogenerationpower plant to reduce emissions and lower power costs by using waste flue gases. Strengthening Fiduciary safeguards 5 1. 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. In this area, considerable progress was made duringFY02-04. The country team completed a CPAR, with the first phase covering the central government, the second phase covering three states (UP, Karnataka and Tamil Nadu) and the third phase covering central public enterprises. At the state level, findings are being translated into action (for example inKarnataka) and have been disseminated in several other states leading to more state-level procurement studies (Maharashtra and AP). 52. While the CAS had proposed a CFAA inFY02, it was later decided to begin with a few SFAAs that could help to better define the issues and frame the focus for a future CFAA. The Bank coiiipleted SFAAs inUP, Karnataka and Orissa. Inaddition, the Bank assisted the Government o f AP with capacity building for its own preparation o f an SFAA. All o f this work has served to directly support recent Bank lending as well as help to strengthen state systems into the future. Pnge IO of I 6 4. THE ONGOING PORTFOLIO 53. For the ongoing Bankportfolio, Bank portfolio performance declined in FY03 after five years o f sustained improvement inmost quality indicators. Results in FY04 were mixed, after a number o f improvement actions were taken on projects that were either slow disbursingor closing in FY04 with large un-disbursedbalances. These actions resulted in an improvement in the disbursement ratio, but also inan increase inthe riskiness rating o f the portfolio. 54. While India's disbursement ratio has improved from 17.7 percent in FY03 to 19.9percent in FY04, it i s still below the Bank average o f 2 1.4 percent and the ratio o f other large borrowers such as China (22.7 percent) and Indonesia (27.2 percent). Duringthe CAS period the ratio varied from a high o f 20.9 percent inFY02 to a l o w o f 17.7 percent inFY03. At current implementation and disbursement rates, none o f the ongoing projects inthe portfolio can be completed within the 5-year implementation period which has been the business standard for Bank projects in the South Asia region. Many o f these projects had clearly not been ready for implementation at approval, and experienced l o w disbursements in the first year or two. The causes o f slow disbursements include a weakening o fproject readiness for implementation, the capacity constraints o f implementing agencies and private sector contractors, a weakening o f supervision quality and oversight, and often a lack o f decisive actions to re-allocate, restructure or cancel unused funds. In order to reverse this trend, a comprehensive.Portfolio Improvement Strategy was developed and agreed with GoI. Implementation o f the strategy started during FY04 and will continue into FY05 and beyond. Details on the strategy are provided inthe FY04 CPPR and in Annex 8. 55. DuringJuly-April 2004, GoI's Departmento fEconomic Affairs (DEA) and the Bank finalized and agreed on the CPPR. Sector Portfolio Performance Reviews (SPPRs) for Rural Development, Health, Education, Poverty Reduction and Econoiiiic Management, and Transport were completed, during which DEA,the Bank and the project authorities systematically discussed some 35 projects, and a detailed project-by-project action plan was developed and implemented. As a result o f the SPPRs; a backlog o f US$222 million o f expenditure claims pending with Go1were processed. Scorecards were used by DEA and State Chief Secretaries to take corrective actions to deal with under-performing projects in their respective states. Training courses on Bank operations and portfolio management were conducted in the New Delhi Office for Bank staff and Go1representatives. A state portfolio perfonnance review was also completed for UP. These concerted efforts resulted in a remarkablejump in the disbursementratio for the India program by almost 9 percentage points injust 4 months (March-June), from 10.8 percent in end- February to the end-June figure o f 19.9 percent, exceeding the FY04 target o f 17 percent. However, as a result o fmore candid reporting and proactive portfolio management by Bank staff, which is reflected in end-FY04 realism and proactivity indices o f 90 percent and 83 percent, the percentage o f projects-at-risk and the amount o f commitments-at-risk have deteriorated further from 11percent and 9 percent to 16 percent and 22 percent respectively. Closer supervision and proactive management o f the portfolio will be requiredto address actual problemprojects, monitor projects-at-risk, and bring the riskiness rating o f the portfolio back down to below 10 percent, which i s comparable to India's past performance. 56. India remains the largest IDA beneficiary and the fourth largest IBRDborrower o f the Bank Group, with an active portfolio at end-June2004 comprising 63 projects with a net commitment o f USS12 billion (IDA: US$6b.; IBRD: US$6 b.; GEFIMontreal Protocol: US$O.1 b.) and an un-disbursedbalance o f USS7.6 billion (IDA: USS3.9 b.; IBRD:USS3.7b.). The trend in net commitment and un-disbursed balance amounts has been stable throughout FY98-03. 57. Infrastructure and Energy, which includes transport, urbanhural water and sanitation: urban development and disaster management, is the largest sector in the portfolio, with 20 projects amounting to Page 1I os16 US$5.7billion or 47 percent o f total net commitments, Human Development i s the second largest sector inthe portfolio (12 projects inhealth, population and nutrition and 7 projects in education, for a combined 25 percent o f total net commitments), followed by Rural Development (with 18 projects amounting to US$2.6 billion or 22 percent o f total net Commitments), Poverty Reduction and Economic Management (2 projects; 5 percent) and Environment and Social Development (3 projects; 1percent). 58. About 60 percent o f the Bank's current portfolio i s concentrated in seven states. The largest state portfolios are inUP (17 percent of total commitments), AP (11 percent), Maharashtra (9 percent), Gujarat (8 percent) and Tamil Nadu, Rajasthan, Karnataka (7 percent). Centrally implementedprojects now account for 38 percent o f total commitments and state implementing agencies account for the balance. Five o f the seven operations approved in FY03 were investment loans for single state projects. Four o f the seven operations approved during FY04 were single state projects (Attachment 1). 59. At the end o f the CAS period, IFC's heldportjolio in India consisted o f investmentsin 84 companies, with total exposure of US$1.14 billion for IFC's own account and USS167 million for B-loan participants. IFC intensified its project supervision duringthe CAS period, with the establishment o f portfolio units inNew Delhi and Mumbai, which together supervise about 40 general manufacturing and financial markets investments. Being closer to the client and market has enabled IFC to monitor its portfolio more effectively as well as seek new investment opportunities out o f the existing portfolio. Increased attention has been given to resolving portfolio problems and to timing IFC's exit from investee companies inorder to optimize capital gains. 5. TRIGGERS,NEW LENDINGAND INVESTMEETS 60. T w o lending scenarios were set out for FY02-04: (i) base case o f about US$3 billion per year a (US2.15 billion IBRD, USS850 million IDA), including about US$500-900 million per year o f adjustment lending; and (ii) a low case o f about US$1.5-2.0 billion per year (US$l.O-1.5 billion IBRD, and a core IDA program o f US$400-500 million). Movement between the low-case and base-case lending scenarios was to be regulated by two sets o f triggers: self-activating triggers, linked to fiscal and structural reforms at the state level; and global triggers linkedto overall macroeconomic perfoiiiiance: 61. Lending commitments ultimately fell short of the base case o f the CAS and below the program envisioned at the time o f the Progress Report. The total planned base case lending over the CAS period was US$9 billion ( U S 6 . 4 billion IBRD; and US$2.6 billion IDA) and actual lending was USS5.2 billion (US$2.2 billion IBRD; and US$2.9 billion IDA). The detailed lendingprogram for FY02-04 i s provided as Attachment 1. 62. The main reasons for the lending shortfall were delays inboth adjustment and investment lending due to the slower-than-expectedpace o f reform implementation in some states. Theselflnctivatirig triggem did indeed cause a substantial reduction inlending volumes at the state level. For example, in the case o f UP, the planned second phase adjustment operation was postponed indefinitely. The second phase o f Bank support for power sector reform inAP was also put on hold due to slow progress in that sector. Similar concerns delayed agreement on the first adjustment loan for Orissa, which was envisaged for FY03 at the time o f the Progress Report. While substantial progress has now been made on this operation, it was held up by slow implementation of actions inthe state's power sector. Engagements with other states, including Maharashtra and Punjab, were confined to analytical work and dialogue for FY02-04. 63, Ingeneral, slow reformmovement inbothpower and urban development were responsible for a considerable portion of the reduction in IBRD lending volumes. Given this. it i s evident that the self- Page I2 ?/ 16 liidin CAS iiiiiies2 activating triggers were successful inmodulating the level o f Bank assistance to match the pace o f state reforms. 64. The global triggers o f the CAS were based on (i) improvements in fiscal and external balances; (ii)importantstructuralreforms,includingextemaltradeliberalization,banking,deregulationand privatization o f public enterprises; and (iii) improved perfomiance o f the Bank portfolio, including a disbursement ratio o f at least 17 percent. India's mixedperformance in these areas at the time of the Progress Report suggested that overall perfonnance was consistent with the l o w end o f the base case for lending. Inthe event, however, the application o f global triggers was moot during the CAS period since the self-activating triggers had already significantly reduced state lending. With hindsight, these global triggers may also have been overly complex for achieving their purpose. 65. Despite the slowdown in IBRDcommitments, IDAfinancing remained in strong demand - particularly for support to rural poverty reduction initiatives (e.g., AP and Chhattisgarh) which are less dependent on state level reform and instead require a greater emphasis on community-driven development and building capacity o f local governments. IDA also supported crucial water resources management reforms (e.g., in Rajasthan and UP). In utilizing IDA resources, India benefited both from a special allocation o f additional IDA (about 180 million in Special Drawing Rights) for response to the Gujarat earthquake. 66. DuringFY04 the Bank has engaged inan intensive and highlyproductive dialogue with GoI, to follow up on GoI's request to renew our partnership with the Center, and move towards a higher degree o f collaboration and program delivery in the coming years. This dialogue, which has included iterative discussions with the Ministry o f Finance and sectoral ministries, has already begun to show results in FY04. Many o f these results have set the foundation for the FYOS-OS CAS - including a greater level o f agreement on sector strategies and a much higher level o f `readiness' in the lendingpipeline than has recently been the case. One example o f this enhanced pipeline readiness i s the completion o f nine project appraisals for possible FY05 projects duringFY04. There was also a sharp increase in delivery and review o f project concept notes for future operations, with twenty-four reviews undertaken during FY04 compared to about eleven such reviews per year inFY02 and FY03. 67. For IFCprograrns, commitments in India grew strongly over the CAS period, albeit with considerable variation inresponse to changing market and regulatory conditions. Over the last t\vo years IFC achieved record Commitments in India, nearly doubling its portfolio, improving profitability and investing in highimpact projects. India today i s IFC's second largest exposure. In FY03,IFC committed a record U S 3 4 8 million and in FY04, IFC commitments were USS290 million, with a concentration o f manufacturing, as well as investments in agribusiness, power, oil and gas, finance and healthcare. The expansion was mainly inlong-term debt, aided by the introduction (inFY02) o f local currency lending which is better suited to sectors such as infrastructure, housing finance and healthcare that do not generate foreign exchange. 68. IFC has been at the forefront in supporting Indian industry'sefforts to achieve international competitiveness inthe face o f declining tariffs. Its investments focused on introducing new cost-effective technologies in second-tier and medium-sized companies that are developing new markets and products; restructuring to become internationally competitive; expanding to establish a regional or global presence. IFC supported pioneering application o f technology by backing IT companies with a potential for contribution to economic development and supporting the movement o f India`s IT sector into higlier- value added market segments. In the financial sector, IFC supported the growth o f institutions providing financing to underserved sections including SMEs, micro-enterprises, and the rural sector through its investments inmicrofinance, factoring, vehicle financing, and export financing targeted at SMEs. IFC also provided long term financing to housing finance companies, extending the availability o f mortgage credit to lower income groups and to rural areas and giving an important boost to the construction industry and associated SMEs. IFC introducednew debt products and helpedthe development o f the long-term debt market by providing partial credit guarantees to debt issues o f a mobile network operator and a paper manufacturer. 69. Ininfrastructure, despite IFC's active pursuitofinfrastructureinvestmentsduringthe CAS period, few o f these reached commitment stage due to obstacles inthe regulatory and policy environment. However, there was new opportunity for investment in the power sector - as IFC, along with Powergrid and Tata Power, financed the first public-private partnership transmission project in Asia. This 1:200 kilometer transmission line between the Indo-Bhutan border and Mandaula near Delhi will evacuate power generated by the Go1financed 1,000 megawatt power plant in Bhutan. IFC will seek to replicate this model inother transmission and generation projects. 70. IFC committed US$5 million alongside a number o f donors to establish a regional SME Facility with a total five-year budget o f more than US35 million. The facility, which is based inDhalta,is promoting SME development by providing technical assistance to SMEs and banks and professional service finns that serve them in Nepal, Bangladesh, Bhutan and North East India. 71. Inregardto MIGA inIndia, as noted inthe Progress Report, MIGA has no outstanding guarantees for projects inIndia, but has insuredprojects undertakenby Indian companies in other countries. Recently,MIGA has been approached to support renewable energy projects, includingbiomass and 1%iiid farms in India. 6. ANALYTICAL AND ADVISORY ACTIVITIES (AAA) 72. On AAA, the CAS envisaged that the Bank would use a program o f knowledge support: To meet the Bank's due diligence requirements at both the national and the state level; In conjunction with lending, to bolster the effectiveness o f Bank support- for example, at the state-level, regular public expenditure reviews and analyses o f growth, poverty, service delivery, financial accountability; and To promote capacity buildingand knowledge sharing, in cases where it i s important to open the dialogue on development and poverty reduction challenges, e.g., inpoor non-refoniiing states, or where policy reforms are required without a corresponding need for financial assistance. 73. UnlikeBank lending,which was reducedby the slowdown in some state reforms, the AAA program o f the Bank was expanded. The number o f discrete activities which were delivered - whether policy notes, workshops, non-lending TA, etc. was greater than had been anticipated in the CAS as the Bank attempted to respond to issues and requests raised by an increasing number of states and partners. Meeting due diligence requiremeizts 74. As noted in Section 3, `theBank undertook considerable work to improve its knowledge of procurement and financial management issues at both the state and central levels in India - and to assist governments in strengthening their fiduciary capacity. This work program i s ongoing, and is likely to continue to be scaled up, particularly given its relevance to sector-wide approaches aiid ne\\! ways in which the Bank is working to support India. Pnge 14 of I6 75. Inaddition, fiscal reviewswere completed for all the states where the Bank is active in a dialogue on cross-cutting reforms or on SAL preparation. While a nation-wide poverty assessment was planned for the period, this was ultimately dropped as a free standing task; an overview of poverty issues was integrated into the 2003 DPR, and will be updated as part o f the 2006 DPR. Other, more detailed aspects o f poverty (for example, disability) are being addressed through separate, free-standing analytic work. I n conjunction with lending, to bolster the effectiveness of Bank support 76. Analytic work was also used in conjunction with lending, or as a precursor to new lending, to help answer key sectoral questions and shape operations. One example i s a comprehensive study o f the health sector completed inJune 2001, "Better Health Systemsfor India s Poor", as well as several other policy notes, which together have served to redefine Bank health sector lending,particularly at the state level, by detailing the need for public health systems to shift towards a stronger focus on results; develop greater partnerships with the private sector (where most o f the poor are receiving their care); and pilot new approaches for equitable health financing (e.g., community health insurance). Another, in the energy sector, was completion o f a study on Rural Energy Access -which has provided a good basis for dialogue with Go1and paved the way for lendingre-engagement inthis sector. 77. Surveys and analysis on improving India's investment climate, jointly carried out by the Bank and the Confederation o f Indian Industry,have informed adjustment operations prepared for several states. Substantial policy advice and non-lending technical assistance across key sectors \yere also provided in states where adjustment lending was under preparation. Topromote capacity building and knowledge sliaring, in cases wlzere it is irtiportarrt to operr the dialogue on developrnerit and poverty rediiction clialleriges 78. Several major studies such as the DPR, Agricultural Policy Review and an AP Growth Study were completed with the aim o f disseminating key messages more widely across India. The Bank also provided advice to Go1on how best to tackle trade policy challenges in the services sector. 79. Other examples include analytical work on indoor air pollution. Two reports - Household Energy,Indoor Air Pollution and Health (2002) and Access o f the Poor to Clean Households Fuels - were completed, and the dialogue i s underway to assist with developing programs to create a coiiiiiiercial market for clean household energy products and services inrural areas. To evaluate and further enhance the health benefits o f RWSS investments, a major study to measure the environmental health outcomes o f Bank-supported RWSS projects was initiated inFY04. 80. Numerous other sectoral policy notes, workshops and dissemination activities were also delivered to bolster the reform process at both the federal and state levels (Attachment 2). CONCLUSION 81. The CAS noted that the main risk to Bank support inIndia mas a vefom deraiZnze///,which would also translate to slower growth and progress inreducing poverty. While the reforms have been broadly on track, their pace has been uneven. The document also closed by highlighting a common risk that the Bank Group faces in all large countries like India - namely the risk o f becoming less relevant. This did not happen and the Bank Group has continued to play a strong supporting role in India's reform process, particularly at the state level. 82. The Country Team's assessment i s that the main thrusts o f the CAS were both relevant to the development challenges inIndia, and effective inpointing out ways to leverage the impact of the Bank's limited resources. The program was ambitious inits efforts to catalyze and expand the state reform process in areas that are central to reducing poverty inIndia. Though progress inreform was slower than expected, the CAS was also well structured to deal with the slow down in reform implementation that took place in several states. Inthis respect, the `self-regulating' triggers o f the CAS worked w e l l in modulating Bank assistance to the pace o f reform. 83. By focusing on key aspects o f the reformagenda and working inpartnership with GoI, reforming states and others, the Bank Group was able to have considerable positive impact. Indoing so, the Bank Group relied on several strengths, including its ability to gather and share global knowledge and experiences with Go1and other important audiences inIndia (e.g., the 2003 DPR and Agricultural Policy Review). The Bank Group employed a broad array of tools to help inobilize private financing and foster greater private sector participation in India's development (e.g., the greatly increased investments o f IFC). Through its lending and investments, the Bank Group also helped to catalyze greater effectiveness and inore efficient spending o f others (Le., via adjustment lending and refonn based investment lending to state level governments), towards the ultimate goal o f reducingpoverty and encouraging India's sustainable development. 84. Though the FY02-04 strategy was broadly appropriate, there are both important lessons o f experience and shifts inthe development context that suggest an evolution (rather than a fundamental rethink) o f the strategy going forward. Experience reconfirms the value o f engaging with states undertaking comprehensive reforms via adjustment lending - but also underlinesthe importance o f clear conditionality linked to reducing the state's fiscal deficit; the value o f a medium-term engagement with states, through ups and downs in reform implementation performance; and the appropriateness of `back- loading' adjustment support. It has also suggested that it would be appropriate to pay greater attention to debt restructuringas an instrument for enhancing progressive restructuring o f expenditure towards priority areas. 85. Given the volatility o f the state level reformprocess, experience also suggests that investment lending should not necessarily be clustered in states undergoing adjustment programs. The Country Team's review o f the CAS also makes clear the importance of a more strategic approach to the Bank's analytic work, with a renewed focus on high quality products and strong disseiiiinatioii plans, in order to raise the debate on critical issues o f national concern in India's development process. 86. Finally, one o f the most important trends underlined in the 2003 DPR i s that, as better-performing states have made greater progress, the largest and poorest states are being increasingly `left behind' with poverty and weak social indicators. The MDGs will not be achieved without greater economic opportunities and better human development outcomes inthese lagging states - suggestingthe importance of further thinking about how the Bank could best reconcile the conflict between needs and performance-based approaches to our work in India. Pnge 16of 16 India: FY02-04 Actual IBRD, IDA and Other LendingProgram Fiscal USS(rv1) Year Project IBRD IDA Other 2002 Andhra Pradesh SAL I 125 125 0 GUjarat Emergency Earthquake 0 443 0 KarnataltaRural Water Supply & SanitationI1 0 152 0 KarnatakaSAL II 50 50 0 KarnatakaTank Management 0 99 0 KeralaTransport 255 0 0 Mizoram Roads 0 GO 0 Mumbai UrbanTransport 463 79 0 Rajasthan Water Sector Restructuring 0 140 0 Uttar PradeshWater Sector Restructuring 0 149 0 Total 893 1,297 0 2003 AP Comniiinity Forestry I1 0 108 AP Rural Poverty 0 150 ChhattisgarhDPIP 0 1 I 3 TechiEngg Quality Improvement 0 250 Food & Drug CapacityBuilding 0 54 RCHISupplement 0 12 Tamil Nadu Roads 348 0 UP Roads 488 0 Total 836 687 2004 Allahabad Bypass 210 0 0 AP SAL I1 110 1 I O 0 ElementaryEducation 0 500 0 GEF Biosafety Project 0 0 1 Immunization Strengthening(Supp. Credit) 0 83 0 KamatakaUWSS Improvement 40 0 0 MaharashtraRural Water Supply 0 I81 0 RajasthanHealth 0 89 0 UttaranchalWatershed 0 70 0 Total 390 1,033 1 TOTAL CAS PERIOD (FY02-04) 2,119 3,017 1 TOTAL IBRD/IDA, FY02-04 5,136 Ptrge I OJl Summary o f Nonlending Services (as of June 30,2004) Product Completion FY Forma1Reports Access of the Poor to Modern Fuels FY03 AP Education Strategy (Vision 2020) FY03 AP Growth Strategy (Vision 2020) FY03 AP HNP Strategy (Vision 2020) FY03 Evaluation o f DPEP FY03 India Development Policy Review FY03 Karnataka SFAA FY03 Orissa SFAA FY03 Power Reform I1 FY03 Public EnterpriseRestr~ict~iriiig,Privat.& Labor Adjustment FY03 Rural Energy FY03 UP SFAA FY03 AIDS Key Issues FY04 Bihar Economic Report FY04 Child Development FY04 Corporate GovernanceROSC FY04 Decentralized Organizations FY04 Fiscal Decentralization Stiidy FY04 Highway Sector Financing FY04 ImprovingAccess to Financial Services FY04 India Agric~iltiireUpdate FY04 India Trade Policy FY04 India Urban Governance & Finance FY04 PersistentOrganic Pollutants Strategy FY04 ProcessAgent Sector Strategy - India (MP) FY04 Punjab Development Report FY04 State-Level Fiscal Reforms FY04 State MDGAssessnient FY04 UP Environment Monitoring FY04 Urban Health Issues FY04 Inforninl Reports Benefit Sharing of It-rigationSubsidies FY03 Fiscal Issuesin Selected States FY03 India Banking Sector Policy Notes FY03 India Capital Markets FY03 Karnataka Risk ManagementOptions FY03 MaharashtraAgricult~iralPolicy Review FY03 Natural Calamity Insurance FY03 Secondary Education Policy Notes FY03 State Education Reforms FY03 State Level Iiivestment Climate Diagnostics FY03 UP Policy Notes FY03 Capital Markets Policy Notes I1 FY04 India GovcrnancePolicy Notes FY04 KarnatalcaPolicy Notes I1 FY04 Next Steps in Power Reforms FY04 Poverty Policy Notes FY04 Private Health Servicesfor the Poor FY04 Punjab Agricultural Policy Note FY04 Tamil NaduAgricultural Policy Note FY04 Tamil Nadu Development Agenda FY04 Tamil Nadu Human Development Policy Note FY01 Urban Air Pollution Policy Notes FY04 Urban Health Issues FY04 Why Fiscal Adjustment Now FY04 rage I of 2 Summary of NonlendingServices (as of June 30,2004) Product CompletionFY Worksliops/Corifereri ces/Technical Assistartce Poverty and Social Monitoring (NLTA) FY03 UP Environment Management Framework (NLTA) FY03 Workshop on Education FY03 A P TA for Poverty & Social Analysis FY04 India - ICT Development FY04 Investment Climate Workshop FY04 Participatory MonitoringNLTA FY04 Poverty Monitoring & Analysis India (NLTA) FY04 Activities Already Underway F o r 1 ~Reports 1 Alternative Telecom Networks FY05 Disability Issues FY05 India A&A ROSC FY05 Road Transport Service Efficiency Study FY05 Rural Service Delivery FY05 Environmental Health Outcomes of RWSS FY06 I nforinal Reports Assam Health Policy Notes FY05 West Bengal Health Policy Notes FY05 Doing Business Indicators in K e y States FY05 Gujarat Agricultural Policy Note FY05 India CFAA FY05 Financial Sector Regulations Review FY05 Impacts of Rural Decentralization FY05 Nutrition Programs and Outcomes inIndia FY05 Orissa Investment Climate Survey FY05 Solid Waste (Urban Sanitation & Waste Management) FY05 Strategic Issues in India's Water Sector FY05 Unlocking Opportunities for Forest Dependent People FY05 Urban Transport fy05 Watersheds & Local Instihitions FY05 Water & Sanitation MDGAction Plan FY05 Worksliops/Corifereit ces/Technical Assistart ce India Pensions Reform NLTA FY05 A P Environment Management NLTA FY05 Karnataka Environiiiental Management Fraiiiewoik N L T A FY05 Tamil Nadu Public Piivate Participation NLTA FY05 Piige 2 of 2 Status of ProgressIndicators for the FY02-04 CAS Program Key IssuesiDiagnostic FY02-04 CAS Status at FY03 Progrcss Cptlatc nt ciitl-F\'04 Report Fiscal Rcfurnt High deficits Significant state refomi efforts and Kumber o f refomiing states The combiiied priiiiary delicit oi'llic slates lias i;illcti reduced fiscal deficits growing. Refomis are deepening from 2.4% iii 2000 io arouiid 1%) oTGSDI' this )"I:', and deficits are starting to come and the fiscal dcficit appears tc h e !ei,cliii# o V down i n sotiie states. Central Consolidation 111 Daiil.: SAL s!ii(cs is h e r tIi,iii 111 goveninieiit deficit is not falling. otlier states. Full) dcvelopcd I\ITFPs iii pl;icc iii 22 slates. Fiscal responsibility IcgisLilioii 111 4 statesmid at the Center Fall over time in consolidated Not being achieved. public sector debcGDP ratio Tlic coiisolidami piiblic seciot- debt GDP is leicliiig off'itid public iiitcrcst paytiiciits 'is a sliwc oI'GIlP are bcginiiiiiy to declitie. Ol'l-budgct liabililtcs rciiiaiii 3 serious coricerri. Deteriorating composition o f Improved expenditure mix, Evideiit i n some refomiiiig expenditure emphasizing Iiigli-priority states Interest spetidiiig coiiliiiiies to croiid oiil iocicilaiid development expenditures otlier developnieiital speiidiny,, but is starltiig to fill (at least at Go1 levcl); Public cupcx speiidi higher i t iSAL tliaii in tioii-SAL sLrilcs *Tax revenue-to-GDP falling; cost Higher tax/GDP ratio and more Evident in some refomiiiig recovery is low efficient tax system, including VAT states. VAT postponed to 04103, The intensified rcvctiLie ei'rort aiiliears to 11 in~plenieiitation but better progress beiiig iiinde off with an aieraxe iiicrease o f oiic jicrccii with preparation. in ohti s o m e rcveiiiies aiid reloriiel! largct increases iii Bank SAL stdtes: ta\ re\eiiiies iiithe *Many states face high indebtedness * Better cost recovery for service Evident i n some refomiing Center are also on the iticreasc \e\,ertlielcss. fwt!icr and a liquidity crisis - uiidemiining 3rovisioii. states. and i n some cases for Gal. efforts to widen die tax base arc iicedcd to help their developniental effectiveness eGoveninients over-stretched and a Reonentatioii o f the state away Go1 61 some states running Significant ]progress with privatiratioii and Refuria failing to provide services areas where credible private successfii! public eriterprise restructiring, iitcliiditig iii AI', I<:irnutaka iirid Orissa: effectively; characterized b y jector alternatives exist. privatization or restructuring cumbersome structures, excessive progratus. regulations and red tape Poor expenditure management Iniprovenients i n service delivery Difficiilt to assess A number ofpolicy refortiis adopted to bring about leading to fiscal deficits, improper 11critical areas (e.g. education, comprehensively, but apparent i n service deli! cry itriproienieiits III crilicLiIc~re;:,. allocation o f scarce resources and >ewer, health) some leading reforming states. waste 1 Improved transparency and public Spreading to tiiore states. iisclosiire, e.g. via freedom o f nfornintion legislation, e- :ovemance, piiblic disclosure o f iollutants) Too niany staff i n positions with Survey data ibr Ihiiiglore, l<.irti;it;ik:i 1 Iniprovenients iii civil service I Dirficult to provide slion r ~ c l i c ~ i l limited value-added ,fficiency and prodtictiv ity. :o mprehensive assessment. iniproveiiietitr in scri ice delivery. Promising initial steps made i n * Bureaucracy increasingly subject to several focus states. Improved prograniniiny o f iiifr'istructtire ill\cstniciit political interference, including in Orissa led to iniproved pro.iect coiiiplcttoti fiilcs in frequent transfers o f officials 2002103 D Need for greater public financial Strengthened public expenditure Some initial moves made (e.2.. xcouritability, traiisparency. and ~rograniniiiigand financial :xpatiditig scope o f budget, iitegrity inanagemetit and accoittitability iiovitig to medium remi :xpeiidttiire fraineworl(. improving predictability o f cash 'eleases i t i focus states. :omputerizing and iietworkitig reasriry iii UP!Iliiie io osses ippropriate tariff structures, lower niplemented in some states, with Zeiitral pro\iders is also positiie. IkIo\\c\ci. liii:iiicial ubsidies and cross-subsidies and ;ignificaiit increases i n agriculture iiid fiscal performaiice overall rciiiaiw problciiiatic. eversal iiiculture o f non-payment. iiid domestic tariffs; but extent o f 'Free Power" ~)roiiiiscs111 ~prc\~iously rcihrniiiig sr.ires #iibsidyreiiiaiiis substaiitial. AI', Th') ruisc ii~ipnrt~iiit coiiceriis. :ulture o f noli-payiiient gradually niproviiig iii soiiie statcs (e.g , AP k Rajastiiaii -- where collectioii ,fficiency is iiow over 98%), but ustaillability still to be stablislied. Limited progress i n iiiiproviiiy High subsidies to agriculture sector Improved quantity and quality o f luantity due to high cost o f iiew iipply o f power iiireforming states ources o f pobxer; targeted Isupportdevelopment. nvestmeiits under Bank fiiianced rojects liave improved tlie qiiality f siipply 111 Haryaiia and AI' Loss assessiiieiits iii progress; L o n access and considerable Reduced traiisiiiissioii and i s s l e t e l s stabilized mid suiting I Key IssuesiDiagnostic FY02-03 CAS Status at FY03 Progress L ptlate at elltl-FI'0.l Report bottlenecks throughout India distribution losses i t i refomiing to decline iiisome states Industrial demand constrained b y states. high prices and unreliable supply(many opt for captive generation) Regulatory cotiiiiiissioiis in Creation ofrlie enabling place in most states. but investor eiivirotitiietit for private sectoi perception o f iiivestiiietit risk iiivestiiietit. reiiiaiiis high B y end 2001. renewable energy Increase i n appropriate use o f (excluding liydroplaiits > 25 hl\Vj reiiewables and development o f local had increased to 3.4% ofIndia's Current uiicertiitiiiy ,ibour future rcpiiiic lbr skills and reiiewable energy products. power generatioii; local subsidization o f reiie\\,ables maiiufacturing o f reiiewble energ) s)steiiis lias dramatically increased. Some progress (e.g., Delliij but Substantial progress oii long tenii sustainability remains cotiitiiercializatioii o f disrributioii in to be proven refortiiing states Urban &mer supply arid sanitation Greater private sector participation No significatir increase iii Yo significant tiicrease in private pro\ isioii. lion ever. in crisis, with state and local utilities in urban services, especially water, private provision but many urban some piloting o f private matiageiiictit ofopcr,iiioti at bankruptcy leading to reduced fiscal burden and local bodies (ULBs) are turning to and maintenance i t 1selected zoiics is being itiiti.itcd increased coverage and quality. private sector for maitagenient o f in I, :omniniiications Convergence iiiil:I\ ri~i~l :ledensity Of4% b y 2010 roposed Convergence bill would introduction of iittified liceiisiiig reptiiic i\~i)itlil cii:ililc liable rapid rollout. Thus cliaiices apid rollout. Teledciisiiy oI'I~".;, ?OL\;.by I(~ii,il f meeting these targets looI< :ledeiisity of4'X by2010 right. Out or approxiiii,iiely 607,000 Program Key IssuesiDiagnostic FY02-04 CAS Status at FY03 I'rogrcss Priority Report 0 Coniiecrions i n all villages; villages, oiily 323.000 have at telephones oii deniaiid by 2002 leastbile public telcplioiie boot~i Telephone on demand likely woit't be achieved tititil 2005/20 10. Accelerated h'ever regulated to the extent o f 0 Increased area under irrigation, and Go1 and several states Illcreased area irrigated and croppiiiy ititelisit) Rural Growth industry, but agriculture still suffers productivity per unit o f water supporting increases through through state reliabilitatioii o f s u r f x c ii-riglitioii from a plethora o f regulations investments iiisurface irrigation s\steiiis and increase V/LA particilxitioii and nieasures to improve oil-fami Agricultural growth iii the 90s was water use efficieiicy. Limited about 3%, similar to that in the 80s, progress in reducing inefficient but belou. govemment target o f 4% electricity subsidies for irrigation. There i s a surplus o f grains: public Improved cost recovery for Several states arc raising water Additional statcs ;ire iiicredsiiig COSI reco\'cr) (Putijiib storage levels are well abo\e buffer operatioii and ~naiiitenance(O&M) 01 user charges aiid traiisferring and Tamil Kiidii). Slon progress it1natcr c l i a y requirements irrigation systems O&M to water user associalioiis. collcc~ioi:erficiet:c! ii: sonicSMIC< .Maliaraslitra water charges Input subsidies to agriculture adjusted to cover full O&M and (fertilizer, power, water) are some capital cost. Slow progress unsustainable inwater collection efficiency. Increasingly scarce water resources Increased water supply and Progress iii iniplementing sanitation coverage iiiruralareas iiatioiial rural water supply & sanitation program has been slo\v. Bank supported projects in UP, Uttaranclial, Kerala aiid I 4 i"i, State financial institutions and perfonmiice, iiicltiding reduction in reduced to 6.7% o f total advancc cooperatives are drain on state non-performing assets (6.2% for entire banking system budgets in FYOOIOI. Steps taken to and facilitate reco\'er) o f 9 P A s . \e\\ bdnl~rllptc! srrengtlien creditors' rights and frame\iork iiilroduced \\it11 the passage o f facilitate recovery o f NPAs by tl anietidiiieiits to tile Coiiipaiiies I:tn (SCiiiu:ir! 2003). newly created Asset Recoiistrnction Company o f lnd Ltd. Increased foreign ownershil allowed, which w i l l bring in beti banking practices. Debt recovery is difficult due to Strengthened capacity o f financial Restructuring o f DFIs will poorly functioning legal systems institutions to extend financial strengthen their capacity. services Opening o f banking sector to greater FDI will strengthen tlie financial sector. Growth o f h73Fls offering mortgage finaiic etc. Crrpitnl Markets: Loiig leiin de61 Smooth (and scaiidal-free) Some pro%ess it1 impro\,itig Scrics o f stelis II.I\C bccii tlilicii lo ciiIiIiticc llic ~iinrkeliuidei -developed functioni~igo f securities markets ftinctiotiiiig and ttaiisparency o f seciirities iii'trl,ci trc~d:iior! rrgiiiic, tiJ t l i c ~ c51cpz j~ niarltets, but regtilarioti needs ;tic expected to lcatl IO s i g i l i c m t coiis)lid:itioti of strengtlietiing. stock exchaiigcm. market iiitcriiiediarics atid listed Development o f secoiidary debt companies tlierehy improving Iiiarket itltegrit? illid market constrained b y existing taxes eriicieiicy. SARF.IESI .4cl liris i:ictliln~cd and regulations securitization trniisactioiis. Legislation (SARFAESI .Act. 2002) ~xtssciito Housing finance underdeveloped Creation o f secondary mortgage Legislation passed to facilitate market secoritization. facilitate seciiritizatioti. Lack o f contractual savings Improved credit access for the poor Little progress Wliile progress iiiimproving access froni foriiia fitiancial instiititioiis has bccli slon, sonic ~proprcsb institutions has bcen made i t i Improving access froiii iilicio Microfinance: Outreach still peci;illy tliro~iglitltc Scli'I lei13 enibryot iic Ipropraiii - oLttrc,icIi !!111 lei1 limtled aiid coiiceiitfiitcd iti rei\ st,ttcs '1 hfany projects - I 111s new Goveriinieiir is revieu iiig the sclieiiie I'eiisioiis Rcgtilotor) Aiitliority ticis bccit e 1 Program Key Issues/Diagnostic FYOZ-04 CAS Status at FY03 Progress I ' p t l a t e a t clltl-F\'Ol Priority - Report Elenr entary Enrollment rates are rising for Implementation o f new generation Go1indicated potential inrerest Education elementary education and the gender ofBank projects to support universa iiiSSAbeing fundedbytlie Bank gap i s falling. But even today oiily education. and the 'Education For All' fast. 19% o f India's elementary school track initiative. age-group (age 6-14) are enrolled. With literacy at just above 6S0/O. tlier is a long way to go. Education resources and N e w state education strategies, Significant progress i n Relbriii strategics for cducatioii sector III ilic S\Ls o f performance inadequate possibly supported by the Bank. fomiulating detailed refonii AI' mid IC budgetary allocation for 3uritig tlie same lieriod. .\lost st,iles have iiicicLiscd elementary educarion increased by their cxpeiiditiircs on clciiiciirar! cdiicatioii. 70 percent iii2002#03compared to pre\iotis year Yea[t/r 1 Disease burden and nutritional 1 Restructuring o f centrally Results have been more positive xoblems reniaiii high #poiisoredschemes'projects to illsoiiieprograins (e.g., TB, xomote decentralization. leprosy, H I V i A I D S and 1 T B is on the rise; the spread o f Reproductive and Child Health) IIViAIDs could become a theat to than iii others (malaria and ndia's future Integrated Child Development Services). Substantial variations in health care ervices across the population Increased integration betweeii D Marginal increase in integration klarginal iiiicgatioti in these sl,iLcs. Coin crgciicc ,arious health and nutrition programs iithese states. \ itli rural po\erty program srtirled 111.\I>, 11AP, I By 2004: (i)reduce under-5 I Interim assessnieiits on progress iiterim assessments 011 progress are not a\ ailsble iortality rate to 80 per 1000; (ii) Ire not available. India needs to :duce niatenial mortality rate to 400 ccelerate progress to achieve er 100,000 live births; and (iii) dDG health indicators icrease access o f eligible couples to xitraceptibe services to 64% cceleraliilg About 75% o f the poor are iii rural Increase ia income o f the poor ro-poor Updated data siiice last CAS not 'eas ural et a\,ailable eveloplrrelll The poor in general have little or Increased cost effectiveness and access to assets and are dependent iproved targeting o f programs iwagelabor. perating costs and leakages lias Specific groups are particularly een slower. Bank DPlP projects iliierable: there are both gender and rovided targeted assistaiice in ste based disparities in access to :lected states. ononuc resources and services Program Key Issues/Diagnostic FYOZ-04 CAS Status at FY03 I'rogress Illltlatc a t clltl-l.'YO1 Priority Report India spends heavily 011anti- Balk supported projects in Baiih siipported projects coiitiiiuc IO builil ilic poverty p r o g r a m iiirural areas, but Greater capaciry o f rural several states are building the capacity o f rur'il coiiiiiiiiiiities to plan and iiiiplciiiciit the efficiency and efficacy o f these communities to plan and implement capacity o f rural coiiiiiitiiiitiesLO activities in rural water supply and saiiitaiioii. prograius are questioned. sustainable activities plan and implenient activities in \ratershed clevelopmciit and iiiaiiagciiiciii. coiiiiiiiiiiii) rural water supply aiid saiiitatioii, forest iiiaiiageiiieiit, irrigatioii iiiaii'igciiiciiI . ~ I l i t o u ~ l i watershed development and the I<\VDP and \\ itli help froni SGOs. SO \\'atcrsIicd management, conimunity forest Societies have coinpleted action plaiis v, liicli ,ire iion management, irrigation iiiider execution. management, sodic land reclamation, etc. Increased participatioii of woiiieii The increased participation o f Parricipatioii o f \ioiiieii 'iiid the disad\aiiiLigcdliris aiid the disadvantaged in decision wonieii aiid the disadvantaged has cupporicd IJl"iccts L1cross making and attaining benefits been integral to Bank supported several states. The 4 P DPIP is siipportiiig .ihout projects across several stater. In 99.000 self help groups,96% o f tlieiii lia\.e woiiieii IWDP 11, 900 womeii's self help iiiembers groups have been organized. ,411rural poverty opeidtioils illcrease viiliierable S: woiiien's panicip~~tioii. e.g. i n l?\VDl3' \\otiicii's ibr groups witli mciiibers elccted to PRls illcreased l'rc~iii under 1% to o i e r 8'%,.. 111i\l'Dl'll'aboul 100.0Oi) ,i:itI iii I<\\'DEP, 17.000 \poor n,oiiieii'r SMGr arc orgaiiized. Greater laud reclamatioii, forest UP Sodic Project I1lias helped Under the Ecode\,elopiiient prqjecr, along \\,itli regeneration aiid biodiversity reclaim sodic lands. Several states improved park-people relatioiisliip, visible prorectioii are increasiiig forest regeneration improveiiietit iii bio-diversity coilsen atioii has bccii via joint or comnititiity forestry. recorded i n Pciicli. IPcri!ar and Bu\,i ii:i1ioiinI lpdrls Go1 is finalizing National Biodiversity Strategy aiid Action Plan. Cortitnutiity Urban poverty increasingly Increased scale for successful DGujarat is iiiiplemeiiting scaled- Sanitation progr,ims in TN and hliiiiib~iIiiivc Driven Upbutt important, as urban areas projected to community-based urban initiatives tip slum upgrading through LLBs. benefited sliiiii dwellers. Cui~eiitscopc oI'ii:itioiiol Developtnetrt grow more quickly aiid state sluiii programs are siiiiill relati\e to iwtl a n d iiot efficieiirly utilized. GO1 lins rcqlicstcil * More than 20% o f urban dwellers assistance ill developing slum Iprogrniiis live in slums, with higher numbers in largest cities PCID'" 7 o/ 7 Summary of the ConsultationProcess 1. TheProcess Consultations with various tiers o f government, civil society, donors and the private sector have been an integral part o f the CAS formulation process. Giventhe multiplicity and geographical spread o f stakeholders inthe Bank Group's work in India, and their wide range o f priorities and points o f view, the challenge was to conduct truly representative and focused consultations that could provide meaningful input and direction to CAS formulation. The consultation strategy.has, therefore, beenbased on the following principles: a) feedback would be elicited ina focused manner on the emerging themes and issues that were expected to underpinthe CAS; b) participants would reflect a divergence of views, but would be familiar with the work and role o f the Bank; and c) consultations would be low-key and transparent so that expectations from the exercise were realistic. The consultation process has comprised four elements: 0 India client survey: About 1,000 interlocutors ingovernment, civil society, academia, media and the private sector were invited to participate ina two-part survey for their views on key development issues in India, and on the Bank Group's effectiveness and priorities. Of these; 581 responded to the first part, which was a quantitative opinion survey. Eighty o f these respondents were then invited to participate inthe second (qualitative) part that consisted o f group discussions on themes that emerged from the first part. The survey instrument was tailored out o f the standard Bank Group survey, and was conducted by an independent, private sector marltet research firiii, Taylor Nelson Sofres Mode, over October-December 2003. A summary o f the findings i s providedbelow. Targetediiieetirzgs: Before the drafting o f the CAS began, a series o f meetings was held over several months with sector ministries, based on notes preparedby the Bank to discuss key sectoral challenges and how best the Bank could help. These discussions provided an important input to the subsequent drafting o f Section IV o f the CAS (World Bank Group Program Priorities). Throughout the drafting process, extensive feedback was provided by govei-ninent counterparts inthe Ministry o f Finance, as well as sector ministries. Several noted Indian economists and policymakers beyond government were also requested to provide informal review and advice. The consultation draft was also circulated to sector ministries for final comments. Oizlirze consultations: InJune 2004, after discussionwith the government, the main text o f the CAS was posted on the extemal websites o f the India Country Office in English. Hindi, Kaniiada and Telugu for public review and comment for a period o f four weeks. Awareness o f this facility was created through a press conference inN e w Delhiaddressed by the Regional Vice President and Country Director, email and fax notification to Bank contacts, the Country Office quarterly newsletter, and other means o f outreach. 0 Coizsultatiorz workshops: InJuly, the Bank Group hosted a series o f half-day worllow levels o f connectivity. Jrban Transport [nstrumentswould include AAA and investment lending limited to a few najor urban centers and contingent on: J Existenceofa statewideurbanpolicy aiming to clarify roles inurban development (including transport) and to enable ULBs to become financially viable; J Quality o f municipal management, including capital planning and budgeting, financial management,revenue administration. and financial performance; J Willingness to prioritize investment using economic criteria; development o f a sound urbantransport development strategy and investment program, commitment to the introduction of moderntraffic nianagenient aiid enforcement; and Conlmitment to institutional reforms required for citywide transport management. liidin CAS Aiiirer 5 Urban Development Based on upfront AAA work, the Bank would only consider SILS for Statedmegacities that have: Demonstrated Commitment through early actions in undertaking a critical core o f URIFreforms and willingness to pursue additional reform o f the sector; Recognizing that the urban reform agenda includes a wide ranging and complex set if issues which cannot be addressed through one project, and there is, as yet, no sustainable and scalable model for financing urban investments, the Bank would be prepared to establish long term partnerships and work with committed counterpart stateshegacities on a series o f sequential operations, subject to continuing demand and progress o n reform and commitment by the state and GoI; Engagement at the state level would depend on the financial capacity o f ULBsto bothundertake investments and develop viable models for operations and maintenance; The Bank's ability to deal directly with ULBs i s limited and the role o f the state governments in `wholesaling' Bank's support for reforms would be critical, except probably incase o f the largest cities. T ~ UitSi s proposed tha the Bank's engagement inthe urban sector privilege those states where bot1 the state government as well as at least some ULBs are refoi-in-oriented; and Only on an exceptional basis would the program include stand alone projects in individual cities to pilot slum improvement approaches, or specific public private partnerships, and regulatory reform. At tlze Center, the Bank could offer AAA and the possibilitl o f ne\\ leiitlirig to finance reformsvia Gol's own urban programs, siicli as the URIF. ~~~ Jrban Water iased on upfront AAA work, the Bank would only consider full scale $upplyand nvestment lending for statedcities that have: sanitation J Demonstrated commitment to reforming their UWSS sector by publishing s "UWSS Sector Vision" after consulting with key stakeholders; J Prepared (if needed as part of initial pilot SILs) credible plans for reformini the UWSS Sector, and have an adequate legislative and regulatory framework; J Designed roll-out activities after extensive consultation with affected stakeholders and detailed evaluation o f lessons learned from pilot SILs; J Agreed to support actions to develop domestic private sector capacities for delivering UWSS services; and J Designed policies to specifically address the need o f the urbanpoor. rrigation and Inowledge-based services and investment lending would be provided on : hainage irogrammatic basis (Le,, over a 10-12 year time horizon) to selected state: hat are willing to: f Conmit upfrontto unbundling overall water resource management from existing irrigation and drainage (I&D) institutions; f Analyze key issues and options to improve the productivity o f water in the irrigation and drainage sector and develop a prioritized investinelit program on the basis o f a full appraisal o f options (on econoinic; environmental, social, technical and financial aspects); / Strengthen and professionalize I&D institutions for efficient and affordable Pnge 3 of6 ~~~~ service delivery; J Establish and operationalize decentralized service delijvery mechanisms (including corporatization, public-private partnerships and water user associations); J Develop an agricultural management strategy focusing on intensification and diversification; J Develop and adopt a strategy for financial sustainability o f service delivery operations; J Develop an appropriate knowledge-base and analytical capacity to assist in resource management and service delivery; and J Pilot tradable water rightsientitlements where possible. igricultural Knowledge based services and investment lending in agricultural research rechnology and would be based on ICAR and State Agricultural University commitment to: Xelated AgriculturalJ Shifting the researchfocus to a farnling systems approach within a Services pluralistic agricultural technology system that incorporates participation of farmers and other stakeholders indeternlining the research agenda J Increasing institutional accountability inusing public funds J Promoting public-private partnerships, including through effective competitive grant programs and other innovations Knowledge-based services and investment lending to GO1 and states in agricultural extension and related support services will be based on their demonstrated commitment to: J Analyze the policy, fiscal and institutional framework for agricultural extension and related support services; J Foster client driven public extension systems, which are decentralized to district and block levels with effective integration o f the extension programs o f various line departments at these levels; J Promote public-private partnerships and increased private sector participation inthe delivery o f agricultural extension and other related services (market information, livestock services, etc); and J Improve the policy and regulatory environment for private sector participaton inagricultural marketing. ~~~~~ :upportingCritical Iealth, Nutrition i A A and investment lending for state health systems projectsn~ouldbe 'ro-Poor nd Population :ontingentupon a comprehensive state health policy and plans that: nterverztions J Focus o n m T Poutcomes specified as goals, with specific provision for their measurement; J Consider the whole health system, both public and private sectors, and the ways in which both can contribute to achieving priority health outcomes; J Orient the role o f the public sector to improve priority health outcomes, with more emphasis on oversight and stewardship o f the sector as a whole; J Increase accountability, efficiency and effectiveness in the private and public sector; J Emphasize sustainability, improved financial management and improved riskprotection particularly for the poor; / Select strategies and interventions o n the basis o f their cost effectiveness in Page 4 of6 achieving the priority health outcomes - this would include review and rationalization o f the proposed infrastructure investments, ensuring that they were linked to need and achieving the health outcomes, and with consideration of the private sector facilities and services already available ineach area; J Create integrated disease control programs and strengtheneddisease surveillance; and J Includemechanisms for donor coordination. Zducation Bank involvementin education would be through 4AA anti investmcnt lending that would provide resources to the Center and states that liarre: J Made anexplicit commitment to fundisupport SSA programs and goals; J Movedtowards decentralized planning and service delivery; J A financing planlinked to outcomes; J A focus oninter-districtvariations ineducational performance and additional support given to weaker districts inthe state; J Monitoring andevaluation systems inplace for understanding and analyzing outcomes; and J Recognition ofthe ability oftheprivate sector to assist government in developing education inthe state. tural Water Supply :nvestnient lendingwill be focused at the state level for states that commit .ndSanitation ipfront to developinga statewide and sector wide approach that RWSS) ncorporatesthe reforms outlined below for all new schemes in the state, rrespectiveof source of financing: :nstitutional / DecentralizedService-Delivery Approach: Providingcentralinstitutional role for village-level rural local governments (GPs), inpartnership with user groups, inRWSS service provision, including inscheme implementation and O&M. Investment funds to be provided to and managedby GPiuser ' groups; Transfer ofRWSS fLmctions, particularly single-village \vater supply schemes, and all sanitation functions to GPs, with associatedsupport interventions to build capacity of PRIs and user groups; and Demand-ResponsiveApproach: Adopting self-selection of villages, based on demandexpressedby GPsiuser groups, using transparent eligibility and prioritization criteria. ?inancing ' Recurrent O&M costs of RWSS services (including billed power costs) to bc recovered through user charges (except for multi-village schemes and water ' quality-affected habitations, where a partial subsidy may be necessary); and Capital cost sharing by users, inproportion to service levels demandedby them. Partial subsidy for basic water supply service (40 litres per capita per day), and 100% user-financing of incremental service levels over basic service level. Declining and targeted subsidies to household for sanitation. `anitation and Hygiene Promotion Integrated approach to water supply, environmental sanitation works, and changing hygiene behavior, including common support mechanism. Water Source Protection, Development and Management J Developing and adopting satisfactory water policies (and associated actions) that are relevant to the sustainability o f water sources used for drillking water schemes; and J Improving water resources management by supporting water conservation and recharge measures, promoting integrated water resources management by communities and GPs, and promoting rain water harvesting. 4t the Center, TA could be offered to GoI. Inaddition, investment lending :odd be offered at the national level: J Ifit is ultimately decidedto move towards channeling all central fLuids to state schemes meeting the above criteria. Rural Livelihoods Investmentlending would be in those states that demonstrate commitment to: J Incorporate a community driven approach that involves direct support to community/user groups (wherein conmunities identify, design, prioritize, share costs o f investments, manage funds, implement and have a substantia role in operation and niaii~taininginvestments); J Implement effective targeting methodologies for reaching the poorest; and J Establish a credible poverty monitoring and evaluation system. ~~~~ ~~~ Broad-basedRural [nvestmentlendingwould be piloted in a few states that demonstrate Service Delivery and Zommitmentto the following principles: Strengthening of J Implementing a legal framework that supports adnlinistrative and fiscal Local Governments decentralization; and J Supporting the role o f sub-national goveriinient entities to provide services and basic infrastruchire to their constituents. Natural resources %AAand investment lending inthose states that demonstrate commitment Management :0: (Forestry and Analyze the legal, policy and iilstihitioiial constraints to, and opportunity Watersheds) for, poverty reduction through natural resources management; and J Forforestry pprojects, focus on sustainable improvement o f incomes and welfare o f poor communities, including through (but not limited to) sustainable use and marketing o f natural resources and appropriate conferral o f rights. J For watershed maiiagenierit, reconcile the need for collective action by resource users with the need to address a higher level o f enviroiiniental externalities through appropriate institutional mechanisms and the participation o f all stakeholders (local government, civil society, line agencies). Pnge 6 of 6 . . . k 5x * M * cj v1 co L xE F Y Iiidin CAS il1iiie.v7 India: Private Sector Strategy for the World Bank Group 1. Indian policy makers recognize that a vibrant private sector - withfinns in\.esting, creatingjobs: and improving productivity -i s central to promoting growth and expanding opportunities for poor people. The Government o f India's (GoI) Tenth Five Year Plan sets ambitious targets for GDP growth (around 8% per year over the next decade) and employment creation (100 million new jobs) required to substantially reduce the incidence o f poverty. The Plan notes that achieving these targets will require a sharp step up in investment, particularly private investment (domestic and foreign), coupled with improved productivity. 2. Private investment in India averaged around 15% o f GDP In the 1990s (somewhat below the average for l o w income countries and below the level necessary to accelerate growth to a sustainable 8% a year). I t was largely financed from domestic savings - foreign direct investment (FDI) iiiflons to India have averaged only around US$5 billion annually over the past few years. as compared to USS40 billion annually to China. As a share o f GDP, FDIin India stood at under 1% percent in 2002/03, compared with 4% in China and between 2% and 3% inmany emerging market countries. Table 1: GDP and Investment Trends Over the Past Two Decades 1980s 1990s 1992193- 1937!98- I996197 200 1/02 5.6 5.8 6.1 3,> .- GDP growth (%pa) Agriculture, Forestryand Fisheries 3.4 3.0 4.7 I.s Industry 7.0 5.8 7.6 4.5 Services 6.9 7.6 7.5 8.1 Investment rate (YOof GDP) 22.0 23.0 23.3 22.5 Public 10.0 7.8 8.0 6.6 Private 12.1 15.2 15.3 15.9 Note: Table froni the India Development Policy Review.World Bank.June 2003 3. In2001, the manufacturing sector inIndia accounted for around 17% of GDP, comparedwith 35% inChina and 25-35% in South East Asian economies.' India's share o f non-agricultural exports in world exports increased marginally from 0.5% in 1990/91 to 0.55% in 2000/01. India's services exports have fared better, today accounting for 1.4% o f global exports in services. But this growth took place on the back o f a narrow set o f subsectors, primarily software exports, which grew at an annual average rate o f 49% during the second half o f the 1990s. India's performance intravel and transportation services: where the underlying growth i s linked to trade ingoods, has been mediocre. 4. International comparisons indicate that India has intrinsic advantages, such as niacroeconoinic stability, a large and rapidly growing local market, a large and relatively low-cost labor force, a critical IThe organized industry and service sectors in Indiatoday together account for just about 27 millionjobs, or under 7% of total employment; some 70% of organizedjobs are in the public sector. Organized manufacturing pi-ovidesjust 7 iniillioii jobs: 01- under 2% o f total employment. mass o f well-educated workers, and abundant raw materials, that should allow it to attract and sustain higher levels o fprivate investment,both domestically and foreign financed. Capitalizing on these national advantages, India's private sector has registered some important achievements in the past decade and a half- for example, the development o f exports of software and back office services, the emergence o f a competitive automotive sector and quantum improvements indomestic air travel - driven largely by the liberalizing reforms initiated inthe early 1990s. 5. At the same time, the potential still to be tapped is clearly enormous. The Bank's investment climate assessments (ICAs) for India, and other recent studies,' show that the private sector in India continues to be constrained by a number o f factors, especially: (i)product market distortions, includiiig persistent wealmesses in the tax and tariff regimes, restrictions on foreign direct investment (FDI), regulatory restrictions on the industrial sector (particularly for sinal1 businesses),distortioils in the pricing and marketing o f agricultural products, and business inefficiencies arising from bureaucratic hassles; (ii) factor market distortions that impede the functioning o f labor and land markets, and wealmesses in the competitive environment, including in legal framework for business operation and exit; (iii)problems in access to finance; and (iv) severe infrastructure bottlenecks. 6. The potential gains to growth from removingkey bottlenecks to private sector growth and coinpetitiveness have been estimated to be in the range o f 2% to 4% per aiiiiuin. A study by McKiiisey (2001) estimatedthat addressing the inefficiencies generated by the multiplicity of investment regulations, distortions in the land markets, and widespread government ownership o f business, would free India's economy to grow as fast as China's, at 10% a year, and create some 75 million n e w jobs, sufficient not only to provide employment to new entrants in the work force, but also to reabsorb the majority o f workers displacedby productivity improvements. The I C A 2002 estimated that, if each Indian state could attain the best practice in India interms o f investment climate, GDP growth could increase by about 2 percentage points. The survey indicated that, if India could achieve Chinese or Thai levels in distinct investinent climate areas where it lags behind those countries, its growth acceleration would be even more dramatic. While recognizing India's real achievements inpromoting the private sector in the last decade and a half, the balance of this section focuses on an assessment o f the key constraints that still remain. 7. ~ V ~ w k iiz~ rbi'w ~t ~~ ~~ ~p +A .key barrier to competitiveness i s the lack o f a unified VAT f i t t m * regime in all the states, barring Haryana. Any raw material or intermediate inputspurchased by a manufacturer attracts state level sales taxes that vary from 2% to 3% ifthese are purchased from the same state; and 4% central sales tax if such inputs are bought from other states. 011 the final product, the `floor' state sales tax rates have slabs o f 4%, 8% and 12%, with petroleum products carrying a rate as high as 20%. The actual rates on the end products are often higher than these floor rates None o f these state sales taxes gets the benefit o f VAT credit, leading to tax cascades that range between 6% and 12% of total ex-factory cost. Successive studies and surveys have demonstrated the highdegree o f uncompetitiveness arising out o f non-VATable state level indirect taxes and levies, and the need to iiiipleiiieiit a unified VAT regime as quickly as possible. The full and uniform implementation o f the new VAT across all states, so as to reduce distortions caused by the indirect tax regime, should be a key priority See, for exaniple: the Teiidz Five )%ai.Plan, Planning Commission (2003); Report q / f / i e h'K Si/ig/iS/eeri/ipCoiiiiiii/leeoii Foreigii Direct lnvestiiient, Planning Commission (2002); Report offlie Pi-inte Minister `s Lco/ioiiiic Advisoi?; Coiiiicil (2013I); G o i ~ i / i d a r ~ ~ a / i Commitlee Report OIZ Re/ormiizg I/ivestmerit Approval and Iniplenwitafio/z Procedures, Ministry of Commercc and Industry (2002); India; Developuzeut Poiicj,Review: Susiaining XeJoriii, Reducing Povwiy, \Yorid Bank (2003); India Country Assistance Sfi-afegy, World Bank Group (2001) & Update (2002); //diu'J Gi-oivfli //iipero/ii,e, McKinsey Global Institute (2001); Learnirzgfionz China fo Unlock Iiidia's Growth Potentia/, CII and McKinsey (2002). f-'nge 2 oJ I I 8. 1t ~ { r i l /jfo<< (oii in India i s still substantially higher than in most other developing countries. In 6 March 2003, including the protective effect o f the Special Additional Duty (SAD). the un-weighted average protective tariff was about 32.796,overall, 30.7% for industrial goods and 46 8% for agricultural products including processed foods. This i s far lower than pre-reform tariff levels during the 1980s. but still very highby world standards (for example, China's import duties are expected to average 9% b y 2005). Highimport tariffs drive up the prices o f finished products, suppress demand and provide opportunities for inefficient firms to survive and for efficient firms to capture rents. A phased reduction in tariffs i s thus a critical priority. 9. i i i t ~ i f il 0,i While policies towards FDIhave been significantly liberalized, FDIi s still subject to limits, particularly on full ownership by foreign players For example, FDIi s currently not permitted in pure retailing (global retailers can participate i n India's retail sector only through wholesale trade or by operating retail outlets through local franchises) In apparel, another important sector for job creation, FDIi s limitedto 24% o f equity. Inhousing construction, restrictions on foreign ownership o f land limit the entry o f foreign builders and developers Inbanking, restrictions on foreign ownership o f domestic banks have heldback improveiiieiits in financial sector performance by constraining competition to domestic banks and the introduction o f new technologies and techniques. 10. P:OII The growth o f small business has'been inhibited by investment ceilings and product resenations for small-scale industries (SSIs). A t the start o f the reform program o f the early 1990s, soine 800 items \\ere reservedfor exclusive production inthe SSI sector, which meant that investment inplaiit and machinery inany individual SSIunit ina `reserved product category' could not exceed the narrowly defined investment ceiling. The list o f reserved items has been pruned, but soine 590 items continue to remain reserved. Small firms that produce goods inthe reserved sectors cannot expand, achieve economies of scale, and improve efficiency. Also, the efficiency of private investmentin agriculture i s constrained by minimumsupport prices on agricultural products, input subsidies, as well as some laws and procedures that create barriers to trade and movement o f agricultural commodities and prevent corporate investment inagriculture. 11. While the complex web o f regulations luiowii as the "License Raj" has been substantially reduced at the Center, it survives at the state level, along with a pervasive culture o f government interference known as the "Inspector Raj", imposing serious costs on doing business in India, and reducing competitiveness. Private investors require many approvals from state government to start a business. They also have to interact with state bureaucracy inday-to-day operations because o f laws goveming pollution, sanitation, worker welfare, etc. The World Bank's Doing Business indicators show that the median time to start a business in India 89 days, almost t h e e times higherthan inChina. The ICA 2004 shows that Indian manufacturers face, on average, 8.9 visits per year froin govemment officials. Although this has reduced from 10.8 visits in2000, and there are significant variations across states, even the best Indian state compares poorly with a country like Malaysia. where the average number o f visits is 2.8. Moreover, 15.8% o f senior iiiaiiageinent time each year is spent dealing with government officials -versus 5% for Malaysia, 7.6% for Brazil, 8.5% for the Philippines and 11.2% for China. Such highlevels o f government interaction raise the potential for corruption, v, hich survey respondents regard as a major problem. Reducing costs related to delays and rent seeking \\odd require re-engineering the entire gamut o f business approval and regulatory processes. especially at the state and local levels. Clear principles o f transparency and strong accountability are needed on the pait of the concerned officials 12. Lahiri.u/oA:c~/~ ~ ~ ~Restrictions.on the hiring and firing o f workers by medium and large. ~ ~ ~ ~ ~ ~ ~ ~ j ~ ~ ~ , ~ ~ f i r m s are one o f the greatest challenges o f doing business in India. India's complex labor market legislation i s designedto protect the formal sector workforce, but has the effect o f deterring the creation o f formal jobs, which as a result account for just about 7% o f the country's total workforce. Employment inIndia's registeredfirms (those with iiiore than 100 employees) is highlyprotected. Any registered firm wishing to retrench labor can only do so with the permission o f the state government which is rarely granted. These provisions make labor rationalization inregistered firms very difficult, discourage the hiringo f labor inthe organized sector, and are especially onerous for labor-intensive sectors. They are obviously especially burdensome for exporters who have to compete with producers in other exporting countries. And they also explain the tendency of FDIto focus on the domestic inarltet rather than use India as a base for exports. The ICA 2002 found that the typical Indian firm reported having 17% more workers than it desired and that the labor laws and regulations were the main reason why it could not adjust to the preferred level. Further, the use of contract labor i s restricted to temporary activities by the existing Contract Labor Act. 13. X,ard tim, iloil(.Problems with the use and transfer o f land also affect the performance ol`fiiiiis According to ICA 2002, some 90% o f land parcels in India are reportedly subject to disputes over ownership, which take decades to settle in court. Restrictive tenancy and rent control laws keep a large part o f urban real estate o f f the market. The central government has already abolished the Urban Land Ceiling Act, which previously made changes in land use very difficult. But only a few states have repealed their corresponding Land Ceiling Acts, and this i s an urgent priority for state governments. I ~ A [i,Difficulty in recovering distressed assets and the lack o f effective bankruptcy procedures have made industrial restructuring and business exit very difficult This has burdenedthe financial sector with highnon-performing loans (NPLs) and deterred lending to the industrial sector. The recently enacted law on Securitization and Reconstruction o f Financial Assets and Enforcement o f Security Interest (2002), which allows banlts to take over collateral more easily. is an important step that could pushdebtors to pay up. However, the effectiveness o f the law reinaim a matter o f concem, given loopholes that make it difficult for creditors to sell recovered assets. Similarly, the enactment o f Amendments to the Companies Act (January 2003) and repeal o f the Sick Industries Company Act (December 2003) provide a new framework for the liquidation o f firms outside the court process, thereby helping to speed up bankruptcy proceedings. The new banlu-uptcy fraiiiework also prescribes the setting up o f National Corporate L a w Tribunals, which are to be manned by experts in corporate law and finance. However, these tribunals have not been formed, and the new bankruptcy procedures are yet to be implemented. 15. After more than a decade o f financial reforms and deregulation, initiated in 1991, India's financial sector has grown significantly insize and complexity. India's financial savings are much higher than in inany other large emerging iiiarltet economies. The share o f financial assets in GDP in India IS about 93 percent, compared to 68 percent in Mexico. Equity markets are booming Prudential norms ha\ e beentightened and competition inthe banking sector has increased However. success with mobilization o f the much-needed long-tern1capital to finance infrastructure reinaiiis limited, and India's financial Recent estimates show that it is entirely common for bankruptcy proceedings in India to take more than 2 years, and ovcr 60 percent of liquidation cases before the High Courts have been in process for more than I O years. Not surprisingly; \\.lien looking at the share o f firms that go bankrupt, India has a much lower share (0.04 per cent) than other emerging niarltets. such as Thailand. Pngc 4 o,f II sector has not been able to efficiently allocate resources to the private sector, to finance the higher levels o f investment necessary for sustained growth, job creation and poverty reduction. The ratio o f pri\,ate credit (from deposit money banks and other financial institutions) to GDP in India remains low at under 40%, compared to over 100% for countries such as China, Korea and Malaysia. While the top layer o f Indian corporates (which can now access both intemational and domestic capital markets) today have much better access to finance than inthe past, critical sectors, such as small and medium enterprises (SMEs),mral households and micro enterprises face serious difficulties inaccessing adequate finance on competitive terms. 16. A number of policies have distorted banks' risk-return signals. Banks' borrowing costs are kept highby floors on short-temi deposit rates, while Govemment policy dictates that lending rates on sinal1 loans (up to Rs.200,000) be capped at the prime lending rate (which banks are free to set). These restrictions make banks reluctant to lend to small clients, particularly rural households and inicro- enterprises, who are perceived as highrisk. Statutory pre-emption o f credit through high liquidity and cash reserve ratios and directed ("priority sector") credit crowd out lending to the private sector. Government's large deficit, financed through the market, further crowds out credit to the private sector. 17. Financial regulations and laws have been upgraded but poor enforcement weakens market discipline and integrity. Gaps also remain inthe infrastructure undei-pinningfinancial institutions and markets, for instance, the lack o f credit information services, and the absence of a well-developed integrated clearing and settlement system for capital markets, Goveminent maintains restrictions on foreign borrowing by Indian companies (including loans from IFC), which constrains the competitiveness o f Indian companies by inhibiting them from accessing capital from foreign sources. Interest caps are also imposed, inhibitingforeign borrowing for riskier projects, including infrastructure projects. 18. An efficient and sound financial system that can mobilize resources (including longer term resources) and allocate them towards productive investment i s critical to ensuringbetter access to finance for sectors (such as SMEs, rural households and micro enterprises, and n e w infrastructure projects) that are currently underserved, and to ensuring overall growth, and stability. As elaborated in the Bank's Financial Sector Strategy (May 2002), key reform priorities for the Go1include: reducing goveiiiment ownership/domination o f the financial sector and correcting the policies that distort credit allocation decisions; improving financial regulation and supervision (including for market risks) and better enforcement o f laws and contracts; enhancing the quality and flow o f credit information; dareloping and deepening capital markets, particularly debt markets, which are critical to the mobilization o f longer-term resources and their efficient allocation for infrastructure investments; continuing pension system reforms, which can play an important role not only inresource mobilization and providing longer term income security, but also, in expanding the institutional base to support the development o f long-term savings instruments and deepen the capital markets; encouraging the development and use o f inno\'ative financial products and instruments (such as insurance products, securitization, etc.) to improve access to finance for underserved segments and to better manage risksrelated to natural disasters. 19. Inthe telecom andports sectors, the regulatory framework evolved over time and once stabilized yieldedpositive results in tenns o f an increase inprivate investment, both domestic and international In other sectors such as power, transport, water and sanitation and solid waste, progress has been negligible Severe infrastructure bottlenecks in these sectors hamper the efficiency and competitiveness o f Indian business, particularly manufacturing firms. 20. ' iThe absence o f adequate, reliable power supply remains a key concern for Indian businesses. Not only does industryreceive irregular and low quality power (the ICA 2004 found that, on average, manufacturers in India face 17 significant power outages per month, versus 1 i n Malaysia and less than 5 in China and that approxiiiiately 9% o f the total value o f output o f fii-nis i s lost due to power breakdowns -compared to 2.6% in Malaysia and 2% in China), but also: industry i s chai-ged tariffs much above the cost o f supply.As a result, a large majority o f Indian firms operate their own (captive) generators. Almost 61% o f Indian manufacturing firms own generator sets, versus 20% in Malaysia and 27% inChina. This switch to captive generators has further increased the cost o f power faced by industry (India's blended real cost o f power i s 74% higher than Malaysia's and 39% higher than China's): and reduced industrial competitiveness. Power sector reforms are now widely accepted as fundamental to improving industrial performance. An urgent priority i s the need to rationalize power tariffs, depoliticize .the tariff-setting process, and implement a phasedreduction incross subsidies that operate against industrial consumers. Time o f day tariffs need to be introduced for industries with peak and off-peak rates. 2 1. j?otd:;.India has one o f the most extensive transport systems in the world, but there are severe capacity and quality constraints, that impose costs on firms. India currently has no inter-state expressways linkingthe major economic centers, and only 3,000 kms o f four-lane highways (China has built 25,000 k m s o f four-to-six lane, access-controlled expressways in the last 10 years). Poor riding quality and congestionresult intruck and bus speeds on Indianhighways that average 30-40 l m s an hour, about half the expected average. Notable progress has been made with the Golden Quadrilateral (GQ)project, which links Delhi, Mumbai, Chennai and Kolkata and i s expected to be completed by mid-2005. The North South-East West (NS-EW) highway project i s slated for completion by December 2008. However, even if the GQ and the NS-EW projects are implemented on schedule by the end o f 2008, India will have reasonably well surfaced, four-lane national highways accounting for just 22% o f the country's national highways and none o f the State highways, which are in serious di~repair.~ 22. k d w c ~ m ~ a network o f 63,OOOkms, the IndianRailways i s the second largest rail network With inthe world. However, it fails to provide an efficient means for transportinggoods. A key problem is highcargo tariffs arising out o f cross-subsidization ofpassenger fares. This has caused long haul goods traffic to move steadily away from rail to roads. Second, excessive congestion on mainlines i s steadily increasing long haul delivery times and making the railways even more unattractive as an erficient transport provider. Third, the rapidly deteriorating quality o f rolling stock has led to declining safety standards. Although there has been limited refomi and operational iniproveiiient o f soiiie o f s and customs procedures, and increased private investment in port facilities, there i s still considerable scope for further advance. For instance, according to the ICA 2004, the mean delay at customs while importing i s still 6.3 days; and while exporting it i s 5.1 days. This compares unfavorably with, say, Malaysia where the mean delay while importing is 3.6 days, and while exporting it is 2.5 days. The upshot o f this i s that exporting industries such as garments, leather goods, textiles, pharniaceuticals and automobile components -all o f which import raw inaterials and intermediates -suffei from a total delay ranging from 13.4 days to 11.8. This raises the working capital requirement and reduces competitiveness. !I*Ye,(?k*kl Banh f 24. As part o f the overall Bank Group CAS, the Bank Group's private sector strategy will support India inits efforts to meet the challenge o f increasing private investment and enhancing productivity, through addressing the key constraints to private sector growth and competitiveness. thereby contributing 'Moreover;there are some 470,000 kin o f `major district roads', and another 2.65 million kni o f `village and other roads`. Page6ofli to the CAS objectives o f promoting private sector led growth and poverty reduction. The focus o f the private sector development strategy will be on: Facilitating greater private sector competitiveness through: (a) improvements in the investment climate; (b) improved financial intermediation to the private sector: and (c) direct support to f i m i s to promote their growth and competitiveness; 0 Improving the quantity and quality o f infrastructure through greater private sector participation; e Promoting private sector participation inthe provision o f health and education services; Promoting improved rural productivity and growth through greater private investment. 25. Inselectingthese priorities, the strategy takes into account the critical constraints that mustbe addressed to foster private sector development and the need to balance opportunities for intervention with the limitedresources and instruments available. The choice o f priorities also reflects the WBG's comparative advantages vis-a-vis other donors and financial institutions, based on such considerations as the WBG's potential leverage and ability to bring to the table cross-country experience, and takes into account the presence o f reform champions within and outside government. 26. The strategy calls for close collaboration between the Bank and IFC, which i s expected to have a strong pay off, allowing the institutions to gain from potential synergies inkey sectors while drawing on their respective comparative advantages. The basic principle guidingthe division o f labor i s for the Bank to support activities which warrant public support while IFC assistance will focus on activities that fall within the private sector's role. 27. The strategy will require engagement with GoI, state and local goveimnients, tlie private sector and independent research institutions. Giventhe respective mandates o f the Bank Group institutions, the Bank's engagement will be primarily with the Central or state governments, to support an enabling policy, regulatory and institutional environment for private sector development. The Bank will pursuethe strategic priorities at the Go1level through sector-specific investment operations, where opportunities exist (and preferably as part o f the GoI's larger, sector-wide reform programs); at state and local government levels, in order to maximize impact with limitedresources, support to foster private sector development will be targeted towards states/local authorities with which the Bank Group i s actively engaged. Such support will be structured, as far as possible, either as part o f adjustment operations or sector-specific state-level investment operations. IFC will provide direct assistance to tlie private sector, focusing on supporting competitive industry and services and private investment in infrastructure. The Bank and IFC will work together closely to support higher private sector investment, including through public-private partnerships in infrastructure, health, and SME development, where a mix of public sector interventions and investment and TA to private companies are required. 28. The Bank Group will meet its objectives through a range o f available instruments: 0 Bank instruments include: (i)knowledge support: diagnostic surveys, knowledge creation and dissemination o f best practice - through reports, worltshops, advisory technical assistance; and (ii)lendinginstruments:adjustmentlendingprograms(at thestatelevel),investmentprojects (State or GoI), guaranteeshsk sharing arrangements, TA loans. IFC instruments include: equity and long-term debt investments in specific firms, including local currency loans for sectors like infrastructure and healthcare which do not generate foreign exchange; guarantees; and technical assistance. e MIGA instruments: guarantees to private Indian companies investing abroad.. lilrilriCAS Aiiiies7 29. Jiii:eilrtwib4 `/im!!~>.Moving from diagnostics to implementation, the Bank Group will use the ICA results to support critical reforms to improve the investment climate inthe States in which the Bank i s actively involved (or about to be involved) through its adjustment lending. The immediate focus will be on streamlining and re-engineering business entry and operation procedures, for example, through introducing "single window" and "deemed" clearances; improving the legal framework, for example labor laws and laws goveming the sale and transfer o f land; and introducing VAT. The regular updating o f ICAs, with the responsibility for this increasingly shifted to the Confederation o f Indian Industry: i s expected to yield an ongoing flow o f data on the evolving investment climate across the Indian States, and this analysis will be usedto identifynew areas/opportunities for Bank Group assistance in support of a better investment climate. 30. At the level o f GoI, the Bank will selectively use investment lending coupled with analytical and advisory assistance (AAA) to support private sector development, for example, in the area of SME sector development and financing. The proposed Bank operation in this sector, with support from donors, will focus on improving access to finance by SMEs but also on broader financial sector and industrial policy issues that affect SME performance and competitiveness. In areas where there i s no investment lending, and where reforms need to be led by GoI, the Bank will use its program o f analytical and advisory assistance to respond to Go1requests for knowledge support to build consensus for key refornis, such as trade and tariff refomis, FDIregulations, improving corporate restructuring and bankruptcy procedures, improved financial sector regulation, strengthened financial infrastructure to ensure better access o f financing for underserved segments, SOE reform, and competition policy (through a recently approved IDFgrant). IFC, through programs such as SEDF (inNorth-East India) and FIAS, couldprovide technical assistance for more detailed diagnostic work, and to support implementation o f reforms aimed at improving the investment climate for foreign and domestic investors. 31. The agenda inthe financial sector is large, and reforms are likely to be gradual. The strategic focus o f the Bank Group will be on reforms to: 1) improve the financial sector's ability to mobilize and intennediate longer term capital required for private infrastructure, and 11)enhance the efficiency o f resource allocation towards productive but underserved sectors (such as SMEs, rural enterprise), while maintaining systemic ~ t a b i l i t yIFC will make investments and provide technical . ~ assistance to build capacity inprivate financial institutions which contribute to financial deepeningand expansion o f financial services to underserved segments. IFC will also support pioneering tiansactions, such as partial guarantees o f bond issues, which will help develop financial markets. In addition, IBRD and IFC may issue Indianrupee bonds. which would contribute to the development o f the long-term bond market. To this end, the Bank will aim to buildpartnerships to support critical reforms. 32. Inaddition to the selective use of investment lendingto improve access to finance for underservedsegments such as SMEs and rural households/micro enterprises (see above), the Bank could respond to GoI's requests through providing AAA to: i)support improved financial regulation, supervision and legal enforcement; ii)enhance the quality and flow o f credit information; iii)help develop and deepen capital markets, particularly debt markets, which are critical to the mobilization of longer-term resources and their efficient allocation for infrastructure investments; iv) accelerate pension systemreforms, which can play an important role not only inresource mobilization and providing longer term income security, but also, in expanding the institutional base to support the development of long- term savings instruments and deepen the capital markets; v) encourage the developinent and use o f innovative financial products and instruments (such as insurance products, securitization, etc.) to improve access to finance for underserved segments and to better manage risks related to natural disasters; vi) Also refer to the India Financial Sector Development Strategy, World Bank (2002). Page 8 of I I Illrlin CAS Aiiiiev 7 build consensus for restructuringpublic sector financial institutions; and vii) keep a watch on financial system stability and potential risks. 3 3 . Dircc! .Y~ippo/!:)! I,ir:ri.i..IFC will continue to invest inmanufacturing and service companies that ~ are: (i)developing new products and markets; (ii) restructuring and modernizing to become internationally competitive; and (iii) expanding and moving towards establishing a regional or global presence. Indoing so IFC will focus on providing firms with long-term debt and equity which may not be available from domestic financial markets, and would add value inthe area o f global best practices; assistance increating global partnerships and entering new markets, where IFC's global presence has an important role to play; and advice and technical assistance to companies to improve the environmental and social sustainability o f their businesses, and improve their corporate governance. 34. Based on the state o f sector reforms to date, the best prospects for private participation are in telecoms, power generation, ports and airports. In telecom and ports, investors have direct access to the end consumer unlike in power, roads (except where tolled), water, sanitation, and solid waste. The interface in these sectors has been through the national or subnational government. The perceived risks are higher and it has been more difficult to mobilize private capital. The analysis o f the Bank Group i s that in the power distribution and transmission, road, water and sanitation and solid waste sectors, involvement o f the private sector needs to be encouraged through a variety o f models including public- private partnerships. 35. The Bank Group i s well placed to promote PPPs by realizing strong synergies between the Bank and the IFC to support infrastructure development. The Bank can promote policy, regulatory, and institutional reforms in the infrastructure sectors to help create a more enabling environment for private investment. These reforms will be supported through the Bank's state-level adjustment lending and sector- investment lending, and should help encourage private entry, mobilize private risk capital and facilitate competition. IFC will support pioneering private or public-private transactions by: i)providing equity and long-term debt ; ii)using guarantees and the B-loan p r o g a m to mobilize financing from domestic and international lenders; iii)developing the local capital markets by introducing credit enhanced long term bonds and securitizations and iv) assisting domestic and foreign sponsors to pursue opportunities in the infrastructure sector. IFC could also provide both financing and advisory services to support the transfer o f public infrastructure assets or their operations and management to the private sector, including water utilities and power distribution systems, ports and airports. 36. ' 7 b l c ~ ~Telecoms~was~the first subsector o f infrastructure where reforms reached the critical ~ ( ~ ~ / ~ ~ point at which large scale private investment took off, which has led to rapid expansion in services, especially in mobile telecoms (where connections grew by 250% over the last year). HoLvever, connectivity remains very low by international standards at around 77 lines per 1,000 people (around a third the teledensity o f Brazil, for example.) IFC has a continuing role to help private companies mobilize the large amounts o f longer term financing requiredto increase teledensity, especially in semi- urban and rural areas. N o Bank role i s envisaged inthis sector. 37. PowLv.. Power sector reforms will f o r m a key part o f the Bank's policy dialogue and TA iii selected states, with a focus on addressing problems o f cross-subsidization and sub-optimal pricing: improving the financial health o f state electricity boards; reducing transmission and distribution (TGID) losses (that arise from theft and leakages) through better metering; and strengthening the state-level electricity regulatory commissions. While the ultimate aim would be to minimize public investnient in power generation, and create a competitive market for power, during the transition period, some public Page 9 o,f I I investment m a y be necessary. In such cases, where needs and opportunities exist (e.&., in the hydropower sector), the B a n k could provide investment lending to help create demonstration projects o f good practice. 38. IFC will capitalize on the Bank's efforts to create a more enabling policy, regulatory and institutional environment for private investment inpower, investing in generating capacity, mainly through captive power plants, especially cogenerationplants which bring environmental benefits, in IPPs with creditworthy off-takers (such as power trading entities or industrial users), and inmerchant plants. IFC will also seek further investments in transmission and distributioninfrastructure.. 39. Pcirfs ~ L(iiqmr!.~.The Bank Group could share case studies o f global best practices regarding I m o d e m independent regulatory authorities for airports, ports and civil aviation, and help in the setting up o f such authorities. Through sharing best practices, creating an enabling legal and institutional environment for encouraging private investment, and investment lending, the Bank Group could be involved in airport modernization to demonstrate the benefits o f private sector investment. In the airport sector, the Bank and IFC are considering a PPP structure w i t h public investment areas being addressed by the Bank, and investment with the winningprivate sector bidder being considered by IFC. 40. Inthe port sector 20 terminals inmajor ports have been concessioned to the private sector. The response froin foreign port operators has been good and the efficiency gains inprivatized terminals such as the Nhava Sheva International Container Tenninal have contributed to the growth and diversion o f traffic. The NSICT, which achieved a growth rate o f 32% per annum over the last few years, illustrates the efficiency gains that can be achieved with private sector participation as well as the potential that remains to be tapped. A n e w concept beingtried out in Eimore, Tainil Nadu, is the concept o f the Landlord Port. In this model, the public sector sets up the basic port infrastructure facilities and then leases it out to private operating companies. Ennore, which has been in operation for 4 years is now in the process o f bidding out various terminals (cargo, petroleum products, commodities, containers) to the private sector. In addition there are minor privately developed ports such as Pipavav and Mundra where the domestic private sector developers have taken the lead and have brought iiiinternational operators as partners. 41. Debt financing to the privatized port terminals has been available from Indian financial institutions that have provided close to U S S l billion equivalent in funding for this sector. IFC's role in the port sector, therefore, i s to consider longer term debt and new financing instruments (mezzanine debt, securitization of financial institution loans) and equity. 42. !?:,?tit:,*:.In its state highway development program, the Bank will help promote PPPs by: (i) sharing with the state governments best international practices as well as lessons from pitfalls 011the building, maintenance and revenue collection from state highways; and (ii) creating a small, but revolving, state-level project development or initiation fund that can finance feasibility studies, provide technical expertise and help in documentation. Inaddition, the Bank Group will a i m to identify and get involved with a few important road projects, involving PPPs, at the national/state levels. This would entail being a k e y partner and being involved with these projects at every level, publicizing these projects as best practice case studies, and using these projects as empirical platforms to push for policy changes. 43. Annuity and build, operate, transfer (BOT) schemes, accounting for 10% and 12% of the Golden Quadrilateral respectively, have attracted investments f r o m domestic private infrastructure firms as \\,ell as from some Malaysian firms. The needs o f this sector are large and the involvement o f both the public and private sector critical. Domestic financial institutions have been active in financing Annuity Road projects which represent sovereign risk, and BOT projects as well. IFC has and will continue to seek opportunities to introduce n e w financing structures such as securitization o f toll receivables or institutional loans provided to projects in the road sector. IFC will also consider financing road projects Illill Clc/1s Airlies 7 where there i s appropriate risk sharing between the government and the private sector, including BOT and annuity projects that are beingconverted to long term operations and management contracts. 44. The focus o f the private sector development strategy inthe social sectors will be on health. Through its state level health sector investment operations, Bank assistance could support: (i)Enhanced regulation o f privately providedhealth care services; (ii)Designing and iiiipleiiieiiting effective social franchising or contracting model for increased private participation inprimary healthcare (including public education and primary curative healthcare services) and non-clinical services; the emphasis will also be to assist public-private partnerships in contracting with output driven monitoringuroiect design; and (iii) Developing an efficient and wide-reaching private health insurance market, and also effective community-based voluntary private insurance plans. 45. Complementing the Bank's work with the national and state governments, IFC could contribute to the development o f the private health sector by directly supporting private providers: continuing to pursue investments with top-tier facilities. IFC will also explore opportunities with second-tier institutions-recognizing that many will require substantial technical assistance in terms o f both financial and clinical practices-and begin to explore opportunities in diagnostic and ambulatory care facilities. IFC will continue to pursue investments in pharmaceutical and biotech companies, either directly or through investment funds. This may include investments in companies which are developing new products or cheaper production processes which can assist inthe control o f infectious diseases. 46. Reforms to support agricultural productivity, and particularly those that benefit siiiall farmers. would likely have a multiplier effect on the rest o f the Indian economy, by attracting greater private investment and improving productivity in agro-industry and other non-farm sectors. These objectives will be actively pursued through policy dialogue with states. At the ,dialogue could include focus on improved rural access to finance (including microfinance), a key ingredient o f promoting rural growth and productivity, and improving livelihoods. These opportunities could be pursuedby the Bank through a rural finance investment operation that capitalizes on the existing branch network o frural banks while leveraging on innovative financial delivery models and practices that have evolved inthe private sector (including micro finance), building on a recently completed AAA IFC will continue to seek opportunities to support financial institutions expanding in rural areas, including finance for small and micro-enteryrises. 47. IFC can also support companies in agriculture, agri-processing and agricultural input supply that expand their operations. Priorities will be on projects that: (i)improve the efficiency o f food supply chains; (ii) have a broader development impact by providing quality inputs and services or integrating the production o f local farmers into commercial supply chains; and (iii) introduce resource-saving technologies. Such support may involve TA or mobilization o f financing, as well as community development activities. This can both strengthen the competitive position o f the processing firms, and helpto strengthen the rural economy. Page 11 q f l l PortfolioImprovementStrategy 1. Background. India's ongoing portfolio performance declined inFY03 after five years o f sustained improvement in most quality indicators and showed mixedresults in FY04 (Annex 2 provides additional detail). The FY04 disbursement ratio reached 19.9 percent, which is slightly below the Bank average o f 21.4percent and the ratio for other large borrowers such as China (22.7 percent) and Indonesia (27.2 percent). As a result of more candid reporting as evident from a higher realism index (90 percent inFY04 compared to 75 percent in FY03), the percentage o f projects-at-risk increased to 16 percent inFY04, compared to 11percent in FY03 and the Bank-wide average o f 16 percent. In order to support the strategy for scaling up Bank support to India, the Bank and Go1 undertook intensive dialogue during FY04 on ways to improve the portfolio and agreed on a Portfolio Improvement Strategy, the implementation o f which began inmid-FY04 and will continue into FYO5 and beyond. 2. Portfolio Improvement Strategy. Implementation o f the Portfolio Improvement Strategy has involved restructuring o f slow disbursingprojects and projects that were closing in FY04 with large un-disbursed balances. The end-FY04 targets were set as follows: (i) lowering the proportion o f projects-at-risk and the comiiiitiiieiits-at- risk to below 10 percent; (ii)maintainingrealism and proactivity indices to 80 percent (minimum);(iii)reaching a disbursement ratio o f at least 17 percent; and (iv) to the extent possible, havingno overage projects (i.e., 8 years or more) and no backlog o f audit reports. To monitor progress in achieving these targets, scorecards were developed and widely disseminated for: (i) each sector, outlining sector-specific minimumaction plans and performance targets; and (ii)each state and centrally-sponsored scheme. The strategy, agreed with GoI, envisages corrective actions, some o f which were aimed at bringingshort-term benefits (paragraph 3 below) and others at leading to a better future portfolio (paragraph 4 below). 3 . Portfolio actions with short-term benefits. These were developed on four fronts, as follows: (i)AttheCentralDepartmentof EcoizoinicAffairs (DEA)/Baizk level,closermonitoringbybothis required through: a. Jointly preparing the annual CPPR and conducting semi-annual reviews to monitor progress in meeting the CPPR targets. b. Changing the CPPR preparationcycle for delivery inJuly o f each year, to give sufficient time to implement action plans. c. Continuing regular consultations, sharingportfolio performance ratings and "exceptions and outliers" reports on a monthly basis, and rigorously using sector/project performance indicators. d. Jointly reviewingprojects-at-risk on a quarterly basis; if a project remains inrisk status for more than one quarter, invitingproject authorities to the semi-annual portfolio review meeting. e. Inaddition to the regular Bank supervision missions, conducting desk reviews to be carried out by DEA and the Bank inthe intervening quarter for all extended projects. f. Processingrequests for closing date extensions only after Sector Portfolio PerformanceReviews (SPPRs) have been completed and action plans for restructuring, reallocation and/or cancellation agreed upon. g. Strengthening in-country capacity (at DEA, line ministries and/or major borrowing states, as applicable) by: (i) working with DEA's Project Management Unit and using DEA's own systems to monitor and evaluate results (possibly for all externally-funded projects) to help in reporting project outcomes and supporting requests for future funding; and (ii)helpingto share implementation experience among line ministries, states, and project teaidentities. h. Reviewing and analyzingthe outcomes o f active and recently closedprojects (starting with projects inHealthandRuralDevelopment), to develop well-structuredand targeted communications regarding the effectiveness o f the Bank's assistance to India's development. i.Morerigorouslyfilteringnewprojects forimplementationreadiness(includingavoidingovei-Iy ambitious development objectives; up-front mobilization o f project stakeholders; up-front institutional and capacity building actions that are critical for implementation; procurement readiness; simpler project designs in the context o f weak implementation capacity; and if Pnge I of 3 applicable, mandating piloting duringpreparation). Preparation time for investment projects nil1be closely monitored and preparation time in excess o f 12 months will need to bejustified. (ii)AttheStateLevel:Conductingannualmulti-sectoralportfolioreviewsforborrowingstatesthathayea large number o f under-performing projects. These state reviews would also cover projects under preparation. (iii) theLineMinistry/Sector/Projectlevel: At a. Bringingpeer reviewers from within and outside the Bank to enhance supervision quality. b. Conducting quarterly informalreviews to develop supervision strategies for coiiiplexirisky projects (on an as-needed basis). c. Conducting SPPRs for the following sectors having a highconcentration o f slow disbursing projects and implementing SPPR-recommended action plans for restructuring, cancellation and re- allocation o f unused funds, These sectors are Rural Development, Education, Health, Poverty Reduction and Economic Management, and Transport. (iv)At the Bank Level: a. Advising task teams to: (i) limit the length o f aide-memoires, which were simply too long and inadequately focused on key issues o f importance for decision making by management and government officials; and (ii)include in supervision aide-memoires information on project procurement, commitment, and disbursement expected in the coming 12 months. b. Strengtheningcapacity through: (i)mobilizing experienced senior staff to strengthen frontline leadership and for business development and delivery; and (ii) providing customized operational training to Delhi-based staff and project authorities in the Delhi Office. c. Utilizing Project Status Reports (PSRs) as a more effective management tool to: (ij convey critical messages to the project teams on how to deal with the issues faced; (ii) monitor more frequently implementation o f agreed supervision actions; (iii) identify warning signs and cost savings; (ivj allow timely restructuring, re-allocation or cancellation; and (v) reinforce the use o f perforinance indicators. d. Monitoring closely PSRratings by management, as a number o f poorly disbursingprojects are not rated as problemprojects, suggesting a possible realism issue. e. Addressing cross-cutting issues through, for example, "thematic supervision" or assessment and discussion with relevant sector or authorities. f. Ensuringadherencebythe task teamto businessstandards, i.e.candidly reporting supervision results and providing timely feedback to the clients. Inthe matrix management environment, improvement in portfolio performance will require sector units to be held accountable for the realism o f ratings, proactivity, and increased decentralization o f task management, while the country management unit i s held accountable for overall portfolio performance, selectivity, closing date management, and cross-cutting issues. 4. Actions for a better future portfolio. These include the following: (i) Financial Management. Financial management actions are needed at the central/state level as \veil as at the project level. SFAAs - which have been completed in four states-Karnatalta, UP, Orissa, and AP - are designed to enhance the knowledge o f financial management and accountability ai-rangements governing the use o f public funds, and to support a process o f institutional reform, capacity building and financial accountability at central, state and local governments levels, as well as in public sector undertakings. There i s also considerable scope to improve project performance by building financial management strengthening components into the design o f individual investment loans. Borrov,er performance within existing projects can be strengthened directly through training in Bankprocedul-es. A variety o f training events were organized through local educational institutions in 2003-04. One of the objectives has been to enable local educational institutions to provide good quality training through training o f trainers. The new Bank policy on financial reporting and auditing offers considerable scope for simplifying accounting, audit, and funds flow arrangements for Bank projects. The Bank will seek opportunities to simplify procedures wherever possible, working with the relevant ministries, departments and agencies responsible, and with other donors. Working with DEA, the Bank \\;illalso try to put in place better procedures for dealing with poorly performing projects, delays in flo\t-o f funds, backlog o f Statement o f Expenditures, and ineligible expenditures. All of the financial management actions can be expected to have a long-term beneficial impact on portfolio performance. (ii)Procurement.ACPARwascompletedforIndiainthreephases,focusingonthecentralgoveminent and its agencies, three sample states (Karnataka, Tamil Nadu and UP), and about 250 Central PSUs. The CPAR recommendations have beenincluded as one o f the inputs to the Committee appointed by Go1for reviewing procurement norms indicated inthe General Financial Rules and suggesting modifications thereof. The CPAR recommendations are also being implemented in Kamataka and Tamil Nadu, and are beingpursued in AP, Orissa, and Punjab. (iii)SocialSafeguards, TheBankwill assistnational/stateauthoritiesandprojectentitiesto identifythe implementation mechanisms best suited to improve social development outcomes o f Bank-financed operations, such as security and risk management, inclusion, social colzesion, and accoitntability While avoiding or mitigating negative impacts must remain a primary concern for some Bank- operations, the Bank will follow a new approach -not imposing requirements that are irrelevant, but mutually agreed safeguard standards for successful poverty reduction, and ensuring transparency and accountability to civil society. With increased future lending, the Bank will move from ring-fenced operations towards building on India's own capacity and procedures. Therefore, the Bank will engage with GO1in a dialogue on differencesbetween the Bank's and India's own resettlement, land acquisition, and tribal development policies and practices. I t will also identify the potential net development gains from addressing any inconsistencies through, for example, better dispute-resolution, incentives, training, policies, or procedures. The Bank will also work with counterparts in India to set clear protocols to monitor performance on resettlement and related issues in each type o f operation, and linkachievements to incentives for improved outcomes. "Sectoral" social assessment will be conducted for multiple projects (such as rural roads and nationalhtate highways) in the lendingpipeline, to effectively address cross-cutting/generic issues. An accountability strategy will be developed to better communicate to the public the social development outcomes o f Bank-financed projects. (iv) Szpportfor Public-Puivnte Pautnership(PPP) Aspects of Projects. An increasing number o fBank projects in sectors ranging from physical infrastructure to the delivery o f health and education now emphasize the importance o f and need for PPPs. The staff o f the South Asia's Finance & Private Sector Development Unit can play an important role in working with project teams to identify opportunities for PPPs within each project, assist with design and implementation o f the PPP in question and, if necessary, support the project through identifying sector specific reforms required for the success o f PPPs or developing sector-specific guidelines for the appraisal and negotiation o f PPP contracts. These staff could also participate in the supervision of existing projects to examine the scope for strengthening the corporate governance, organization, and financial sustainability o f existing project managementhmplementationstructures. India at a glance POVERTY and SOCIAL South Low- India Asia income ,Development diamond, 2002 Population, midyear (millions) 1,048.3 1,401 2,495 Life expectancy GNI per capita (Atlas mefhod, USS) 470 460 430 GNI (Atlas method, US$ billions) 494.8 640 1,072 Average annual growth, 1996-02 I Population (%) 1.7 1 8 1.9 Labor force (%) 2.2 2 3 2.3 GNi d Gross per 7 primary Most recent estimate (latest year available, 1996-02) 1capita enrollment Poverty (% ofpopulation below nationalpovertyline) 29 Urban population (% of total population) 28 26 30 Life expectancy at birth (years) 63 63 59 - Infant mortality (per 1,000live birfhs) 68 71 81 Child malnutrition (% of children under 5) 1 Access to improved water source Access to an improved water source (% ofpopulation) 78 84 '76 illiteracy (% ofpopulation age 15+) 41 44 37 Gross primary enrollment (% of school-age population) 102 97 95 l- * -lndia -_ Low-income group Male 111 108 103 Female 92 89 87 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios' GDP (US$ billions) 194.8 244.2 478 5 510.2 Gross domestic investmentiGDP 21.7 23.8 22 3 22.8 Exports of goods and servicesiGDP 6.1 9.0 13 5 15.2 Trade Gross domestic savingsiGDP 18.3 21.8 21 7 22.5 Gross national savingsiGDP 19.2 21.8 23 7 24.6 Current account balanceiGDP -2.0 -1.6 0 1 0.6 Domestic interest paymentsiGDP 0.4 1.4 0 6 0.7 ~ savings .c ' Investment " d ` d Total debVGDP 14.1 37.0 20 4 20.6 I Total debt serviceiexports 13.6 28.0 11 7 13.9 Present value of debVGDP 14 2 Present value of debVexports 84 7 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annual growth) GDP 5 6 6 0 5.2 4 6 6.2 y -lndia Low-income group GDP per capita 3 4 4 2 3.5 3 0 4.7 Exports of goods and services 6 9 135 7.1 21 8 7.9 STRUCTURE of the ECONOMY I 7---- - 1982 1992 2001 2002 ~ Growth of investment and GDP (YO) (% of GDP) Agriculture 359 309 25 0 Industry 25 8 26 7 25 7 Manufacturing 162 162 15 3 Services 38 3 423 49 4 Private consumption 699 658 65 9 65 0 97 98 99 00 01 02 I General government consumption 1 0 7 11 2 12 5 12 5 Imports of goods and services 8 4 9 8 14 1 156 . _ _ 1982-92 1992-02 2001 2002 r GrowthTexports and imports (yo) (average annualgrowth) Agriculture 3 1 2 5 6 5 industry 6 7 6 2 3 4 Manufacturing 6 5 6 6 3 6 Services 6 8 8 2 6 8 Private consumption 5 3 5 0 6 2 General government consumption 6 1 7 1 3 0 Gross domestic Investment 5 7 7 2 1 6 Imports of goods and services 5 7 120 4 0 Note 2002 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 incomolete PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Domestic prices (% change) Consumer prices 6.7 12.6 3.1 4.3 Implicit GDP deflator 7.7 8.8 3.9 3.5 Governmentfinance (% of GDP, includes current grants) 0' Current revenue 18.7 17.5 19.1 97 sa 59 00 01 32 Current budget balance -3.2 -8.1 -7.4 ..................... Overall surplusideficit GDP deflator -CPI -7.2 -10.5 -10.9 TRADE 1982 1992 2001 2002 (US$mf///ons) Export and import levels (US$ mill.) Total exports (fob) 9,490 18,869 44,915 52,512 80000 - Marine products 377 602 1,237 1,381 Ores and minerals 445 738 1,262 1,900 Manufactures 5,109 14,039 33,370 38,353 Total imports (cif) 16,468 24,316 57,618 65,422 Food 1,071 507 2,043 2,368 Fuel and energy 5,957 6,100 14,000 17,640 Capital goods 2,662 4,532 9,882 12,746 Export price index (1995=100) 94 95 90 101 96 97 98 99 00 01 02 Import price index (1995=100) 125 96 93 100 Exports E? Imports Terms of trade (7995=100) 75 99 97 101 I BALANCE of PAYMENTS 1982 1992 200I 2002 (US$miilions) Current account balance to GDP (%) Exports of goods and services 12,377 23,599 65,580 77,475 Imports of goods and services 18,352 27,917 73,706 83,620 Resource balance -5,975 -4,318 -8,126 -6,145 Net income -335 -3,423 -3,601 -4,882 Net current transfers 2,510 3,852 12,125 14,807 Current account balance -3,800 -3,889 398 3,727 Financing items (net) 3,101 4,692 11,359 13,682 Changes in net reserves 699 -803 -11,757 -16,980 Memo: Reserves including gold (US'S millions) 4,896 9,832 54,106 75,428 Conversion rate (DEC, /oca//USS) 9.7 30.6 47.7 48.4 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 jUSS millions) Composition of 2002 debt (USS mill.) Total debt outstanding and disbursed 27,546 90,264 97,516 105210 IBRD 1,395 9,326 7,015 5,141 G 6053 A 5 14' IDA 6,983 15,438 20,402 21,642 Total debt service 2,054 7,697 9,327 13,042 IBRD 172 1,395 1,372 3,029 IDA 72 267 569 637 Composition of net resource flows Official grants 394 363 384 410 Official creditors 1,352 2,543 365 -3,657 Private creditors 1,180 1,563 -1,569 -1,861 Foreign direct investment 0 313 4,741 3,611 Portfolio equity 0 244 1,951 944 Worid Bank program Commitments 1,889 2,678 2,190 1,523 A IBRD - E Bilatera; - Disbursements 1,397 1,954 2,089 1,465 B - IDA D O ' k r msJl'ia:eral - F .Private Principal repayments 98 834 1,467 3,196 C IMF - G - Short-term Net flows 1,300 1,119 622 -1,730 Interest payments 146 828 474 470 Net transfers 1,153 292 148 -2,200 Development Economics PNgN 2 of2 Selected Indicators* of B a n k Portfolio Performance and Management (as of June 30,2004) Indicator 2002 2003 2004 Portfolio Assessment Numbero f Projects Under Implementation " 69 70 63 Average Implementation Period (years) 'I 3.8 4.0 3.9 Percent o f Problem Projects by Number", 4.3 8.6 14.3 Percent o f Problem Projects by Amount 5.0 6.3 15.9 Percent of Projects at Risk by Number", I' 5.8 11.4 16.1 Percent o f Projects at Risk by Amount "' 6.2 8.9 21.8 Disbursement Ratio (%) e 20.9 17.7 19.9 Portfolio Management CPPR during the year (yesho) Yes Y e s not yet due Supervision Resources (total US$) 6,477 7,222 6,95 1 Average Supervision (US$/project) 69 76 88 M e m o r a n d u m Item Since FY 80 Last Five FYs Proj Eval by OED by Number 278 38 Proj Eval by OED by Amt (US$ millions) 34,900.3 5,430.1 % o f OED Projects Rated Uor HU by Number 27.4 18.4 % of OED Projects Rated Uor HUby Amt 26.1 19.2 a. As shown inthe Annual Report on Portfolio Performance (except for current FY). b. Average age o fprojects inthe Bank's country portfolio. c. Percent o f projects rated Uor HUon dev. objectives (DO) and/or impl.progress (IP). d. As definedunder the Portfolio ImprovementProgram. e. Ratio o f disbursements during the year to the undisbursed balance o f the Banks portfolio at the beginning o f the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception o fDisbursementRatio, which includes all active projects as well as projects which exited during the fiscal year. Pcige i of i IBRD/IDA Projects Under Consideration/ OperationsProgram a (as of June 30,2004) US$(M) Fiscal year Project Name IDA IBRD Other 2005 State Structural Adjustment Loaii 100 100 State Structural Adjustment Loan 35 35 Disease Surveillance 59 Hydrology I1 124 Urban WSS 100 State Urban Sector Reform 100 Project Development Facility 50 SME Financing 120 Reproductive and Child Health 300 State Health Systems 100 State L4gricultt~ralCompetitiveness 110 State Rural Service Delivery 100 State Water Sector Restructuring 240 State Water Sector Improvement 300 E-govemaiice Phase I 100 State RWSS 150 State Urban 150 Lucknow-Muzaffarpur National Highways 500 Rural Roads 3 00 100 Powergrid 400 Rural Energy Access I 50 20 Energy Conservation (GEF) 8 8 URlFilGrban Reform 200 ODS IV (Montreal Protocol) 52 Total 1,312 2,619 80 2006 State Structural Adjustment Loan * 125 125 Statistical Strenghthening 100 Urban Infrastructure 200 Vocational Training 50 50 Vector-bome Disease Control 200 HIV/AIDS I11 150 Tuberculosis Control I1 150 State Health Systems 150 Critical Water Infrastructure Rehabilitation 200 State Rural Service Delivery 150 State Rural Livelihood* 150 State Rural Livelihood* 100 State Livelihood 112 State Community Forestry 40 Biodiversity Conservation (GEF) 15 25 Kational ,4gricuItiire Technology I1 200 State RWSS 150 State RWSS 200 State Urban Development I11 200 Non-NHDP National Highways 250 State Highways I(PPP) 150 Hydropower I 400 Industrial Pollution Management 10 30 Stistainable Land Manageinent 30 Total 1,752 1,905 55 IBRDilDA Projects Under Consideration / Operations Program '' (as of June 30,2004) Fiscal year Project Name USS(M) IDA /URD Other 2007 State Structural Adjustment Loan* 100 100 State Structural Adjustment Loan* 180 1so Elementary Education 350 Early Childhood Development 200 State Health Systems* 100 State Rural Livelihood 100 Multi-State Forestry 100 Land Administration 100 State Agricultural Diversified S~ipportI1 200 State Water Sector Restructuring 250 State RWSS 200 NationaliState Rural Water Supply* 200 Mumbai Slums 200 State Urban 150 State Urban Reform & Mun Services* 130 Urban Transport I(PPP) 150 State Roads I1 250 MORTHNational Highways 250 Rural Roads I1 250 250 Rural Energy Access I1 150 Clean Household and Rural Energy 30 30 Persistent Organic Pollutants (GEF) 40 Total 2,010 2,160 70 2008 State Structural Adjustment Loan* 65 65 State Structural Adjustment Loan* 100 100 Rural Finance Access 150 Health* 200 State Health Systems* 150 State Water Sector Restructuring 300 State Water Sector Restructuring* 150 State Water Sector Restructuring 150 State LivelihoodiWatershed 50 50 State Livelihood 100 Agricultural Productivity and Marketing 130 E-governance Phase I1 400 NationaliState Slums Sanitation* 150 Urban Development 200 State Highways III* 250 Ports (PPP) 100 Powergrid 500 Hydro 11- Partial Risk Guarantee State Power* 200 150 Environment Management 20 20 10 Total 815 2,935 10 Total Operations Program for FY05-08 - 5,889 9,619 215 aThis presents the total operational program o f activities agreed for consideration between the Government o f India and the Bank. The operational prograni is subject to periodic updating inconsultation with the Govemnient o f India. The actual level of lending deliveries will be below this amount and within the limit o f US$2.15 billion per year for IBRD (on average for the four year period o f the CAS) and the IDA-14 limits for India. * For projects for whicli states are currently unidentified, as stated inthe CAS, priority will be given to the larger and poorest states that are also able to meet guidelines for engagement in that particular sector. Pnge 2 0/3 India - IFC and MIGA Program, FY 2001-2004 (As o f June 30,2004) 2001 2002 2003 2004 IFC approvals (US$m) 413.49 210.21 361.29 267.98 Sector (YO) Agriculture and Forestry 1 Chemicals 9 3 10 Construction and Real Estate 14 9 Education Services 3 Finance & Insurance 46 19 51 25 Food & Beverages 4 Health Care 5 Industrial & Consumables 5 32 9 Information 19 23 7 10 Oil, Gas and Mining 11 Plastics & Rubber 14 0 Primary Metals 3 12 Pulp & Paper 7 6 Textiles, Apparel and Leather 5 Transportation and Warehouseing 4 3 Utilities 5 28 Total 100 100 100 100 Investment instrument(%) Loans 17 47 88 80 Equity 13 10 7 5 Quasi-Equity 25 9 4 15 Other 45 34 1 Total 100 100 100 100 2001 2002 2003 2004 ~~~~~ ~ MIGA guarantees (US$m) 0.00 0.00 0.00 0.00 INDIA: Analytical and Advisory Activities Summary o f Proposed M a j o r Reports in FY05-06 1. Disability Review The objective o f this report i s to assess the scope and nature o f disability inIndia, assess the main impacts o f disability on economic and social development, and understand how public policies could be focused to improve the welfare and productivity o f the disabled. The evaluation would use an economic framework and would utilize international and regional evidenceibest practice, as appropriate. 2. AIDS Economic Impact On the basis o f different scenarios for the development o f the AIDS epidemic inIndia, this report would assess likely economic impacts. 3. Vulnerability and Adaptation to Climate Change This report would present and assess the current assessments available from different soiirces around the world on the likely extent o f climate change inIndia; identify and describe the most severe adverse impacts; and provide our initial view o f appropriate mitigation strategies for these impacts. 4. Water and Sanitation MDGAction Plan This report would provide an assessment o f the reform agenda needed to extend the water supply and sanitation services in a reliable, sustainable and affordable manner to India's urban and rural population to meet the MDG o f halving the percentage o f population with no access to service by 2015. 5. Development Policy Review The report would offer an overview o f India's medium-term development challenges. I t would update the first India DPR (2003) with a special emphasis on assessing the latest trends inpoverty in India. 6. Building India's Knowledge Economy This report would examine the challenges and opportunities that India faces in its transition to a knowledge economy, and suggest the policy implications that would need to be addressed. 7. The Employment Challenge This report would describe the characteristics of the unemployment inIndia, analyze the reasons for unemployment, and suggest appropriate corrective policies with a special emphasis on youth employment. It may also review issues related to labor standards. 8. India's Gender Imbalance - Implications for the Future This report would assess the causes for the growing imbalance inthe ratio o f infant boys to infant girls inIndia, and, on the basis o f scenarios, suggest implications for India's long-term development. 9. Environmental Health Outcomes of Rural Water Supply and Sanitation Thisreport would provide an evidence-based assessment o f the extent to which different levels o f access to rural water supply and sanitation would improve specific health outcomes. 10. Social Safety Net Review This study would provide an overview o f social safety net policies and programs in India, and suggest feasible options for strengthening the welfare impact of the system in the fLiture. 11. LandIssuesfor Growth This report would review landpolicy and land administration systems at the state level and examine their impact on agricultural productivity, tenure security, and credit access o f farmers. 12. UnlockingOpportunitiesfor Forest DependentPeople This report would identify priorities and opportunities for change inpolicy and legal frameworks at the state and national level; assess roles, responsibilities, legal obligations and comparative advantages o f state government, local government, private, and non-governmental institutions involved in forest sector activities; and review alternative designs for state level forestry projects in India incorporating as appropriate experience from other regions and projects. 13. Strategic IssuesinIndia'sWater Sector Thisreport would provide an assessment o f the key aspects of India's growing water development and management challenges, including an assessment o f possible impact on longer-term development prospects. Drawing on international experience, it would suggest key challenges ahead, and key directions for reform and investment by Union and State Governments. 14. AgriculturalMarketing and Value-ChainDevelopment The report will examine the structure, participants and performance o f the agricultural marketing and processing system, identify key constraints, and propose options for increasing their efficiency, growth and competitiveness and for encouraging greater private sector investments and participation. 15. Long-termEnergyIssues for India This report would take a long-term view o f India's energy sector and attempt to identify key challenges ahead, suggesting possible implications for current policy. I t would include a review o f possibilities for regional cooperation. Page 1of 2 India Social Indicators Latest single year Same regioniincome groti1) Lev- 1970-75 1980-85 1996-2002 South Asia iiicniiie POPULATIOX Total population,mid-year (millions) 613.5 765.1 1,048.6 1,401.5 2.494.6 Growth rate (% annual average) 2.3 2.1 1.7 I.8 I!, Urbanpopulation(% o f population) 21.3 24.3 28.1 28.0 30.6 Total fertility rate (births per woman) 5.3 4.4 2.9 3.2 3.5 POVERTY (% ofpopuiaiion) Nationalheadcountindex 28.6 Urbanheadcountindex 24.7 Rural headcountindex 30.2 IKCOME GSIper capita (US$) 190 290 470 460 430 Consumerprice index (1995=100) 21 41 156 Foodprice index (I995=l 00) 36 139 ISCO~IEICOiVSUJlI'TIOiVDISTRIBUTION Gini index 32.5 Lowest quintile (% o f incomeor consumption) 8.9 Highest quintile (% of income or consumption) 41.6 SOCIAL INDICATORS Public expenditure Health(% ofGDP) 0.9 1.o i . 1 Education(% ofGDP) 2.5 3.3 4.1 2.3 3. I Social securityandwelfare (% ofGDP) Net primary school enrollment rate (9% of nge group) Total 60 83 82 so Male 72 91 88 85 Female 48 76 75 74 Access to an improvedwater source (% ofpopulaiion) Total 78 84 76 Urban 95 94 90 Rural 79 80 70 Immunizationrate (94 of children ages 12-23 iiionihs) Measles 1 67 66 65 DPT 18 70 70 65 Child malnutrition (% under 5 years) 47 48 42 Life expectancy at birth (years) Total 52 57 63 63 59 h4ale 52 57 63 62 58 Female 51 57 64 64 60 Mortality Infant (per 1,000 live births) 127 113 68 68 79 Under 5 (per 1,000 live births) 202 173 90 95 I 2 i Adult (15-59) Male (per 1,000 population) 324 26 1 250 252 3 I O Female(per 1,000 population) 353 279 191 202 2 5 9 Maternal (modeled, per 100,000live births) 540 Birdis attended by skilled health staff(%) 43 38 Note: 0 or 0.0 meanszero or less than half the unit shown. Net enrollmentrate: break in series between 1997 and 1998 due to change from ISCED76 to 1SCED97. Immunization: refers to children under ages 12-23 months who receivedvaccinations beforeone year of age. 2004 World DevelopmentIndicatorsCD-ROM, World Bank India Key Economic Indicators - Actual Estimate Projected Indicator 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 National accounts (as ?4of GDP) Gross domestic producta 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1000 Agriculture 26.2 24.6 25.0 22.7 22.8 21.8 21.2 20.7 Industry 25.9 26.6 25.7 26.6 25.9 26.1 26.1 26.2 Services 47.9 48.8 49.4 50.7 51.4 52.2 52.7 5 3 . 1 Total Consumption 78.3 78.1 78.3 77.5 78.0 77.5 77.4 77.3 Gross domestic fixed investment 21.8 22.0 21.9 22.5 22.6 23.5 23.5 23.5 Government investment 6.2 6.1 5.5 5.8 5.3 5.4 5,5 5 6 Private investment 15.6 15.9 16.4 16.7 17.3 18.1 18 0 17.9 Exports (GNFS)b 11.8 13.9 13.5 15.2 14.4 15.3 15.7 15.9 Imports (GNFS) 13.7 14.6 14.1 15.6 15.9 17.2 17.5 17.6 Gross domestic savings 21.7 21.9 21.7 22.5 22.0 22.5 22.6 22.7 Gross national savings' 23.6 23.9 23.7 24.6 23.8 24.4 24.6 24.7 Memorandum items Gross domestic product 446968 457377 478524 510177 608853 654445 705538 762764 (USS million at current prices) GNI per capita (US$,Atlas method) 440 450 460 470 540 590 640 690 Real annual growth rates (%, calculated from 1993 prices) Gross domestic product at market prices 7.1 3.9 5.2 4.6 8.2 6.2 6.0 6.0 Gross Domestic Income 5.5 3.0 4.8 2.5 7.6 6.5 6. I 6.0 Real annual per capita growth rates (%, calculated from 1993 prices) Gross domestic product at market prices 5.3 2.2 3.5 3.0 6.6 4.7 4.6 4.7 Total consumption 3.1 -2.4 4.0 -1.7 3.5 5,9 4.7 4.5 Private consumption 1.7 -2.7 4.5 -2.3 2.6 6.5 5.1 4.6 Balance of Payments(US$millions) Exports (GNFS)b 532.51 63764 65.580 77475 87446 I00428 1 IO778 121468 Merchandise FOB 37542 44894 44915 525 12 61077 69900 7668 I 83501 Imports (GNFS~ 67028 75656 73706 83620 96560 II2805 123575 134383 Merchandise FOB 55383 59264 57618 65422 81 157 I 4 103478 II2252 Resource balance -13777 -11892 -8126 -6145 -91 14 -949 I2377 - 12797 -12915 Net current transfers 12256 12798 12125 14807 17431 16848 I8662 18458 Current account balance -5080 -3926 398 3727 1988 218 1 722 2536 Net private foreign direct investment 2165 3272 4741 3611 3613 4020 4700 345 I Long-term loans (net) 1214 4147 -459 -4804 -1857 2326 -5478 -537 Official 1068 -237 365 -3657 223 I I908 1586 I280 Private 146 4384 -824 -1 147 -4088 418 -7064 -1817 Other capital (net, iiicI. 2rrors & ommissions) 7237 2363 7077 14446 32432 230 I 2 8857 6343 Cliange in reservesd -5536 -5856 -I1757 -16980 -36 176 -29576 -980 I -I1794 Meniorandunz itenis Resource balance (% o f GDP) -3. I -2.6 -1.7 -1.2 -I.5 -1.9 -1.8 -1.7 Real annual growth rates (YR93 prices) Merchandise exports (FOB) 14.2 22.0 5.5 3.6 10.2 12.8 8.4 7.5 Merchandise imports (CIF) 9.4 -0.9 4.9 5.1 19.7 20.1 9.7 7.6 IlltilflCAS Aiiiirr R6 India Key EconomicIndicators - (Continued) Actual Estimate Projected Indicator 1999-00 2000-01 200 1-02 2002-03 2003-04 2004-05 2005-06 2006-07 Public finance (as %) of GDP at market prices) Current revenues 17.5 17.7 17.7 18.5 18.9 18.5 18.7 18.9 Current expenditures 24.0 24.6 24.3 24.5 24 0 23.3 23.1 22.9 Current account surplus (+) or deficit (-) -6.5 -6.9 -6.6 -6.0 -5.1 -4.8 -4.4 -4.0 Capital expenditure 3.3 3.0 3.5 4.2 4.3 4.6 4.8 5.0 Foreign financing 0.0 0.3 0.6 -0.5 -0.4 0.3 0.3 0.3 Monetary indicators M2/GDP 58.0 62.8 65.7 69.9 70.9 72.2 73.0 74.1 Growth of M2 (%) 14.6 16.7 14.4 15.0 14.8 12.8 12.0 12.2 Private sector credit growth / 62.3 55.0 52.9 62.1 - 1 15.7 166.1 70.1 71.1 total credit growth (%) Price indices ( YR93 =loo) Merchandise export price index 92.2 90.4 85.7 96.7 102.0 103.6 104.8 106.2 Merchandise import price index 1 1 1.1 119.9 111.1 120.0 124.3 121.1 120.3 121.3 Merchandiseterms of trade index 83.0 75.4 77.1 80.6 82.0 85.5 87.1 87.5 Real exchange rate (US$/LCU) ' 66.5 68.4 68.4 Real interest rates Consumer price index (% change) 3.3 3.9 3.1 4.3 4.3 3.4 4.1 4.2 GDP deflator (% change) 3.8 3.8 3.9 3.5 4.6 4.3 4.5 4.3 a. GDP at factor cost b. "GNFS"denotes "goods and nonfactor services " C. Includes net unrequited transfers excluding official capital grants d. Includes use of IMF resources e. Consolidated central government. f. "LCU" denotes "local currency units An increase inUS$/LCU denotes appreciation " India - Key ExposureIndicators Actual Estimate Projected Indicator 1999-00 2000-01 200 1-02 2002-03 2003-04 2004-05 2005-06 2006-07 Total debt outstanding and 98313 99098 97516 105210 115277 121456 128446 137671 disbursed (TDO) (US$ni)a Net disbursements(US$m)a -443 3867 -1204 -5518 11048 6179 6989 9225 Total debt service (TDS) 9845 10842 9327 13043 14469 11337 17510 16091 (US$m)" Debt and debt service indicators (%) TDO~XGS 148.4 127.0 121.9 112.0 109.6 102.5 96.0 94.1 TDOiGDP 22.0 21.7 20.4 20.6 18.9 18.6 18.2 18.0 TDSiXGS 14.9 13.9 11.7 13.9 13.8 9.6 13.1 11.0 ConcessionaYTDO 45.4 37.9 37.8 38.2 IBRD exposureindicators(%) IBRD DSipublic DS 19.6 11.5 16.0 24.8 17.2 6.8 3.7 7.9 Preferredcreditor DSipublic 30.0 26.6 25.5 49.2 15.5 23.9 14.2 25.6 DS (%)' IBRD DSIXGS 2.5 1.4 1.7 3.2 2.0 0.5 0.4 0.5 IBRD TDO (US$~I)~ 7509 6915 7015 5141 4324 5058 6123 7520 Share o f IBRDportfolio (%) 6.2 5.8 5.7 4.4 3.9 4.7 5.7 7.0 IDA TDO (USsrr~)~ 18918 18813 20402 21642 22572 22782 22900 22903 IFC (US$m) 686.0 677.7 804.0 782.0 782.0 .. Loans 436 412 512 498 503 .. Equity and quasi-equity IC 250 266 292 284 279 .. MIGA MIGA guarantees(US$m) a. Includespublic andpublicly guaranteeddebt, privatenonguaranteed,use o f IMF credits and net short- term capital. b. "XGS" denotes exports o f goods and services, including workers'remittances. c. Preferredcreditors are definedas IBRD, IDA, the regionalmultilateral development banks, the IMF. and the Bank for InternationalSettlements. d. Includes presentvalue o f guarantees. e. Includesequity and quasi-equitytypes ofboth loan and equity instruments. Page I os1 . 3 c Statement of IFC'sHeld and DisbursedPortfolio as of June 30,2004 (US$ Millions) Held Di5btirsed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1989 AEC 0.00 0 00 0.00 0.00 0.00 0.00 0.00 0.00 2002 ATL 21.33 0.00 0.00 15.00 20.16 0.00 0.00 15.00 2003 Alok 17.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 Anibtija Cement 0.00 4.94 0.00 0.00 0.00 4.94 0.00 0.00 1992193 A n ind Mills 0.00 5.66 0.00 0.00 0.00 5.66 0.00 0.00 1997 Asian Electronic 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 BILT2 0.00 0.00 15.00 0.00 0.00 0.00 15.00 0.00 2001 BTVL 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2003 Balrampur 15.24 0.00 0.00 0.00 15.24 0.00 0.00 0.00 2001 Basix Ltd 0.00 0.98 0.00 0.00 0.00 0.9s 0.00 0.00 2004 Birla Home Finance 10.45 0.00 10.45 0.00 0.00 0.00 0.00 0.00 198411991 Bihar Sponge 14.00 0.68 0.00 0.00 14.00 0.6s 0.00 0.00 2001 CCIL 9.00 0.00 0.00 9.58 9.00 0.00 0.00 9.55 1997 CEAT 8.50 0.00 0.00 0.00 8.50 0.00 0.00 0.00 199511997 Centurion Bank 0.00 0.77 0.00 0.00 0.00 0.77 0.00 0.00 I990192196 CESC 27.70 0.00 0.00 36.48 27.70 0.00 0.00 36.45 2004 Croinptoii Greeves 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 CMS Computers 10.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 COSMO 8.75 0.00 0.00 0.00 8.75 0.00 0.00 0.00 2003 Dataquest 0.00 1.50 Is o 0.00 0.00 I.50 1.50 0.00 2003 Dewau 12.33 0.00 0.00 0.00 12.33 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 EXB0STG 0.31 0.00 0.00 0.00 0.30 0.00 0.00 0.00 1995 GE Capital 0.00 4.39 0.00 0.00 0.00 4.39 0.00 0.00 2001 GTF Fact 0.00 2.39 0.00 0.00 0.00 2.39 0.00 0.00 1994 GVK 0.00 7.45 0.00 0.00 0.00 7.45 0.00 0.00 1994198100101 Global Trust 0.00 1.44 5.00 0.00 0.00 1.44 5.00 0.00 1994 Gtijarat Alnbtlja 0.00 4.88 0.00 0.00 0.00 4.8s 0.00 0.00 1978187191193101103 IHDFC 100.00 0.00 0.00 lO0.00 lOO.00 0.00 0.00 100.00 1990 HOEL 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 IAAF 0.00 1.45 0.00 0.00 0.00 1.29 0.00 0.00 1990195100 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 2001 IIEL 0.00 3.14 0.00 0.00 0.00 2.06 0.00 0.00 1990193194198 IL& FS 0.00 8.04 0.00 0.00 0.00 8.04 0.00 0.00 1992195 IL&FS Venture 0.00 1.05 0.00 0.00 0.00 I.05 0.00 0.00 2000 IndAsia Fund 0.00 15.00 0.00 0.00 0.00 0.61 0.00 0.00 1996 India Direct Fnd 0.00 6.86 0.00 0.00 0.00 6.36 0.00 0.00 1985190194 India Lease 0.00 0.86 0.00 0.00 0.00 0.86 0.00 0.00 2001 India Seainless 10.50 0.00 0.00 0.00 6.00 0.00 0.00 0.00 I993194196 liido Rama 7.86 0.00 0.00 0.00 7.86 0.00 0.00 0.00 2003 Indo Rama (IRTL) 0.00 0.70 0.00 0.00 0.00 0.70 0.00 0.00 1996 Indus I 1 0.00 1.88 0.00 0.00 0.00 1.ss 0.00 0.00 1996 Indus I1 Mgint 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1992 IildUSVC Mgt CO 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1992 Indus VCF 0.00 0.60 0.00 0.00 0.00 0 59 0.00 0.00 1992 Info Tech Fund 0.00 0.62 0.00 0.00 0.00 0.62 0 00 0.00 1992194197 Ispat Industries 30.35 0.00 0.00 0.00 30.35 0.00 0.00 0.00 2001 Tetair 0.00 0.00 15.00 0.00 0.00 0.00 35.00 0.00 2003 L&T 50.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00 2001 LearningVniverse 0.00 0.00 0.00 0.00 0.00 0 00 0 00 0.00 19s1 190193 M&M 0.00 0.2s 0.00 0 00 0.00 0.28 0.00 0 00 2003 Mdx HealthCare 19.59 0.00 0.00 0.00 0.00 0 00 0.00 0 00 2001 hllECL 0.00 1.64 0.00 0.00 0.00 1 0 4 0.00 0.00 3 0/4 liidiii CAS A,i/ies B6 2002 MMFSL 10.67 0.00 7.61 0.00 10.67 0.00 7.61 0.00 2003 MSSL 0.00 2.29 0.00 0.00 0.00 2.20 0.00 0.00 2001 MahIiifra 0.00 10.00 0.00 0.00 0.00 0.70 0.00 0.00 1996199100 Moser Baer 32.48 16.33 0.00 0.00 32.48 16.31 0.00 0.00 1992196197 NICCO1UCO 1.88 0.49 0.00 0.00 I .88 0.49 0.00 0.00 2003 NewPath 0.00 13.00 0.00 0.00 0.00 8.78 0.00 0.00 2003 Niko Resources 30.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 2001 Orchid 0.00 4.67 0.00 0.00 0.00 4.61 0.00 0.00 1997 Owens Coming 11.55 0.00 0.00 0.00 I1.55 0.00 0.00 0.00 2004 Powerlinks 74.01 0.00 0.00 0.00 3.59 0.00 0.00 0.00 1995 Prism Cement 11.25 5.02 0.00 6.00 11.25 5.02 0.00 6.00 2001 RCIHL 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 RTL 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 00 2004 RAKIndia 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0 00 1995198 Rain Calcining 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00 1997 SAPL 0.00 0.07 0.00 0.00 0.00 0.07 0.00 0.00 1997100 SREI 16.00 3.00 0.00 0.00 16.00 3.00 0.00 0.00 1995 Sara Fund 0.00 5.94 0.00 0.00 0.00 5.94 0.00 0.00 2001103 Spryance coni 0.00 3.00 0.00 0.00 0.00 3.00 0.00 0.00 2000102 StindaramHome 10.88 2.18 0.00 0.00 10.88 2.18 0.00 0.00 2003 Siindaram Finance 43.54 0.00 0.00 0.00 43.54 0.00 0.00 0.00 I998 TCWiICICI 0.00 3.92 0.00 0.00 0.00 3.92 0.00 0.00 1990 TDICIOVECAUS 1 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 TELCO 50.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00 1981186189192194 TISCO 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 Tanflora Park 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1989190194 Tata Electric 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1987188/90/93 Titan Industries 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1989 UCAL 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1996 United Riceland 8.13 0.00 0.00 0.00 8.13 0.00 0.00 0.00 2002 Usha Beltron 21.00 3.60 0.00 0.00 2I.00 3.60 0.00 0.00 2004 UPL 17.50 0.00 0.00 0.00 17.50 0.00 0.00 0.00 1991/93/9601 VARUN 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 00 2001 Vysya Bank 0.00 3.66 0.00 0.00 0.00 3.66 0.00 0.00 1997 WIV 0.00 1.97 0.00 0.00 0.00 1.97 0.00 0.00 1998 WTI 0.00 0.20 0.00 0.00 0.00 0.20 0.00 0.00 1997 Walden-Mgt India 0.00 0.02 0.00 0.00 0.00 0.02 0.00 0.00 2002 Webdunia 0.00 2.00 0.00 0.00 0.00 0.67 0.00 0.00 Total Portfolio: 747.30 202.60 54.56 167.06 568.66 161.50 44.1 I 167.06 Approvals Pending Commitment FY Approval Project Name Loan Equity Quasi Partic 2000 APCL 7.10 1.90 0.00 0.00 2004 CIFCO 23.50 0.00 0.00 0.00 2001 GI Winds Farms 0.00 0.00 0.98 0.00 2003 Niko Resources 10.00 0.00 0.00 0.00 2004 Ocean Sparkle 3.00 0.00 0.00' 0.00 2004 Sealin Sparkle 5.30 0.00 0.00 0.00 Total Pending: 48.90 1.90 0.98 0.00 Note Values do not reflect off-balancesheet items such as guarantee and risk management products