Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 26550-IN

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND

THE INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR

A PROPOSED LOAN IN THE AMOUNT OF U S 8 5 MILLION

AND

A PROPOSED CREDIT IN THE AMOUNT OF SDR 27.4 MILLION (US$40 MILLION EQUIVALENT)

TO

INDIA

FOR THE ORISSA SOCIO-ECONOMIC DEVELOPMENT PROGRAM

September 28,2004

Poverty Reduction and Economic Management South Asia Region

This document has a restricted distribution and m a y be used by recipients only in the performance o f their off icial duties. I t s contents may not otherwise be disclosed without W o r l d Bank authorization.

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A E S AG BJD B JP BPL BSES CAS CSPRO DES DFID

DSO FRBM

Go1 Go0 GRIDCO GSDP IBRD

IDA IMF IPR MDGs MDMP MoU MTFRF

NCCDS

CURRENCY EQUIVALENTS

Currency unit: Rupees (Rs.) as o f August 3 1,2004 US$1 = Rs. 46.30

1 billion = 100 crore

GOVERNMENT’S FISCAL YEAR

April 1 - March 3 1

ABBREVIATIONS AND ACRONYMS

Amer ican Electric Services Audi tor General Biju Janata D a l Bhart iya Janata Party B e l o w Poverty L ine Bombay Suburban Electricity Supply Country Assistance Strategy Census and Survey Processing System Department o f Economics and Statistics UK Department for International Development Distr ict Statistical Offices Fiscal Responsibil i ty and Budget Management Government o f Ind ia Government o f Orissa Grid Corporation o f Orissa Gross State Domestic Product International Bank for Reconstruction and Development Intemational Development Association International Monetary Fund Industrial Pol icy Resolution M i l l enn ium Development Goals M id -Day M e a l Program Memorandum o f Understanding M e d i u m Term Fiscal Re fo rm Framework Nabakrushna Choudhury Center for Development Studies

NSS NTPC O&M OERC

OPGC OHPC OSEDL

PHDMS

SGRY UPA PDS PES PHC PRIS PTF sc SFAA

ST TA UPA VAT VRS ZBI

National Sample Survey National Thermal Power Corporation Operations and Maintenance Orissa Electricity Regulatory Commission Orissa Power Generation Corporation Orissa Hydro Power Corporation Orissa Socio-Economic Development Loan Poverty Human Development Monitoring System The Sampooma Gramin Rojgar Yojana United Progressive All iance Public Distr ibution System Public Enterprises Primary Health Center Panchayati Raj Institutions Poverty Task Force Scheduled Caste State Financial Accountabil ity Assessment Scheduled Tribes Technical Assistance Uni ted Progressive All iance Value Added Tax Voluntary Retirement Scheme Zero-Based Investment Review

Vice President : PrafUl Patel, SARVP Country Director : Michael F. Carter, S A C I N Sector Director : Sadiq Ahmed, SASPR Sector Managers : K a p i l Kapoor, SASPR Task Managers : V.J. Ravishankar and Mar ina Wes, SASPR

FOR OFFICIAL USE ONLY INDIA

ORISSA SOCIO-ECONOMIC DEVELOPMENT CREDITLOAN

I. A. B. C.

11. A. B.

111. A. B. C. D.

IV. A . B . C. D. E.

TABLE OF CONTENTS

THE SETTING ................................................................................................................. 1 Background ......................................................................................................................... 1 Recent Economic Developments in India ........................................................................... 2 Incentives for State-Level Reforms .................................................................................... 3

ORISSA: DEVELOPMENT CHALLENGES AND REFORM PROGRAM ............. 4 Development Challenges .................................................................................................... 4 The Govemment’s Strategy to Accelerate Growth and Reduce Poverty ............................ 8

ORISSA’S REFORM PROGRAM FOR SOCIO-ECONOMIC DEVELOPMENT.. 9 Growth-Enhancing Reforms ............................................................................................... 9 Fiscal Reforms .................................................... . I 4 Govemance and Administrative Reforms ........................ 17 Human Development and Poverty monitoring and evaluation ......................................... 23

THE PROPOSED CREDITLOAN .............................................................................. 27 Country Assistance Strategy and Rationale for Adjustment Lending .............................. 27 Loan Objective, Size, Des ign and Impact ......................................................................... 28

.30 Arrangements for Performance Monitoring ..................................................................... 30 Benefits and Risks ......................................................................................

Prior Actions for the First and Second Operations

A. Govemment o f Orissa’s Letter o f Development Policy B. Program Policy Matr ix C. Medium-Term Fiscal Framework and Bank’s Explanatory Note D. Monitorable Program Indicators E. Poverty in Orissa F. Technical Assistance for Capacity Bui lding G. Public Information Notice (IMF) H. Statistical Annex

M a p

Task Team Task Team Leaders: V.J. Ravisliankar (Senior Econoniist, SASPR) and Marina Wes (Senior Econoniist. SASPR);Peer Reviebters: ,Vfartin G. Rama (Lead Economist, E,4SPR) atid Richard Allen (Lead Public Sector Specialist, MNSED); Team .Members: Modripe A. Adebowale (Senior Finance Oflcer, LOAG?), Syed I. Ahmed (Senior Counsel, LEGMS), Asya Akhlaqire (Senior Private Sector Development Specialist, SASFP), Sliellka Arora (Legal Assistant. SARIM), Ananya Basu (Senior Economist. SASPR , H. Bhawani (Progrant Assistant. SACJN), Pooja Churamani (Research Anal?st, SASPR), E l rna Glinskaya (Senior Economist, SASPR), Peter F. Heywood (Lead Health Specialist, SASHD), Stephen Howes (SASPR), Nalin Jena (Operations Officer. SASHD), Chingboon Lee (Lead Education Specialist. SASHD), Vikram Merrori (Public Sector Management Specialist, SASPR), Rohit Mittal (Financial Analyst. SASEJ), Mohan Nagarajan (Senior Economist. SASPR), Madliavi M. Pillai (Senior Natirral Resources Management Specialist. SASAR).Jriditli Plummer (Senior Financial Analyst. SASEI), Vinod Saghal (Lead Financial Management Specialist, SARFM), Shiinalini Sarkar (Program Assistant, DECVPj, Rajesh Sinha (Senior Financial Analyst, SASEI), Rita Soni (Program AssistantSASPR), Jyoti Sriram (Program Assistant. SASPR). Sam riel Thangaraj (Senior Social Development Specialist, SASES), Lipasana Varma (Research Analysi, SASPR); Mrrkrrl Asker (Consultant. Tax and Pensions Reforrns), Natarajan Raman (Consirltant, Procurement), Salvatore Schiavo-Campo (Consultant, Public Sector Management), P. Sundaram (Comultatil, Civi l Service Reform).

Th is document has a restr icted d is t r ibut ion and may be used by recipients on ly in the performance of their of f ic ia l duties. I t s contents may n o t be otherwise disclosed w i thout W o r l d Bank authorization.

INDIA

Orissa Socio-Economic Development Program Creditnoan

Credit and Loan Summary

Borrower: Government o f India (GoI)

Implementing Agency:

Beneficiaries:

Amount:

Terms:

Government o f Orissa (GOO)

State o f Orissa (population: 35 mill ion)

US$40 mi l l ion IDA and US$S5 mi l l ion IBRD

The IBRD loan wil l be payable in 20 years, including 5 year o f grace and annuity principal repayment, at six-month LBOR for U S D plus variable spread for variable rate single currency loan. The IDA credit will be o n standard terms with 35-year maturity and IO-year grace period.

The proposed Orissa Socio-Economic Development Loadc red i t (OSEDL-I) would be the f i rst in a proposed series over the next f ive years to support the medium-term program for socio- economic development o f Orissa, the poorest and perhaps most fiscally stressed o f India’s major states, located o n i t s east coast between West Bengal and Andhra Pradesh.

Fol lowing a fiscal crisis in 1999, the State has in recent years implemented a number o f measures to significantly reduce the primary fiscal deficit and has established a track record o f reform, which extends beyond the fiscal domain into sectoral policies. The multi-pronged approach o f GOO’S reform program

Description:

economic growth-enabling reforms covering agriculture and land administration, regulatory framework governing private enterprise, and privatization and restructuring o f public enterprises;

fiscal reforms aimed at improving the revenue system, saving o n unproductive expenditures while increasing the quality o f public spending in pr ior i ty sectors and enhancing the effectiveness o f public investment;

measures to strengthen governance and administrative effectiveness, including in the areas o f public expenditure management and financial accountability, public procurement, service delivery, and government organization; and

investments in poverty monitoring and human development, including in education, health, and social protection.

Measures to improve revenue mobilization, public expenditure management and financial accountability should reduce waste

Benefits:

Risks & Mitigation:

and the state’s dependence on debt financing, while increasing fiscal space for development expenditures along with their efficiency. Improvements in governance and administrative effectiveness combined with growth-enabling structural reforms should lead over time to increased private investment and expanded access to improved basic services, particularly for the poor. These are complemented by reform-linked assistance from Government o f India (GoI), and concessional donor financing to support the state’s development.

The proposed operation, consistent with CAS objectives, aims to stabilize the fiscal situation and introduce growth-enabling reforms in the poorest o f India’s major states, reinforcing recent initiatives by Government o f India to accelerate economic growth and improve public service delivery to reduce poverty. Expected benefits include: (a) more rapid economic growth, (b) improved fiscal performance and contribution to reduction o f public sector borrowing in India; and (c) enhanced quality o f governance and service delivery.

The Orissa program entails significant r isks. First, implementation o f the reform program may be slower than planned because o f institutional capacity constraints. Second, opposition by powerful affected interests could slow down the pace o f reform. Third, non-adherence to the targets set in the Medium-Term Fiscal Reform Framework (MTFRF) could derail Orissa’s adjustment path.

Several factors contribute to a mitigation o f these risks. The Government has already implemented important up-front actions, laying the foundation for subsequent reforms. Starting in 2001, the Government began to consult extensively with various stakeholders, and awareness o f the necessity for fiscal and economic reforms and their anticipated outcomes has improved. Elections for the Orissa Legislature, which were due in Spring 2005, were advanced by one year and have returned the same alliance and Chief Minister to power, with a renewed and strengthened mandate. Fairly broad ownership o f key objectives has been built among senior polit ical leaders, bureaucrats and c i v i l society. Careful consideration has also been given in the design o f the reform program to broaden public support, including in the areas o f public enterprise reform and c i v i l service reform.

To help alleviate capacity constraints, and in close cooperation with other donors, particularly the UK Department o f International Development (DFID), the Bank i s trying to ensure that significant technical assistance i s available to fo l low through on the reform measures supported by the proposed operation. Close attention i s also being paid to sequencing reforms in the context o f a medium-term programmatic framework, so as to try to avoid an overloaded agenda which would excessively strain implementation capacity at a particular point in time and/or risk

a breakdown o f the consensual reform momentum that has been built.

The loadcredit would be disbursed in one tranche in an amount equivalent t o US$l25 mi l l ion upon effectiveness. The program i s designed so that all key actions have been taken pr ior to the Board Presentation o f the credit/loan. Satisfactory outcomes against agreed milestones will be a prior condition for subsequent credits/loans in the proposed series.

Schedule o f Disbursement:

Project ID number IN-PO81882

PROGRAM DOCUMENT FOR A PROPOSED CREDITLOAN TO INDIA FOR THE ORISSA SOCIO-ECONOMIC DEVELOPMENT PROGRAM

1. This document constitutes the Program Document on a proposed creditiloan to India for an equivalent amount o f US$ l25 mi l l ion (US$40 mi l l ion IDA equivalent and US$85 m i l l i on BRD) to support the f i rs t phase o f the comprehensive medium-term reform program o f Government o f Orissa (described in Annex A'). This Program Document should be read in conjunction with the India Country Assistance Strategy [R2004-170, discussed at the Board on August 26, 20041. The India Country Assistance Strategy (CAS) highlights support for reforming states as one o f the central thrusts o f the Bank's strategy in India. I t emphasizes, in particular, the importance o f efforts to assist reform initiatives in India's poorest states, including Orissa.

I. THE SETTING

A. Background

2. Located o n India's east coast, between West Bengal and Andhra Pradesh, Orissa comprises 4.7% o f India's land mass, 3.7% o f the population and over 5% o f India's poor. Despite i t s r i c h endowment o f mineral wealth, forests, lakes, rivers, and a long coastline, Orissa remains the poorest, and perhaps the most fiscally-stressed, o f India's 14 major states, and growth performance lags the all-India average. The Biju Janata D a l (BJD), an ally o f the Bhartiya Janata Party (BJP), was elected in early 2000, and re- elected in M a y 2004 for a second term that extends until M a y 2009.

3. The present government took office in 2000 at a time o f severe fiscal crisis caused by over- expansion o f government and public enterprise in the past, with l o w returns and financed partly by high- cost debt f rom Government o f India (GoI). The crisis had been aggravated by the unaffordable pay hike awarded to government employees in l ine with the central Fifth Pay Commission award o f 1997 and the supercyclone o f 1999. L i ke in many other Indian states, the fiscal crisis acted to galvanize the reform momentum in Orissa. The Government o f Orissa (GOO) has designed a comprehensive reform program for the socio-economic development o f Orissa; i t has implemented the init ial phase, consisting o f growth- enabling, fiscal and governance reforms; and it has put in place institutional mechanisms to further develop and deepen the reforms and broaden the agenda through 2007/08.2

4. During the past few years, the record o f implementation o f the init ial stage o f fiscal and administrative reforms, the rescuing o f the power sector reform and the f i r s t steps in growth-enabling reforms, became progressively stronger and i s n o w persuasive. The same i s true o f polit ical commitment f rom the highest level, as evidenced by the following:

Tabling in the State Legislature o f a Med ium Term Fiscal R e f o m Framework (MTFRF) during 2003-08, committing to a substantial fiscal correction; Measures to reduce the primary fiscal deficit f rom 6.5% o f Gross State Domestic Product (GSDP) in 1999/00 to an estimated 1.4% in 2003/04; Init iation o f broad consultations with c iv i l society about the need for fiscal reforms and the rationale for the public enterprise and administrative reform; Measures to grapple with second generation reforms in the power sector, after mixed success with privatization o f distribution in 1999 (explained in paras. 40 to 50 below);

' Annex A should be read in conjunction with the Medium Term Fiscal Framework, which was tabled in the State Legislature in August 2004, and i s presented in Annex C.

The Indian fiscal year runs from April 1'' to March 3 1"; 2003/04 refers to the year ending on March 3 1,2004.

0 Cabinet approval o f a Health Sector Strategy based on identification o f priority outcomes and effective public-private partnership; Implementation o f two zero-based investment reviews, entailing substantial reallocation f rom low-priority to more efficient and pro-poor projects, and speedier completion o f such projects; Adoption and implementation o f Industrial Policy Resolution-200 1, including adoption o f measures to improve the labor inspection regime and the introduction o f transparent and standard rates for the allotment o f land; Progress with the public enterprise reform program, entailing closure o f 10 unviable enterprises and initiation o f privatization o f 10 units; and Init iation o f redeployment and phasing out o f redundant employees in the government workforce, including exit by over 3,500 non-regular employees.

5. The Bank has had a long-standing engagement with Orissa and a targeted dialogue o n major administrative and fiscal reforms began in 2001. T o help underpin continued progress, both G o 0 and Go1 have requested the Bank to provide support for Orissa’s Socio-Economic Development Program, in the form o f programmatic structural adjustment lending. This Document explains the reform program o f G o 0 and proposes Bank support, commensurate to the reform process and sequenced appropriately so as to manage the r isks involved. Fol lowing a background section including a discussion o f the national context for state reforms, section I1 provides a snapshot o f Orissa, outl ining progress in development and main challenges. Section I11 reports o n the proposed medium-term reform program, to be supported by the proposed series o f Onssa Socio-Economic Development Loans (OSEDLs). The final section discusses the Bank’s assistance program in Orissa, and deals with project implementation and monitoring issues.

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B. Recent Economic Developments in India

6 Orissa’s development challenge needs to be viewed within the context o f the country as a whole. India has made significant progress in improving the living standards o f i t s citizens since launching wide- ranging economic reforms in 1991, even though the pace o f reform has been uneven. Real GDP growth averaged 5.8% during the 1990s, and poverty fe l l significantly, though the exact degree o f decline i s debated. After slow and uneven growth in 2002/03, due in part to a bad drought resulting in negative agricultural growth, the growth performance in 2003/04 was excellent with an estimated growth rate o f 8.2%. This was dnven by a good monsoon, continued strong service sector performance, and further recovery in the industrial sector. Medium-term growth prospects in India depend crit ically o n the pace o f structural reform and fiscal consolidation. Sustaining an 8% economic growth rate will require an aggressive reform effort by a l l levels o f government to encourage private investment.

7. However, the persistence o f high consolidated fiscal deficits o f the central and state governments since the mid-1990s has prevented India’s growth potential f rom being fully realized. These fiscal deficits have been largely financed by borrowings, with a strategic shi f t towards long-term rupee debt after the 1991 crisis. General government debt rose f rom 58% o f GDP at end-March 1986 to an estimated 86% o f GDP at end-March 2004. Debt servicing has begun to pre-empt a large a share o f public resources, leaving too l itt le room for developmental expenditure, especially in the poorer states. India’s vulnerability to an external crisis i s presently l imi ted by i t s large reserves, equivalent t o 15 months o f imports, and i t s l o w level o f external public debt. (See Annex H).

8. At the Center there are early signs that the fiscal and revenue deficits have fallen below their peak o f 2001/02, and that central debt i s stabilizing. Estimates indicate a central government fiscal deficit o f 4.5% o f GDP for 2003/04, significantly lower than the budgeted number o f 5.6%. The passage o f the Fiscal Responsibility and Budget Management (FRBM) Act, which mandates elimination o f the current account deficit o f the central government by March 31, 2008, i s an encouraging development.

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Nevertheless, the combined fiscal deficit o f the states has stayed between 4-5% o f GDP; and the revenue deficit between 2.5-3%. Although the combined states’ primary deficit has been on a declining path since 2000, debt and debt service continues to rise, especially in India’s poorer states.

9. Whi le India’s economic and social performance has been impressive on many accounts, i t has also been uneven; the performance o f India’s states i s increasingly divergent. As much as 54% o f the poor (around 150 million people) now l ive in four states alone: Uttar Pradesh, Bihar, Madhya Pradesh and Orissa. Fol lowing the liberalization of 1991, most o f the middle and high-income states were able to take greater advantage of the new conditions, because o f better init ial conditions, governance, infrastructure and human resources than the poorer states. B o t h in the eighties and nineties, average real GDP per capita in the poorer states grew at around 2.5% annually; average real GDP growth per capita in the other states increased f rom 3.1% in the 1980s to 4.8% in the 1990s. As a result, per capita income in Orissa decreased from 74% o f the national average in 1989/90 to 58% in 2001/02.

10. Recent political developments. The national elections o f April 2004 brought a new coalition to office, committed to continue with economic reforms with greater emphasis on rural livelihoods, social safety nets and rural development. This ‘United Progressive Alliance’ (UPA) i s l ed by the Congress Party and relies o n le f t is t support in the Parliament. I t has agreed o n a National Common Minimum Program, which retains the broadly l iberal economic pol icy thrust o f the last decade but with a strengthened emphasis o n social programs and benefits t o l o w income groups, especially in rural areas. The maiden budget o f the UPA Government, presented o n July 8*, 2004, signals reasonable fiscal restraint, including continued adherence to the FRBM Act; with a lump-sum allocation for additional pro- poor initiatives contingent on achievement o f ambitious revenue targets. Simultaneous assembly elections held in a number o f states in Apri l -May 2004 witnessed the defeat o f incumbent parties in the majority o f cases, with the exception o f Orissa, where the incumbent coalition has been returned with a renewed 5-year mandate. With the completion o f elections, the new governments at the Center and the states face the challenge o f protecting vulnerable sections and investing in infiastructure and rural development, whi le facing up to the prime necessity o f fiscal and power sector reforms, and creating conditions that would encourage private investors and employment-oriented growth.

C. Incentives for State-Level Reforms

1 1. M a n y o f the structural and fiscal reforms required to accelerate India’s growth and reduce poverty are in the domain o f the states. Improvements in the composition o f public expenditures, improvements in the investment climate (through the removal o f bottlenecks in product and factor markets), as we l l as more effective delivery o f health, education and safety-net services, a l l require significant pol icy and institutional reforms at the state level. In addition, almost ha l f o f the consolidated fiscal deficit i s made up of the state-level deficits. State-level reforms are thus key to India’s development.

12. The Government o f India has in the past few years intensified i t s efforts to support reform at the state level. I t s Fiscal Reform Facil ity provides additional funding to states o n the basis o f improved fiscal performance, and Orissa has been one of the beneficiaries. Go1 also has in place a scheme to enable states to benefit f rom debt restructuring through swapping low-interest for high-interest debt. This initiative i s o f particular importance for heavily-indebted reforming states such as Orissa. In addition, efforts are being made to provide incentives for power sector reforms, and the Go1 has expanded the scope o f incentive-based fiscal transfers for urban reforms. Al though these initiatives are in the right direction o f strengthening incentives for state reforms, they s t i l l account for a very small port ion o f central resource transfers to states.

13. State-level adjustment loans and credits f rom external multilateral donors play a useful complementary role to GoI’s own initiatives to encourage reforms by state governments. Extending such support t o catalyze reforms in the lagging states, such as Orissa, i s o f particular strategic importance. To ensure that a l l states have common criteria and equal access to assistance, Go1 issued a set o f guidelines

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on structural adjustment lending.3 Finalized in December 2002, these guidelines emphasize that any state seeking S A L assistance should have in place a multi-year reform program that:

Aims at generating primary and current surpluses and limiting the consolidated fiscal deficit to less than 3% o f GSDP over the medium term (3-5 years); Includes a program for subsidy elimination and a sustainable program for power sector subsidy elimination or containment; Reforms the c iv i l service and reduces the administrative costs o f government; and Reforms public sector enterprises including disinvestments.

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14. The Guidelines also state that “an overall focus on poverty reduction and sector-specific parameters (infrastructure, education etc.) which are ingredients o f Millennium Development Goals (MDGs), should also be reflected in the action program o f the SAL. ” The proposed Operation i s broadly consistent with these Go1 guidelines o n adjustment support for states.

11. ORISSA: DEVELOPMENT CHALLENGES AND REFORM PROGRAM

15. Oriya society i s characterized by high incidence o f subsistence production, traditional land tenure patterns and pronounced social and regional differences. With a population o f 35 mi l l ion, almost ha l f o f who are below the official poverty line, annual per capita income in the state (about US$250) i s the same as in Rajasthan and Madhya Pradesh 15 years ago, and Uttar Pradesh almost 10 years ago. About 85% o f the population lives in rural areas. Regional disparity i s marked, with a relatively wel l -o f f coastal area, having historically benefited more f rom trade and public investment, and an extremely poor and isolated interior, populated largely by tribal forest dwellers. The Scheduled Tribes (STs) constitute 22% o f the total population in Orissa (compared to 8% in India), and 40% o f the poor in the state. Annex E presents a prof i le o f poverty in Orissa.

A. Development Challenges

16. I n spite of rich natural resources, the rest of India is outgrowing Orissa. Onssa’s growth has lagged behind the all-India average during the 1990s. Orissa i s r i ch in mineral resources, with 26% o f India’s ore deposits, 23% o f coal, and 70% o f bauxite reserves. Forest cover i s also relatively high. Fishing, mining and mineral-based industry have been among the most important sources o f economic growth in the past. Whi le accelerated growth in the rest o f India has l i f ted many out o f poverty, Orissa’s progress remains l imi ted - even in comparison with other poor states. All the broad sectors o f the state economy - agriculture, industry, and services - slowed down in the 1990s (Tables 1 and 2). Mining and non-agricultural primary activities, which include forestry, fishing and aquaculture, are the only sub- sectors o f the economy that grew faster in the 1990s compared to the previous decade.

Table 1: Economic Growth in Selected States and All-India,

1960-2001 (in percent)

Annual Growth Orissa Andhra Pradesh W. Bengal All-India

1960161 - I969170 4.4 1.5 2.5 3.0

1970171 - 1979180 2.3 3.2 2.9 3.6

1980181 - I990191 5.0* 4.0 4.8 5.6

I990191 -2000101 4.1 5.4 6.8 6.1

Notes: * 1980181 to 1989190

Source: Central Statistical Organization Data

L imi ted backward linkages o f some o f these sub-sectors has restricted the impact o n employment and poverty in the State.

“Structural Adjustment Assistance Facilities Guidelines”, Department o f Economic Affairs, M in is t ry o f Finance, Govemment o f India, December 2002.

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17. A key reason for Orissa ’s relatively low growth is the poor performance of agriculture. Agriculture i s the mainstay o f the economy, providing employment to over four-fifths o f a l l workers- even if i t s contribution to GSDP i s only about one third. Small and marginal holdings predominate. Over ha l f o f the rural poor work as casual laborers and over one- third struggle to subsist by cultivating small plots o f land. Orissa’s agricultural sector i s less diversified and less commercialized than in any other

Table 2: Orissa’s Economic Growth - 1980s and 1990s (in percent)

Annual Growth Rate* Contribution to Growth 1980-89 1991-00 1980.89 1991-00

Primary 2.8 2.0 41 20 Agriculture & Livestock 3.1 0.5 35 1 Fishing & Forestry - 0.9 2.4 4 Mining &Quarrying 9.7 11.6 6 15 Industry 7.1 3.7 22 20 Services 7.5 6.6 37 60 Total GSDP 5.0 4.1 100 100 Notes: *Trend rates using a semi-log regression on GSDP data at 1993194 prices Source: Central Statistical Organization data

major Indian state. The l o w and declining productivity o f agriculture i s attributable in part to poor investment in irrigation and l o w yields, regulatory constraints on private investment in marketing yards and storage facilities, which, together with poor road connectivity, limits the market price realizable by farmers in the state.

18. Following significant reductions in the 1980s, progress with poverty reduction has stalled during the 1990s and nearly half of the population lives below the poverty line. About 17 mi l l ion people are below the official poverty l ine in Onssa - 47% o f the population. Whi le poverty declined significantly during the 1980s, at a rate exceeding the all-India average, progress in poverty reduction stalled during the 1990s (Figure l).4 Poverty declined in the rural coastal region during the 1990s, but rural areas in the southern interior region witnessed an unprecedented increase in poverty f rom 69% in 1993194 to 87% in 1999100 (poverty also increased slightly in the northern interior region). Despite the marked contrast in poverty rates across regions, in absolute number the rural poor are roughly equally distributed across different regions (on account o f the very high population density in the coastal region). High poverty in Orissa i s t ied mainly to l o w wages in agriculture, which are in turn linked to l o w land productivity.

Official estimates are not comparable between 1993/94 and 1999/2000 due to changes in the design o f the 1999100 survey. At the All-India level, official estimates show a decline in poverty from 36% in the early 1990s to 26.1% in 1999-2000, but attempts to adjust the household survey underlymg the 1999-2000 figures to make i t comparable with earlier surveys result in a smaller degree o f poverty reduction; how much smaller i s a matter o f considerable debate and estimates vary widely. One set o f now- widely used estimates come f rom Deaton and Dreze’s (2002) “Poverty and Inequality in India: A Reexamination”, Economic and Political Weekly, September 7. These estimates correct for non-comparability o f the 1993-94 and 1999-2000 surveys, and are also based on poverty lines updated with revised price indices rather than the price indices that underpin the official poverty lines. According to these estimates the headcount poverty ratio in 1999/2000 was 38.8% in Orissa. Using these adjusted estimates changes the overall ranking o f Orissa as the poorest state in India to the second poorest (after Bihar). I t does not change, however, the trend o f l i t t le progress in poverty reduction in Orissa during the 1990s.

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19. I n spite of recent improvements in literacy and population growth, Orissa lags behind the rest of India on most indicators of human development (Table 3). Literacy and primary school enrolment are close to the all-India averages, indicating success in catching up with the rest o f the country. The rate o f annual population growth has slowed to 1.5% in the 1990s, lower than all-India (1.9%) and Orissa’s o w n rate in the previous decade (1.8%). However, Orissa i s s t i l l significantly behind with respect to infant mortality and access to potable water, and the gap with respect to the prevalence o f underweight children i s not narrowing. Although the status o f women in Orissa lags behind India as a whole, there are welcome signs that the gender gap i s narrowing, as evidenced by school enrollment statistics and the existence o f several thousand active women’s self-help groups, both in coastal Orissa and in the interior. Most social indicators remain considerably worse for the tribal population compared to others.

Table 3: Orissa and India - Selected Social Indicators Orissa India

, 1 9 8 3 / ~ 1 9 9 3 ~ 4 1999100 I 983184 1993194 I999100 Poverty Headcount (percent) 65.3 48.6 47.2 44.8 36 26.1

Rural (percentj Urban (percent)

Infant Mortality Rate (per 1,000 live births) Under-five Mortality Rate (per ‘000 live births) Maternal Mortality Rate (per 100,000 live births) Prevalence of Underweight children (percent) Fully vaccinated children 12-23 months Two doses or more of TT vaccination during pregnancy Access to improved water source (percent) Households with no LatrineRoilet facility (percent) Adult Literacy rate (female) Adult literacy rate (both sexes) Enrollment rate 6-10 (both sexes)

67.5 49.2 163 nla nla nla nla nla nla nla 25.1 41 nla

49.8 40.6 122.1 131 nla 53.3 36.8 53.8 50.9 87.8 34.7 49.1 67

48.1 42.8

104.4 361 54.4 43.7 74.3 65.3 86.5 51 63.6 75

a i

45.7 40.8 115 nla nla nla nla nla nla nla 29.8 43.6 nla

37.1 32.9 78.5 109.3 nla 53.4 35.4 53.8 68.2 69.7 39.3 52.2 71

27.1 23.5 67.6 94.6 408 47 42 66.8 77.9 64 54.3 65.4 77

Enrollment rate 6-10 (female) nla 62 69 nla 65 73 Source: Planning Commission 2001; NFHS-1, NFHS-2

Note:

20. Figure 2 shows Orissa’s performance against some o f the key MDGs. W h i l e Orissa appears to be on track to meet some o f the MDGs - infant mortality, access to safe water, and education enrolment, many o f the other indicators are currently below target - such as the poverty rate, and the share o f births attended by a health professional. The incidence o f underweight children i s high and remains a challenge.

2 1. Socio-economic development of Orissa requires a rise in both quantity and quality of public and private investment. As noted, public investments in the past have yielded l o w rates of return. Orissa’s infrastructure remains relatively underdeveloped, especially with respect to transport, communication and rural electrification. Orissa does we l l in terms o f roads, but only for unpaved and not for paved roads where it lags behind. Investments in marketing yards and storage facilities, more balanced use o f surface and groundwater irrigation, rural roads and upgrading o f linkages to the towns and the ports, are essential for a vibrant market-oriented agricultural growth. Reliable power supply i s an essential condition for employment intensive industrial and services growth, as we l l as for expanding groundwater irrigation. Over the longer term, improving the effectiveness o f public investments in elementary education and basic health, including with innovative forms o f public-private partnerships, are necessary conditions for rapid poverty reducing growth.

6

Figure 2: Progress in Orissa against the Millennium Development Goals (MDGs)

’987 1994 2001 2008 2015 Orissa MDG target -0rissa - Actual

-- India - Actual

I 1. Poverty reduction

e- 78.5 67.6

55.6 60 - 48 6 & 47.2 1. - 1 38.9 36

10 26.1

50

3. School enrolment

71 6 / ~

*’ 6 8 4 , ‘ 60

987 1994 2001 2008 2015 Year

.r Orissa M E target -0rissa - Actual

- - India - Actual

5. Proportion of births attended by a health professional

r 100

42.3

20.5

1987 1994 2001 2008 201 5 Year 0 Orissa MDG target -0rissa -Actual -- India - Actual

I 2. Prevalence of underweight children

B

1987 1994 2001 2008 20150

~

Year -- .C

__.- India - Actual Orissa MDG target -0rissa - Actual

--- e- Orissa MDG target -0rissa - Actual India - Actual _ _

6. Access to improved w a t e r sources

I , ‘ o 1987 1994 2001 2008 2015

Year Orissa MDG target -0rissa - Actual India - Actual _ _

Source: NFHS I, NHFS 11, NSS. T h e baseline for the MDGs i s based on extrapolation from existing data to the M D G baseline year, 1990. Note that these are only a subset o f the MDGs.

22. Effective public investment is constrained by the acute fiscal crisis and cash crunch in which Government of Orissa is caught. In spite o f recent progress, including in own revenue mobilization, the fiscal deficit in Orissa remains high, estimated at 8.3% o f GSDP in 2003-04. As explained in greater detail in Section IIIB and in Annex C, the structural roots o f the fiscal stress in Orissa include an excessively large and unaffordable c i v i l service and a large debt ~ v e r h a n g . ~ This results in a skewed public expenditure composition with interest, salary, and pensions, absorbing 94% o f the state’s total revenue. Furthermore, although fiscal consolidation so far has been successful in reducing the primary deficit, the large debt overhang has prevented significant reductions in the overall fiscal balance.

See INDIA: Strategy and Options for Fiscal Stabilization in Orissa (Report No. 15809-IN) and INDIA: Fiscal Reform and Economic Growth in Orissa (Report No. 19234-IN).

7

B. The Government’s Strategy to Accelerate Growth and Reduce Poverty

23. As noted earlier, facing up to the severity o f the fiscal crisis, Go0 began from early 2001 to publicize and address i t s fiscal problems. Go0 has also recognized that (i) restoring fiscal sustainability cannot by itself accelerate growth and reduce poverty; (ii) public acceptability and hence polit ical feasibility o f fiscal consolidation, involv ing downsizing o f the govemment, depends on the climate for employment growth in the private sector; and (iii) it i s possible to encourage faster growth in some key employment intensive sub-sectors without significant additional fiscal cost. I t has therefore initiated the process o f formulating a broader reform program for socio-economic development, to address the key constraints to faster economic growth, effective service delivery, and poverty reduction.

24. GOO’S strategy to accelerate growth and poverty reduction i s articulated in i t s Tenth Five Year Plan and draft “Vision 2020” strategy, under preparation. At the core o f the vision and strategy are: efforts to encourage private sector growth to increase per capita incomes in Orissa, so that the widening gap between the state per capita income and the national average i s f i r s t arrested and then reduced; and efforts to enhance the quantity and quality o f public investment in human and social capital so that the benefits o f income growth are more equitably distributed than in the past. A Poverty Task Force (PTF), established in 2002, has contracted a wide range o f technical w o r k to feed into a Poverty Reduction Strategy, currently under consultation and to be finalized in 2004/05.

25. Go0 has realized that poverty reducing economic growth would need to be broad based, requiring acceleration o f growth o f both agriculture and non-agricultural sectors. Since the vast majority of the poor are involved in paddy cultivation, and Orissa’s importance as a source o f national grain supply may increase as the foodgrain surplus and water deficient states begin to diversify out o f rice and wheat -- raising productivity and value realization in paddy cultivation i s o f high pr ior i ty for poverty reduction in this state. There i s some scope for diversification into high value cash crops in selected regions, which could be realized as market access improves for Onssa farmers. Other sectors also can and need to grow faster -- such as tourism, handicrafts and other manufacturing sub-sectors with significant presence o f small and medium scale producers -- to absorb the presently under-employed in agriculture and the future unemployment that productivity enhancing agriculture technology i s l ike ly to create.

26. With the goals of accelerating economic growth to 6-6.5% per year and reducing poverty by 7 percentage points during 2002-07, and by 15 percentage points during 2008-12, the State’s development strategy focuses on:

An enabling pol icy framework to improve the State’s investment climate and expand income generating opportunities, particularly for the poor; Successful completion o f second generation reforms in the power sector, to ensure sustainable, adequate and affordable power supply to support the above; Restructuring o f the largely loss making public enterprise sector, through divestment/sale/closures; Improving rural connectivity and expanding irrigation with emphasis o n groundwater and watershed development programs; Strengthening the social sectors, including promotion o f ruralitriballfemale literacy, better health for all, safe drinking water supply, food security, and other social safety net programs; Mobi l iz ing and enabling village women and the poor to participate in and benefit f rom economic growth, including through self-help groups and paani panchayats (water user groups); and

Fiscal and govemance reforms, which focus on tax reforms, user charges for identified public services, improved public expenditure management, rightsizing the bureaucracy and improving the delivery o f public services.

8

27. Whi le the principles underpinning this strategy are sound and consistent with the development challenges facing Orissa, translating them into concrete and effective actions will be n o small task. Go0 has taken some promising steps in this direction, with the State cabinet having approved pol icy papers on (i) fiscal reform, (ii) public enterprise reform, and (iii) public expenditure management and administrative reform. These provide the policy foundation for a coherent medium-term reform program. The main content o f this program, and the important init ial reform steps that have already been implemented, are explained in detail in the next section.

111. ORISSA’S REFORM PROGRAM FOR SOCIO-ECONOMIC DEVELOPMENT

28. As outlined above, Goo’s reform program focuses on growth-enhancing reforms; fiscal reforms and expenditure policy; public expenditure management and governance reforms; and human development and poverty monitoring. Annex A contains Goo’s Letter o f Development Policy, and should be read in conjunction with the MTFRF tabled in the State Legislature in August 2004 (Annex C). The associated pol icy program matrix, which outlines specific actions and benchmarks for these components, i s found in Annex B.

A. Growth-Enhancing Reforms

29. The emerging growth strategy i s based o n the recognition that the state has potential t o grow much faster if it can better utilize and market i t s considerable endowment o f cultural and natural resources and improve the climate for private investment. Reforms implemented by the Government o f India during the 1990s have contributed to enhancing Orissa’s growth potential. In particular, the pol icy o f cross-subsidization o f transport costs under the o ld freight equalization arrangements, annulled Orissa’s attraction as a location for mineral processing industries; and since Go1 terminated the freight equalization scheme, private investor interest in Orissa has increased in such sectors as ferro-chrome, aluminum and steel. The emerging growth strategy focuses o n reviving agricultural growth and encouraging private- sector l ed industrial growth through an improved investment climate.

Agriculture h Irrigation Policy and Land Administration

30. Go0 understands that without improving the productivity and market orientation o f agriculture in the State, it would be impossible to achieve a visible reduction in poverty. The Government has contracted analytical work to improve i t s understanding o f the constraints to agricultural growth in the state. At the same time, i t has also initiated actions to redress some o f the already known problems in Orissa, including:

0 an unbalanced public investment program in irrigation, with excessive importance traditionally given to canal systems, whi le groundwater remains under-exploited in many districts;

a relatively l o w density o f wholesale markets and road infrastructure leading to farmers in the state receiving a lower price than their counterparts in neighboring states, while private investment in new market yards and storage infrastructure i s restricted by law; the poor quality o f administration and ownership records that restrict transactions in land, and negatively affect particularly the poor and most vulnerable among the farmers; the lack o f a legal framework (unlike in other states) for jo in t spouse ownership o f land, which restricts access o f women farmers to institutional credit, apart f rom weakening their relative position within the family; and the prevalence o f illegal land leasing arrangements (estimated at 10-20% o f operational holdings) that restrict access o f poor tenant farmers to institutional credit.

0

0

0

0

9

3 1. In recognition of excessive and inefficient public investment in large-scale surface irrigation projects in the past, Goo's Tenth Five-Year Plan (2002-07) and Budget for 2003/04 have initiated a trend towards more balanced use o f ground and surface water. The share o f minor irrigation within the budget for Irrigation and Flood Control has risen, albeit gradually, f rom 18% in 1999100 to 21% in 2003104. A new project has been introduced to incentivize private investments in groundwater irrigation by individual farmers, or by water user associations (paani panchayats), with a one-time capital subsidy f rom the budget; while the recurring cost o f Operations and Maintenance (O&M) would be the responsibility o f the private owner or water user group.

32. In addition to the strategic shift in irrigation investment, and to enhance agricultural productivity, Go0 has also introduced jo in t spouse titling o f land, thereby enhancing the status and security o f women within the family. Computerization o f land records has been taken up by an estimated third o f a l l tehsils, with significant reductions in transaction costs. Legal land ownership records will be available to the public f i o m the computerized system in more than 90% o f al l tehsil offices by the end o f 2004/05. Future initiatives to further raise agricultural productivity include steps to create appropriate institutional arrangements, including a legal framework, for land leasing, to ensure adequate safeguards for both tenants and landowners, and to attract private investment in agriculture and all ied sectors. In 2004-05, Go0 plans to introduce an important amendment to the Agricultural Produce Markets Act, 1956, to facilitate private investment in market yards and cold storage, and enable contract farming.

Regulato y Framework for Private Enterprise

33. G o 0 has committed itself to reducing transaction costs o n the private sector through i t s Industrial Policy Resolution (IPR 2001), which represents a marked shift f rom the earlier pol icy o f control and micro-regulation. The IPR entails, among other things: (i) selective streamlining o f laws and procedures; (ii) facilitating an effective 'single point contact' by ensuring buy-in o f a l l relevant govemment departments and necessary delegation o f powers; and (iii) strengthening govemment capacity to discharge i t s regulatory role in a more transparent and effective manner.

34. Since the adoption o f the IPR, G o 0 has undertaken concrete initiatives to remove product and factor market barriers and create an improved investment climate in Orissa. Some o f these include: (a) establishment o f a rational schedule o f visi ts by labor inspectors, to minimize scope for harassment; (b) establishment o f a grievance redressal mechanism for private investors through a High-Level Standing Committee, under the chairmanship o f the Chief Secretary; (c) streamlining the allotment o f land; and (d) establishment o f an objective zonal schedule o f ground rent for industrial use, thereby eliminating discretionary powers o f district officials. In addition, preparatory work for an Industrial Facilitation Bill, which will lay the foundation for the establishment o f a Single Window Clearance System, has been largely completed over the past year and the Bill i s expected to be introduced in the legislature during

35. Leaving aside the key issue o f power supply, anecdotal evidence suggests that particular important provisions of the IPR are those relating to rationalization o f registration and reporting procedures, inspection processes and the strengthening o f the single window facility. In this context, actions planned for 2004105 include: rationalization o f entry regulations for private investors, including reduction in the number o f application forms f rom 16 to 2.

36. While the actions already taken by Go0 suggest a more business-friendly Govemment willing to address pol icy constraints to private investment, they will need to be complemented by a more systematic and better-informed approach to improving the investment climate for a l l categories o f business. Go0 has requested the Bank to conduct an Investment Climate Study, based o n structured consultation with private entrepreneurs, for a more comprehensive survey o f impediments to investment and private economic activity. The study wil l help identify not only pol icy and regulatory constraints but also informal obstacles, and will complement the reviews o f sector-specific constraints that are planned or

2004-05.

10

under way for tourism, handicrafts, fisheries, horticulture and agro-processing, with technical assistance from the Wor ld Bank and the United Kingdom Department o f International Development (DFID). The medium-term reform program envisages further follow-up including the design and implementation o f a prioritized Act ion Plan based o n the Investment Climate Survey and pol icy reviews o f key sectors, and accelerating the on-going activities to introduce selective information technology innovations.

Public Enterprise Reform

37. Orissa has made considerable progress with public enterprise reform. The Public Enterprise Reform and Privatization Policy, adopted in April 2002 after extensive stakeholder consultations, i s aimed at reducing fiscal losses, facilitating private investment through a comprehensive program o f privatization, closure/liquidation and restructuring o f both Public Enterprises (PES) and Co-operatives, increasing the allocation o f public resources for priority development, and creating employment opportunities over the medium term. Special provisions are included to protect the interests o f workers adversely affected by the restructuring.

38. A significant achievement has been the closure o f 10 unviable enterprises and separation o f more than 25,000 employees (or about one third o f those employed in non-power public enterprises) under a cost-effective Voluntary Retirement Scheme (VRS) and transitional assistance program, financed by DFID assistance (about one-third o f retrenched employees found alternative employment through this program). Restructuring of a number of the large non-power public enterprises (Orissa State Road Transport Corporation, Orissa State Financial Corporation, Orissa Lift Irrigation Company, and Orissa Seed Corporation) has also made significant progress, with restructuring plans approved by the Government, and organizational restructuring through VRS has commenced. The restructuring process i s expected to be completed by 2005106. Also, G o 0 has initiated privatization o f ten enterprises, including completion o f the privatization process for one such enterprise; i t i s expected that at least a further three of these will be completed during 2004/05. The program has been facilitated by an extensive communications program of the Department o f Public Enterprises, involv ing a l l stakeholders, including workers and trade unionists, the media, potential investors, and administrators.

39. In the next phases o f the public enterprise reform program, in addition to continuing the privatization and restructuring processes, G o 0 wil l focus on establishing capacity within a central body to manage transactions proactively and ensure that due process i s followed, and prevent any weakening o f necessary regulation.

The Power Sector

40. Backgrourzd In response to a growing financial crisis in the power sector, Orissa pioneered the unbundling and privatization o f electric power distribution - with mixed success. An independent regulator, the OERC, has been functioning since 1996. In generation, the Orissa Hydro Power Corporation (OHPC) continues to be entirely Government owned, whi le Orissa Power Generation Corporation (OPGC) has sold 49% o f i t s equity, with management control, to the private sector. GRIDCO, the transmission company, has spun off i t s distribution business into four separate distribution companies (“discos”). GRIDCO remains Government owned, whi le the discos have been privatized; 51% o f the shares, plus management control, have been transferred to the private sector. Three discos (Wesco, Nesco, and Southco) were sold to Bombay Suburban Electric Supply C o (BSES) and the fourth (Cesco) to AES in 1999.

41. Onssa’s pioneering efforts in power sector reform went against the then-prevailing national consensus against privatization. However, Orissa’s privatization was not an unqualified success. The program was severely affected by the super-cyclone that hit Orissa in October 1999, damaging transmission and distribution infrastructure; and by the severe drought in 2002/03 that impacted the sector’s financial performance. The reforms have also been set back by a number o f other problems, al l leading to a continuation o f the financial distress, including:

11

a.

b.

C.

d.

e.

f.

The init ial expectations that privatization would lead to an infusion o f private capital and management sk i l ls have not been realized. Moreover, the reform process suffered a major setback when AES abandoned Cesco in September 2001, fo l lowing which the OERC appointed a state c iv i l servant as administrator o f Cesco;

W h i l e the state government stopped paying subsidies post privatization, the sector continued to perform poorly and accumulate losses, which were partly financed by accumulating debt on the books o f GRIDCO, guaranteed by GOO.

Delays in the tar i f f revision process and inadequate tar i f f adjustments have harmed cost recovery;

Insufficient improvements in metering, billing, and collection for electricity sales and customer service have exacerbated financial distress;

Inadequate efforts by the distribution companies and G o 0 have resulted in the continuation o f significant power theft;

A decrease in the remunerative industrial load has had a negative impact o n financial v iabi l i ty

42. After a per iod of perceived high regulatory risk and poor sector performance post privatization, various measures have been taken to get the reform process back o n track. In the latter part o f 2001, OERC began to take leadership o f the sector - thus dramatically reducing the perception o f regulatory risk. In response to a tariff order given by OERC in 2002, G o 0 accepted the need for various items o f financial restructuring which have effectively reduced the Bulk Supply Tar i f f (by 5-10%). G o 0 has also provided increased l a w and order support to the discos in their efforts to improve collections and revenues n o w cover the cost of bulk supply as wel l as part o f the distribution cost. Recent improvements in the off-take f rom industrial consumers has also helped to boost collections by the discos. However, owing to the past accumulation of debt, GRIDCO continues to be in severe financial difficulty, despite recently malung some profits through the sale o f surplus power to other states. Table 4a: Financial Performance of the Power Sector

43. Current Jinancial performance Table 4a summarizes the financial performance o f Orissa’s power sector, and shows significant variation in power sector performance over recent years. Especially if one looks at current performance, segregating the impact of past problems and related accumulated debts, performance improved between the late 1990s and 2003/04. However, performance in 2002/03 was particularly bad as the drought l ed to

had to be placed o n thermal rather than hydro power; if the impact of the hydro failure was segregated, EBID in 2002/03 would have been an estimated Rs. 0.61 bil l ion, equivalent to 0.14% o f GSDP.6 In 2003-04 GRIDCO made a prof i t (mainly f rom the trading of surplus hydro power, and overall the sector (including generation) i s capable o f covering i t s costs. In recent years, the power sector financing requirement (i.e. the negative o f EBID plus interest plus capital expenditure), i s estimated to have been around 1-1.5% o f GSDP annually. With the exception o f 2002103, i t has been declining steadily since 1998/99. As outlined in para 47 below, this

€BID Net Profit Rs.Bn. %GSDP Rs.Bn. %GSDP

1996197 -0.96 -0.36% -2.95 -1.11% 1997198 -1.05 -0.33% -3.19 -0.99% 1998/99 -2.29 -0.64% -5.79 -1.63% 1999/00 -0.27 -0.07% -5.24 -1.36% 2000/01 0.34 0.09% -5.83 -1.50% 2001102 1.43 0.33% -5.24 -1.21 Yo 2002/03 -3.89 -0.88% -1 1.33 -2.58%

increased power purchase costs as greater reliance 2003/04 5.25 1.13% -1.77 -0.38%

Notes: EBID is Earnings Before Interest and Depreciation. All figures are for Transmission and Distribution only. Source: Gridco and Distribution companies

At the hydro availability levels of 2001102, the power purchase expenses in 2002103 would have been lower by some Rs. 4.5 billion; EBID would then have been around Rs. 0.61 billion.

12

financing requirement has been met largely through borrowings and defaults. Unl ike in other Indian states, the G o 0 has not paid any power subsidy since the beginning o f the reform program.

44. Billing and collection efficiency Improvements in Table 4b: Efficiency of the energy sector

current performance are correlated 199940 2000-01 2001-022002-032003-O4 with enhanced billing and Collection efficiency 77% 77% 74% 80% 84% collection efficiency, in particular Transmission and distribution (T&D) loss 47% 47% 50% 44% 43%

over the past two years (Table Aggregate Technical & Commercial (AT&C) Loss 59yo 59% 63% 55% 52%

have resulted from several Source: Gr idco and Distr ibution companies 4b). Efficiency improvements

initiatives including increased of f - take f i o m large consumers, more widespread consumer metering (Cesco has achieved 100% consumer metering in February 2004 and has introduced spot billing for a l l consumers), the use o f squads for arrear collection and disconnections, and recruitment in the areas o f finance and engineering. The discos are n o w covering their bulk supply tar i f f bill with their cash collections, which i s a f i rs t for the new mixed load discos in India. The three BSES-managed discos have been paying full current power purchase dues to Gridco for more than a year and have also started to make some payments towards past debts. (Figure

45, Tariff levels Electricity tariffs cover o n average about 77% o f the cost o f supply, which although a l o w ratio, i s better than in some other Indian states. Domestic tariffs cover 55% o f cost, whi le industrial tariffs exceed cost levels. The last retail tar i f f increase in Orissa was in February, 200 1. The OERC has been given a mandate f rom the cabinet to implement a multi-year tar i f f framework and also to develop a multi-buyer market, but progress o n both these aspects, and the open access mandated by the Electricity A c t 2003, has been slow. The tar i f f order for FY2005 has yet to be notified, the filing was submitted based on a multi-year filing, but it i s not yet clear whether OERC will implement the multi-year aspects at this stage.

46. Figure 3: The bulk supply tariff bill

and cash collections The timely payment of government bills Since January 2004, Go0 has also taken administrative measures to ensure timely payment o f electricity bills by the government. A s a result, payment by state government departments has risen to 95% o f current billing, on average, during January- March, 2004, showing that the Government Order had an impact (payments during FY2004 are 79% o f current billing). However, as yet l i tt le impact has been made

1800 1700 1600 1500 1400 1300 1200 1100 1000

1999- 2000- 2001- 2002- 2003- 2000 01 02 03 04

I

+Bulk supply tari r - - i - l sl +Cash collection

I I

o n the payments from local government, and the total outstanding claims f rom Government departments to the distribution companies i s Rs 123 crore (i.e U S $ 26.5 million). Addressing these outstanding dues and ensuring the sustainability o f the improvement made in current payments will be key to ongoing improvements; and will form part o f the financial p lan being developed for the sector. Establishing a credible mechanism for ensuring full and t imely bill payment by state and local governments will be a pr ior action for OSEDL-11.

47. The accumulation of past debts Although there are some signs that current performance i s improving, power sector borrowing levels have continued to increase during the reform period. In

Source: Data from distr ibution companies

13

2003104, the outstanding debt o f the power sector’ was estimated at Rs. 74.15 billion, equivalent to 15.9% of GSDP. Under the securitization scheme, GRIDCO has securitised power purchase dues to N T P C (National Thermal Power Corporation) through issue o f bonds o f about Rs. 11 bil l ion. T h e final settlement o f arrears and past dues remains to be addressed, in the context o f discussions o n the business plan for the sector as outlined below.

48. A power sector business plan Going forward, most importantly a financial plan needs to be completed, t o address the financial requirements o f the sector, including a mechanism to reduce the burden o f past debt in the sector. Such a plan will need to have commitment f rom a l l the key stakeholders (discos, GRIDCO, Go0 and OERC) before it i s submitted to lenders and creditors. In particular, the p lan needs to resolve financial issues between GRIDCO, G o 0 and the private discos. The process o f reaching agreement o n the business plan requires Commitment f rom a l l parties involved and continued strong leadership f rom G o 0 to reach finalization during 2004-05. AES, who abandoned their investment in 2001, have expressed interest in resuming the management o f Cesco and are in discussion with OERC o n this.

49. Over the past two years, discussions have been on-going on such a Business Plan for the power sector. At the Government’s initiative, two rounds o f discussions were held with the distribution companies and GRIDCO in January and April, 2004, pr ior to the state elections. The discussions centered around the performance parameters (e.g., base level o f AT&C loss, future loss reduction trajectory, and payment o f past government dues), securitization o f past debts and commitment f rom Reliance Energy (formerly BSES, the private company in charge o f three out o f four distribution zones) to finance deficits resulting f rom shortfall in committed performance. The finalization and publication o f the Business Plan, expected to be achieved during 2004-05, i s among the key pr ior actions required for

50. Medium-term reforms Other key steps that the Government needs to take during 2004105 are the implementation o f provisions o f the Electricity Ac t 2003 including anti-theft provisions, open access and multi-year tariffs, inline with OERC orders. At present doubts over the sustainability o f the power sector reform program remain and there i s a risk that the sector could be brought to financial crisis by another year of l o w hydropower resources. Over the medium term, as the sector achieves sustainable financial improvements, the Government o f Orissa may consider selling i t s remaining holdings in the power sector. Further, in l ine with the terms o f the Electricity Ac t 2003, the transmission business i s in the process o f being divided into wires and trading (earlier deadline o f separation o f wires and trading business before June 10, 2004 has been extended by Government o f India by one year), after which private participation in the wires operation could also be invited.

OSEDL-11.

B. Fiscal Reforms

51. The historical and structural roots o f the fiscal crisis in Orissa include an excessively large and unaffordable c iv i l service, an excessive number o f loss making public enterprises, and a large debt overhang - resulting in an unsustainable deficit path and skewed public expenditure composition, with interest, salary and pensions absorbing 100 percent o f the state’s total revenues at the end o f the 1990s (see also Annex C, f inal part). Starting in 2000101, Go0 has implemented significant revenue enhancement and expenditure saving measures to address the roots o f the problem. As a result, the ratio of the salary bill to the state’s own revenue has been reduced f rom 160% in 1999100 to an estimated 99% in 2003104. The primary fiscal deficit has been reduced between 1999100 and 2003104, by over 5 percentage points of GSDP (Figure 4).* However, the interest burden has continued to rise, due to the

GRIDCO and OHPC (Orissa Hydro Power Corporation) debt.

T h i s figure excludes the one-time impact in 2003-04 of the securitization o f power sector dues, amounting to Rs.ll.02 billion or

7

2.4% of GSDP. Overall deficit would be 10.6% o f GSDP if we include this impact.

14

impact o f high fiscal deficits o f the recent past. This has prevented a significant decline in the overall deficit, with net debt accumulation at 7.9% o f GSDP in 2003104.

52. Tax Reforms. Orissa’s own revenues have increased from 6.3% in 1999100 to an estimated 9.0% in 2003104, o n the back o f a series o f tax reforms. A professions tax was introduced in 2000101. Fixing o f excise adhesive labels on liquor bottles has reduced loss o f excise revenue. Motor vehicle tax rates have been enhanced, by 20% for stage carriers and by 50% for private cars and two wheelers. Sales tax incentives to industries have been withdrawn, and the structure has been rationalized to only four rates. The 2004/05 budget reiterates GOO’S commitment to introduce the Value Added Tax (VAT) in

Figure 4 : Fiscal correction (Per cent GSDP)

2%

7%

5%

3%

i%

1%

3% < Actuals > < Projections > +Overall deficit (net borrowing) --I-Primary balance

place o f the current state sales tax, by April 1, 2005. The MTFRF targets a moderate further enhancement in the state’s own tax revenues, about 0.4% o f GSDP over 4 years, mainly by strengthening and cleaning up tax administration.

53. Expenditure restructuring. On the expenditure side, after the substantial national public sector pay settlement o f the late 1990s, Onssa has exercised more wage restraint than other states, including a freeze o n new hires, separation o f over 3000 casual and temporary employees, sensible abolition o f vacant posts, and some rationalization o f staff benefits. Act ion has been taken to more strictly enforce eligibil i ty criteria for higher and secondary education subsidies, paid in the fo rm o f ‘grants-in-aid’ l inked to the teachers’ salary bill, so as to rationalize them and curb abuse. Significant progress has been made with respect to privatizatiordclosure o f public enterprises (paras. 37-39 above). The efficiency o f public investment has improved as a result o f raising the share o f groundwater within irrigation investments (para. 3 1 above), and through improved expenditure management to achieve speedy completion o f priority infrastructure projects (paras. 58-63 below).

54. Fiscal framework. The MTFRF for 2003-08, which was tabled in the State Legislature in August 2004, reflects a two-pronged approach to fiscal correction in Orissa. First, the effort i s t o further reduce, as rapidly as consistent with developmental imperatives, the primary (non-interest) deficit and convert i t in to a significant surplus o f at least 2% o f GSDP by 2007/08. Second, the interest burden i s t o be reduced not only over the longer term through the achievement o f a primary surplus, but also in the short term by making maximum use o f (i) debt swap and debt restructuring arrangements with GoI; and (ii) additional debt restructuring financed by adjustment assistance at relatively concessional terms. The combined result i s a projected reduction in the overall fiscal deficit (net borrowing) f rom 7.9% o f GSDP in 2003/04 to n o more than 3.5% in 2007108. The burden o f annual interest payment i s projected to decline f rom 35% of total revenue in 2003104 to 30% by 2007108.

55. Budget for 2004/05. Whi le an Inter im Budget had been presented in February 2004, pr ior to the state elections, the full budget was presented o n July 6’, 2004. In his budget speech, the Finance Minister of the re-elected government emphasized Orissa’s commitment to restructure i t s finances, continuing the process o f fiscal consolidation initiated in late 200 1. Presenting a targeted reduction in the fiscal deficit o f over 1 percentage point o f GSDP, consistent with the MTFRF, he reiterated that the objectives would be to accelerate economic growth, reduce poverty and provide social security to the weaker sections o f the society. The budget speech also announced the government’s intention to (i) seek adjustment loans to strengthen the reform effort; (ii) introduce a Fiscal Responsibility and Budget Management Bill shortly, so as to institutionalize the medium t e r m reform program and i t s objectives; and (iii) break f rom the past

Source: MTFRF

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practice o f trying t o maximize the size o f the 'State Plan', focusing instead on improved uti l ization o f a l l available developmental resources, including specific purpose central grants that are chanelled to the districts, outside o f the state budget.

Table 5: Fiscal Summary - 1999/00 - 2007/08

Per cent GSDP I999100 2000101 2001102 2002103 2003104 2004105 2005106 2006107 2007108 Actuals Actuals Actuals Actualsia Estimate Proj. Proj. Proj. Proj.

Revenue State's own revenue Central resources

Central taxes Central grants Ib

Non-interest expenditure Current expenditure (excl. interest)

01w Salary bill IC 01w Pensions 01w Non-wage O&M Id

Capital investment Net lending l e

Primary balance Interest payments Overall balance l e

15.2 17.8 16.3 6.3 7.4 7.3 9.0 10.4 9.0 4.5 6.7 6.1 4.4 3.7 2.9

21.7 20.5 18.9 18.7 16.9 16.3 10.1 9.8 8.4

1.8 2.1 2.3 2.2 1.8 2.1 2.1 2.2 2.0 1.0 1.4 0.6

-6.5 -2.7 -2.6 3.2 5.9 6.5

-9.7 -8.6 -9.2

18.7 19.6 20.3 21.9 21.7 21.2 8.8 9.0 9.2 9.3 9.4 9.4 9.9 10.6 11.1 12.6 12.3 11.8 6.3 7.1 7.9 8.5 8.8 9.0 3.6 3.4 3.2 4.0 3.6 2.8

20.2 21.0 20.7 20.8 19.9 19.2 17.3 17.4 17.6 18.0 17.2 16.4 9.4 9.0 8.9 8.4 7.9 7.5 2.8 2.6 2.7 3.3 3.0 2.8 2.0 2.4 2.4 2.4 2.4 2.4 2.4 2.7 2.7 2.7 2.7 2.7 0.4 0.9 0.3 0.0 0.0 0.0

-1.5 -1.4 -0.4 1.1 1.8 2.0 6.6 6.9 6.8 6.8 6.7 6.4

-8.0 -8.3 -7.1 -5.7 4 . 9 -4.4 Overall borrowing (net borrowing) l e 8.7 7.5 6.1 8.6 7.9 7.1 4.7 3.7 3.2 Memo items: Salary1 Own revenue 160.6 132.5 114.9 106.1 99.3 96.2 89.5 84.4 79.9 (Salary + Pension)/Own & Mandated revenue 109.7 80.2 78.3 77.7 71.5 67.7 61.3 57.6 54.1 lnteresff Revenue 21.0 33.1 40.2 35.1 35.3 33.3 31.2 30.7 30.0 Current balance1 revenue receiptslf -43.7 -27.9 -40.1 -24.6 -23.9 -17.2 -8.6 -4.3 -1.9 DebffGSDP 1g 47.4 54.7 55.0 62.5 69.3 71.5 70.6 68.5 66.0 Consolidated debt stock1Revenue receipts If1g 311 307 338 326 354 344 308 300 295 Stock of guarantees1 Revenue less grants (t-2) 86 101 127 95 90 80 80 80 80 /a Cash based accounts have been adjusted to include extraordinary payment arrears in 2002103 of about 1 .I % of GSDP 1b Excluding grant component of extraordinary financing from external donors IC Including Grants-in-aid of salary of employees in government aided institutions Id Including non-salary recurring expenditures in education, health, nutrition, public works, water supply and sanitation, housing, major 8, medium irrigation, minor irrigation, flood control and roads and bridges l e Excluding the one-time impact in 2003104 of the securitization of power sector dues, amounting to 2.4% of GSDP If Definition includes SAL grant, as defined by the G o 0 and the Go1 1g Debt stock includes off-budget borrowing of the G o 0

Source: Go0 Budgets and World Bank estimates

Note: Differences in some o f the figures in this table f rom those shown in the Govt o f Orissa's Medium-Term Fiscal Reform Program (Annex C) are due to definit ional differences as l isted in the footnotes above.

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56. Improvements in efficiency and effectiveness o f public spending, which have already started, are necessary to justify further reallocation o f resources. Accordingly, as some additional fiscal space i s created as a result o f the reforms, in the immediate future the fiscal dividend would accrue in large part t o deficit reduction and only to a small degree to recovery o f O&M and capital investment, and to increased expenditure o n pr ior i ty economic and social programs. In particular, recovery o f public investments would be gradual and back-loaded, as the emphasis in the early phase o f reform i s on obtaining better value for the money spent. The share o f resources for elementary education and basic health services will nevertheless continue to rise as a result o f (i) some recruitment o f personnel to fill critical vacancies, largely on contract basis, whi le recruitment will remain banned in most o f the other departments and (ii) enhanced allocations for non-wage O&M and for the state’s share o f priority anti-poverty programs co- financed by the center, for which Go0 i s seeking additional external grant support f rom bilateral donors.

C. Governance and Administrative Reforms

57. Go0 has embarked o n a far-reaching program to improve governance and administrative effectiveness - through creating stronger accountability mechanisms, better enforcement o f existing rules, focusing the role o f the state, and more effective channels for public feedback and voice. T h i s program includes measures to sharpen the tools o f public expenditure management and financial accountability, strengthen service delivery and public service integnty, take forward structural administrative reforms, and streamline government organization with some rightsizing o f government employment. The reform program was included, in relevant and time-bound detail, in a White Paper o n Public Expenditure Management and Administrative Reform, which has been approved by the Cabinet and presented to the legislature.

Public Expenditure Programming and the Budgeting Process’

58. As evident f rom the previous section, there i s virtually n o discretionary expenditure margin in Orissa under the current straightjacket o f wages, pensions and debt service; hence fiscal space for developmental initiatives must be created by deliberate policies to improve expenditure composition. In order to operationalize these policies, improvements in expenditure programming, budget formulation and budget execution are thus a key part of the reform program. Moreover, measures to raise allocative and use efficiency are needed to both justify the gradual increases in expenditure in priority sectors and to improve their effectiveness.

59. Zero-based investment reviews In terms o f expenditure effectiveness, the proliferation o f development schemes in Orissa (as elsewhere in India) has meant not only that resources have been poorly used on low-priority projects but, more damaging, that priority projects have been starved o f the resources needed to achieve their intended benefits. Moreover, the squeeze o n a l l discretionary expenditure has led to a grave problem o f deferred maintenance and degradation o f the existing capital stock. To overcome this problem and raise the effective rate o f return o n investment, Go0 conducted in 2002/03, with technical assistance f rom the Bank, the first zero-based investment review o f a l l 149 physical infrastructure projects o f total cost greater than Rs.400 m i l l i on (about US$1 million). The objective was not fiscal savings, but greater investment efficiency through expenditure-neutral internal reallocation. The zero-based investment review, guided by a High-powered Committee led by the Chief Secretary, required each government department to rank the identif ied investment schemes/projects under four categories: (i) those to be fully funded for fast track completion; (ii) those to be funded o n a slower track; (iii) those to receive “subsistence” funding until redesign or restructuring; and (iv) those to be

Expenditure programming, budget preparation and approval, budget execution and monitoring, accounting, audit and financial reporting are all part o f an integrated public expenditure and financial management system. Although the upstream and downstream phases o f the system are discussed under separate headings, the dialogue with Go0 has been carried out on a joint basis by the respectively-concemed staff.

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scrapped or shelved indefinitely. A s a result, the Government cancelled 83 projects deemed unproductive or obsolete, and reallocated about 25% o f the investment budget for physical infrastructure f rom low- to high-priority schemes -thus permitting the completion o f a significant number o f investment projects.

60. Because the reallocations were made internally within departments, n o inter-sectoral reallocation occurred. However, the investment review was extremely useful and identified high priority projects related to two o f the key constraints o n growth, i.e. rural connectivity (roads and bridges) and water supply. Regarding the latter, through the zero-based investment review G o 0 began an important shift in emphasis f rom large-scale ’surface water irrigation to more effective small projects for improved exploitation o f groundwater. The first zero-based investment review has been followed in 2003/04 by a second review, to complete the weeding out o f obsolete infrastructural projects. In parallel, a more qualitative exercise, described later under service delivery, will be conducted on the major social sector projects and programs.

61. New investment procedures In addition to the zero-based investment review, G o 0 also introduced new investment procedures in 2003/04 to tighten the funding o f plan schemes. Amongst others, the measures included the setting out in advance o f sectoral envelopes, giving pr ior i ty to continuing projects and to projects nearing completion and requiring viabil ity analysis for proposed schemes. One o f the key imperatives in moving forward would be to prioritize available resources so as to maximize uti l ization o f available central and extemal donor funds for priority social programs, and enhance the effectiveness o f the targeting o f such programs while containing the size o f overall spending.

62. Strengthening of the budgeting process In i t ia l strengthening o f the budgeting process also includes improvements in systems and procedures for revenue forecasting (with actual revenue in 2002/03 and 2003/04 closely approximating the budget targets) and the communication o f aggregate expenditure envelopes for each department at the start o f the preparation o f the budget, started with the 2003/04 budget. For the better preparation and execution o f future budgets, G o 0 intends, among other things, to:

0 improve fiscal marksmanship further; 0

0

assure consistency o f the ex ante departmental spending envelopes with the MTFRF; formulate an annual, quarterly and monthly cash plan, based on revenue and expenditure seasonality, to improve cash management and predictability; implement a system for monitoring o f expenditure commitments, to prevent arrears; and introduce ‘fiscal responsibility’ legislation, with scope and modalities suited to Orissa’s reform program and circumstances.

63. Capacity building Capacity building i s crucial to operationalize these institutional reforms, and G o 0 has formulated a training program in public expenditure programming and budget preparation for key officers in the Finance Department, the l ine departments, the Panchayat Raj institutions, and members o f the legislative assembly. Implementation of this program has begun in 2004 with DFID and Bank assistance. In addition to MTFRF preparation and budget formulation, the program will also contain modules o n project appraisal and project management; and elementary budgeting for Panchayati Raj Institutions (PRIs) staff.

Public Procurement and Financial Accountability

0

0

64. reform program in Orissa. A number o f steps in that direction have been taken by G o 0 including:

Financial accountability. Improving public financial accountability i s a central part o f the

The decision to establish departmental committees to monitor responses to the Auditor General (AG), as wel l as an Apex Committee headed by Chief Secretary to monitor the fo l low up;

0

18

0

0

The practice o f tabling AG reports in the Assembly at the same time as the budget; The instruction to include in utilization certificates for physical infrastructure a description o f the physical progress o f works or assets created - signed by the Head o f Department; Tightening o f controls over the issues o f guarantees; Mak ing public enterprises whose accounts are late ineligible for loan guarantees and for funding o f cost-of-living allowance for employees, beginning with 2003/04; and Launching o f expenditure tracking o f selected major programs to identify leakages and improve targeting and efficiency.

65. A State Financial Accountability Assessment (SFAA) was completed during the f i rs t ha l f o f 2004. The general conclusion i s that fiduciary risk in Orissa i s significant, mainly as a result o f weaknesses in the practice o f financial management rather than f rom inadequacy o f the rules - the framework for which i s centrally-determined. The principal SFAA conclusions and recommendations, consistent with the fiscal reforms described earlier, are:

0

e

0

The fiscal crisis has caused a ‘financial crunch’ such that liquidity management overshadows almost al l development efforts and budget implementation i s hampered; The institution o f Financial Advisors in l ine Departments has become largely ineffective and there are weaknesses in internal controls; Accounting and financial reporting comply with national requirements, but financial reporting formats are unnecessarily complex; The framework for financial management o f public sector undertakings i s reasonably sound but not functioning as intended. Of greatest concern are the extensive weaknesses in internal control and audit, and the failure to enforce the enterprises’ financial reporting requirements, with annual financial statements often incomplete and grossly in arrears; Concerning local government, financial transparency i s insufficient and fiduciary risk i s high. Progress in devolution would call for building local financial management capacity and strengthening the accountability o f local officials to the communities they serve; Stated standards o f external audit are very good, but follow-up o f audit findings by the Executive i s not, although the situation has improved in the last two years; and Legislative scrutiny i s nonpartisan and independent, but no t as effective as it could be. The response by the Executive has not always been timely.

66. Consistent with the above conclusions, recommendations have been formulated for the short-, medium- and long-term respectively, t o help ensure better delivery o f public services, enhanced productivity o f public resources, and greater accountability to the stakeholders. G o 0 has prepared a time- bound Development Act ion Plan, and a framework o f a monitoring system for tracking the progress o f the implementation o f the DAP has been developed. The beginning o f the implementation o f the key steps in the first phase o f this Act ion Plan i s a milestone for OSEDL-11.

67. Procurement. The Government o f Orissa, with technical support f rom Wor ld Bank procurement specialists, has conducted an assessment o f the strengths and weaknesses in the system and practices o f public procurement in Orissa. The discussions concluded with the assessment that Orissa suffers f rom the same weaknesses that other Indian states suffer from, as reflected, for example, in the State Procurement Assessment Report for Maharashtra. Standard guidelines need to be modernized and rationalized.

68. On the basis o f this assessment, a draft Medium Term Act ion Plan i s under preparation which i s to be finalized in 2004-05. Meanwhile, the fol lowing actions have already been taken towards enhancing transparency and value for money:

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0 Tenders and bid documents for works costing above Rs. 5 mil l ion have been posted o n the website;

M a x i m u m time has been stipulated for scrutiny o f tenders; and

Monetary incentives (1% for one month and 2% for two months) have been introduced for early completion o f contracted works.

0

0

Service Delivery and Devolution

69. Service delivery T o begin the process o f improving public services and to consolidate public support for the reform process, Go0 i s concentrating o n citizen-focused service delivery. Act ion plans have been developed for improving service delivery in four selected agencies, including the tehsil (land records) office, the motor vehicles office, and selected municipal offices. Transaction costs for large sections o f the population wil l be significantly reduced by the computerization o f land records (one third of which has already been completed), births and deaths registrations, and other specific public services. G o 0 also intends to strengthen the effectiveness o f the Public Distribution System (PDS), with a v iew to improving i t s targeting and management, without reducing the resources dedicated to this essential objective. A variety o f concrete steps are already being taken by a number o f individual District Collectors, on their own initiative, including the devolution o f responsibility for managing the PDS outlets to wel l functioning women’s self-help groups.

70. As mentioned in para. 5 3 , improvements in use efficiency are needed to underpin a reallocation of expenditure to priority sectors. The expenditure tracking studies being launched, in addition to pinpointing financial leakages (see para. 96), will serve to identify potential efficiency improvements and complementary measures needed for greater effectiveness. Over the medium term, actions will be initiated o n the findings o f these two studies, and an additional four expenditure tracking studies will be launched, inclusive o f two major infrastructure projects.

7 1. Devolution Directly related to the service delivery agenda i s Go0 decision to pursue appropriate devolution to local bodies, as a means to both improve basic public services through stronger accountability and to empower the poor. Devolution i s a vast medium- and long-term challenge, but significant init ial steps have already been taken. As many as 25 subjects in 11 departments have been transferred to the Panchayati Raj institutions (rural local bodies), including the transfer o f the supervision of village education committees to elected rural local bodies. Also, water access and distribution are expected to be substantially improved by Go0 encouragement o f the establishment o f water user groups (paani panchayats). Go0 has also launched i t s urban reform initiative with an Ordinance to upgrade the two largest cities, Cuttack and Bhubaneshwar, as Corporations; and moved to simplify property tax assessment and l e v y mechanism as o f 2003/04.

72. T o examine systematically the key issues o f effective devolution, the Government has established a High-powered Committee including the top leadership o f the administration; and will develop a medium-term action plan for effective devolution. As concluded in the State Financial Accountability Assessment (para. 65 above), substantial strengthening o f financial accountability mechanisms at local level, and capacity building in basic financial management, wil l be needed for significant devolution o f resources to proceed further. Go0 also recognizes the importance o f strengthening administrative institutions at the district level to support better planning, co-ordination and monitoring o f service delivery. Reviews o f district administration are planned to study institutional constraints and provide short and medium t e r m recommendations to strengthen key functions.

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Anti-corruption

73. The Orissa Vigilance Commission has been effective on the enforcement side, and the rate o f prosecution o f anti-cormption cases, already comparatively high, has accelerated in recent years. The number o f anti-corruption cases registered has increased from an average o f about 260 per year in the 1990s, t o an average o f 310 per year since 2000. G o 0 plans to establish two new special courts in 2004/05, with proper rationalization o f manpower, to help tackle the backlog o f pending cases.

74. G o 0 has made a strategic choice to f i rs t address corruption problems through a variety o f concrete measures with significant impact on reducing opportunities for corruption. These measures, described separately under the other areas o f the program, include mainly:

0 improvements in financial controls and accountability, as summarized in para 64 above; 0 rationalization o f drug procurement for the public health system;

0 init ial placement o f government forms on-line to facilitate transactions and reduce intermediation;

0 init ial contraction in payroll for temporary and casual employees (some o f whom were in fact n o longer employed); and tighter scrutiny o f eligibil i ty o f higher educational institutions for budgetary grants. 0

75. Over the next year, building o n these init ial concrete actions, G o 0 plans to formulate and adopt a broader anti-corruption strategy, based o n wide-ranging consultations and public debate. Fol lowing international good practice, the strategy wil l rest o n three pillars: prevention, enforcement, and communication. Improvements in procurement practices will contribute to reducing the scope for corruption. Finally, service delivery surveys will be conducted, including at the district level, t o assess citizens' perceptions o f constraints to the delivery o f selected public services and these surveys will serve as benchmarks against which improvements in service delivery can be tracked.

Administrative and Civil Service Reform

76. Organizational Reviews G o 0 recognizes that major improvements are needed in both the machinery o f government and the management o f human resources if the state i s to move f rom playing an a l l pervasive interventionist role to one that i s more focused and enabling. The imperative to provide some space for development and O&M expenditure makes it essential to reduce share o f the salary bill in total spending. It i s important, however, that the reduction in the number o f employees not occur in an arbitrary manner, but f low from a pr ior review o f the functions o f government. Accordingly, G o 0 has launched a series o f organizational reviews and zero-based functional audits o f the l ine departments. Ten such exercises were completed in 2002 and 2003; and the process o f organizational reviews o f a l l major departments o f state government i s expected to be completed in 2005.'' The findings and recommendations o f the organizational reviews are expected to begin to be implemented as and when they emerge in final form. Effective organizational restructuring and institutional change are long-term tasks and require broad consultations and steady leadership. Such leadership has been and will continue to be provided by an Administrative Reform Cell, established by G o 0 in 2002, to guide and coordinate the implementation o f the administrative reform program, and reporting directly t o the Chief Secretary. In addition G o 0 i s considering the setting up o f a Centre for Governance to support departments to better analyze and implement institutional reform strategies.

lo, The four departments reviewed in 2002 are: Health, School and Mass Education, Forestry, and Water Resources. T h e departments reviewed in 2003 are: Commerce and Transport, Govemment Press, Panchayati Raj Institutions, Industries, Land Revenue and Registration, Commercial Tax, and Agriculture.

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77. Human resource management In human resource management, revision o f the current rules and strengthening o f their enforcement are badly needed in the medium term, mainly to increase the role o f merit in personnel decisions; encourage mobil ity whi le protecting employees f rom arbitrary action, particularly sudden transfers; introduce some accountability for performance; and generally move toward a comprehensive human resource development strategy and personnel management function - partly by computerizing payrol l and pensions. A human resource management and information system and database are under development and Go0 plans to take forward a comprehensive analysis o f human resource policies and practice in 2004/05.

78. Civil sewice reform For years, the public sector in Orissa has acted as employer o f f i rs t resort, leading to a govemment workforce proportionately much larger than in other Indian states (Table 6). The ensuing fiscal burden was aggravated by the impact o f the large pay hike along the lines o f the 1997 central Fifth Pay Commission recommendation for Go1 employees. Go0 has already taken a number o f key steps to downsize the govemment workforce by attrition. With respect to regular employees, 50% o f the vacant entry level posts have been abolished, and a recruitment freeze has been enacted f rom mid 2001 (with exemptions in case o f demonstrated need for doctors, nurses, primary teachers, and strike police). Going forward, 75% o f vacant regular posts at entry level will be eliminated (except for freeze exempted posts). The recruitment freeze will be maintained for some time, and will be closely monitored with the aid o f the new payroll system being constructed.

Table 6: Government Employment, Selected Indian States

pamil Nadu 162.000,OOO 1696,700 (1.12 11,092,731 11.76 11,317,512 12.13 I Note :All data pertains to 2002103 apart from (i) data pertains to 1999/00 ; (ii) data pertains to 1998/99. Note: Total Public Sector Employment includes core civil service, work charged and daily wage employees, grant-in- aid institutions, state- owned enterprises, and local bodies. Source: World Bank estimates

79. 1200 staff have been redeployed f rom surplus to deficient departments and/or functions. Go0 has also taken steps to rationalize staff benefits, such as the elimination o f the facility to encash accumulated leave whi le s t i l l in service. Go0 i s also considering to replace the practice o f 'compassionate appointment' o f relatives o f deceased c iv i l servants with appropriate monetary assistance in genuine hardship cases and i s putting in place provisions for enforcement o f the rules for premature retirement o f poor- performing employees.

I ~~~

Figure 5. Teacher Absenteeism Across Major Indian States (%)

I 0.45 1

Source: WDR 2004

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80. Curtail ing payroll for temporary and casual workers can have a significant anti-corruption and efficiency impact as well as reduce the fiscal burden o f the wage bill, at l i tt le human cost, further addressed by appropriate severance provisions. At least 10% o f the 36,000 temporary/casual staff have been separated. Going forward, further reductions o n the salary bill for temporary workers are planned.

D. Human Development and Poverty monitoring and evaluation

Education

81. As noted earlier, Orissa has achieved some degree o f progress in terms o f primary school enrollment and the literacy rate among men and women. I t i s also judged to be performing better than average among Indian states in terms o f teacher attendance in schools (Figure 5), although regional disparity i s a continuing concern.

82. Nevertheless, many challenges remain if Orissa wants to achieve the MDG targets. Public spending o n elementary education, at around 2.6% o f GSDP in 2001/02, i s less than what i s required to provide services o f adequate quantity and quality to achieve universal primary schooling. In addition, and in recognition o f the fact that the current resources could be spent more efficiently, G o 0 has started to take steps aimed at raising the share o f elementary education by (i) reallocating wasteful expenditure that could be saved through the rationalization o f higher education grants and improved deployment o f teachers; and (ii) leveraging effectively additional resources available f rom Government o f India and external donors under the Sawa Shiksha Abhiyan, a centrally sponsored program for universalizing elementary education.

83. As a f i rs t crit ical step the Government has issued an order to begin addressing the inefficient use of public funds in the form o f ‘grants-in-aid’ to private higher education institutions, whose outcomes in terms o f the number o f students educated do not warrant the level o f public funding. G o 0 will prepare half-yearly reports o n the implementation o f the government order. If the order, which requires strict enforcement o f the provisions under the existing legislation (Orissa Education Act, 1969) governing eligibil i ty for grants, i s implemented effectively by education authorities, the resulting budgetary savings would reduce the shortfall estimated to be about Rs. 20-25 crores (i.e US$ 4.5-5.5 mi l l ion) in 2003-04 alone in the state’s share o f centrally sponsored programs, including the SSA. A longer t e r m solution would be to restructure the ‘grants-in-aid’ scheme to make i t more responsive to educational needs, and reduce the fiscal burden for providing higher education.

84. Over the medium term, developing methods to deliver education services to remote and less- populated areas will go a long way to improving education outcomes. G o 0 i s preparing to implement a number o f institutional reforms aimed at improving the management o f education to make it more effective and accountable to beneficiaries (i.e. parents and their children, particularly in ST/SC areas), An Organizational Review o f the School & Mass Education Department has been completed. Stakeholder consultations on the Review’s findings would be important for building the broad-based support that i s essential for key recommendations to be implemented. In i t ia l steps towards decentralized management o f education have already been implemented. These include:

Involvement of user groups (school education committees) alongside elected local body representatives in the affairs o f elementary schools;

Evidence-based deployment of teachers and school-based generation o f vacancies in order to ensure efficient use o f human resources; and

Hiring of qualified locals as para-teachers in elementary schools through village education committees. Among other advantages, this practice would alleviate the chronic teacher shortages due to substantial rotation o f teachers in interior areas (especially tribal areas).

0

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85. The immediate challenge for the Government i s to implement the key recommendations o f the Review through a time-bound action plan aimed at establishing more effective structures at the state-, district and block-levels. This plan would include actions to abolish non-essential posts and re-deploy staff to the field where they are needed to provide improved technical/academic support to schools.

Health care system

86. The population o f Orissa has one o f the highest burdens o f disease, mainly due to infectious disease (acute respiratory infections, diarrhea, TB, malaria) and under-nutrition. The highest incidence i s among children under 5 years and women, particularly in rural areas. Approximately one-quarter o f public expenditure i s on primary care and one-quarter on public health. The largest category o f expenditure across al l levels o f public health care i s for salaries - more than 85%. The total sanctioned personnel strength consist o f 4,900 doctors, 2,308 nurses and 11,600 multi-purpose health workers. However, the vacancy rate i s high - for example, 25% o f al l doctor positions are vacant, with the vacancy rate as high as 33% in Primary Health Centers (PHCs), and even more in remote areas. Absence o f critical personnel as well as lack o f functioning equipment and adequate drug supply have contributed to ineffective public spending in health. Accordingly, the population relies to a significant extent on informal private practitioners, who have many advantages for villagers: they are already present in the village (as compared to the doctor who often does not l ive locally and i s frequently absent f rom the public facility); they open at convenient times; provide greater confidentiality; charge less than the cost o f travel to and informal charges at the public facilities; and provide credit if necessary. Overall, informal private practitioners represent an important under-utilized resource for providing basic ambulatory care.

87. Recent initiatives by Go0 include measures to retain staff in post and reduce vacancies; introduction o f user charges at tertiary and secondary hospitals; devolution o f some building maintenance decisions; establishing a communicable disease surveillance system; and the launching o f an infant mortality reduction mission. In addition, Go0 has established a new pol icy for drug procurement and distribution, with stringent quality checks and computerized inventory management with online connection between al l district and state warehouses. An assessment conducted by DFID suggests that the new drug procurement system established by Go0 has resulted in an improvement in the availability o f drugs on the essential drugs l i s t and has increased the use o f standard treatment protocols in public facilities.

88. A new Health Sector Strategy, based o n the identification o f priority health outcomes (infant and chi ld mortality, maternal mortality, control o f communicable diseases) and effective public-private partnership, was approved by cabinet in 2003. A new system o f drug procurement has been introduced, with stricter enforcement o f quality standards, to improve the availability o f essential drugs and the use o f standard treatment protocols. An organizational review o f the Department o f Health has been completed in 2003-04. Immediate next steps, expected in 2004-05, include:

Consolidation o f the new system o f drug procurement and distribution, with quality checks and computerized inventory management, to ensure availability o f essential drugs in at least 80% o f primary health centers; Implementation o f the f i r s t phase o f reorganization o f the Department o f Health, based o n the recent organizational review, to facilitate achievement o f the health goals of the state, including enabling and facilitating the involvement o f the private sector; and Preparation o f a draft action p lan for achieving pr ior i ty health outcomes (infant and chi ld mortality, maternal mortality and control o f communicable disease)

0

0

0

89. Medium-term actions include the following:

0 Implement first phase o f the Act ion Plan to achieve improved pr ior i ty health outcomes;

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0 Formulate plans for intersectoral collaboration to achieve better health outcomes with emphasis o n nutrition, potable water and sanitation; Formulate and agree with Department o f Finance on a Medium Term Expenditure and Financing Plan for health, l inked to the priority health outcomes; and Independent evaluations o f government’s health interventions by reputed institutions.

0

0

Poverty monitoring and evaluation

90. A multi-sectoral Poverty Task Force (PTF) led by the Orissa Development Commissioner, i s mandated to develop a comprehensive anti-poverty strategy to promote pro-poor growth, rationalize the main anti-poverty programs, monitor implementation o f policies, and communicate to a broad range o f stakeholders within as wel l as outside o f the government the content and impact o f programs and policies. The PTF has contracted analytical work and organized a series o f public workshops to communicate the urgent need for institutional and pol icy reforms to enable more rapid poverty reduction. A number o f studies to underpin the anti-poverty strategy have been completed and a series o f public workshops were organized to communicate the urgent need for reforms. In late-2004, after appropriate consultations with c i v i l society, the anti-poverty strategy currently being prepared by the PTF i s expected to be finalized.

91. The PTF has also been entrusted by Go0 with the responsibility for poverty monitoring and evaluation o f anti-poverty programs. T o accomplish monitoring and evaluation tasks more effectively, a comprehensive poverty and human development monitoring system (PHDMS) has been set-up by the PTF. One o f the main objectives o f this system i s to track the impact o f reforms o n the public, and strengthen GOO’S capacity to design pro-poor policies by more clearly linking expenditures with outcome measures. These monitoring initiatives involve Orissa’s Department o f Economics and Statistics (DES), the Nabakrushna Choudhury Center for Development Studies (NCCDS), and the PTF secretariat located in the department o f Planning and Coordination. The framework for P H M D S includes four sub- components: (i) strengthening capacity in the Directorate o f Economics and Statistics, including the devolution o f data entry to the district offices; (ii) improving institutional capacity for poverty analysis and developing a comprehensive baseline o f poverty and development indicators; and (iii) expenditure tracking o f selected anti-poverty schemes (see para. 96). Whi le poverty analysis i s being carried out by NCCDS and DES, the PTF secretariat will act as a main focal point, and will advise Go0 on pol icy implications o f these analyses.

92. Strengthening capacity in the Directorate of Economics and Statistics. The Directorate o f Economics and Statistics, which i s responsible for collection and entry o f the State National Sample Surveys (NSS) sample, has l imi ted capacity for t imely collection and processing o f data. DES has produced a document summarizing i t s critical capacity needs, identifying (i) shortage o f sk i l ls in the DES to process and analyze many o f the important data (this i s currently done in the NSS central statistical office in Calcutta), and (ii) the centralization o f data entry in Bhubaneswar, as the major obstacles for enhancing the timeliness and quality o f data reporting.

93. T o support strengthening o f statistical capacity in Orissa, DFID and the W o r l d Bank have been providing technical assistance focusing on (i) computer training for data analysis (STATA and CSpro), and (ii) computerization o f district statistical offices. On-the-job training in data analysis for officers in the DES in Bhubaneswar has started in M a y 2003 and a core group o f DES and PTF senior officers have already received specialized and basic training. DFID has agreed to support the purchase o f hardware and software for the District Statistical Off ices (DSO) and the PTF, and the implementation o f this TA component i s expected to start soon. I t wil l be followed by technical assistance to support the development o f specialized software for the DSOs and training o f D S O statistical officers.

94. Improving institutional capacity for poverty analysis and developing a comprehensive baseline of poverty and development indicators. Orissa has recently drafted a State Development Report, including chapters on poverty and social sector development; and a Human Development Report i s being

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prepared with the assistance from UNDP. Orissa also has a substantial information database on development outcomes including various rounds o f India's National Sample Surveys (NSS); two rounds o f Demographic and Health Surveys (DHS); and a Population Census, conducted every ten years, whose latest round was completed in 2001. There are further indicators collected by line ministries (e.g. health surveillance, nutr i t ion monitoring under ICDS, etc.), and by individual project implementation units. M a n y o f these data sources are available at the unit-record or district level.

95. Based on analysis o f the most recent micro-level data, the baseline assessment wil l outline levels and trends in various dimensions o f poverty. The choice o f key indicators will be based on the development goals o f the Tenth Five Year Plan (similar in many respects to the Mi l lennium Development Goals), but include a broader range o f indicators discussed with stakeholders within as wel l as outside o f the government. The PTF secretariat has primary responsibility for the preparation o f the comprehensive baseline assessment and i s in the process o f finalizing the indicators to be monitored (see Annex E) as well as institutional and reporting responsibilities o f different agencies. The DES and the N C C D S have started analysis o f the NSS data with the view to computing baseline district-level poverty estimates and disaggregated prof i le o f poverty.'' DES and NCCDS staff, as wel l as other government officials are being provided training in research methods o f poverty analysis through support f rom the W o r l d Bank and DFID.

96. Finally, expenditure tracking will be conducted of three expenditure programs to improve the design of public service delivery programs with major implications for the poor. Funds for delivery o f social services flow, upon release, within a pre-defined legal, regulatory, and institutional framework, passing through the layers o f the government down to the facilities, which are charged with the responsibility o f actual spending. There i s a concern (not just in Orissa, but in many other states and countries), however, that some o f the money often fails to reach frontline service providers, and some o f the services fa i l t o reach beneficiaries. In response to this concern, a methodology for expenditure tracking studies has evolved, to trace the f l ow o f resources through each institutional layer in order to determine how much o f the original resources reaches each level, and how long they take to get there. Three schemes have been identified by G o 0 for a f i rs t round o f expenditure tracking, namely:

The Sampoorna Gramin Rojgar Yojana (SGRY), which i s the key rural employment programme in the state, administered by the Department o f Panchayati Raj.

The Special Nutrit ion Programme ( S N P ) which provides supplementary nutrit ion to children in the 0-6 age-group, as well as to expectant and nursing mothers, administered by the Department o f Women and Chi ld Development.

The Mid-Day Mea l Programme (MDMP) which provides noon meals to primary school children across the state, administered by the Department o f Women and Child Development.

The PTF secretariat i s supervising expenditure tracking and it i s expected that early results will feed into the formulation o f the Government Budget for 2005/06.

0

0

0

l1 The district-level poverty estimates are expected to be used to improve the identification and targeting o f Below Poverty Line (BPL) households by determining the BPL allocations across districts. The Ministry o f Rural Development, which conducts a B P L census every five years to identify beneficiaries to participate in various development programs, has recently outlined new criteria for the selection o f poor households. Instead o f using self-reported income, as has been done before, rural households will be asked 13 questions including on the size o f their operational holdings, type o f house, availability o f clothing, food security, ownership o f consumer durables, type o f indebtedness, reasons for migration, etc. Their responses to the 13 questions w i l l be marked on a scale o f 0 to 4, with the total score for each filled questionnaire thus ranging from 0 to 52. States are given the freedom to decide on the cut-off scores to identify the households as very poor, poor, not so poor and non-poor, subject to the provision that the total number o f B P L households in each state i s not allowed to exceed the poverty estimates o f the Planning Commission (based on 1999100 NSS) by more than 10%.

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IV. THE PROPOSED CREDITLOAN

A. Country Assistance Strategy and Rationale for Adjustment Lending

97. India CAS Since 1997, the India CAS has included a focus on states undertaking comprehensive reforms, in order to support the leaders o f change and to serve as a catalyst to the state-level reform process. With the widening gulf o f the reforming and non-reforming states in India, leading to a concentration o f poverty and poor social indicators in a few states, the current India CAS [R2004-1701 proposes to go as far as possible in opening up new opportunities for engagement with India’s poorest states, while retaining an essentially reform and performance-based approach to the states. A number o f steps are being taken. First, in consultation with GoI, the Bank i s s e e l n g to ensure that al l the largest and poorest states o f India that so wish are engaged in a dialogue o n cross-cutting reforms. Second, the Bank wil l work proactively to build a productive development relationship with those four states where poverty i s increasingly concentrated in India and where public institutions are considered to be the weakest (Bihar, Jharkand, Orissa, and UP). Third, state-level adjustment operations are also expected to remain an important part o f the Bank program. Any such lending would be preceded by analytic work and technical assistance would b e provided as states implement their comprehensive reform programs.

98. All three strategic principles are applicable to the proposed Operation. The additional financing that the Bank can provide wil l help ensure that high-priority expenditures are protected rather than crowded out at a time o f fiscal stress. It also provides financial backing for the state’s reform program and will enable Orissa to finance the direct costs o f reforms as we l l as to substitute cheaper for costlier debt. The relatively concessional terms o f Bank assistance would enable Orissa to achieve a more rapid decline in i t s debt service burden than would otherwise be possible.

99. Lessons learnt from state reforms Especially since the late 1990s, and in response to fiscal stress, f i rst a few and by now the majority o f state governments have embarked o n fiscal reforms, aimed no t only at reducing deficits but also at expanding the fiscal space for more and better spending in pr ior i ty areas, backed up by an enhanced revenue mobilization effort. The Wor ld Bank has been actively involved in the process o f state-refoms since the mid-nineties when the f i rs t economic/fiscal report for a state was written (for- Orissa). Since then, a total o f nine such reports have been authored by the Bank [Orissa (2), Rajasthan (2), Andhra Pradesh (2), Uttar Pradesh (l), Maharashtra (l), Kamataka (l)]. Another half- dozen state fiscal reports were authored by the National Institute o f Public Finance and Pol icy (NPFP) under Bank sponsorship. The Bank i s currently workmg on reports for a few more states, including Tami l Nadu and Punjab. Apart f rom reports, the Wor ld Bank has provided adjustment lending to three states (Uttar Pradesh, Andhra Pradesh and Karnataka) to assist them with fiscal reforms. The Asian Development Bank has provided adjustment lending to three states (Gujarat, Madhya Pradesh and Kerala).

100. Based in part on i t s experience, the Bank has prepared a draft report o n the progress and remaining challenges with states’ fiscal reforms in India.12 This report shows that fiscal reforms implemented thus far by states, whi le showing in i t ia l returns, are s t i l l a work-in-progress and significant challenges remain. Some o f the lessons that have so far emerged f rom the Bank’s experience with state- level reforms include: (i) the need for a well-identified multi-year reform framework; (ii) the importance o f fully accounting for the fiscal impact o f the power sector’s financial performance; (iii) the need for institutionalizing the fiscal framework; and (iv) the inadequacy o f fiscal adjustment o n i t s own, and the need to place it in the context o f growth and human development.

101. The Bank’s assistance program in Orissa The Bank has a long-standing engagement with Orissa, and a significant program o f assistance has developed. In l ine with the CAS, the Bank’s program (i) i s closely aligned with Goo ’s reform program, (ii) it i s focused o n poverty reduction, and (iii) it i s

l2 INDIA: States Fiscal Reforms in India - Progress and Prospects (Report No. 28849-IN), June 17,2004

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programmatic in nature, with a sequence o f interventions designed to further govemment reforms and goals.

Analytical work The Bank’s analytical and diagnostic work o n the emerging economic and fiscal problems o f Orissa began with a f i rst state economic report in August 1996,13 and was followed by an updated economic report in 1999.14 A targeted dialogue on major fiscal and administrative reforms began only after the state government’s resolve in March 2001 to face up to the crisis, shown by the issuance o f fiscal austerity measures, fo l lowed by a Memorandum o f Understanding (MoU) with Government o f India (GoI) in June 2001. A draft State Financial Accountability Assessment (SFAA) was recently delivered to the Government. A variety o f studies have been undertaken by the Bank and DFID to evaluate the fiscal and administrative problems o f Orissa, review the regulatory framework, evaluate the impact o f reforms on the poor, assess the investment climate, review legal precedents in retrenchment, and identify obstacles to faster economic growth. Policy notes were prepared in 2002-03 by the Bank, and a further series o f pol icy notes on Orissa i s currently under preparation, fo l lowing up on emerging issues arising f rom the dialogue between the Bank and Orissa. The current work i s focused on prof i l ing poverty, identifying potential sources o f accelerated economic growth, and a review o f health sector policy. A State-level Investment Climate Survey i s also under preparation. Investment Lending T o support implementation o f various G o 0 initiatives, the W o r l d Bank has two ongoing state-specific projects (health, and water resources). Finally, the Bank and DFID are supporting several multi-state or national level programs covering Orissa, including the District Primary Education Program. N e w investment lending proposals under consideration include a state roads project and a poverty reduction project.

0 Programmatic Adjustment Lending A cross-sectoral pol icy dialogue, supported by adjustment lending i s proposed to support Orissa’s core fiscal, governance and structural reforms. The OSEDLs are envisaged to be a series o f one-tranche loandcredits based on up- front structural reforms. They would help provide financial backmg to the State’s reform program, and protect high-priority development expenditures. Because the pace o f reform determines the State’s capacity to use resources efficiently, each OSEDL will fo l low the adoption o f reforms and will be based o n the need for financing. This approach takes full advantage o f the flexibility which the programmatic approach framework offers, with an expectation o f annual or biannual loansicredits depending o n the pace o f re form and financing needs.

102. DFID Partnership The Banks technical work has been carried out in close collaboration with the UK Department for International Development (DFID), which also has selected Orissa as one o f i t s focus states. DFID funds have also been used by the Poverty Task Force to commission specialized studies o n socio-economic and institutional aspects pertaining to poverty reduction programs, Self Help Groups, the linkages between tribal populations and the forest economy, and the effect o f reduced budgetary expenditure o n growth and poverty. Outside the fiscal/governance (including power sector reform) and poverty monitoring area, the DFID programme includes work to improve watershed management and rural l ivelihood opportunities, better business regulation to promote pro-poor economic growth, and significant technical and financial support in the health and primary education sectors.

0

0

B. Loan Objective, Size, Design and Impact

103. Objective and Rationale. The objective o f the proposed f i rs t Orissa Socio-Economic Development Loadc red i t (OSEDL) i s to support implementation o f crit ical structural, fiscal and

l3 INDIA: Strategy and Options for Fiscal Stabilization in Orissa (Report No. 15809-IN), August 21, 1996 l4 INDIA: Fiscal Reform and Economic Growth in Orissa (Report No. 19234-IN), June 9, 1999

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administrative reforms needed to revive economic growth and achieve rapid poverty reduction over the medium term. The easing o f fiscal constraints and improvements in systems o f service delivery will, among other things, enable Orissa to effectively utilize additional project assistance in key sectors in future years. The justification for the operation rests on GoO’s track record o f fiscal adjustment since March 2001, in i t ia l expenditure reallocation and efficiency improvements. In the absence o f such adjustment support, GoO’s finances will either remain unsustainable or there wil l have to be anti-growth and anti-poor expenditure reductions.

104. Loan Amount. Commensurate with Orissa’s strong fiscal correction program and financing needs, adjustment support f rom the Bank i s envisaged to be up to US$700-US$900 m i l l i on over 4-5 years. I t i s envisaged that this support would be in the form o f a series o f four one-tranche operations, disbursed against upfront actions. The individual size o f each operation i s to be determined at the time o f negotiations depending on progress with reforms, and consistent with a pol icy o f backloading. G o 0 i s also benefiting f r o m Go1 support through the Fiscal Reform Facil ity (Orissa was one o f the f i rs t states to s i g n the MOU and has received incentive grants for i t s fiscal performance in the 2000-03 period), and has benefited f i o m a debt restructuring package.

105, Implementation arrangements. The Chief Secretary o f G o 0 will coordinate the overall re form program being supported by this operation. The nodal agency for the fiscal and public expenditure management reforms i s the Finance Department. Guidance and coordination o f administrative reforms are the responsibility of the Administrative Reforms Cel l under the General Administration Department, assisted by a n e w unit to be established outside the Government for analytical and technical support. Under the private sector development component, the Departments o f Energy, Public Enterprises, Industry and the Agriculture Production Commissioner have primary responsibility for the power sector, PE reforms, industrial deregulation and agncultural pol icy reform components respectively. The Development Commissioner i s responsible for oversight o f the Poverty Task Force.

106. Disbursement o f the loadcredit proceeds would not be linked to specific purchases. However, Go1 would no t use the loadcredit proceeds to pay for expenditures included in the Bank’s standard negative l i s t which includes expenditures o n mi l i tary hardware, and environmentally hazardous goods. F l o w o f funds arrangements for the Loadc red i t will be finalized at negotiations.

107. Design. The Policy Ma t r i x at Annex B shows the program in three phases. Support for the f i rs t phase o f the Orissa program would be extended based o n upfront actions taken through August 2004, which are a subset of the actions shown in the Policy Matr ix and are summarized in Table 7 below. The second OSEDL would be appraised once G o 0 has met the next set o f agreed milestones, which i s tentatively envisaged for the summer o f 2005; and the third and fourth OSEDLs could fo l low during 2005-08. The pr ior actions for each phase include both specific reform actions and measurable results with respect t o growth-promotion, fiscal adjustment, expenditure reallocation, govemance and power sector performance.

108. Fiduciary issues. As outlined in paras 64-66, improving public financial accountability i s a central part o f the reform program in Orissa and a number o f steps have been taken by Go0 starting in 2002. The Bank has completed a State Financial Accountability Assessment, which concludes that the fiduciary r i s k in Orissa i s significant, and sets out recommendations for strengthening the system o f financial management and accountability. A Development Act ion Plan in this regard has been finalized by G o 0 and implementation o f key components o f this Act ion Plan i s a pr ior action for OSEDL-11.

109. The Bank has also initiated a dialogue o n ways to improve procurement practices in Orissa. In i t ia l actions have been taken to improve transparency o f procurement processes and enhance value for money (paras. 67-68 above), as outlined in Table 7 below. A medium-term action p lan for procurement reform i s t o be finalized.

1 10. Environmental aspects. The only component o f the operation that has potential environmental impact i s the privatizatiodclosure o f public enterprises, which i s being supported by DFID under a

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parallel operation. The state Pollution Control Board monitors adherence by a l l public and private sector units to all-India environmental standards o n an annual basis, and environmental audits to international standards have been camed out for selected enterprises, with support f rom DFD.

1 1 1. Go1 perspective. The Bank’s sub-national adjustment lending i s fundamentally a tripartite endeavor between the Bank, Government o f India and the concerned state. Go1 has reviewed Orissa’s reform program and fiscal framework, and has released three installments o f incentive grants under the Fiscal Reform Facility, for the state’s performance over the past four years.

C. Prior Actions for the First and Second Operations

112. The emphasis o f Orissa’s reform efforts to date has, o f necessity, been o n fiscal correction and administrative reforms that have major fiscal impact. The milestones for the f i rs t operation, OSEDL-I, reflects this core emphasis. The second operation, OSEDL-11, would be focused o n structural reforms, including major steps towards turning around the power sector, whi le continuing with fiscal and governance reforms. T h e key upfront actions for the f i rs t two operations are listed in Table 7. These key actions are also included in the Policy Matr ix showing Go0 Program in Annex B. All o f the first-phase milestones have been achieved.

D. Arrangements for Performance Monitoring

113. G o 0 supports the strengthening o f monitoring and public reporting. The Government has held workshops o n i t s reforms strategies and plans to finalize i t s key strategy papers fo l lowing stakeholder consultation. The Vision 2020 document wil l be made publicly available. So wil l the medium t e r m fiscal framework. The establishment o f a poverty and human development monitoring system wil l improve the availability o f poverty data, and the impact o f G o 0 policies o n the poor.

114. K e y monitoring indicators, which wil l be used to assess progress under the program, and for preparation o f any subsequent operations, are listed in Annex D.

E. Benefits and Risks

115. The fiscal, developmental and poverty problems o f Orissa have grown over a number o f years and will not be resolved overnight. Both the benefits and r isks o f the proposed operation are accordingly high. However, the benefits make the r isks worth taking, with an appropriate r i s k mitigation strategy.

Benefits

116. program in Orissa are as follows:

The main benefits f rom a credible and well-implemented economic, fiscal and governance reform

First, and most important, the private sector-centered economic growth made possible by the reforms, along with specific pro-poor measures, would increase opportunities to raise the standard o f living for mill ions in this poorest o f major Indian states; The emergence o f an efficient and viable power sector in the state that f i rst privatized power distribution in India would have a strong demonstration impact o n perceptions o f and prospects for power sector reform in the country; and The fiscal adjustment, when completed, will move Orissa f rom extreme and growing financial dependence on Go1 to fiscal sustainability, with a more developmental composition of expenditure and better capacity to finance well-designed investments.

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Table 7: Pr ior Actions for OSEDL-I and Indicative Actions for OSEDL-II Milestones for OSEDL-I (by August 2004) Growth-en hancing reforms Adoption of "new industrial policy", and implementation of first set of administrative measures in line with the policy, including adopting measures to improve the labor inspection regime, and introducing transparent and standard rates for allotment of government land. Continued progress with (non-power) Public Enterprise reforms, including closure of 10 unviable enterprises, separation of over 25,000 employees under the voluntary retirement scheme, initiation of restructuring plans for 3 key enterprises, and initiation of privatization of 10 enterprises, including completion of the privatization process for one

1 Indicative Milestones for OSEDL-II

of these. Initiate a consultative process with state level public and private stakeholders in the power sector with a view to developing an agreed Business Plan to achieve financial viability in the sector over the medium term; also, ensure payment of current electricity bills by state government departments, of at least 95% of billing in Jan-Mar 2004 (compared to 88% in the same quarter of previous year) Fiscal reforms and expenditure policy Table in the State Legislature a Medium-Term Fiscal Reform Framework for 2003-08 that targets a primary surplus of over 2% of GSDP and overall fiscal deficit (net borrowing) of less than 3.5% by 2007108. Primary deficit reduced from Rs. 25 billion (6.5% of GSDP) in I999100 to less than Rs. 7 billion (1 5% of GSDP) in 2002103 and estimated Rs. 6.7 billion in 2003104 (1.4% of GSDP); overall fiscal deficit reduced from 9.7% of GSDP in 1999-00 to an estimated 8.3% in 2003104 (figures for 2003104 exclude one-time impact of securitization of power dues). Reduce the ratio of salaries to state's own revenues from over 160% in 1998199 and I999100 to an estimated 99% in 2003104; and the ratio of salary plus pension to state's own revenue plus mandated transfers from 110% in 1999-00 to an estimated 72% in 2003104.

Public expenditure management and governance reforms Progress in prioritization of public spending through the implementation of the findings of Zero-Based Investment Reviews, including closure of 83 schemes and completion of 41 selected high-priority infrastructure investment schemes during 2002103 and 2003104.

Government approval of a Development Action Plan to strengthen the system of financial accountability in the state, based on the findings of a State Financial Accountability Assessment; issue Government Order to post on the website tenders and bid documents for works costing in excess of Rs. 5 million, stipulate maximum time for scrutiny of tenders, and provide incentives for timely completion of works. Initiate implementation of civil selvice reform by: (i) separation of at least 10% of 36,000 templcasual staff (ii) freeze in recruitment, with exceptions for demonstrated needs in socially-essential areas; and (iii) redeployment of 1200 regular employees from surplus to deficient departmentslfunctions.

Human Development Issue Government Order to release grants-in-aid only on the basis of certification that the schoollcollege qualifies.

Government approval and publication of a Health Sector Strategy that identifies priority health outcomes; approval of a Drug Management Policy for improving procurement of drugs on the essential drugs list and for framing of standard treatment guidelines.

Implement further measures to rationalize regulation of entry of private investors, including reduction in number of application forms from 16 to 2; and introduce Industrial Facilitation Bill to establish a Sing e W naow Clearance system ntroaJce amenament io ine Orssa Aqricu.tural ProaLce Marrters

Act so as to lift state monopoly and enable private investment in marketing yards and storage facilities. Continued progress with implementation of (non-power) Public Enterprise reforms, including privatizationldivestment of at least 2 additional units,

Establish a credible mechanism to ensure timely and full payment of current electricity bills by both state and local governments; Finalize and publish the Business Plan and begin implementation; operationalize measures to curb theft.

Table in the State Legislature a Fiscal Responsibility Bill. Execution of the 2004105 budget, and budget targets for 2005106to be consistent with the Medium-Term Fiscal Reform Framework. Primary deficit targeted to decline reduced to below 0.5% of GSDP in the revised estimates for 2004105.

Reduce the ratio of salaries to the state's own revenue further to 96% in the revised estimates for 2004105. Continue to decrease the ratio of revenue balance to revenue receipts to below -18% in 2004105. Reduce the ratio of consolidated debt to revenue receipts from an estimated 354% in 2003104 to 344% in 2004105.

Annual Plan 2004105 to aim at enhancing development outcomes, with a fully funded State Plan; Improved utilization of centrally financed and co-financed schemes and completion of at least 25 high-priority infrastructure investment schemes in 2004105.

Begin implementation of Action Plan to strengthen further public financial accountability, including enhancing financial information published in budget documents. Anti-corruption action plan, covering measures to strengthen prevention, enforcement and public awareness to be finalized by GOO.

Continue implementation of civil service reform by: i) Pilot a Human Resource Management Information System in Education department; (ii) further reduction on the salary bill for temporary workers over 03104 figures; (iii) 75% of vacant regular posts at entry level identified and eliminated (except for freeze exempted posts); and (iv) maintenance of recruitment freeze with selected exceptions.

Finalize reorganization action plan along the lines of the Organizational Review of the Department of Education and implement its first phase including abolition of non-essential administrative posts and redeployment of qualified staff to head teacher posts. Implement first phase of reorganization of the Department of Health, along the lines of Organizational Review. Progress in implementing the drug management policy.

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117. reform program, are expected to make a significant contribution to reducing poverty. Specifically:

Poverty impact. The reforms supported under Operation, and more broadly under the State’s

Orissa’s fiscal reforms wil l enable a greater share o f resources to be focused o n poverty-related expenditures. The MTFRF seeks to reorient public spending towards high-priority developmental spending (social sector spending, non-wage O&M, capital spending) that will provide primary education, health, basic social and infrastructural service to the poor, including support for improved agricultural performance. Orissa’s structural reforms seek to enable private sector led growth o f markets for agncultural produce, and improve the investment climate by easing the regulatory burden o n the private sector. This will enhance economic growth and generate more jobs. The governance reforms would reduce corruption and harassment, which tends to hurt the poor disproportionately. The comprehensive poverty and human development monitoring system (PHDMS, explained in para 91 above) will help the state take account o f actual progress to reorient pol icy towards the Mi l lennium Development Goals. Negative impacts o n displaced workers through the public enterprise reforms are being mitigated, including through severance packages, counseling and relocation guidance. Introduction o f jo in t (husband and wife) land titling will improve woman’s position in the household. Reallocation o f education expenditures away f rom wasteful grants-in-aid to high pr ior i ty areas in education, use o f para-teaches, and devolution o f school supervision to elected school education committees will improve education outcomes for everyone, including the poor.

Risks and their Mitigation

118. In the lagging states such as Orissa, with a high concentration o f India’s poor, potential benefits of reform are high but so are the risks. The main r i sks specific to Orissa include polit ical r isk, vulnerability to natural shocks, and l imi ted administrative capacity. The nature o f these r isks and the corresponding mitigation strategy i s as follows:

Political Risk. As the reform program involves some measures that would affect entrenched interests that benefit f rom the status quo, there i s significant risk o f reforms being undermined as a result o f polit ical opposition or ‘backlash’. This risk i s being mitigated by building a publ ic consensus through broad consultations with c iv i l society. It i s also being mitigated by agreeing o n firm targets for reducing the relative fiscal burden o f the salary bill, whi le leaving the mix o f measures to achieve this target at the discretion o f the state authorities.

Vulnerability to Natural Shocks. Poor economic performance as a result o f drought, floods or other natural disasters could undermine the fiscal correction. This risk i s being mitigated by basing the MTFRF on a conservative assumption o f GSDP growth, at about 3% o n average during 2002-07, even though faster growth i s likely, and the five-year plan targets an ambitious 6.5%.

Limited Administrative Capacity. Addressing capacity constraints and issues o f skill mix in the c iv i l service i s one o f the explicit components o f the c iv i l service & administrative reforms program. In addition, capacity constraints are also addressed by substantial and focused technical assistance provided by the Bank and by DFID (Annex F). Such assistance has facilitated the use by G o 0 o f experts f rom other reforming Indian states; most o f the short-term consultants for the preparation o f the proposed operation have been chosen in this manner, with excellent results.

Coordination with GoL The success o f the program wil l require continued Go1 support in terms of central transfers and debt restructuring/swaps. T o mitigate these coordination risks, the Bank has interacted closely with Go1 and wil l continue to do so as part o f program supervision and preparation o f subsequent operations.

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Annex A Page 1 o f 11

Enck af above.

Annex A Page2of11

6 SHRl PRATIP K, MOHANTY

Chief Secretary a n d Ch ie f Development Commiss ioner

Orissa

Dear de+,

E.mad-csori r7ort.nic. in

Oflice : 253a300. 2536700 PABX ' 2196

2536660 \ Res. ,2534400, 2534000

D.0. No. ... l. 2qJ.p- ,...*..*..

Letter 01 Oevelopment Policy af Government of Otissa

The Govemmenl of Orissa has been continuing a dialogue with the Worid Bank and DFlD to put logether a package of assistance under the rubric Orissa Saclo-Economic Development Credr! (OSEDC), to support the State's ongoing efforts at undertaking a major fiscal correction, accompanied by govemam and economic policy reforms The aim is lo put the macro finances on a sustainabte equilibrium path as well as remove the impediments in critical areas of service dellvety so as lo increase the pace of development which would, in turn, have a signifcant impact on poverty alleviation. Thus this package of assistance would have the twin objective of achieving bcd correcbon and accelerating economic growth and social development. The Stale feels that correction of fiscal imbalance is a prerequisite to acce\erate growth as welt as to redw;e and remove povefly

Compared with rest of India, Orissa is facing a serious development imbalance. If one compares some of the major social and economic indicators, il would be amply evident that Onssa has a lot of caUiing up to do even lo reach the national average, let alone achieve the levels of olher developed states. An important w i a l indicator which reflects Ihe quality of life is infant moriality Infant mortality d e in Onssa is 90/1000 against the all India average of 6011000 Average life span in Onssa h only 57 years when compared to SD years in rest of h e country, Similarty, n other indicators like literacy, school enrolment and availability of safe dnnking water Orissa has lagged behind the mst of the country. Even in economic indicators like per capita income, families below poverly line, power consumpton, prcductruty in agriculture, Orissa comparas unfawdutably wlth the rest of lndm Not only are the social and economic indiators lower than rest of the country, but there has been further divergence between Orissa and other states over the years For example, the gap between the per- capita income of Orissa and resi of the country was R5.8401- in 1991. This has widened to Rs 46491- in 200142. Thus there IS an unquestionable need lo increase the pace of development 50 that the State can meaningfully tackle the problem ol the large incidence of poverly

The State has not been able to effectively tackle the problem of poverly because of the lack of resources caused by the extreme fiscal stress, The State is facing senous !ism\ imbalance characterized by, (1) large revenue deficit, (2) large fiscal deficit and (3) unsustainable debt level The revenue deficit was of Ihe order Of.% of GSOP and fiscal deficrt ol8.6% GSDP in the 2000-01 These ratios have been brought down to 3 6% and 6 4% in 2002-03. But these are unsustainable levels, without correction of which Ihe State cannot achieve macro equilibrium, whiih is a prerequisite for accelerated growth Over the years the borrowing of the State has Increased substantially In 2001-02 revenue defEit was i l X of the fiscal deficlt - indKating the degree to which Ihe Slate was borrowing to finance recumng cusk If we took at the development of the State Finances over recent decades, in 1980-81 the State had marginaf surplus under revenue account In 1990-91 the revenue account was breaking even and hwn 2000-01 there has been rapid increase in revenue dekit To appreciate the seriousness of the fiscal problem it may be seen hat salary, pensm and interest Irability together IS more than the revenue slream availabb lor the State Because of the senous stress on finances, the Slate has had to conbnmusly borrow to meet a growng part of the revenue expenditure Because of the large quantum of bomwing the Stale has accumulated a large debt stock and the resutling debt sewing liability has become unsustainable The total deb4 of !he State is around 60% of GSDP The debt service is around 50% of the revenue receipt Because of the senous fiscal imbalance the finances of

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the State are under canbnuous stress resullrng in chronc liquidity problem The senots fiscal stress has direct effect on economic growth and social development After meebng the day-today needs of running the government and sewicing its debt and petxion commilments, there are no resoues lefl for developmental needs

Taking info account the severe fiscal problem the SIate is facing, a Whde Paper on State Finances was brought out by the Government in 2001 to correct the structural problem TQ quote, 'The State finances has aiready reached a CIISIS point If the pdicres and the straleg)es so far fdlowed continue io be pun& unchanged, all the resources generated would be used up in debt s e w n g and unpmductwe expenditure with lritle or no money ieff to fake up any developmenfal work wodh the name, Hence B detailed discussron and public debale axe absolutely necessary on the g r a q and senwsiws of fhe probiem and cOI*Bctlve measwes needed fo be taken W& his objecbve in view the State Govemmenf have decrded to place the facts before ftre people thorough this W?tge Paper ft IS hoped that this Paper will bad to a heatthy discussmn on the fnfensq of poveffy and fiscal SrtuaOon in Orissa and help to budd consensus on the corrective measures to take the economy to the path ofsustmed high grow# *

The State entered into an agreement wrth Govemment of India in October 2001 to implement a programme of structural fiscal correction Political sustainability of the reform process requires that the fiscal Correcbve measures are accompanied by other growthenhancing and directly poverty reducing measures

Immediate assistance is required to reinforce correction in macro finances, improve tfie quality of fiscal correction as well as to take care of the up-front cost of wme of the reforms It IS in this context that Govemment of Onssa IS requesting Government of India to propose the Onssa Socio-Economrc Development Credit (OSEDC) to WoM Bank and DFlD

Strategy GoOs strategy to accelerate economic growth and reduce! poverty is articulated in its Tenth

Five Year Plan, and in its draft 'Vision 2020", which IS currently under preparahon At the core of the wion and sirategy are (I) ~fforts to epccunge p w & sector growth in sectm where Dnssa has strategic comparative advantages (tourism, mineral processing, hortvculture, marine products. high quality rice, handicrafts, etc.). (11) efforts to strengthen integrabon between regions of the state and with the rest of the world, and (is) efforls to enhance the quantity and quality of public investment in human and social capital so that the benefits of income growth are more equitably distributed ban in the past The twin objecbves are to increase per capda income - narrowing the gap between Onssa and the national average - and to improve its distnbution across the poputabon.

With the goals of accelerating economic growth to 6% - 6 5% per year, reducing poverty by 7 petcentage pints during 2002-07 and by 15 percentage points dunng 2008-12, the State's development strategy would bcus on improving the effusncy of public investment and creating an enabling policy framework to improve the climate for pnvate investment Translating these objectives into complete and effective action will be no small task Some of the key reforms to revitaiise the economy alongside the continuahon of stabilization and fiscal empowerment, are indicated below

An enabling policy framework to improve the State's investment climate and expand income generating opportunities parttcularly for the p r -through simplification of regulatory regime with legal backing, lhng state monopoly over agncuftuial markets, etc , Successful complehon of second generation reforms in the Power Sector, to ensure sustainable adequate and affordable power supply to support the economic growth objecbves Restructuring of !he largely loss making Public Enterprise Sector, through divestmenVsaieiclosures; Improving rural connecbvrty and expanding irngation with emphasis on ground water and walersned development programs, backed by reallocatron of resources in the budget,

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* Strengthening the social sectors, induding promotion of rural / tribal I female literacy, better health for all, safe drinking water supply, food security and other social safety net programmes - through the functional rewganizalion of major departments and effective decentralization of service delivery to elected toea1 bodies and other local groups; Mobilizing and enabling village women and the poor to participate in and benefit from economic growth, including through self-kip groups and Pani Panchayats (Water User Associations); and

+ Public Expenditure Management and Administrative Reforms (oudined in the White Paper published in November 2002) which focus on improved medium-term planning and annual budget formulation, budget execution, cash and debt management, alongside an outcome oriented rightsizing of the bureaucracy and improving the delivery of puMic services,

Growth Enhancins Reforms Agriculture :

Ortssa is primarily an agrarian economy with a contribution of around 30% to Net State Domestic Product. Neariy 87% of the population live in the rural areas and productivity and income from agricutural adivity is extremely crucial br the economic weif-being of the people of the state. Some of the d-ellenging issues in agriculture ate extreme fluctuations in agricultural production ranging from 66 lakh tones of food grain production in 1997-98 to 49 lakh tones in 2000-01, exemplifying the fact that agricultural production is substantially affected by natural calamities, especialiy drought. Another challenge is the per capita availability of cultivabk land, which was 0.39 hedare in 1950-53 and has dedined to 0.19 hectare in 1993-94, on account of the increase in population Another challenge facing agriculture is the stagnant productivity in the sector. Not only is the produdivity low compared to the national average, spatial differences in productivity are acute and the poorer and drought-prone districts have significantly inferior produdity in agncutture. The development strategy of the State in agriculture is aimed at achieving diversification of m p s and growth of a dynamic agmgocessing sector, genefating rural employment and alleviating poverty. We strategy would alsu encompass creating a sustainable irrigation system with active user participation in management, improved marketing and connectivity, higher effiaency of public investment and greater security and tenure for tribal and poor cultivators.

In recognition of preponderant public invesZment in large-scale surface irrigation projects in the past, Goo’s Tenth Five-Year Plan (200247) and Budget for 2003104 have initiated a trend towards more balanced use of ground and surface water. A new project has also been introduced to improve imgabon management and encuurage investments in groundwater irrigation by individual farmers, 01 by water user assodahms (paani panchayats), with a one-ttme capaal subidy from the budget. Go0 has atso introduced joint spouse titling of land, thereby enhancing the status and security of women within the family. Computerization of land remrds has been taken up by one third of all tehsils, with significant reductins in transadw costs.

Fuhrre initiatives to further raise agricultural productivity include the creation of appropriate institutional arrangements, including a legal framework, for land teasing - to ensure adequate safeguards for both tenants and landowners, and a0 attract private investment in agriculture and allied sectors. We also plan to amend the Agricultural Products Marketing Act, to facilitate private investment to complement the state’s investment m marketing yards and storage facilities for farmers in Orissa.

Regulatory Framework for Prjvate Enterprise : Promoting private enterprise and making the State attractive for private investment would be

one of the key elements in promoting grovinh and employment generation and consequently poverty reduction in the State. While the State has an abundance of mineral resources, other favourable factors like long coastline, disdplined labour force, Wvourable law & order situation dc., the overall private investment of the State has been negligible. With the opening of economy, domestic 3s well as

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foreign investmant have gravitated to other states which are already well developed in infrastructure and human capital, Onssa has not been able to get the advantage of market and trade liberalizatm. One of the objecbves of O S E E would be to support changes in the regulatory framework for private enterprise, to make the State a prefened investment destrnatiin for private entrepreneurs

GoO has committed itself to reducing transaction costs on the pnvate sectw through its new Industrial Policy Resolution (IPR-2001), whlch represents a marked shift From the earliir policy of control and micro-regulation. The IPR-2001 entails. among other things: (i) seledive streamlining of laws and procedures; (ii) facilitating an effective 'single point contad by ensuring buy-in of all relevant govemment departments and necessary delegabon of powers; and (iii) stntngthening government capacrty lo discfiarge Its regulatory role in a mom transparent and effective manner

Following the adoption of the IPR-2001, the thrust of the State's efforts to improve business environment has been on reducing bureaucratic interference and providing greater transparency Over the medium term, Go0 plans to implement both overarching policy and pfooedural changes, affecting all sectors of private business activity in the state, as well as Focus on spedfic subsectors with maximum growth and employment potential. Some specific changes to be supported by OSEE are

lntroductian Or an Industrial Facilitation Bill to establish a single window clearance system for industrial investments (expected in 2004); Redudon in the number of application farms from 16 to 2 (expected in '2004); and Develapment of Action mans for key sectom in which the State has annparative advantagebased on investment climate studks (already initiated with BanWDFID support) and sector-specific policy reviews.

Public Enterprise Reforms: Onssa is a leader among Indian states in public enterprises reform, which is a key

component of the mediumtem strategy of the Govemment.. The objective of public sector reforms is to release resources for priority development programs, by withdrawal of the state from commemal activities, and by inmasing efficiency in those enterpnses that remain with Ihe staie. The budgetary support for PSUs wouM be progressively reduced so that there wifl be complete stoppage of outilow of public resource for PSUs, starting immediately with the unviable ones.

A significant achievement has been the closure of 10 unviable enterprises and separation of over 15,000 employees (or about one fourth of tlwstt empioyed in non-power public enterprises) under a cost-effective Voluntary Retirement Scheme (VRS)% with 30% finding reemployment tftrough counseling. Restructuring of a number of the large non-power public enterprises (Orissa State Road Transport Corporation, Orissa State Finanaal Carpcrration, Orissa Lift lnigatin Company, and Onssa Seed Corporation) has also made signifmnt progress, with restructuring plans approved by the Government, and organizational restructuring through VRS has commenced.

The strategy under OSEDC wouM be to further maintain and accelerate the process, wrih divestmentlsale of an addhnal5 enterprises in 2004.05 and completion of the programme by 2006- 07.

Power Sector Orissa was a pioneer in India in Power Sector Reforms, which were initiated Lo address the

inherent inefficiency of the erstwhile Government monopoly in power generation, distnbutlon and transmrssion, namely. the Orissa State Electricity Board. The reform centered around unbundling of generation, transmission and distnbutjon and estabiishment of an independent regulator for power supply standards and tanff. Even though the reforms in the power sector has run for over five years, and the distnbutian companies are currently covering their power purchase wsts with their tanff collections, they continue to bear heavy debt serviang burden. As a result, the sector has not yet turned around in financial terms

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Orissa is now grappling with the second generation of power sector reforms. A key objective of the Government's reform programme is to provide continuing guidance and support for operationally and Faancially tuming around the power sector, whicb is critical for economic growth. The OSEDC envisages assistance to cover v.le transitional costs in !he sedor, on the basis of agreed pf?fformance indicators, so as to achieve the reform objectives originally envisaged for the sedor. Some of the key action points are: (i) preparation of business plan for the sedor (pmcess has been initiated and two rounds of mnsuitations organized by GoO with all the stake-holders including World Bank and DFID): (ii) implementation of mu& year tariff (expeded En 2004-05); (iii) further extension of rum! electrification; ( N ) inweased rural and urban access to viable power supply (medium-term objective), and (v) achievement of financial viability of the sector (by 2007-08).

Fiscal Rdorm The principal objectives of the fiscal reform programme are to bring down defldts and debt

to a sustainabk path and at the same time improve the composition and quality of puMic spending. Currently, the State's finances suffer from a deep disequilibrium, with committed recurring costs pre- empting too large a share af available r w u m s , and outstanding debt at 63% of GSDP. The reforms are required, not only to restore creditwofthiness but also to mate fiscal space for strengthening developmental interventions and initiatives.

The State has been reasonably successful in impiementjng revenue enhancing measures, which have swmedd in raising the buoyancy of the state's own taxes It has had more limited success so far with non-taw revenues and in controlling and rationaliing expenditures, both of Wttich pose a more difficdt challenge. The measures already implemented, during 2001-2004, include:

tax reform measures in areas such as sales tax, motor vehides tax, exdse tax, etc, - including rate rationalization and administrative simplificabon; adjustments to user charges for irrigation water, higher and professional education and specialized hospital services; zero-based investment reviews to improve fne producfwity of capital expendiiures;

0 tight control on salary expenditure through rationalization of benefits (e.@ leave encashment), recruitment freeze with limited exemptions, ahlition of over 23,000 vacant posts

* separation of 4000 employees of Orissa Lift lmgation Corporation through VRS I VS5 and consequent reduction in the quantum of suWidy; and

* introduction of long term debt sustainabrlity program by creating guarantee redemption fund and consolidated sinking fund. These measures have resulted in some improvement in the fiscal indicators The Primary

Revenue Balance, for instance, ha5 been conwed from a deficit of Rs. 1336 mre in 1999-00 to a small surplus in 2002-03. The ratio of Ute State's Own Revenue to Non-Interest Committed Expenditures (Salaries, Granb-in-Aid of Salary and Pension) has been raised from 53% to 72% in the same period.

The details of the fiscal correction programme have been expbined in the Orissa Medium Tem Fiscal Framework, 2003-08. As mentioned, an important objective of OSEDC is to enable the State to deepen and institutionalize the fiscal reforms, as well as to Rnance the cost of some of the r e f o m dunng the interim M o d .

While Govwnment of Orissa is seeking the first installment of the OSEDC as a well-deserved reward for the fiscal correction already achieved, we seek fo use the subsequent installments in the proposed s s k under OSEDC to strengthen the fiscal correction in a number of ways, including:

formulation and introduction of a Fiscal Responsibitity Bill that is suitable to the state (expected in 2004-05); Strengthenng of revenue administration and introductbn of VAT,

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Readentation of the Annual Ran {starting in 200445) towards maximiration of development outcomes, and away from maximization of size of an inadequately funded 'State Pian'; Measures to ensure fuli utilization of central and external r e s w m s available for universalmation of elementary education, and for other priority soaal sector programs (starting in 2004-05); Measures to rationalhe grants-in-aid to coileges and high schools, so as to limit total outflow and to link grants ~8 th educational outcomes {initiated in 2003-04 and to be pursued further}: and Measures to bring down the debt servicing burden of the state by using a part of the mcessional funds under OSEDC to prepay old expensive debt.

In addition to the above-mentioned measures, the OSEE€ wouM aiso enable the State to more successfuiiy control the growth of salary expenditures, by successfully implementing the right- sizing program, which is explained further under the section on Governance Reforms, below.

By the year 2007-08, the Government of Otissa aims to raise the ratio of the State's Ow Revenue to its Non-lnterest Committed Revenue Expenditure to about 95%, as compared with 72% in 2002-03 and 53% in 1999-00. Along witti a reasonable increase assumed in tax devolution and grants from the Government of India, the Pnmary (Non-Interest) Fiscal Defiit of Qrissa is projected to be turned into a surplus of at least 1.5% of GSDP. Achievement of (a) reducing overall Fiscal M c i t to 3% of GSDP and (b) elimination of Revenue Defiat - wouM depend on additional support from the Government of India, espeaally for debt restructuring. Depending on the award of the Tweltlh Finance Commission, these two targets may be pcssible by 2007-08, of may need one or two years m e to achieve.

Govemance Reforms A key development challenge for Orissa is to improve the quality of governance to improve

&ce delivery and to bring about inclusive human development and poverty reduction. A principal objective d the refom programme ki therefore to support improvements in the nature of govemance in Orissa, including the manner in which govemment delivers its functions. Enhancing the performance of government through redefining its roles arid functions, impraving the management of public expenditure, supporting measures to improve transparency and acmntability, including administrative and financial devolution to iocal bodies, are key components of our programme. Towards this end, Government have adopted a policy framework and action plan, formulated in the November 2002 White Paper on Public Expenditure Management & Administrabve Reforms, This renewed focus on governance has resulted in a numkr of reforms over the last two years

Expenditure Management Zero based investment reviews have been undertaken in support of improved management

of public resources, focused on better pnoritsation of limited resources for infrastructure investment. This has resulted in completion of important investments. in addition, GOO has conducted a State Financtal Accountability Assessment that has examined areas of vulnerability in financial management and suggested institutional reforms. Government have approved a Development Adion Plan fo slrengthening financial management a& amuntability.

Civil Service Reforms The White paper on Administrative reforms recognized that Mssa coufd no longer support

the expanding cost of govemmnt. The aim of dvil service reforms is to right-size and modernize government in order to improve producttvity and performance, while at the Same hrne substantially reduce the cost a i governance by prudent management. With this in mind, the following steps have been taken:

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0 Organizatiinal Reviews have k n conducted in SIX departments including Forest 8 Environment Department, School & Mass Educabwr Oepaibnent, Health & Family Welfare Department, Panchayati Raj Department, Transport Department and the Commercial Tax Department. On the basis of the organizational review of the Forest Dcpat?ment, the existing field formatin with its parallel structures, overlapping jurisdictions, duplication of functrons, sub-optimal uiilisation of staff,and lack of community' mentation, has been reorganized, rn Itne n t h the needs of managing forest resources of the Stale in an efficient, equitable and sustainable manner. Similar reorganizabon exercises am slated to begin in Mass Educahon and Health departments in 2004-05. 24220 vacant posts have b n abolished as on 01.07.2004 (Group A - 599 + Group 8 - 980 + Group C . 13055 + Group D - 9586). A total ban on recruitment has been imposed exceptjng in areas like pnmary education, health and poke

4 VRS forgovemment employees has been introduced vide Finance Department resdution no Pen.- 81200314481/F dated 27.01.2003

Improved Service Delivery, Transparency and Accountability The Government of Orissa has taken a number of steps to improve sewm delivery through

expanding participation and voice in governance, and through computemation. Key are% of reform include

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Computensation of Land Records, Registrations, Transports and Motor Vehicle Tax 8 Commercial Tax offices, to improve client servm. Establishment of 10600 Pani Panchayais (Water Users Associations) covering 8.79 lakh hectares and handing over of the maintenance of imgation work to 8013 Pani Panchayats covering 5 63 lakh hectares. Establishment of 1950 Watershed Mission t Bhumi Panchayats for integrated soil and water consewaim and livelinood management and the establlshment of 7002 Vanasarankhan SamiBs for protection of Forests as well as Community use of Forest Prcduce Establishment of 119994 self-help groups as a part of "Mission Shakti - Women's Empowerment have k e n established Establtshrnent of Zira Swastha Sanities (in Health) and Village Education Committees. for control and appointment of Pnmary School Teachers Devolution of powers and functions to P R.1 s

The Government of Onssa wishes to expand and consolidate govemance reforms in these core areas in the coming years With this in mind Go0 intends to take forward further reforms to improve governance and service delivery

Administrative and Civil Service Reform Further admimstrabve reform focusing on reorganization of at least two major service delivery departments ( Health and Educabon) and an nght - siang govemment staffing Allied to this the Govemment wrshes to focus on human resource management aimed ai rationaliang the systems of transfers and focusing on productivity and performance This will be accompanied by investments in capacity buiMing Lo bnng about the necessary attitudinal change amongst oficiafs for responsive and crbzen fnendly govemment

Anti - Corruption Recognising that corruption most affmts the poorest, the govemment IS committed to take forward antr-corruption initiabves including strengthening the functions of enforcement preventlon and public awareness Suppang grievance redressal mechanisms and

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citizens charters IS a key component of the reform program. Continuing investment in computerization in support of e-governance will also be central to these efforts.

Human Development and MQnitoring Impact on the Poor The State believes that human capital development, through education and health care, ts

the key to overan social deveiopment. While the fiscal m d i o n is aimed at creating space for enhancing resources for priority SOcial services, Government of Odssa reoognizes the need to improve the quality and effectiveness of these services, io justify abating them a greater share of scarce public resources. The emphasis in the immediate future (Le., in 200405) would therefore be on (I) functional reorganization of the school education and heath departments; and (ii) reprioritization of resources within these departments towards achieving the pnority outcomes.

Education While the State has been able to increase literacy from 15.8% in 1951 to 63% in 2001, this is

sa below the National Average and further investments will have to be made in the feld of elementary education, Universalisation of Elementary Education has been adopted as one of t k mponents of basic minimum services. The strategy of State Gavemment would be to (i) kverage maximum passlble additional msources forthe universalisation of Elementary Education and literacy, and (ii) cap the subsidies to higher and secondary levd education and strengthen their linkage to perfomance and educatiaslaf outcomes. .

RefQrrn measures will address efficient use of available human resources in the &or. Starting in x#)4-05, Government will carry out reorganbation of the Department of School and Mass Education - so as to abolish non-essential administrative posts and re-deploy qualified staff to vacant head teacher posts, as well as strengthen capacity of distrid and Modc level staff and head teachers to provide academic suppat to schools for improving the quality of education, While educetion is a crucial area in enhancing grwh as well as improving oaet social indicators, the challenge is to maximize the retums on state investment. In order to achieve this as well as to keep the macro- flnances in equilibrium budgetary provision under grant-in-aid will be frozen in the short term and eligibility criteria in terms of defined performance indicators will b the base of budgetary provision of grant-in-aid.

Health The population of Orissa has one of the highest burdens of disease, mainly due to infectious

disease and under-nutrition. The highest inddence is among children under 5 years and women, particularly in rural areas Approximalely onequarter of public expenditure is on primary care and onequarter on public health Absence of critical personnel as well as lack of functioning equipment and adequate drug supply have contributed to ineffedive public spending in health. Accordingly, the population relies to a significant extent on private providers. Since poverty is so wide spread, majority of population will have to be pmvided health care through govemment delivery mechanism.

A new Health Sectw Strategy, based on identifition of priority health outcomes and effecbve pubkc-private partnership, was approved by the Cabinet on 1 February 2003, Recent initiatives induding measures to retain staff in post and reduce vacancies; introduction d user charges at tettiary and secondary hospitals; devotution of some building maintenance decisions; establishing a communicable disease surveillance system; and the launching of an infant mortality reduction mission In addition, we have established a new policy for drug procurement and distribution, With stnngent quality checks and computerlzed inventory management with online connection between all district and state warehouses. Success has been achieved in making all essential drugs available in 85% of pnmary health centers

The Government intends to take the following steps in the near future, with technical assistance and 5uppoFt under the OSEDC:

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Implement first phase of reorganization of the Department of Health, along the lines of the Organizational Review; Rewew the performance of central and state sponsored schemes in achieving priority targets including reduction of Infant Mortagty Rate, and Develop and initiate implementation of Action Plan to improve priorlty health outcomes identifed in the Health Sector Strategy.

Poverty Monitoring Compared to rest of India, the incidence of extreme poverty is most glaring in Orissa. The

percentage of population below poverty line is 47% in Orissa compared to the all India average of 23%. Not only is incidence of poverty high, but i t is skewed against mofe vulneraMe sections of society, namely, those belonging to SC and ST population.

Orissa has 3d highest concentration of Scheduled Tnbe population. SC and ST constitute 16.2% and 22.2% of the total population respectively. Poverty among the SC and espeaaily ST populatiin is striktngty higher than other population group. Thus while the ST represent 22Y0 of the population of Onssa they constitute 40% of the tolal number of poor.

Rapid reductin and eventual eradication of poverty is the overriding aim of the devdopmenl strategy of the State. The reforms outlined above will strengthen the pro-poor orientation of the State Government budget and services in a number of ways. The economic gmwlh enhannng reforms spanning agriculture, industry and the power sector, would help accelerate the generation of ptMfuctive employment in the state eoonomy. Fiscal and QovemanGe reforms WUM help create space for enhancing the quantity and quality of public expenditure on basic services for the poor. h t r a l i z a b n to local bodies and community groups would strengthen accountabil'i of the service providers to the poor.

One of the objectives in the strategy is to improve the capacity lo " tor progress in poverty reduction. A Poverty Task Force has been established, headed by the Development Commissioner and inclusive of offciais in charge of key social seruices. Under %e direction of the PTF, a Poverty and Human Development Monitoring System is being devebped, which is working to create a comprehensive base line of pove!ty and human development indicators and strengthen the State's statistical system to provide regular and reliabie updates. An expenditure tracking study has been launched, to identify leakages and improve targeting and efficiency of setecfed anti-poverty programs, starting wth the Rural Employment and Chikl Uutriticln programs.

Consultative Process of Farmulating Reforms The Government of Orissa has followed a consultative approach to #e process of

formulating the refon program, which therefore has a broad degree of acceptance among the population of the state. Ever since the While Paper on the Slate's Finances, published in 2001, the Government have taken the pubRc into confidence. A number of regional workshops have been organized on various components of the reform program, to involve civh society representatives in developing the course of conectin.

Moving forward, the State plans to further strengthen the consuitatwe process in a number of ways, including the following:

State Planning Board to prepare and release a Vision 2020 document for public discussion (in ZW), prior lo finalization; and

t Poverty Task Force to finalize a Poverty Reduction Strategy (by 2Do5), n line with the Vision 2020 and d e r consultations wdhin govemment and with civil society

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Case for SAL Support The proposed Orissa Socio-Economic Development Credit from the World Bank, along with

co-financing in the form of grant support from DFID, is indispensable for the success of our efforts to lift Onssa out of its current fiscal mess and set it on a sustainable course of rapid ecOnOmic growth and poverty reduction, The OSEDC is needed for the following reasons:

The palicy dialogue and reform (inked programme of financial support plays a v i i l catalytic role in maintaining as weli as accebratrng the reform momentum, The OSEDC would enaMe the State to finance the direct up front cost of reforms such as VRS and other transitional costs (e g,, in the power sector), apart from enhancing technical assistance to tmplement the reforms; The availability of such financing at relatively concessional terms would enable the State to reduce its debt servicing burden more rapidly than otherwise, Such funding would ease the liquidity constraint and assist Government of Onssa to make fuller use of available matchrng finance from Government of India for high pnonty social sector and poverty alleviation programmes.

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(P. K. Mohanfy)f

Sri 0. C. Gupta, Secretary to Government of India Department of Economic Affairs, Minisby of Finance, NEW DELHI.

Memo No. - , Dated Cow forwarded to Sn S. C. Gam, Joint Secretaw (State Finances), Department of

Expenditure, Ministry of Finance, Norih Block, kew Dehi, for information and necessary &tion.

Principal Secretary to Government, Finance Department

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GQYERHMENT OF ORISSA

MEDIUM TERM FlSCAL PLAN 002-03 - 21Q074

wish Explanatory Hat 8z

Development Poticy

August 2004 rkra Legislative Auembk otl the T m of A

FINANCE DEPARTMENT

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EXPLANATORY NOTE ON

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MEDIUM TERM FISCAL PLAN 2002*03 TQ 2007-08 FOR ORlSSA

Unsusbtlnabla Debt BuFden;

The unamstirnaQle debt burden is the most Swnblifirs m achievitw fml

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Bank’s Explanatory Note

Introduction

1. The Medium-Term Fiscal Reform Framework (MTFRF) for 2003-08 reflects a credible and realistic program o f second-generation fiscal correction measures and targets, to enable faster economic growth and poverty reduction in h s s a .

2. The structural roots o f the fiscal crisis in Orissa, as identified by the Wor ld Bank’s analytical reports in 1996 and 1999, and acknowledged in various publications o f the State Government, are: (a) an excessively large, ineffective and unaffordable c iv i l service - due to the government acting as a de-facto j o b creation agency in the past - resulting in Orissa having one of the largest ratios o f c i v i l servants per 1000 population in the country, (b) an excessive number o f inefficient public enterprises, (c) large debt overhang resulting f rom central loan financing o f successive state development plans over several decades, resulting in (d) skewed composition (interest, salary and pensions absorbing 100 percent o f the state’s total revenue) and poor quality of public expenditures; along with (e) an inefficient tax system and l o w cost recovery for public services.

3. As a result o f the fiscal reforms initiated in 2001 by the Government o f Orissa, the primary deficit has declined consistently since the super-cyclone year o f 1999-00, by about 5 percentage points o f GSDP, to 1.5% in 2002-03 and 1.4% in 2003-04. The larger part o f this correction has come f rom revenue enhancement measures, and a smaller part f rom expenditure savings. In spite o f the overall fiscal correction achieved so far, the composition o f government expenditure remains skewed, with too high a share o f revenues being pre-empted for covering fixed and largely inflexible costs, such as salaries, pension and interest payments. Resources continued to be highly restricted not only for non-wage operation and maintenance (O&M) but also for anti-poverty programs, including the state’s share o f centrally sponsored and externally aided schemes and projects.

4. The MTFRF for 2003-08 targets an improvement in two key structural ratios in the state’s finances, namely:

o Salary Bill (including grants-in-aid o f salary) / State’s Own Revenue - already reduced f rom 160% in 1999-00 to 106% in 2002-03 and 99% in 2003-04; targeted to be reduced further to n o more than 80% by 2007-08; and

Salary & Pension / State’s Own & Mandated Revenue - already reduced from 110% in 1999-00 to 78% in 2002-03 and 72% in 2003-04; targeted to be further reduced to n o more than 55% by 2007-08.

5. Along with a reasonable increase assumed in the level o f central transfers (exact amounts to be subsequently aligned with the Twelf th Finance Commission award for the period 2005-lo), the structural correction i s projected to result in a correction o f about 3.5 percentage points o f GSDP in the primary fiscal balance during the period 2003-08. Together with debt restructuring measures to reduce the interest burden, the overall fiscal deficit (net borrowing) would be reduced from 8.6% o f GSDP in 2002-03 and 7.9% in 2003-04 to n o more than 3.5% by 2007-08. Achievement o f this target would place Orissa wel l o n i t s way to fiscal sustainability. The interest to revenue ratio i s already o n a declining trend starting 2002-03, and i s projected to fa l l to 30% by the end o f the period.

6. The MTFRF i s based deliberately on a conservative assumption o f economic growth in the state at 3.0% o n average during 2002-08 compared to 4% in the 1990s and 5% in the 1980s.

P

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Even though Go0 i s aiming for a significant acceleration in economic growth, through a range o f growth-enabling reforms initiated recently and to be followed through in 2004105, the fiscal framework i s based o n a conservative growth assumption. I t therefore presents a credible and feasible yet bold set o f targets for G o 0 to pursue, with the knowledge that achievement o f economic growth acceleration could enable the state to over-achieve the MTFRF targets. Or at least, the conservative growth assumption gives confidence that the r i s k o f revenue fall ing short of the targets has been minimized to the extent possible.

7. The MTFRF envisages that during 2003-08, relatively concessional financing would be available f rom external donors in the form o f programmatic loans/credits, to be used towards direct costs o f reforms, additional debt restructuring and protection o f priority spending; and in the outer years, increasing amounts of project assistance would also become available as the benefits o f fiscal and governance reform become evident.

Definition o f Base and Reform Case Scenarios 8. In order to measure the fiscal impact o f the revenue and expenditure measures envisaged in the medium-term reform program, it i s useful to lay out a Base Case scenario that projects what would have happened to Orissa’s finances in the absence o f the reform measures. Comparison o f the MTFRF projections with this Base Case would then yield estimates o f the fiscal impact o f the reforms.

9. Common Assumptions. The following macro-economic assumptions are common to both scenarios: (i) growth rate o f real GSDP would r i se f rom 1.4% in 2003-04 to 3.8% by2003- 08, averaging 3.0% over the five years 2003-08; (ii) inflation would be 4.5% in 2003-04 and 5% in each subsequent year; and (iii) interest rates o n new borrowing, which have declined over the past two years, would stabilize at 10% on average (implying a 5% real interest rate).

10. Base Case Assumptions. The Base Case scenario has been projected o n the basis o f the following key assumptions: (i) state tax revenues would grow with a buoyancy o f 1 (as achieved historically during the period 1985-2000) with respect to GSDP, f i o m their actual level in 1999100; (ii) user charges would grow in nominal rupee terms at the same rate as the state’s population (implying n o change in rates); (iii) the salary bill will remain constant in real terms, at i t s 1999100 level (attrition based moderate reduction in size being compensated by an equivalent annual meri t increase); (iv) G o 0 will fully use the standard sources o f borrowing, as wel l as additional borrowing at market terms to finance the projected deficits; and (v) there i s n o additional debt restructuring other than the 2002-05 Go1 debt-swap scheme.

11. Base Case Outcome. The projected outcome under the Base Case i s that the overall fiscal deficit remains at almost 10% o f GSDP or higher until 2007-08 and the primary balance remains negative. The economic composition o f expenditure remains skewed, with the salary bill absorbing 138% o f the state’s own revenues and non-wage O&M remaining way below recommended norms. The continuing deficits would lead to an explosive path for the outstanding stock of debt and guarantees, which would rise to 98.6% o f GSDP, or 554% o f total revenue, by

12. Reform Case. The Reform Case scenario i s defined as the outcome o f implementing the fiscal reform program o f GOO, including the measures already taken during 2000-03 and those envisaged during 2003-07. The resulting fiscal saving i s used to (i) reduce the primary deficit lower than in the Base Case and convert i t into a significant surplus; and (ii) ensure that investments and non-wage O&M are protected in the short-term and enhanced in the medium- term, along with governance reforms to improve the quality o f such expenditure.

2007-08.

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13. Revenue enhancing measures. In addition to the measures already implemented until 2002-03 (outlined in the main document), Go0 aims to implement the fo l lowing additional revenue enhancing measures:

9 Shift from specific to ad-valorem basis for motor vehicles taxation (impact f rom 2003-04 onwards);

9 Modernization o f administration leading to improved compliance with motor vehicles taxation (impact f rom 2004-05 onwards);

9 Introduction o f Value Added Tax in place o f the State Sales Tax (impact f rom 2005-06 onwards);

9 Rate rationalization and improved administration o f Electricity Duty (impact f rom 2004- 05 onwards); and

9 Full and effective implementation o f Professions Tax (partial impact in 2003/04 and full impact thereafter)

14. Expenditure Saving Measures. In November 2002 the Government tabled in the State Legislature a White Paper o n Public Expenditure Management and Administrative Reforms. Under the envisaged program, fiscal savings are projected from the fol lowing measures:

Salary bill containment, through attrition based downsizing and redeployment, exit o f casual and regular government employees with a moderate V R S payment, and rationalization o f staff benefits; Rationalization o f higher and secondary education subsidies (‘grants-in-aid’ to privately managed colleges and high schools); Privatization/closure/restructuring o f state government owned enterprises; and Init iation o f pension reform, including establishment o f a contributory scheme for new recruits.

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Table 1 : Impact o f Fiscal Reforms Rs. Billion 2003-04 2004-05 2005-06 2006-07 2007-08 Impact of reform measures

Revenue reform 12.05 14.76 17.15 19.71 22.09 Tax measures 11.21 13.91 16.31 18.19 19.89 Non-tax measures 0.84 0.85 0.84 1.53 2.19

Expenditure reforms 1.79 2.13 8.15 13.24 15.86 Savings in Salary bill 1.64 1.13 2.28 2.90 3.78 Grants-in-aid reform 0.15 0.35 0.60 0.88 1.19 Power sector reform 2.43 5.91 6.45 Other Public enterprises reform 0.65 2.63 3.02 3.44 Interest savings from additional debt swap 0.21 0.54 1.01

Total 13.84 16.89 25.30 32.95 37.95

Costs of reform 0.26 1.69 4.42 4.92 4.63 Employee separation 0.26 0.69 0.92 0.92 0.63 Performance based budget support to power sector 0.50 1.50 2.00 2.00 Provisioning for contingent liabilities 0.50 2.00 2.00 2.00

15. Fiscal Impact of Reform Measures. The cumulative impact o f measures taken during 2000-03 and those envisaged during 2003-08, are shown in Table 2. The fiscal gain i s projected

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at Rs. 12700 crore (about US$2.8 bil l ion) during 2003-08, while the direct costs o f implementing the reforms are estimated at Rs. 1750 crore (US$ 375 million). The principal outcomes o f this bold yet feasible program i s that, with appropriate levels o f concessional assistance from the Government o f India and external donors, Orissa would be able to achieve in five years from now (i) a permanent exit fi-om debt relief and rescheduling; and (ii) freeing up o f resources for growth- inducing publ ic investments and poverty reducing social programs.

16. Fiscal Sustainability. The MTFRF targets a turnaround in the primary fiscal balance, f rom a deficit o f 1.5% in 2002-03 into a significant surplus o f 2% o f GSDP by 2007-08. A long with savings in the debt servicing burden resulting f rom the swapping o f new relatively cheap borrowing for o ld expensive debt to the central government and the small savings fund, the overall fiscal deficit (net borrowing) i s projected to decline fairly rapidly to less than 3.5% o f GSDP by 2007-08. Whi le the primary deficit i s projected to be eliminated by2005-06, the revenue (current account) deficit i s projected to become negligible by 2007-08.

Table 2: Reform Scenario Rs. Biliion I999100 2000101 2001102 2002103 2003104 2004105 2005106 2006107 2007108

Revenue 58.85 69.02 70.48 82.14 91.34 101.74 119.01 128.71 137.01 Actuals Actuals Actuals Actualsia Estimates Proj. Proj. Proj. Proj.

State's own revenue Tax Non-Tax

Central Resources Shared taxes Central grantsib

Non-Interest expenditure Salary Grants in aid of salary Pension Subsidies and transfers

oiw power subsidy Separation Cost Infrastructure O&M/c Expenditure on key social sectorsid Devolution to iocal bodies Other revenue expenditures Capital outlay Net Iendingie

Primary balance Interest payments

OM interest for power sector oiw Provisioning for contingent liabilites

24.21 28.69 17.04 21.84

7.16 6.85 34.64 40.33 17.48 26.04 17.16 14.29

83.93 79.42 37.26 35.97

1.61 2.06 6.88 8.32 1.60 1.17 0.00 0.00 0.00 0.00 4.88 4.24 3.48 2.80 0.16 1.20

16.33 9.68 7.99 8.39 3.73 5.59

-25.08 -10.40 12.38 22.87

31.59 38.77 24.67 29.16 6.92 9.61

38.89 43.37 26.49 27.62 12.41 15.75

81.77 83.68 33.62 38.60 2.66 2.54

10.03 12.30 1.17 1.46 0.17 0.58 0.00 0.00 6.27 5.83 2.64 3.13 1.27 1.46

12.76 10.98

2.47 1.66

.11.29 -6.55 28.35 28.85

8.87 10.74

42.15 31.68 10.47 49.19 33.25 15.94

98.08 39.31

2.54 12.03 2.61 1.50 0.26 8.21 3.11 1.50

11.30 12.81 4.37

-6.74 32.27

2.34

46.17 35.88 10.29 55.57 39.76 15.81

103.71 41.86

2.54 13.77

1.61 0.50 0.69 8.82 3.32 1.55

14.12 13.77

1.65

-1.97 33.86

1.04 0.50

50.71 40.10 10.61 68.30 46.33 21.97

113.05 42.87

2.54 17.72 2.61 1.50 0.92 9.57 3.58 2.97

15.33 14.94 0.00

5.96 37.15

1.03 2.00

55.71 4407 11.64 73.00 51.89 21.12

11 7.99 4451

2.54 17.86 3.11 2.00 0.92

10.44 3.89 3.04

15.40 16.29 0.00

10.72 39.57

1.05 2.00

60.72 48.05 12.67 76.29 58.11 18.18

124.00 46.00

2.54 17.91 3.11 2.00 0.63

11.37 4.23 3.12

17.33 17.75 0.00

13.01 41.15

0.99 2.00

Overall balanceie -37.46 -33.27 -39.64 -35.39 -39.01 -35.83 -31.19 -28.85 -28.15 Memo:

Overall net borrowingie 33.50 29.00 26.49 37.67 37.01 35.35 25.68 22.15 20.44 Consolidated debt 183.24 212.16 237.92 274.97 323.09 358.50 384.09 406.13 426.54 Guarantees 33.29 37.87 53.09 51.78 52.32 53.11 60.32 68.75 77.63

/a Cash based accounts have been adjusted to include extraordinary payment arrears in 2002-03 of about 1.1% of ibEiiluding grant component of extraordinary financing from external donors /c Includes non-salary recurring expenditures on public works, water supply and sanitation, housing, major & medium irrigation, minor irrigation, flood control and roads ar id Including non-salary recurring expenditures in education, health and /e Excluding the one-time impact in 2003-04 of the securization of power sector dues, amounting to Rs.l l .02 billion. Overall deficit is Rs.50.03 billion if we Include this

Note: Differences in some of the figures in this table from those shown in the Govt. of Orissa's Medium-Term Fiscal Reform Program are due to definitional differences that are listed in the footnotes above.

Revenue balance -25.74 -19.29 -28.30 -22.99 -21.33 -20.40 -16.24 -12.56 -10.39

GSDP 386.29 387.79 432.93 439.74 466.12 501.08 543.68 592.61 t x . 9 4

17. Expenditure Restructuring. The MTFRF envisages a slow but steady shift in the economic composition of public expenditure in Orissa - away f rom interest payments, salaries,

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subsidies, loans and guarantees to unviable public enterprises - towards capital outlay and non- wage operations and maintenance in infrastructure and key social sectors, including education and health. There are also important shif ts in intra-sectoral composition o f expenditures, such as in the case o f education and irrigation. In the case o f education, rationalization o f subsidies at the higher level, along with increased funding o f elementary education, using central and external resources available for this purpose, would raise the share o f elementary within total education. In the case o f public expenditure on irrigation, Go0 i s shifting the focus o f i t s investment budget away f rom expansion o f major canal systems, towards minor irrigation schemes and groundwater exploitation based on management by user groups.

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LITEM

List o f Monitorable Program Indicators

Indica tors

1. Agricultural policy and land administration: agro-markets Rural connectivity

2. Improving the regulatory framework for private enterprise

3. Restructure and privatize public enterprises

9

9

Review o f impact o f amendment o f Orissa Agricultural Produce Market ing Ac t

Number o f paani panchayats established and functioning (annual)

9

9

>

Estimates o f private investment by sectors in the state (annual).

Number o f unviable enterprises closed (annual).

Number and value o f assets sold (annual).

4. Continue reform of the power sector

5. Establish a sustainable and transparent medium-term fiscal framework

> Bi l l ing and collection o f electricity charges f rom state govemment, urban local bodies, public enterprises and non-govemment (bi-monthly).

6. Revenue measures

7. Expenditure & Public Expenditure Management measures

8. Improve public procurement and

9. Improve service delivery financial accountability

10. Implement and monitor a comprehensive anti-corruption program

11. Reform the civil service and public administration

III. PUBLIC EXPENDITURE MANAGEk

9

9

Progress towards Med ium Term Act ion Plan on financial accountability

Number o f tehsils/districts where computerization o f land records and birthsideaths registration is operational (half yearly).

Rate o f disposal o f vigilance trial cases as seen f rom court statistics (annual).

Departmental reports on corruption prone processes (annual)

9

9

>

9 9

Number o f regular, temporary, work-charged and casual employees at the end o f March each year (annual). Number o f posts abolished and number o f staff redeployed (Annual). Actions taken against Organizational Review recommendations

Primary (non-interest) balance - in Rupees and as YO GSDP (Annual)

Ratio o f Salary (including grants in aid to educational institutions) to State’s Own Revenue(Annua1).

Ratio o f Salary (including grants in aid to educational institutions) plus Pensions to State’s Own and Mandated Revenue (Annual).

Ratio o f Revenue Def ic i t to Revenue Receipts (Annual)

Ratio o f Fiscal Def ic i t to GSDP (Annual)

Interest / Revenue (Annual)

DebVTotal revenue receipts (Annual)

Outstanding Guarantees / Revenue (excluding grants) 2 years ago (Annual).

9 Revenue f rom each individual tax -in Rupees (Monthly)

9 Disbursement o f state counterpart funding for centrally sponsored programs (Hal f yearly).

L ist o f schemes completed and closed (with financial details) as a result o f Zero- Based Investment Reviews(Annua1)

Non-salary expenditure on education, health and nutr i t ion - in Rupees (annual).

9

9 NTAND GOVERNANCE REFORM

Annex D

1. ITEM Indicators

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IV. HUMAN DEVELOPMENT

12. Education > Number o f educational institutions, colleges & high schools, receiving Grants-in-Aid, showing how many were disqualified (Annual);

An indicator (to be specified after finalization o f reorganization plan) o f the status o f reorganization o f the Dept o f School and Mass Education

>

13. Health > Number o f institutional deliveries and number o f deliveries by skilled personnel (annual).

P Immunization coverage (annual)

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Poverty in Orissa’

1. “Orissa is rich, but Oriyas are poor” as the popular saying goes, despite i t s r i ch endowment o f forests, metals and minerals, lakes and lengthy coastline, Orissa has become India’s poorest state: per capita income in the state today i s the same as in Rajasthan and Madhya Pradesh 15 years ago, and Uttar Pradesh almost 10 years ago about 17 m i l l i on people, nearly ha l f o f Orissa’s Table 1: Orissa and India - progress in poverty reduction population, l i ve below the poverty l ine Orissa India (Table 1). Wh i le the poverty headcount declined by almost l7 percentage Poverty Headcount (percent) 65.3 48.6 47.2 44.8 36.0 26.1 points between 1983 and 1993, Rural (percent) 67.5 49.8 48.1 45.7 37.1 27.1

Urban (percent) 49.2 40.6 42.8 40.8 32.9 23.5 progress in poverty reduction stalled between 1993 and 1999. This pattern is in sharp contrast with the PerfOrIIIanCe o f glJ major Indian states, (except Assam), l ike ly a reflection o f slow down in growth: GSDP growth in Orissa averaged 2.6% annually in the 1990s, down f i o m 4.7% in the 1980s and the state’s economy i s increasingly lagging behind the rest o f India.

2. Regional disparities: Onssa i s an overwhelmingly rural state: about 87% o f i t s population lives in rural areas. Poverty in rural Orissa (48%) i s higher than in urban areas (43%). Inequalities are pronounced between the relatively wealthy coastal area (32% poverty) and inland areas (the rates range from 50% in the northern region to a staggering 81% in the southern region). Whi le poverty declined in the rural coastal region during the 1990s, rural areas in the southern region witnessed an unprecedented increase in poverty f rom 66% in 1993194 to 81% in 1999/00; poverty also increased in the northern region (Table 2). Despite the marked contrast in poverty rates across regions, the absolute number o f rural poor are roughly equally distributed across different regions (on account o f the very high population density in the coastal region).

1983184 1993194 1999100 I983184 I993194 1999100

Source: Official estimates Planning Commission, Press Releases (March 11.1997. and Fehniarv22.201111.

Table 2: Orissa - Trends in incidence of poverty by sector and region

1983-84 198748 1993-94 1999-2000 1999.2000 1999-2000 Region

HCR* (rural)* (urban)**

HCR contribution HCR contribution to poverty to poverty

Coastal 56.5 47.7 45.6 31.5 31.8 31.4 41.8 49.7 Southern Northern

79.1 80.3 66.1 81.3 87.1 33.4 44.0 13.0 72.3 58.2 43.9 50.1 49.8 35.2 45.8 37.3

Total 66.2 56.8 48.6 47.2 48.1 100.0 43.5 100.0 *Source: A, de Haan and A. Dubey “Poverty in Orissa: a Disaggregated Picture”, 2004, processed. Note that these numbers do not match the official Planning Commission numbers, because they were calculated by the authors from the unit record data. No regional disaggregation is available from the official sources. **Source: M.Panda “Poverty Reduction Strategy for Orissa”, 2003, based on NSS 55th round, Consumption Expenditure survey, processed.

3. Orissa has the third highest concentration (after MP and Maharashtra) o f scheduled tribes (ST) population; Scheduled caste (SC) and ST constitute respectively 16.2 and 22.2% o f the total population. Poverty among the SC and especially the ST population i s strilngly higher than among other population groups. Thus, while the ST represent 22% o f the population of Orissa, they constitute more than 40% o f the total number o f poor. The relative disadvantage o f the scheduled tribe population i s a remarkably robust feature o f the profi le o f poverty in

Poverty in Orissa is intrinsically linked to social identity.

’ From ‘Poverty Analysis: Diagnosis and Approach’, by Elena Glinskaya.

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Orissa: many social indicators for this group are considerably worse than for the major i ty population, as wel l as compared to the ST population in other parts o f India. Whi le the plight of tribal populations i s reasonably well-known in Orissa, it i s not uncommon to encounter the misconception (especially among the relatively better-off in coastal cities) that caste has a much weaker influence in Orissa than in the rest o f India.

Table 3: Rural Orissa-Poverty by social group (1999-2000) ~

Other "Backwards" Majority Total Classes Scheduled Tribes Scheduled Casts

Head Count Ratio (HRC) 73.1 52.3 39.7 24.01 48.14

Source: M. Panda "Poverfy Reduction Strategy for Orissa", 2003, based on NSS 55th round, Consumption Expenditure survey, processed Contribution to poverty 41.01 22.74 26.02 10.23 100

4. Non-income welfare indicators in Orissa have improved steadily, but a tall agenda lies ahead. Notwithstanding substantial improvements in recent years in infant and under-five mortality, both measures in Orissa are considerably higher than Al l - India levels (Table 4). Maternal mortality (362 per 100,000 l ive births) i s much higher than in many neighboring states (e.g., 154 in Andhra Pradesh and 264 in West Bengal). More than h a l f o f a l l children are underweight, and - in contrast to other major states - there has been l i t t le progress in Orissa over the past decade in reducing chi ld malnutrition rates. In education, there are heartening signs o f catching-up with the rest o f India, both in te rms o f enrollment and literacy rates for both sexes. However, evidence suggests that health and education outcomes are considerably worse among the poor, perpetuating a vicious cycle o f debilitating ill-health, illiteracy, and poverty. Improvements in health and education outcomes require improvements in local capacity to deliver health and education services.

5. Forests cover 30% o f a l l

Table 4: Orissa and lndia - Selected Social lndicators Orissa lndia

1983184 1993194 1999100 1983184 1993194 1999100

Infant Mortality Rate 163 112.1 81.0 115 78.5 67.6 (per 1,000 live births)

Under-five Mortality Rate nla 131.0 104.4 nla 109.3 94.9 (per '000 live births)*

nla nla 361 nla nla 408 Maternal Mortality Rate (per 100,000 live births)

Of Underweight nla 53.3 54.4 nla 53.4 47.0 Children (percent)

12-23 months

Two doses Or more Of TT nla 53.8 74.3 nla 53.8 66.8 Vaccination during pregnancy

nla 50.9 65.3 nla 68.2 77.9 Access to Improved Water Source (percent) Households with no Latrine/ 87,8 86,5 n,a 69,7 64,0 Toilet Facility (percent)

41.0 49.1 63,6 43.6 52.2 65.4 Adult Literacy rate (both sexes) Adult Literacy rate (female) 25.1 34.7 51 .O 29.8 39.3 54.3 Source: NFHSI and NFHS2

vaccinated children n/a 36.8 43.7 n/a 35.4 42.0

geographical area in Orissa, and are an important source o f l ivelihood for the tribal population, which collect goods (e.g. nuts, sal and kendu leaf) for subsistence. Forest and mineral resources in Orissa tend to b located o n state-owned land inhabited by the poor and disadvantaged. Whi le forest dwellers are allowed by the government to collect minor non-timber forest produce (NTFP) (and the recent liberalization of NTFP sales and marketing i s expected to improve their standing viz. a viz. middlemen), the high poverty incidence among them i s inextricably l inked to property rights. Many believe that in the most deprived hinterlands, a significant dent in poverty will not occur without at least partial transfer of property rights o n forests and mineral resources to people who l ive there (e.g., see Saxena 2000).

6. Agriculture i s the mainstay o f the economy, providing employment to over four-fifths o f a l l workers, even if i t s contribution to GSDP i s only about one-third. Small and marginal holdings predominate in the state. Over 50% o f the rural poor work as casual laborers and over one-quarter

Annex E Page 3 of 6

struggle to subsist by cultivating small plots o f poor quality land (Table 5). Outside the coastal region, there has been l i t t le employment diversification out o f apcu l tu re in rural areas during the nineties. Moreover, the share of total employment working as cultivators declined dramatically (from 45% in 1993/94 to 30% in 1999/00), with many small-holders entering agricultural casual wage occupation instead. This trend i s consistent with population growth, declining per-capita land endowments, and scarcity o f j ob opportunities outside o f agriculture.

Table 5: Orissa-Distribution of rural population by per capita consumption quintile and principal economic activity (1999100)

Agricultural Labor Cultivation Regular Casual Self Other Total non-farm non-farm non-farm

Bottom 59.6 26.3 0.5 4.0 9.2 0.4 100

2 50.1 32.2 1.5 5.3 10.8 0.1 100

3 48.9 26.4 2.4 8.0 14.1 0.2 100

4 41.3 33.7 4.2 6.1 14.4 0.2 100

TOP 22.3 35.1 16.1 4.7 21.4 0.5 100

All 44.6 30.7 4.8 5.7 13.9 0.3 100

Source: Staff estimates from 55" Round NSS

7 . High poverty in Orissa is tied to low wages in agriculture: Wages o f agncultural laborers in Orissa are l o w - the lowest in India- and have been slow to change. In the coastal region, a day o f work by a male agricultural laborer bought 3.9 kg o f rice in 1999/00 which represents more than 20% increase f rom 3.2 kg in 1993/94. In the southern region, however, the corresponding change was only 10% (from 2.1 kg in 1993/94 to 2.3 kg o f rice in 1999/00), see Table 6. In other poor states (e.g. Bihar) real agricultural wages over this period increased considerably faster as compared to the hinterland o f Orissa.2 A day of female labor buys even less -

Southern regions. The increase in share o f Rslkg Rslkg all male female all male female agricultural casual labor in southern and northern Coastal 5.31 9.59 3.02 3.2 2.47 3.79 3.93 3.03 regions (as we l l as the concomitant stagnation o f Southern 5.37 9.31 1.95 2.14 1.63 2.25 2.34 2.09 real wages) i s in sharp contrast to trends in the Northern 5.43 9.77 2.37 2.62 1.91 2.65 2.78 2.35

Table 6 Orissa - Real agricultural daily wage (kg of rice)

1993 1999 1993 1999 in 1999 it bought 3 kg in Coastal and 2.1 kg in the

Coastal region, and goes a long in explaining the differential pace o f poverty reduction across

Source: Staff estimates from 50 and 55" Round NSS

the two regions.

8. ... which in turn are linked to low landproductivity. In Orissa, r ice yields are only about one- ha l f the All-India level (Table 7), l ikely the effect o f l o w penetration o f modem agricultural practices (e.g. l o w seed replacement ratio, l o w fertilizer use, etc), l o w availability o f extension services, and underdeveloped markets. h g a t i o n in Onssa, in addition to having the lowest coverage across Indian states, i s also skewed towards canals. In the past, irrigation projects have yielded disappointingly l o w rates o f return due to management problems, inappropriate water use, and high non-completion rates. Similarly, the proportion of villages connected by all-weather roads i s also lower than in the rest o f India, impeding access by farmers to markets and processing infrastructure. These constraints in turn result in limited crop diversification and an unusually high share o f paddy in output (paddy accounts for 90% o f cropped area and 80% of irrigated area).3 Regulatory constraints o n private investments in marketing outlets and storage facilities don't help either. Another big hurdle to efficient land use i s an outdated

* In terms o f purchasing power of rice (the main staple), daily wages o f agricultural laborers increased b y 24 % in Southem and by 60 % in Central region of Bihar between 1993-94 and 1999100.

Based on estimate from 5Sh Round NSS . According to administrative data, paddy accounts for 54 % o f the gross cropped area.

Annex E Page 4 of 6

tenancy l a w that encourages informal (Le. unrecorded leasing) contracts between absentee landlords and poor tenant farmers who do not have access to institutional credit.

9. Absence of adequate resettlement and rehabilitation policies have hindered investment. While the rural non-farm sector in Orissa provides some economic opportunities to a small share o f the population with relatively better sk i l l s and education, there are many constraints to attracting private capital, related in particular to underdeveloped physical infrastructure and regulatory hurdles. Once the engine o f growth in the state, mining and allied industries have stalled in recent years, as has mineral and forestry-based manufacturing (annual industrial growth rates decelerated fi-om 7.7% in the 1980s to 3.2% in the 1990s). Part of the reason for this loss of momentum may be due to liberalization policies o f the 1990s (public investments predominated in these sectors earlier, but have dropped o f f in more recent years) as we l l as the drop in worldwide prices o f raw materials. However, the absence o f well-defined and fair resettlement and rehabilitation (R&R) policies for people adversely affected by land acquisitions have also acted as a barrier, as these are a major

Orissa India source o f confl ict between local communities, Per capita food production (kg) 164 209

1210 1930 c iv i l society, private investors and government4 Rice yield (kglha) With the surge o f interest among private investors Foodgrain yield (qtlha) 10.8 16.2 in large-scale mineral-based manufacturing in Milk yield (per animal kglper day) Orissa (e.g. aluminum and steel, fertilizer 1996-97: manufacturing, cement, etc.), i t i s o f utmost importance for Go0 to review existing policies (and their implementation) in consultation with al l concerned stakeholders and strive to develop a fair and transparent R&R pol icy framework.

10. Urban poverty is a growing cause for concern: Whi le as noted the overwhelming major i ty (90%) o f the poor l ive in villages, urban poverty i s also pervasive and has not improved since 1987/88. An emerging problem i s slum dwellers in cities, many o f whom come (sometimes with their families) in search o f seasonal jobs, mainly in construction. Slum dwellers are largely excluded f rom access to public health and education services (most of the public programs are rural based). One o f the most worrisome trends have been the significant decline in enrollment among poor primary school-age children in urban areas. Urban unemployment i s high (8% in 1999100, o n average) especially among the educated (20% in 1999/00).

11. GOO’S strategy to accelerate growth andpoverty reduction is articulated in its Tenth Five-year plan and drafl “Vision 2020” strategy. There are important linkages to poverty reduction in the elements o f the reform program as discussed in the main text. An important pro-poor reform has been the establishment o f a multi-sectoral Poverty Task Force (PTF) under the Development Commissioner. PTF has also been entrusted by Go0 with the responsibility for poverty monitoring. T o accomplish monitoring and evaluation tasks more effectively, a comprehensive poverty and human development monitoring system (PHDMS) has been set-up by the PTF. One o f the main objectives o f this system i s to track the impact o f reforms on the public, and strengthen GOO’S capacity to design pro-poor policies by more clearly linking expenditures with outcome measures. A set o f poverty and social development indicators to be monitored by the P H D M S i s presented in Table 9.

Table 7: Orissa and India--Productivity Indicators

Indigenous 0.483 1.840 Crossbreds 3.931 6.160

see Industrial Policy Resolution 2001 of the State of Orissa. Vienna, June 2001.

.e c

m" b a

m" m " &

i i

d

Annex F Page 1 of 3

Framework for monitoring the implementation of the Development Action Plan Technical Assistance for Capacity Building

Orissa: Technical Assistance and Capacity Building

The Department for International Development (DFID) o f the United Kingdom has been providing substantial Technical Assistance (TA) to Government o f Orissa (GOO), since the 1980s to the health sector and since 1996 to the power sector. F rom 2000, the Wor ld Bank and DFID have been collaborating in providing this assistance, which has been developed through several jo in t technical missions between 200 1/02 and 2003/2004. Mos t o f the assistance includes contributions by Indian experts f rom other reforming Indian states, often in cooperation with foreign experts. Regardless o f the sources o f funding, a l l TA related to the preparation o f the proposed OERL (or Orissa Socio- Economic Development Loan as i t i s n o w called - OSEDL) was designed and supervised cooperatively among the Bank, DFID, and GOO. The technical assistance covers mainly the fo l lowing areas:

Investment climate studies, including cross-cutting issues o f deregulation as we l l as issues specific to identified sub-sectors (World Bank and DFID); Study o f constraints to a p c u l t u r a l growth (World Bank, under i t s ongoing Water Resources Consolidation Project); Study o f health care-seelung behavior among the poor in Ollssa (World Bank); Various analytical work by Indian and international researchers to feed into the development o f the poverty reduction strategy in Orissa (World Bank and DFID, see below); Public Enterprise Reform Program including consultancy support to plan restructuring and sale, and counseling and retraining under the Social Safety N e t program (DFID); Restructuring o f the power distributing company, promoting commercial partnerships between two privatized distribution companies and rural village level committees, and helping the Orissa Electricity Regulatory Commission better address the commercial requirements o f the sector. These inputs have helped to pave the way for sector reforms (DFID); Strengthening o f revenue generation - analytical reports by intemational consultant on Orissa’s revenue system (World Bank); International consultancy support for computerization o f Sales Tax, and the design, preparation and training for introduction o f Value Added Tax (DFID); Compiling a database o f a l l employees paid out o f the budget o f Government o f Onssa (DFID). Inputs to the Administrative Reform Cel l (DFID, see below) including support for 10 Organisational Reviews o f Go0 Departments with a view to planning more efficient and effective government; A small challenge fund program to build capacity among Orissa c i v i l society organizations and to encourage their dialogue with GOO, with an emphasis o n strengthening local governance (DFID).

Health and business deregulation sectors (DFID).

Annex F Page 2 of 3

2. First, a DFID-funded international consultant camed out a study to assess the impact o f the proposed reform measures on the poor - concluding that most o f the reforms are l ikely to be poverty-neutral or have a positive impact on the poor. A DFID grant has been set up with a local research institution (NC Centre for Development Studies) to establish an Academic & Research Support Unit dedicated to GoO’s Poverty Task Force (PTF). With the help o f this grant, the PTF commissioned a report o n poor people’s perceptions o f service delivery in 2001. Significant activities being taken forward by the PTF include: (i) assessing poverty monitoring activities across l ine departments; (ii) strengthening capacity in the Directorate o f Economics and Statistics (DES) including computerization; (iii) improving capacity for poverty analysis and developing a comprehensive baseline o f poverty and development indicators (iv) reviewing expenditures o n social services and anti-poverty programs, including expenditure trackmg in two departments and (v) improving identification and targeting o f BPL households. The PTF has also commissioned a number o f studies analyzing different aspects o f poverty in Orissa (including institutional, fiscal and socio-economic issues) as we l l as the impact o f ongoing interventions. These will in form the poverty reduction strategy o f the Government.

3. T o underpin i t s governance and c i v i l service reform agenda, a study was conducted o f legal and judicial precedents in retrenchment in India. A senior Indian consultant was also engaged since early 2002 (funded at different times by DFID or the Bank) to serve as strategy advisor to G o 0 Administrative Reform Cel l (ARC) set up to guide and monitor the process o f administrative reform. A priority task for the ARC has been to co-ordinate and oversee the organizational reviews o f key government Departments, to appraise their functions, scale, organizational stmcture, and staffing needs. In the context o f the current fiscal crisis in Orissa, one key immediate output o f the reviews was and will be the identification o f surplus posts and personnel. The reviews, however, have the broader objective o f improving the efficiency, effectiveness and responsiveness o f government. Consultancy inputs for these reviews have been and will continue to be provided by DFID.

4. In order to complement the assistance provided under the Wor ld Bank assisted power sector project, due to be concluded in 2004, DFID i s extending i t s current technical assistance to the power sector for a year.

5. In 2002, the Bank carried out a preliminary public accountability assessment in Orissa as part o f preparatory technical work for the programmatic adjustment loan. On GoO’s request, the Bank and DFID have conducted a comprehensive State Financial Accountability Assessment. The need to improve management o f the state’s treasuries was suggested by the assessment, and DFID i s supporting a Treasury Management Systems Scoping Study.

6. The Department o f Information Technology o f GOO, has prepared a proposal for DFID assistance to formulate an IT Strategy. The proposal calls for establishment o f a state- wide V-SAT based G R A M S A T network in al l 314 blocks and 30 districts o f Orissa. In order to take this forward, DFID has funded a workshop to share knowledge o f what has been initiated in Onssa and best practice in other Indian States. This exchange o f views i s expected to help decide the best way to proceed with a government-wide IT strategy, focusing on the user requirements o f the priorit ized departments.

7. As part o f the decentralization agenda, the panchayats (rural local bodies) play a central role in rural development. A large major i ty o f panchayat members elected in 2002 are new and need training to discharge their responsibilities effectively. G o 0 submitted a

Annex F Page 3 of 3

proposal for DFID assistance on capacity building for PRI members in Orissa, and a workshop was organized in April 2003 o n Training Needs Analysis for the PRI officials. The findings o f the workshop are under discussion between Go0 and DFID.

8. Finally, a training program in public expenditure management for key officers in the Finance Department, the l ine departments, the Panchayat Raj institutions, and members o f the legislative assembly, i s being designed, for implementation with DFID and Bank assistance. The program’s focus will be mainly o n budget preparation and execution; project appraisal; project management; accounting and reporting; and elementary budgeting for PRIs staff.

Annex G Page 1 of 6

EXTERNAL RELATIONS DEPARTMENT

Public I n formation Notice

Public Information Notice (PIN) No. 031104 August 2 1,2003

International Monetary Fund 700 19th Street, NW Washington, D.C. 20431 USA

IMP Concludes 2003 Article I V Consultation with India

Public Information Notices (PINS) are issued, (i) at the request o f a member country, fo l lowing the conclusion o f the Article IV consultation for countries seeking to make known the views o f the IMF to the public. This action i s intended to strengthen IMF surveillance over the economic policies o f member countries by increasing the transparency o f the IMF's assessment o f these policies; and (ii) fol lowing pol icy discussions in the Executive Board at the decision o f the Board.

On July 18, 2003, the Executive Board o f the International Monetary Fund (IMF) concluded the Art ic le IV consultation with India.'

Background

Economic activity in 2002/03 was uneven across key sectors. Growth i s estimated to have slowed to 4% percent in 2002/03 from 5% percent in 2001/02, with the sharp drought-induced decline in agriculture (by 3% percent) offsetting the recovery in industry and the strong growth in services. Within industry, infrastructure-related sectors seem to have led the way, on the back o f the publ ic ly sponsored national highways development project.

Inf lat ion has picked up in recent months, mostly owing to supply side factors. WPI inflation rose f rom under 2 percent in April 2002 to about 6% percent at end-April 2003 before subsiding again to around 5 percent in early June. The pickup was mostly due to the higher global o i l prices and a drought, which affected edible o i l prices.

Balance o f payments developments have been favorable and foreign exchange reserves are being accumulated at an unprecedented rate. Goods and services export growth was strong-benefiting f rom improved competitiveness and the global trend towards outsourcing driven by the need to cut costs. Notwithstanding the relatively strong growth in non-oil imports (13% percent in 2002/03), India registered a current account surplus estimated at % percent o f GDP in 2002/03. Capital account developments appear to have been driven by dollar weakness and expectation o f a rupee appreciation, a highly favorable interest rate differential, and changes in international banlung practices. The result o f these developments has been an unprecedented accumulation o f reserves- reserves reached $83 b i l l ion in mid-July-and an appreciation o f the rupee vis-a-vis the dollar by around 4 percent in the year to mid-July 2003.

Financial markets were characterized by general weakness in equity prices, coupled with a sustained ral ly in bond markets. Stock market developments in India have generally been weak, but have improved measurably since April 2003 along with global and regional equity markets. In contrast, bond markets have witnessed a sustained rally. Easy liquidity conditions, coupled with weak investment demand and structural reforms that have deepened government securities markets,

' Under Articled IV of the IMF's Articles o f Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses w i th officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion o f the discussion, the Managing Director, as Chairman of the Boards, summarizes the views o f the Executive Directors, and this summary is transmitted to the country's authorities.

Annex G Page 2 of 6

resulted in a sharp decline in interest rates to historical lows, notwithstanding the large government borrowing needs. These conditions also allowed a lengthening o f the maturity o f government debt, and led to a flattening o f the y ie ld curve and a narrowing o f spreads between government and corporate bonds, across the maturity and credit quality spectrum.

Monetary and exchange rate pol icy was aimed at maintaining easy liquidity conditions whi le also attempting to limit volatility in the rupee and stem i t s appreciation. Since April 2002, the bank rate-the key pol icy signaling rate-has been reduced by 50 bps to 6 percent, the rep0 rate by 100 bps to 5 percent, and the cash reserve ratio (CRR) by 1 percentage point to 4% percent. At the same time, the RBI continued i t s pol icy to contain volatility in the exchange rate, with the effect o f limiting the appreciation o f the rupee. This intervention in foreign exchange markets was accompanied by sterilization operations. The authorities also used the opportunity provided by the strong reserve position to further open up the capital account, prepay some external debt, and offer debt rel ief to H P C nations.

General government fiscal imbalances in 2002/03 are l ikely to be worse than expected in the budget, The provisional estimate i s for a central government deficit (including privatization receipts in revenues) o f 5.9 percent o f GDP, compared with the budget target o f 5.3 percent o f GDP. The outcome for the subnational governments in 2002/03 i s also l ikely to be worse than expected-the staff estimates a deficit o f over 4% percent o f GDP, compared with a budget target o f 4 percent o f GDP. Revenue shortfalls were the main factors underlying the weaker-than-planned outcome, notwithstanding some expenditure compression. Consequently, the general government deficit in 2002/03 i s estimated to be about 10 percent o f GDP and general government debt about 85 percent of GDP. Contingent liabilities in the form o f central and state government guarantees stand at around 12 percent of GDP.

The budget for 2003/04, announced in February 2003, makes litt le headway in checkmg fiscal imbalances. The deficit i s to be reduced by only about !A percent o f GDP to 5.6 percent o f GDP in 2003/04.2 On the revenue side, the budget includes some measures to improve tax administration, but does l itt le to reduce exemptions. The budget also expects to collect some Rs. 132 b i l l ion (% percent o f GDP) in privatization revenues, compared with about Rs. 30 b i l l ion actually realized in 2002/03. There were only a few measures aimed at containing expenditure. A central plank o f the budget i s the promotion o f infi-astructure projects worth Rs. 600 b i l l ion (2% percent o f GDP) over the medium term. These projects are to be undertaken throughspublic-private partnerships, with the government expecting to contribute Rs. 20 b i l l ion annually.

The budget also contains several proposals aimed at taking advantage o f the l o w interest rate environment to restructure the debt obligations o f both the central and state governments. The central and state governments have agreed that, over a three year period ending in 2004/05, all states' debt owed to the central government carrying interest rates in excess of 13 percent will be swapped for additional proceeds f rom small savings and market loans, both o f which currently have lower interest rates. In addition, the government also offered a scheme to buy back banks' holdings of central government securities which were contracted under high interest rates o f the early 1990s. These securities are to be bought back on a voluntary basis f rom banks that are in need o f liquidity or want to encash the premium o n their bond holdings for malung provisions on their nonperforming assets (NPAs). T o provide the incentive for banks to do the latter, the authorities have allowed a tax deduction o n the premium income if banks use it to increase provisions.

The staff projects that the economy will grow at 5% percent in 2003/04, broadly in l ine with consensus forecasts, but there i s some upside potential to this projection. Ear ly indications are for good monsoon rainfall. The projection for 2003/04 incorporates a recovery in agriculture, but there

On the staffs definition-excluding privatization receipts from revenues-the deficits would be broadly unchanged in 2003/04 relative to 2002/03.

Annex G Page 3 of 6

i s potential for an even stronger rebound in this sector. Inflation i s expected to moderate to around 4% percent by end-2003/04. The external current account i s projected to remain in surplus.

Executive Board Assessment

Executive Directors viewed the recent resilience o f the Indian economy as testimony to the benefits o f the reforms undertaken since the early 1990s. They noted that, despite a weak global environment and a severe drought during 2002-03, the economy grew at a rate that compares favorably with that o f most other countries. Directors welcomed the significant strengthening o f India's extemal position-manifest in the high level o f reserves and l o w external vulnerability. At the same time, Directors noted that the slowdown in growth since the mid-1990s i s o f concern because o f i t s implications for poverty reduction. They reiterated the v iew that higher, sustained output and employment growth rests on pushing ahead with fiscal consolidation and critical structural reforms. Some Directors asked for further study o n isolating the cyclical and structural factors affecting growth.

Directors stressed that India's large fiscal deficits and public debt are exacting an economic cost in terms o f foregone growth. Despite the apparent ease with which the fiscal deficit has been financed, they noted the detrimental effects o n growth through crowding out o f critically needed spending o n physical and social capital and through the preemption o f resources for private investment. Directors pointed out that the large fiscal imbalances leave l i t t le r o o m for maneuver in the face o f shocks and have tended to result in ad hoc pol icy changes, which increase investment uncertainty. They believed that the authorities should use the favorable external and interest rate environment to build the necessary polit ical consensus for accelerating needed fiscal and structural adjustments. Directors noted that the strategy o f postponing consolidation whi le attempting to stimulate growth i s r i sky , and that few countries have had success in growing out o f severe fiscal problems without implementing a comprehensive reform program.

Directors looked forward to passage o f the Fiscal Responsibility and Budget Management (FRBM) bill, and welcomed steps to advance implementation o f provisions o f the FRBM. They noted that the FRBM would bring important discipline and transparency to the central government budget process and enable the authorities to draw up a clear and time-bound p lan for restoring fiscal sustainability. They urged early introduction o f medium-term fiscal plans and targets, anchored by clearly specified fiscal rules that can be enforced. Directors noted that fiscal adjustment needs to focus on revenue mobil ization through widening the tax net and simplifying the tax system. In particular, the range o f exemptions should be narrowed and the scope for discretion reduced. Directors also encouraged the authorities to use the recommendations in the various reports o n tax and expenditure reform that have been prepared in recent years to draw up a roadmap for fiscal reforms with explicit timetables.

Directors recognized that some important initiatives have been undertaken to strengthen state finances in recent years, including the use o f performance-based transfers f rom the center, limits o n government guaranteed loans, and the introduction o f fiscal responsibility legislation by some states. Nevertheless, Directors pointed out that state finances have improved only moderately, suggesting that much more needs to be done, including in the areas o f reforming the tax system, divesting public enterprises, and reducing subsidies and losses in the power sector. In this context, Directors regretted the delay in the introduction o f the value added tax (VAT). They urged that top priority be given to developing the necessary consensus to implement the VAT within the current fiscal year, with the central government launching a concerted campaign jo in t ly with the states about the VAT's benefits.

With inflationary pressures under control, Directors viewed the maintenance o f easy monetary conditions as appropriate. They welcomed recent cuts in administered savings rates and pol icy rates, noting these should al low banks to lower lending and deposit rates and narrow the rupeeidollar interest rate differential. However, Directors noted that administered interest rates and

Annex G Page 4 of 5

directed lending reduce the effectiveness o f monetary pol icy and hinder financial development. M a n y Directors encouraged a clearly specified automatic link between administered rates and market rates to prevent a prolonged misalignment o f interest rates.

Directors noted that, going forward, the scope for continued sterilized intervention could narrow and make the task o f managing the monetary impact o f balance o f payments inf lows increasingly diff icult. Several Directors cautioned that the current strategy could inadvertently expose the system to more risk-through further increases in interest-sensitive inf lows and unhedged foreign currency exposure in the corporate sector. They welcomed recent measures to facilitate and encourage hedging, but noted that such measures would be most effective if market players perceive the need to undertake such hedging activities. Whi le a few Directors noted the potential implication o f exchange rate appreciation, most Directors encouraged the authorities to gradually al low greater f lexibi l i ty in the exchange rate.

Directors saw the continued strength in the external accounts as a good opportunity to further liberalize external transactions. They welcomed measures to liberalize capital account transactions, but going forward, encouraged deeper trade reforms. Directors singled out the need to simplify the trade regime by lowering tariffs, introducing a more uni form duty structure, significantly reducing exemptions and eliminating administrative barriers. They welcomed India's decision to grant debt rel ief under the enhanced HIPC Initiative.

Directors commended the steady progress made in moving ahead with financial sector reforms. They welcomed the introduction of risk-based supervision and implementation o f a prompt corrective action framework for commercial banks. They encouraged the introduction o f t ime limits o n remedial actions in the latter, so as to increase the framework's effectiveness. Directors also saw a need to broaden the scope of the market for interest rate derivatives and to tighten the regulatory treatment of state-government guaranteed loans.

Directors welcomed the recent reforms aimed at providing a comprehensive framework to clean up banks' impaired assets and strengthen their underlying finances. In particular, Directors saw the passage o f the Securitization Act, the issuance o f the accompanying guidelines by the Reserve Bank of India, and the amendments to the Companies A c t creating the National Company L a w Tribunal as important steps. To give full effect to these reforms, they encouraged early repeal o f the Sick Industrial Companies A c t and steps to ensure that borrowers are not able to obtain unduly long protection against collateral enforcement under the new tribunal.

Directors encouraged the authorities to advance the timetable for bringing India's classification and provisioning standards in line with international best practice. They viewed the government's new debt buyback scheme with banks, as wel l as banks' improved profitabil ity and the new securitization framework, as a good opportunity to shorten the timeframe for classifying loans as doubtful and for building provisions needed under the new norms. Directors commended the recent passage o f the anti-money-laundering law, and urged the authorities to complete the questionnaire o n money laundering and terrorism financing.

Directors also encouraged further steps to strengthen the performance and efficiency o f the banking system, including reducing government ownership and improving the commercial orientation o f public sector banks. Some Directors noted that raising the foreign direct investment limit in private banks and lifting the restrictions on voting rights would be complementary steps to strengthen competition in the banking system. Directors also saw the need for a clearer strategy o n the future role o f development finance institutions, given their weak overall financial condition. Owing to the current fiscal situation and need to contain systemic risk, they encouraged the authorities to move away f rom government-orchestrated rescue packages o f these institutions, with l i t t le conditionality.

Directors viewed sustained progress o n other reforms also as critical t o improving growth prospects and generating j ob opportunities. They welcomed recent steps to further decontrol fertilizer

Annex G Page 5 of 6

distnbution and the planned introduction o f a pricing system to discourage inefficient fertilizer production. However, Directors called for early action on lifting restrictions on agncultural marketing and trade and reforming the public distnbution system, minimum support prices, and fertilizer subsidies. As for industry, they welcomed the removal o f key goods f rom the l i s t reserved for small-scale industries, the enactment o f a more modem competition bill, and the passage o f a new Electricity Bill allowing the power sector to be opened up to greater competition. Directors encouraged further progress with small-scale dereservation, and on reforming labor laws to allow more flexibility, reflecting market conditions.

Directors noted the promising start to the process o f privatization in the f i rst h a l f o f 2002/03, and encouraged publicizing the benefits o f previous divestment to build popular support for this reform. They also supported the authorities' proposal to create a fund for divestment receipts, t o be used for debt reduction and identified development programs, rather than for recurrent spending.

Directors welcomed the smooth operation o f periodic price adjustments for diesel and petrol. Going forward, they encouraged the authorities to formulate an explicit strategy to deal with episodes when o i l prices temporarily move out o f a normal range.

Directors commended India for completing assessments under most o f the Fund's standards and codes. They welcomed India's subscription to the SDDS, but urged that pr ior i ty be given to addressing shortcomings in the timeliness and coverage o f fiscal data to support the objective o f fiscal consolidation. They also encouraged the authorities to facilitate early completion o f the Statistics ROSC report.

Annex G Page G of G

India: Selected Economic Indicators I’ 1998199 1999100 2000101 2001102 2002103

Domestic economy Change in real GDP at factor cost Change in industrial production Change in wholesale prices Change in consumer prices

Extemal economy Merchandise exports ” Merchandise imports ” Current account balance (In percent o f GDP) Direct investment, net 31

Portfolio investment, net Capital account balance Gross official reserves 41

(In months o f imports) ” Extemal debt (in percent o f GDP) 41

Short-term debt (in percent o f GDP) 41

Debt service ratio (in percent o f current account receipts) Change in real effective exchange rate (in percent) 41

71

Financial variables Central govemment balance (in percent o f GDP) ” General govemment balance (in percent o f GDP) Change in bank credit to commercial sector Change in broad money 4’

Interest rate 41 91

6.5 4.1 6.0

13.1

34.3 47.5 -4.0 -1.0 2.4

-0.1 8.4

32.5 5.8

23.4 2.7

19.1

-4.6

-5.5

-8.8

14.5

19.4 8.7

(In percent)

6.1 4.4 5.6 6.6 5.0 2.7 3.4 7.1 3.4 3.4 3.8 4.3

(In billions o f U.S. dollars)

37.5 44.9 55.4 59.3 -4.7 -3.6 -1.1 -0.8 2.1 3.3 3.0 2.6

10.4 10.0 38.0 42.3 6.0 6.9

22.0 21.9 2.8 2.3

17.8 15.3

1.1 6.2

(In percent)

-5.5 -5.7

-9.9 -9.9

18.3 15.8

14.6 16.8 9.2 8.7

44.9 57.6

0.8 0.2 4.7 2.0

10.6 54.1

7.7 20.5

3.0

9.5

1.7

-6.3

-10.5

11.3

14.2 6.1

4.3 5.8 3.6 4.0

53.0 65.5

3.7 0.7 3.6 0.9

12.6 75.4 9.2

3.0

14.1

-5.6 6‘

20.1 6/

-6.0 6’

-10.06‘

19.6

15.0 5.9

Sources; Reserve Bank o f India; Ministry o f Finance; CEIC; Intemational Financial Statistics; and IMF staff estimates.

(July 18, 2003). ” Balance o f payments basis. 3’ Net foreign direct investment in India less net foreign investment abroad. 4’ End o f period. ” Imports o f goods and services projected over the following twelve months. 61 Staff estimates for 2002103. ’ I Residual maturity basis, except contracted maturity basis for medium- and long-term nonresident Indian accounts. ” Excluding divestment receipts f rom revenue and onlending o f small saving collections f rom expenditure and net lending. 9/ 9 1 -day Treasury Bill rate.

Data are for April-March fiscal years, as available at the time o f the Board Meeting for the 2003 Article IV consultation

Annex H Page 1 of 6

1983-93 2o02 2003 (average annual growth) Agriculture 3.1 2.4 -5.2 9.1 Industry 6.4 5.9 6.4 6.7

Manufacturing 6.1 6.0 6.2 7.3 Services 6.7 8.1 7.1 8.7

Private consumption 5.2 4.5 -0.8 7.6 General government consumption 5.6 7.1 3.1 9.9 Gross domestic investment 5.3 7.5 9.5 12.0

Ind ia at a dance

Growth of exports and imports (Oh) 30

20

' O

-10

----Exports *imports

9/20/04

POVERN and SOCIAL

2003 Population, mid-year (miliionsJ GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1997-03

Population (%J Labor force (%J

Most recent estimate (latest year available, 199743) Poverty (% of population below national poverty IIneJ Urban population (% of totalpopulationJ Life expectancy at birth (years) infant mortality (per 1,000 live births) Child malnutrition (% of children under 5J Access to an improved water source (% of population) Illiteracy (% ofpopulation age 75+J Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983

GDP (US$ billions) 212.3 Gross domestic investmenffGDP 19.7 Exports of goods and servicesIGDP 6.0 Gross domestic savings/GDP 17.6 Gross national savingslGDP 18.4

Current account balance/GDP -1.7 Interest paymentsfGDP 0.4 Total debffGDP 15.1 Total debt service/exports 16.5 Present value of debffGDP Present value of debffexports

1983-93 1993-03 (average annual growthl GDP 5.4 5.9 GDP per capita 3.3 4.2 Exports of goods and services 8.0 13.4

India

1,064.4 540

569.8

1.6 2.1

29 28 63 65 47 84 39 99

107 90

1993

273.9 21.3 10.0 22.5 23.1

0.6 1.3

34.4 25.2

2002

4.6 3.0

21.8

South Asia

1,425 51 0 726

1 8 2.3

28 63 68 48 84 41 95

103 80

2002

510.2 22.8 15.2 24.2 26.3

0.7 0.7

20.6 13.9

2003

8.3 6.7 7.0

LOW- income

2,310 450

1,038

1.9 2 3

30 58 82 44 75 39 92 99 85

2003

603.3 23 8 14.5 22.2 24.4

1.4 18.3 19.6 18.3

200347

6.0 4.6 9.2

Development diamond'

Life expectancy

7

GN I Gross per primary capita nrollment

1 Access to improved water source

India Low-income group -

Economic ratios.

Trade

T

Investment Domestic savings

1

Indebtedness

India - Low-income group -

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

1983 Igg3 2o02 Zoo3 Growth of investment and GDP (Oh)

36.6 31.0 22.7 22.2 ' 5 T

I 25.8 26.3 26.6 26.6 10 16.3 16.1 15.6 15.8 37.6 42.8 50.7 51.2

71.8 67.4 65.0 64.9 1 O' 98 99 00 01 02 d3 I "GDI *GDP 10.6 11.4 12.5 12.8

8.1 10.0 15.6 16.0 I

Annex H Page 2 of 6

Statistical Annex

India

PRICES and GOVERNMENT FINANCE

Domestic prices ( X change) Consumer prices implicit GDP deflator

Government Finance (% of GDP, includes current grants) Current revenue Current budget balance Overall sumius/deficit

TRADE

(US$ millions) Total exports (fob)

Tea Iron Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) import price index (1995=100) Terms of trade (1995-100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, local/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1983 1993

14.4 5.0 8.9 9.5

.. 17.5

.. -4.3

.. -8.3

1983 1993

9,861 22,683 348 814 434 888

5,234 16,657 16,575 26,739 1,694 327 4,703 5,754 3,069 6,243

101 104 106 96 96 109

1983 1993

13,141 27,947 18,767 31,468 -5,626 -3,521

-527 -3,270 2,558 5,265

-3,595 -1,526

2,777 10,160 818 -8,634

5,649 19,254 10.3 31.4

1983 1993

32,139 94,342 1,779 10,123 7,820 16,192

2.618 8,345 246 1,509

91 294

380 368 1,360 1,754 1,318 2,634

0 668 0 3,567

1,072 929 1,345 1,716

120 964 1,225 753

216 838 1,009 -86

2002

4.1 3.5

17.5 -6.0

-10.2

2002

52,512 1,432 1,996

40,245 65,422

2,411 17,640 13,498

88 96 92

2002

77,475 83,620 -6,145

-4,935 14,807

3,727

13,253 -16,980

75,428 48.4

2002

105,210 5,141

21,642

13,042 3,029

637

410 -3,657 -1,861 3,611

944

1,523 1,465 3,196

-1,730 470

-2,200

2003

3.7 3.7

18.7 -4.9 -9.3

2003

62,952 1,321 2,341

47,616 79,658 3,059

20,570 17,132

93 100 94

2003

90,568 96,590 -6,022

-4,703 18,885

8,160

8,820 -16,980

11 1,648 46.0

2003

118,075 4,128

22,632

20,545 2,048

693

559 -2,765 -1,983 3,137

11,355

1,169 1,557 2,403 -846 338

-1,184

98 99 00 01 02

-GDP deflator +CPI

Export and Import levels (US$ mill.)

loo'ooo T

I Exports Imports

Current account balance to GDP (%)

' T

j Composition of 2003 debt (US$ mlll.)

A - IBRD B - IDA D Other multilateral F - Private C - IMF

E - Bilateral

G - Short-term

Development Economics 9/20/04

Annex H Page 3 of 6

India Social Indicators Fabst single y a w same reglonlincbrm group

lQT&?K

813.5 2.5

31,3 5.3

190 21

2.5

60 12 48

52 . 5 2

51

127 202

324 353

1 9 W 6

765.1 2 1

24.3 4.2

W U 41 36

3.3

1 18

57 57 57

119 173

28: 279

Wb2002

1 , O W . G 1.7

2.9 28.1

z8.6 2d .? N . 2

470 1 % 134

32.5 E.8

41.6

0.8 4.1

.J3 91 76

84 95 79

67 70 43

liB 83 64

65 00

356 l#l 2d V 4 3

south Asia

1,40'.5 1 8

3.2 21.0

460

1.0 2.3

a2 a8 75

84 534 80

Eli 7D 46

153 62 64

68 sti

YY2 2c2

38 . .I

LOW- inwmp

2.494.6 1.9

'30.6 3.5

430

1.1 8.1

ail 85 74

?$ 90 70

€5 F5 42

59 9 3 En

10 12!

31 0 259

Annex H Page 4 of6

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 YO of GDP) Gross domestic producta

Agriculture Industry Services

Total Consumption Gross domestic f ixed investment

Government investment Private investment

~ x p o r t s (GNFS~ Imports (GNFS)

Gross domestic savings Gross national savings'

Memorandum items Gross domestic product (US$ mi l l ion at current prices) GNI per capita (US$, Atlas method)

100.0 26.2 25.9 47.9

78.3 21.8

6.2 15.6

11.8 13.7

21.7 23.6

446968

440

100.0 24.6 26.6 48.8

78.1 22.0

6.1 15.9

13.9 14.6

21.9 23.9

457377

450

Real annual growth rates ("?, calculated from 1993 prices) Gross domestic product at market prices 7.1 3.9 Gross Domestic Income 5.5 3.0

100.0 25.0 25.7 49.4

78.3 21.9

5.5 16.4

13.5 14.1

21.7 23.7

478524

460

5.2 4.8

Real annual per capita growth rates (%, calculated from 1993 prices) Gross domestic product at market prices 5.3 2.2 3.5 Total consumption 3.1 -2.4 4.0 Private consumption 1.7 -2.7 4.5

Balance o f Payments (US% millions) EXPOITS (GNFS)~ 53251 63764 65580

Merchandise FOB 37542 44894 44915 Imports (GNFS)~ 67028 75656 73706

Merchandise F O B 55383 59264 57618

N e t current transfers 12256 12798 12125 Resource balance -13777 -11892 -8126

Current account balance -5080 -3926 398

Ne t private foreign direct investment 2165 3272 4741 Long-term loans (net) 1214 4147 -459

Off icial 1068 -237 365 Private 146 4384 -824

Other capital (net, incl. errors & ommissions) 7237 2363 7077 Change in reservesd -5536 -5856 -11757

Memorandum items

Real annual growth rates ( YR93 prices) Resource balance (% o f GDP) -3.1 -2.6 -1.7

Merchandise exports (FOB) 14.2 22.0 5.5 Merchandise imports (CIF) 9.4 -0.9 4.9

100.0 22.7 26.6 50.7

77.5 22.5

5.8 16.7

15.2 15.6

22.5 24.6

5 10240

470

4.6 2.5

3.0

-2.4 -1.8

77475 52512 83620 65422

14807 3727

361 1

-6 145

-4804 -3657 -1 147 14446

-16980

-1.2

18.3 9.5

100.0 100.0 100.0 22.2 20.8 20.3 26.6 26.4 26.5 51.2 52.7 53.2

77.7 77.2 77.1 22.8 23.4 23.6

5.4 5.5 5.5 17.4 17.9 18.1

14.5 16.4 17.3 16.0 17.9 18.9

22.3 22.8 22.9 24.5 24.2 24.6

603286 666946 727707

540 590 650

8.3 5.6 6.5 7.7 5.8 6.4

6.7 4.1 5.1 6.4 3.8 4.3 6.0 4.2 4.5

90568 62952 96590 79658

18885 8160

3137

223 1

7540

-6022

- 1857

-4088

-16980

109308 76705

11 9520 98435

18406 -10213

-936

4020 1558 1908

15463 -350

-20105

125901 88747

137702 113795

20388 608

4700

1586

9732

-1 1801

- 1675

-3261

-13365

-1.0 -1.5 -1.6

10.2 9.4 19.8 19.7 8.9 23.5

100.0 19.8 26.7 53.5

76.5 24.0

5.6 18.4

18.1 19.5

23.5 25.2

190276

700

6.0 5.9

4.7 3.3 3.2

14291 1 101263 154109 127540

20165 2152

345 1 472

1280

6806

-1 1198

-808

-12882

-1.4

15.0 14.7

Annex H Page 5 of 6

India - Key Economic Indicators (Continued)

Actual Estimate Projected Indicator 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Public finance (as % of GDP at market prices)e Current revenues 11.5 Current expenditures 24.0 Current account surplus (+) or deficit (-) -6.5 Capital expenditure 3.3 Foreign financing 0.0

Monetary indicators M2IGDP 58.0 Growth o f M 2 (%) 14.6 Private sector credit growth I 62.3 total credit growth (%)

Price indices( YR93 =loo) Merchandise export price index 92.2

Merchandise terms o f trade index 83.0 Real exchange rate (US$/LCU)' 66.5 Real interest rates

3.3 GDP deflator (% change) 3.8

Merchandise import price index 111.1

Consumer price index (% change)

11.1 11.7 11.5 18.1 19.6 19.9 20.2 24.6 24.3 23.5 23.6 24.3 23.9 23.1

3 .O 3.5 4.2 4.4 4.1 4.8 5.0 0.3 0.6 -0.5 -0.4 0.3 0.3 0.3

-6.9 -6.6 -6.0 -4.9 -4.7 -4.0 -3.5

62.8 65.1 69.9 11.5 72.2 73.0 74.1 16.7 14.4 15.0 14.8 11.8 12.6 12.4 55.0 52.9 62.1 -115.7 58.1 12.2 14.0

90.4 85.7 84.7 92.2 102.6 99.1 98.3 119.9 111.1 115.3 117.2 133.1 124.6 121.7 15.4 17.1 13.5 18.6 71.1 79.6 80.8 68.4 68.4 74.3 12.6 0.0 0.0 0.0

3.9 3.1 4.1 3.7 4.9 4.3 4.3 3.8 3.9 3.5 3.1 4.8 4.5 4.5

a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use o f IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units.'' An increase in USSILCU denotes appreciation.

Annex H Page 6 of 6

Ind ia - Key Exposure Indicators

Actual Estimate Projected Indicator 1999-00 2000-01 2001-02 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$m)a

N e t disbursements (uS$m)a -443 3867 -1204 -5518 11048 6179 6989 9225

Total debt service (TDS) (US$m)a

9845 10842 9327 13043 14469 11337 17510 16091

Debt and debt service indicators

("/I 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 Concessional/TDO 45.4 37.9 37.8 38.2

IBRD exposure indicators (%) IBRD DSipublic DS 19.6 11.5 16.0 24.8 17.2 6.8 3.7 7.9 Preferred creditor 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$mld 7509 6915 7015 5141 4324 5058 6123 7520 Share o f IBRD portfolio (%) 6.2 5.8 5.7 4.4 3.9 4.7 5.7 7.0 IDA TDO (US$m)d 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 (USSm)

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-

b. "XGS" denotes exports o f goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the

Bank for Intemational Settlements. d. Includes present value o f guarantees. e. Includes equity and quasi-equity types o f both loan and equity instruments.

term capital.