Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No.25057-N

MEMORANDUM OF THE PRESIDENT

OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

THE INTERNATIONAL DEVELOPMENT ASSOCIATION

AND THE

INTERNATIONAL FINANCE CORPORATION

TO THE

EXECUTIVE DIRECTORS

ON A

COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT

OF THE

WORLD BANK GROUP

FOR

INDIA

January 15, 2003

This document has a restncted distnbution and may be used by recipients only m the performance oftheir official duties Its contents may not otherwise be disclosed without World Bank authorization

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CURRENCY EQUIVALENTS

Currency unit: Rupees (Rs.) as of October 31, 2002US$1 = Rs. 48.41

GOVERNMENT FISCAL YEAR

April 1-March 31

ABBREVIATIONS AND ACRONYMS

AAA Analytic and Advisory Activities Gol Government of IndiaADB Asian Development Bank GSDP Gross State Domestic ProductAP Andhra Pradesh GTZ German Development CorporationAPL Adaptable Program Loan IBRD International Bank for ReconstructionARPP Annual Report on Portfolio and Development

Performance ICRIER Indian Council for Research onAusAID Australian Agency for International International Economic Relations

Development IDA International DevelopmentANL Anti-Money Laundering AssociationBOP Balance of Payments IFC International Finance CorporationBJP Bharatiya Janata Party IEP International Federation of AntiCAE Country Assistance Evaluation Leprosy AssociationsCAS Country Assistance Strategy IMF International Monetary FundCDF Comprehensive Development IMR Infant Mortality Rate

Framework IT Information TechnologyCDS City Development Strategy KfW Kreditanstalt fur WiederaufbauCIDA Canadian International Development JBIC Japan Bank for International

Agency CooperationCII Confederation of Indian Industry MDGs Millennium Development GoalsCMR Child Mortality Rate MIGA Multilateral Investment GuaranteeCRISIL Credit Rating and Information Agency

Services of India Limited MP Madhya PradeshCPI Consumer Price Index MUTP Mumbai Urban Transport ProjectDANIDA Danish International Development MYRADA Mysore Rural Agricultural

Assistance Development Agency (an NGO)DFID Department of International NCAER National Council of Applied

Development (U.K) Economic ResearchDPEP District Primary Education Program NGO Non-Governmental OrganizationDPIP District Poverty Initiatives Project NHAI National Highway Authority of IndiaEU European Union NHFS-2 National Family Health SurveyFDI Foreign Direct Investment NPA Non-Performing AdvancesFSAP Financial Sector Assessment Program NSS National Sample SurveyGDP Gross Domestic Product OED Operations Evaluation DepartmentGDPfc Gross Domestic Product at factor cost O&M Operations and MaintenanceGEF Global Environmental Facility PER Public Expenditure ReviewGNFS Goods and Non-factor Services

Note: Fiscal years indicated by numerals only-e.g., 2000/01-refer to the Government of India fiscal year(April 1-March 31). Fiscal years indicated by "FY"-e.g., FYOI-refer to the Bank Group's fiscal year (July 1-June 30).

FOR OFFICIAL USE ONLY

PPIAF Public-Private Infrastructure UNDAF UN Development Assistance

Advisory Facility Framework

PSBs Public Sector Banks UNDCP United Nations International Drug

PSP Private Sector Participation Control Program

PSU Public Sector Undertakings UNDP United Nations Development

PWD Public Works Department Program

QRs Quantitative Restrictions UNESCO United Nations Educational,

RBI Reserve Bank of India Scientific and Cultural Organization

RWSS Rural Water Supply and Sanitation UNFPA United Nations Population Fund

SDC Swiss Agency for Development & UNICEF United Nations Children's Fund

Cooperation UNEFEM United Nations Development Fund

SEB State Electricity Board for Women

SEWA Self Employed Women Association UP Uttar Pradesh

(NGO) USAID U.S. Agency for International

SIDA Swedish International Development Development

Agency VAT Value-Added Tax

SME Small and Medium Enterprise WHO World Health Organization

SSPR Structural and Social Policy Review WBI World Bank Institute

TA Technical Assistance WPI Wholesale Price Index

TB Tuberculosis WTO World Trade Organization

ULB Urban Local Body WWF World Wide Fund for Nature

UNAIDS Joint United Nations Program onH1V/AIDS

The World BankVice President Ms. Mieko Nishimizu

Country Director Mr. Michael F. Carter

Task Manager Ms. Lili Liu

The International Finance CorporationVice President Mr. Assaad Jabre

Director, South Asia Department Mr. Dirnitris Tsitsiragos

Task Manager Mr. Neil Gregory

This document has a restricted distribution and may be used by recipients only inthe performance of their official duties. Its contents may not be otherwise disclosedwithout World Bank authorization.

TABLE OF CONTENTS

I. POVERTY AND DEVELOPMENT: GOALS AND CHALLENGES ..................................... 1

II. RECENT POLITICAL, ECONOMIC AND POLICY DEVELOPMENTS ............................ 3

Political Developments .......................................................... 3Economic and Policy Developments .......................................................... 3

III. PROGRESS IN CAS IMPLEMENTATION ........................................................... 6

A. Strengthening the enabling environment for growth .......................................................... 6Fiscal Reform, Governance Reform and Decentralization ................................................. 6Improving Competitiveness of Industries and Services ..................................................... 7Financial Sector Development .......................................................... 7Improving the quality of Infrastructure .................... 8.....................................8Accelerating Rural Growth .......................................................... 12

B. Supporting Critical Pro-Poor Interventions .................... ..................................... 13Promoting Education and Health for All ......................................................... 13Accelerating Pro-Poor Rural Development ......................................................... 14Mainstreaming Social and Environmental Concerns ....................................................... 15

C. Supporting Comprehensive State Reforms ......................................................... 16Key Reforms and their Outcomes ......................................................... 17Overall Impact on Growth, Poverty and MDGs .......................................................... 21Expanding State Reforms ......................................................... 22

IV. BANK GROUP PORTFOLIO ......................................................... 23

IBRD/IDA Lending ......................................................... 23IFC Portfolio and Program ......................................................... 27MIGA Program ......................................................... 28Partnerships .......................................................... 28

V. EMERGING ISSUES AND RISKS ......................................................... 29

Supporting State Reforms and Development ..................... .................................... 29Achieving the MDGs ......................................................... 30Key Risks ......................................................... 30

BOXES

Box 1 Achieving the MDGs-India's Progress in the 1990s ....................................................... 2

FIGURES

Figure 1 The Challenge of Meeting the MDGs .......................................................... 3Figure 2 Consolidated Fiscal Deficit as a Percentage of GSDP ................ ...................... 18Figure 3 Selected Tax & Expenditure Indicators ...................................... 18Figure 4 Credit Ratings of Selected India States, 1996-2002 ...................................... 20Figure 5 Trends in Selected Economic and Social Indicators ...................................... 22Figure 6 Trends in Portfolio Performance ...................................... 24Figure 7 New Commitments by Sector, FYOO-02 ...................................... 26

TABLES

Table 1 State-wise Distribution of New Lending FY 98-02 .................................. 26

ANNEXES

Annex Al India At-A-GlanceAnnex A2 Key Economic and Program IndicatorsAnnex B 1 Selected Indicators of Bank Portfolio Performance and ManagementAnnex B2 Proposed IBRD, IDA and GEF Base-Case Lending ProgramAnnex B2 EFC and MIGA Program FY 2000-2003Annex B3 Summary of Nonlending ServicesAnnex B4 India: Key Economic IndicatorsAnnex B5 India: Key Exposure IndicatorsAnnex B6 Status of Bank Group OperationsAnnex B6 Statement of IFC's Held and Disbursed PortfolioAnnex B7 Country Program Matrix

INDIA COUNTRY ASSISTANCE STRATEGYPROGRESS REPORT

1. The last full Country Assistance Strategy (CAS) [R-2001-0037/1)(IFC/R2001-0037/1] wasdiscussed by the Board on April 5, 2001. This progress report provides an update on recent political,economic and policy developments; reviews CAS implementation; and discusses emerging issues. Thereport has been prepared by IBRD/IDA and IFC, in consultation with MIGA.'

I. POVERTY AND DEVELOPMENT: GOALS AND CHALLENGES

2. Poverty reduction remains India's most compelling challenge, notwithstanding good progress inthe 1990s. Based on new information (1999/002), the GoI estimates that poverty fell from 36% of thepopulation in 1993/94 to 26% by the end of the decade, with rural poverty falling from 37.3% to 27.1%and urban poverty falling from 32.4% to 23.6% over the same period.3 However, changes in the surveymethodology used to calculate the most recent estimates render them not comparable to earlier officialpoverty estimates. This has generated a debate on poverty levels and trends in India. Recent work4

suggests that poverty fell at a slower pace-from 36% to 29% of the population-than suggested byofficial estimates. These issues were fully discussed in a joint GoIVBank workshop on "PovertyMeasurement, Monitoring and Evaluation" in January 2002. Differences on data notwithstanding, broadconsensus exists that poverty fell in the 1990s. However, India is still home to 260-290 million poorpeople-poverty in India is of global significance. The draft Tenth Five-Year Plan, currently underpreparation by the Indian Planning Commission, emphasizes the key goals of poverty reduction andhuman development, recognizes the importance of the Millennium Development Goals (MDGs), andidentifies an explicit set of development goals and monitorable targets.

3. How likely is it that India will achieve the stated goals for poverty reduction and development bytheir target dates of 2015? Box 1 presents progress made with the MDGs in the 1990s. Significantreduction in poverty and improvements in literacy and school enrollments were achieved in the 1990s:poverty fell by 1.2 percentage points a year and the enrollment rate among primary-aged children grew by1.0 percentage point a year. Forecasting the likelihood of India achieving the MDGs by their target datesis difficult because the desired outcomes will require coordinated interventions across many sectors.Nevertheless, a comparison between actual progress in the 1990s and needed progress to achieve MDGsis useful. As figure 1 shows, targeted reductions in poverty will be achieved if poverty levels continue tofall by at least 0.7 percentage points a year. However, the rate of progress in the primary schoolenrollment rate must accelerate to 1.5 percentage points a year to achieve the relevant MDGs. Comparedto poverty and education, progress in health indicators was slower in the 1990s and a rapid acceleration isnecessary if India is to reach the stated goals by 2015. It is worth noting that all 15 largest states(accounting for over 90% of India's population), including the three large and poorer states-UttarPradesh (UP), Bihar and Madhya Pradesh (MP), showed progress in reducing poverty (including ruralpoverty) and by and large improving social indicators. However, as better-perforning states have madefaster progress, poverty and illiteracy have become more concentrated in India's large and poorer states.Thus, while UP, Bihar and Ml accounted for 41% of India's poor in the early 1990s, this figure had risento nearly 50% by the end of the 1990s. The MDGs will not be achieved without widening economicopportunities and overcoming barriers to more rapid poverty reduction and better human outcomes in

I The report has been discussed with the Government of India, but the Government does not necessarilyendorse all its contents, judgments and opinions.2 National Sample Survey (NSS) 55h Round, covering July 1999 to June 2000.3 Planning Commission, Government of India, February 2001.

See, for example, "Adjusted Poverty Estimates in 1999-2000" by Angus Deaton, Princeton University,2001. Also "Recent Debates on the Database for Measurement of Poverty in India: Some Fresh Evidence" bySuresh Tendulkar and K. Sundaram, Delhi School of Economics, 2001.

l

these poorer states. An important focus of the Bank's work with the Gol over the next year will be toanalyse the actions that will be needed to achieve the MDGs (see para. 92).

Box 1: Achieving the Millennium Development Goals-India's Progress in the 1990s

Key Targets Current Levels and Recent Trends in India

Halve, between 1990 and 2015, the Based on official estimates, poverty fell from 36% (1993/94) of theproportion of people whose income population to 26% by the end of the 1990s. Estimates based on anis less than US$1/day. alternative methodology, the international poverty line (US$1/day), also

suggest good progress (from 46% in the early 1990s to 39% in 1999).Enroll all children in primary school Enrollment rate of primary aged children rose in the 1990s, withby 2015. considerable progress evident in some of India' poorest states. According

to the National Sample Survey (NSS), enrollment rate rose from 71%(1993/94) to 77% (1999/00).

Make progress towards gender The gap between the enrolment ratios between 1993/94 and 1999/00 forequality and empowering women by boys and girls was reduced from 11 to 8 percentage points for 6-10 yeareliminating gender disparities in olds and from 17 to 10 percentage points for 11-14 year olds (progressprimary and secondary education by made by some of India's poorest states is noteworthy). Female share of2005 and at all levels of education by enrolments for secondary school increased from 33% in 1990 to 38% in2015. 1998 and remained at 37% for tertiary education over the same period.Reduce infant and child mortality Infant and child mortality rates fell slowly in the 1990s. The childrates by two-thirds between 1990 and mortality rate (CMR) fell from 109 per 1,000 live births to 95, while the2015. infant mortality rate (IMR) fell from 78 per 1,000 live births to 68 between

1992/93 and 1998/99. Progress was more rapid in the 1980s.Reduce maternal mortality ratios by Maternal mortality remains high at 540 maternal deaths per 100,000 livethree-quarters between 1990 and births, and there is little evidence of decline in the past decade. 34% of2015. births were attended by a trained birth attendant in 1992/93, rising to 42%

in 1998/99.Have halted by 2015 and begun to Evidence suggests that around 4 million people in India are infected byreverse the spread of HIV/AIDS, HIV/A1DS and the rate of infection is increasing. Deaths due to TB remainincidence of malaria and other major high at 500,000 deaths per year. Although access to reproductive healthdiseases. services is on the rise, 52% of Indian couples of child-bearing age still do

not use contraceptives. Of those using contraceptives, most do not usereversible methods.

Integrate the principles of sustainable The cost of environmental degradation is high (6-8% of GDP), and andevelopment into country policies estimated 10% of deaths are due to water-borne disease. While pollutionand programs and reverse the loss of management is improving in some areas, degradation of India's naturalenvironmental resources. Halve by resources (soil, forests, fisheries, coastal zones, biodiversity) remains high.2015, the proportion of people Access to safe drinking water is on the rise, although continuous accesswithout sustainable access to safe remains a concern.drinking water. I

Source: The poverty figures are taken from the Planning Commission of India, 1999-2000 and "Adjusted PovertyEstimates in 1999-2000" by Angus Deaton, Princeton University, 2001. The US$1/day estimates are based onWorld Bank estimates, 2002. The data source for row 2 is taken from NSS 52Id round (1993/94) and NSS 55S round(1999/00). The source for rows 3, 4, 5 and 7 is the NFHS-1 and NFHS-2. Figures in row 6 are based on World Bankestimates 2002. The figures in the last row are from Brandon C and Hommann K (1996) "The Cost of Inaction:Valuing the Economy-Wide Cost of Environmental Degradation in India" in Modeling Global Sustainability, Fu-Chen Lo, ed., United Nations University Press, Tokyo and The Global Burden of Disease by Christopher J.L.Murray and Alan D. Lopez, Harvard University Press, 1996.

2

Figure 1: The Challenge of Meeting the MDGs(selected indicators, annual percentage point change)

3.03.0 2.6

2.0 -1.581.3

1.2 i.0a.~~~~~~~~.

1.0 0 W .7 0.7

0.0 Poverty Headcount Total Enrollment Boys Enrodlment Girls Enrollment Inent Mortality Rate Proportion of

Rate Rate Rate Attended Deliveries

E3 Rate of progress in 1990s

* Rate of progress required to achieve MDGs (late 1990s to 2015)

Source: Poverty measures from "Adjusted Poverty Estimates in 1999-2000" by AngusDeaton, Princeton University, 2001; NSS 50& and 55h Round, Schedule 10 for enrollmentestimates; NFHS-1 (1992193) and NFHS-2 (1998/99) for IMRs and attended birth estimates.

II. RECENT POLITICAL, ECONOMIC AND POLICY DEVELOPMENTS

4. The FY01 CAS noted that India had experienced relatively strong growth of 5% to 5.5% perannum over two decades, which reforms in the 1990s had made more sustainable. The CAS alsohighlighted several vulnerabilities: (a) excessively high fiscal deficits, resulting in one of the highestlevels of public debt in India's history; (b) a slowdown in the implementation of structural reforms due topolitical developments; and (c) a financial system that was successful at mobilizing savings but notefficient at allocating them. This picture remains broadly unchanged but the following developments areworth highlighting.

Political Developments

5. The National Democratic Alliance government led by the Bharatiya Janata Party (BJP) remains inpower, but the BJP has lost a number of state-level elections to the country's biggest political party,Congress, which now rules in 14 states. The BJP rules in just four states, as a junior member of coalitionsin another two, while its allies rule three. While a broad political consensus for reform exists, a series ofscandals in 2001 related to corruption in defense procurement, stock market manipulation andmismanagement of the country's largest state-owned mutual fund may have distracted the centralgovermnent from its ambitious reform agenda. After the events of September 11, 2001, and a terroristattack on the Indian Parliament in December 2001, tension with Pakistan has increased, further distractingthe central government from important domestic matters. Sectarian violence in Gujarat starting inFebruary 2002 shook India, and the long-term consequences are yet to be fully understood. Thesedevelopments appear to have resulted in delays in Parliament's consideration of important policychanges-from reduction of government ownership in the banking system to the fiscal responsibilitylegislation-and a slow down in reforms (para. 10).

3

Economic and Policy Developments

6. India's economic growth has been strong but below the Government-set target. Economic growthwas estimated at 5.4% in 2001/02, up from 4% in 2000/01. The service sector, the least regulated in theeconomy, continues to be the strongest while manufacturing, the most regulated, is the weakest. Raisingeconomic growth to the GoI's objective of 8% per year is unlikely to be achieved without substantialprogress in fiscal consolidation and faster structural reform.

7. Inflation is temporarily subdued. In 2001/02 WPI inflation was about 3.4% and CPI inflationabout 4.3%. The fall in WPI inflation over the last 3 years reflected the waning effects of earlier energyprice hikes and flat manufacturing goods prices. The easing of monetary policy since early 2001 providesample liquidity to meet potential revival in private credit demand. Management of the exchange rate andreserves during the past year has been broadly appropriate. While accumulating reserves, the central bankhas partially sterilized the impact of capital inflows on domestic liquidity to contain inflation andmaintain a relatively constant real effective exchange rate.

8. Persistent and large fiscal deficits remain a major concern, as they nmay result in higher inflation,push up interest rates, further crowd out private investment, weaken the health of the financial system andincrease vulnerability to macroeconomic risks (para. 95). The fiscal position has deteriorated markedly:the general government deficit increased from 8.8% of GDP in 1998/99 to 10.3% in 2001/02, and thegeneral government debt rose from 68% of GDP in 1998/99 to 81% in 2001/02 (consolidated public debtup from 77.6% to 91%). At the central government level the fall in the tax to GDP ratio, the rise in debtservice costs, and the steep increase in the salaries of civil servants have been the main contributors to thedeterioration of public finances. The states account for about one-half of India's national fiscal deficit:large increases in the salaries of civil servants and growing power sector losses have been powerful forcesbehind the deterioration of the states' finances.

9. The deteriorating fiscal situation has not spilled over to the balance of payments which remainsstrong. Exports, which slowed in 2001/02, have since picked up with 17% of growth rate in the firstquarter of 2002/03. The current account is near balance and the capital account remains favorable. Theresilience of software exports, the transfers from non-resident Indians, the slowdown in import demandand lower world oil prices all were important determinants of the low current account deficit. Andtogether with the US$10 billion surplus on the capital account last fiscal year, these factors led to an all-time high in the foreign exchange reserves (US$64 billion as of October 18, 2002, or equal to about 12months of imports). High foreign exchange reserves and a low external debt-to-GDP ratio (about 20% ofGDP) imply a solid external position. The latter, coupled with the fact that India has a relatively flexibleexchange rate regime and a high ratio of net international reserves to the money base (about 86% as ofSeptember 2002) discourage speculation against the Rupee.

10. Structural reforms have moved at a mixed pace. The ambitious reform plan set out by the2001/02 Budget has fallen short of full implementation. The 2002/03 Budget sought to consolidatereforms. However, the pace of reforms may continue to be influenced by political developments (para. 5).

* External liberalization has continued Remaining quantitative restrictions (QRs) were dismantledin March 2001, and the weighted average tariff rate was reduced from 35% in 2001/02 to anestimated 29% in 2002/03. Export quotas on agriculture products have been removed exceptthose for jute and onions. The Gol plans to further liberalize the capital account.

* The pace of domestic liberalization is mixed. Liberalization of the sugar sector has continued. Thefertilizer subsidy was reduced from 0.45% of GDP in FY 1999/2000 to 0.28% in FY 2002/03.Restrictions on FDI have been further relaxed. The pricing of petroleum products and privateentry into the distribution and marketing of these products have been recently liberalized.However, only 54 of 813 items have been removed from the Small-Scale Industries Reservation

4

list. A recent report by a Gol high-level committee on the reform of long-term foodgrain policy isbeing discussed within the Government (para. 38).

* Privatization has moved faster. After 10 years of limited progress, the government has raised

more than US$1.9 billion in the last 16 months by selling 30 public sector units, including severalindustrial enterprises, India's former monopoly provider of international telecoms and a number

of public sector hotels. The GoI has set a target of US$2.5 billion to be raised from privatizationin 2002/03.

* Progress has been made in banking reform but the system remains inefficient, and reduction of

government ownership has not advanced. Loan recovery efforts have led to a steady decline inbanks' net nonperforming advances (NPAs)5 . The net NPA ratio (net NPAs as a share of totaladvances) declined from 6.8% in 1999/00 to 6.2% in 2000/01 for the banking system, and 7.4%

to 6.7% for the 27 public sector banks (PSBs). Further progress has been recently made inaddressing the NPAs (para. 22). Prudential supervision has also been strengthened and the entryof foreign banks has been eased. However, the financial system remains inefficient,6 and theGol's continued domination of the banking system (with the PSBs accounting for 80% of bankingassets) has led to weak management and the absence of a commercially-driven credit culture. The

proposed bill to reduce the GoI's minimum shareholding in the PSBs to 33% from its current51% has not been enacted.

* Incentives for states and cities to undertake reforms have been strengthened. For example, theGoI's Fiscal Reform Facility provides additional funding to states on the basis of improved fiscal

performance. The 2002/03 Budget expanded the scope of incentive-based fiscal transfers to urbanreforms. Efforts are also being made in the power sector to provide incentives for reforms.Although these initiatives still account for a very small portion of central resource transfers tostates, they represent significant steps toward strengthening incentives for state reforms (para.

89).

11. Medium-term economic prospects. According to the latest forecasts, growth is projected to

decline to below 5% for 2002/03, due to severe drought. There are signs of recovery in industry, butindustrial growth faces risks from rising oil prices and a faltering global recovery. Inflation pressures are

expected to remain subdued, although rising oil prices pose a risk, if sustained. The external position is

expected to remain comfortable for 2002/03, with rising international reserves and higher reserves toshort-term debt, and declining ratios of external debt to GDP and debt service to exports. On the otherhand, the general government deficit is expected to continue to be above 10% of GDP for 2002/03, owing

largely to continuing expenditure pressures such as spending on drought relief and rising interest

payments.

12. There are a number of factors which have helped contain to date the risks of persistent large fiscaldeficits, including the strong external position, low inflation, the low level of external debt, domesticnominal interest rates at or below nominal GDP growth rates, capital controls which have helped insulate

domestic markets from short-term capital flows, and relatively strong domestic savings and remittancesfrom non-Indian residents. Nonetheless, the rising fiscal deficits and public debt pose real risks (see para.

95 for a discussion of the risks arising from a lack of fiscal adjustment). Growth beyond 2002/03 couldwell exceed the 5-6% a year level observed in recent years if significant fiscal consolidation andaggressive structural reforms are pursued by the center and state governments; on the other hand, if fiscal

5 Advances are defined to include total loans and other advances, including cash credit, overdrafts, and billspurchased and discounted.

Indian banks continue to invest in govermnent securities far in excess of statutory requirements becausethey are perceived as risk-free assets at a time when liberalization has increased the risks associated withcommercial lending. This is especially the case for the PSBs because their managers are hesitant to take commercialrisks.

5

deficits do not come down, weakness in the domestic financial market persists and reforms are stalled,growth is likely to slow significantly.

III. PROGRESS IN CAS IMPLEMENTATION

13. The FY01 CAS was based on India's strategy for poverty reduction, the fundamental elements ofwhich are contained in the Ninth Five-Year Plan. Accordingly, the CAS defined the Bank Group'sprogram priorities around the Ninth Plan themes of strengthening the enabling environment for growth,and supporting critical interventions of special benefit to the poor and disadvantaged. Progress in theBank Group program against these broad themes is assessed in the following two sections (EI. A-B),covering support to the GoI on key national issues and to states on critical sectoral reforms. Recognizingthe need for selectivity, especially in a country as large and full of potential as India, the CAS also arguedfor an emphasis on assistance to states that are implementing wide-ranging reform programs, as acomplement to a strong but focused program of support to the GoI on key national issues. Progress inproviding support to the Bank's three focus states and in expanding comprehensive state reforms beyondsectoral reforms are assessed at the end of this section (M. C). 7

m A. STRENGTHENING THE ENABLING ENVIRONMENT FOR GROWTH

14. To support India's Ninth Plan goal of strengthening the enabling environment for growth anddevelopment, the FY01 CAS delineated roles for the Bank Group with respect to the parallel andcomplementary tasks of improving govemment effectiveness (through fiscal and govemance reform, anddecentralization) and promoting private-sector led growth (through financial sector development,improved competitiveness, the provision of adequate infrastructure and an acceleration of rural growth).This section reports on progress on each of these fronts.

Fiscal Reform, Governance Reform and Decentralization

15. In line with the CAS, the thrust of the Bank's support to fiscal and govemance reform efforts hasbeen concentrated at the state level through both analytic work and investment and adjustment lending(see section Im C). States are an increasing part of the combined center-state deficit (about half), andfiscal adjustment is a core component of the Bank's sub-national lending and analytic work. Building onpublic expenditure reviews (PERs) completed for five states before the CAS, two additional PERs havebeen completed and two more have been initiated. Initial progress has been made at the state level, bothin terms of outcomes, with deficits starting to fall in some reforming states, and institutional refomis. Atthe national level, a conference on fiscal sustainability co-sponsored by the Bank and the GoI, amongothers, was held in May 2001. In consultation with the Gol, the Bank is planning further analytic work toexamine fiscal sustainability, focusing on the impact of high debt/GDP ratio on key economic variables.To help prepare for the introduction of a value-added tax (VAT), the Bank organized a national trainingworkshop in January 2002 at the request of the GoI.

16. On the governance front, in addition to extensive involvement at the state level (see m C), theBank has started to work with the GoI by financing TA on strengthening citizens' charters and otherservice delivery-related reforms. An IDF grant is under implementation to supplement the efforts of theOffice of the Comptroller and Auditor General (C&AG) in developing a strategy for modernizingC&AG's institutional capacity, including audit functions. The Bank is also engaged in a dialogue with theMinistry of Railways, the second largest ministry in terms of procurement, to introduce a pilot for E-procurement under a trust fund. The GoI is currently undertaking strong initiatives for anti-moneylaundering (AML), including: the Prevention of Money Laundering Bill which is being submitted to theParliament; the Reserve Bank of India's intensive efforts to initiate AML regulations for banks such as

7 Annex B9 presents a more complete assessment of CAS implementation.6

know-your-customer requirements; and the Prime Minister's call for effective investigation andprosecution of large-scale econormic crimes. The possibility of Bank support is currently being discussedwith the GoL.

17. Analytic work is underway on fiscal decentralization to the local governments, in both rural and,more recently, urban areas. In partnership with the Gol, the Bank has focused its work on states that areinterested in pushing fiscal decentralization forward, such as Karnataka and Kerala. Central to this workis the identification of the basic elements of a system of fiscal transfers between state and localgovernments that would strengthen incentives for performance and accountability. Recent initiativestaken by states to further decentralization in all its various dimensions show that this is a dynamic agenda.Karnataka' s recent comprehensive report on furthering rural decentralization is a case in point.8 The Bankhas an important role to play in this regard, especially in sharing international experience. The Bank'sanalytic work complements project-level interventions, especially those to support the rural poor, whichincreasingly work with and through local rural governments (see paras. 4749).

Improving Competitiveness of Industries and Services

18. A major analytic report on improving India's investment climate, jointly carried out by the Bankand the Confederation of Indian Industry (Cl[) (completed in March 2002), analyzed factors that haveconstrained India from enjoying fully the benefits of global integration, and highlighted the urgency ofremoving impediments such as complex procedures for entry and exit, the burden on firms imposed bygovernment regulation, the high cost of power and inflexibilities in the markets for land, labor and capital.The AAA covered policies that required attention at the central government level, as well as state-levelpolicy issues based on a survey of the investment climate in 10 states. Its findings have been disseminatedin workshops throughout India. The Bank is currently in dialogue with two states, Andhra Pradesh (AP)and UP to undertake a second-round of surveys that would help define a more concrete agenda for reformin support of improving the investment climate in those states. Separately, Karnataka has also takensignificant steps to streamline cornplex regulations governing the entry and operation of firms in theindustries and service sectors. The Bank would be ready to support a larger number of state-levelinvestment climate surveys as well as a follow-up investment climate survey at the all-India level.

19. Following requests from the Gol and a number of state governments, the Bank, in collaborationwith the National Council of Applied Economic Research (NCAER) is reviewing Indian experiences withlabor adjustment in the privatization of loss-making public enterprises. The Bank-NCAER study aims toprovide policy lessons on developing a framework for implementing severance and labor redeployment tofacilitate the sale of loss-making central government and state-level public enterprises, while minimizingsocio-economic costs.

20. IEC has continued to invest in the restructuring of second-tier manufacturing finrs to improvetheir competitiveness. IFC's support has been critical for these companies to obtain financing, since theircredit rating does not allow them to mobilize longer-term financing, and domestic financial institutionsare unable to extend sufficient additional credit due to balance sheet constraints. IFC has also invested innew growth sectors with good prospects for international competitiveness, including informationtechnology (IT), IT-enabled services and pharmnaceuticals. IFC's financing and advice on issues, such asenvironmental management and corporate governance, help clients move toward world-class performancestandards required to attract further financing and compete internationally.

21. The Gol has sought the Bank's assistance for a long-term reform program to strengthen technicaland engineering institutions at the tertiary level to produce high quality professionals. The first operationin support of this reform program is scheduled for Board discussion in November 2002. At present, thedesign of the project provides for competitive funding of public and private institutions in seven states,

http://www.kar.nic.in/rdpr/decentralisation-frameset.html7

based on their willingness to undertake major governance and financing reforms. IFC has financedinnovative student loan programs to help IT students.

Financial Sector Development

22. The Bank Group has stepped up its financial sector policy dialogue with the Gol. A major AAAreport on a Financial Sector Strategy for India (May 2002) provided a forum for intensive consultations.A number of other significant AAA products have also been prepared in response to the GoF's requests.Through these non-lending services, the Bank has brought in international experience, which is valued bythe Gol, and has helped shape the direction of policy debate in support of four pressing reform issues:

* Strengthening the regulatory and legal framework for dealing with banks' NPAs. At the GoI'srequest, the Bank recently prepared policy notes on improving the legal framework for debtrecovery and mechanisms to deal with NPAs (early 2002). These notes provided inputs to therecent ordinance on creditors' rights and the creation of the first majority privately-owned assetreconstruction company. IFC will consider investments in future asset reconstruction companies,subject to appropriate structuring.

* Enhancing the governance and regulation of the equities market, which has experienced a numberof scandals in recent years and is the main source of capital markets vulnerability. The Bank, incollaboration with the IMLF, has recently completed a major AAA on improving securitiesmarkets integrity (October 2001). The Gol has expressed interest in follow-up assistance from theBank to help design and implement key recommendations of the report. IFC is supporting thedevelopment of a long-term corporate bond market through the use of partial credit guaranteesand structured finance products for pioneering transactions.

* Designing and implementing pension reforms to help savings mobilization, provide theinstitutional investor base necessary to support the development of longer-term debt instruments,and deepen the capital markets. Pension reforms are also important for fiscal consolidation, givena large and growing unfunded government pension liability. A major AAA on pension reformswas recently completed and submitted to the Gol (June 2001), and the Bank has been asked tostep up its efforts to help build consensus for pension reform.

* Implementing reforms in rural finance which is crucial for broadening access to financialservices. Recent dialogue with the GoI has led to the launching of a AAA study on improvingaccess to financial services. Building on a microfinance report (June 2001), the new AAA workwill assess the gaps between the demand for and supply of financial services by poorer segmentsof the population, and examine how markets and institutions can be developed to bridge thesegaps. The Bank may support reforms in these areas through financial assistance in future. IFChas invested in and provided TA to microfinance and other non-bank financial institutions servingrural areas.

23. The agenda for future reform remains large and challenging, as articulated in the Bank'sFinancial Sector Strategy. The Strategy will underpin the Bank Group's medium-term engagement in thesector, focusing on: (i) enhancing the supervisory and regulatory framework governing financialinstitutions so as to bring it up to international standards, thereby improving market discipline andensuring the smooth implementation of legal reforms to facilitate debt recovery; (ii) strengthening thePSBs through reducing government ownership and improving corporate governance; (iii) enhancing theintegrity of the equity markets and deepening the debt markets; (iv) developing a contractual savingsbase; and (v) implementing reforms to improve poor people's access to financial services.

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Improving the Quality of Infrastructure

24. Reform of the power sector is critical to India's fiscal adjustment and growth prospects,especially since the sector represents such a large claim on government financial resources (financiallosses of the sector account for 1.5% of GDP). Despite financial problems stemming from the weaknessof the state power utilities, the central power generation and transmission utilities are reasonably efficientand are continuing to increase their capacity, under the regulation of the Central Electricity RegulatoryCommission. In contrast, the state power utilities are in financial crisis, stemming from an abnormallyhigh level of theft, leakages and losses that are related to weak internal management and poor governance,and from major tariff deficiencies. Technical and commercial losses amount to between 40-50% ofelectricity generated across most Indian states. States have thus continued to default on their obligationsto central utilities (with arrears amounting to Rs. 414 billion, or 1.8% of GDP) and to lenders, and/or toborrow off-budget. This has exacerbated fiscal deterioration in many states, as ultimately governmentsbecome liable for the losses of their utilities.

25. Power sector reforms remain a priority for the Banrk The Bank's support for power sectorreforms began with Orissa, where, despite privatization of the distribution companies, the privateoperators were unable to reduce losses or improve the quality of supply significantly given pervasiveinherited governance problems and an uncertain regulatory environment. Learning from this experience,the Bank is revising its approach to power sector reforms to focus on the corporate governance of utilities,measures to reduce theft and leakage and steps to improve the regulatory regime, as a pre-requisite forsuccessful privatization (at least of distribution). Based on the Orissa experience as well as the reformexperience of several other states (para. 26), the following elements appear to be of key importance:

* Improving the corporate governance and financial management of the transmission anddistribution companies (the latter configured with privatization in mind) so that they operate asindependent companies, albeit with public ownership, and ensuring satisfactory progress byutilities in achieving financial viability.

* Introducing a regulatory regime conducive to private management and ownership of utilitieswhich replaces the government as the supervisory body of the power sector.

* Implementing measures to reduce theft, leakages and losses (even when the utility's ownershipremains public)-through better internal management and discipline to prevent graft,enforcement of proper billing and collections, and curtailment of corrupt practices by employees;public governance reforms to enable the commercial operation of distribution utilities, includingthe ability to install and read meters, and to disconnect fraudulent or non-paying customers; andenforcement of law and order to protect the commercial interests of utilities.

* Developing alternative mechanisms to subsidize agricultural consumers. The political reality inIndia is that the government will provide subsidies for farmers. Unfortunately, in the past decade,the power tariff has emerged as the key instrument for subsidizing farmers, with heavy costs interms of efficiency, equity and environmental impact. As long as this is so, privatizingdistribution will remain difficult, and the issue of losses suffered by the utility as a result of lowagricultural tariffs will continue to complicate reforms of the power sector. A key element ofpower sector reforms, therefore, is the development of mechanisms to deliver subsidies to thefanners or other target groups in a manner which is more transparent and direct, and place thefinancial burden of such subsidies on the government rather than the power utilities. The Bankhas started to work with AP and Karnataka to explore options.

* Addressing the legacy of the heavy indebtedness and other unfunded liabilities (such as arrears tovendors and central utilities, and pensions) that the new utilities have inherited from the formerstate electricity boards. A financial workout would be necessary to create the base balance sheetto attract private investors to the sector.

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* Subjecting the sector to increased fiscal discipline, by (i) closing the loophole that allows utilitiesto run up large arrears with central suppliers (the GoI has begun actions in this regard recently, tosecuritize states' arrears to the central utilities into long-term bonds. Under the securitizationpackage between the GoI and a concemed state, any future defaults would be deducted by thecentral government from its transfers to the state concemed); and (ii) ensuring that the subsidyobligations imposed by the sector on govemment are consistent with the state govemment'sfinancing capacity, and then ensuring that these subsidies are paid.

26. In line with the above approach, AP has taken the lead in reducing theft and addressinggovernance problems. Stiff penalties for non-payment have been introduced, truly independentcommercial entities for transmission and distribution have been created, and a three-year track record hasbeen established of tariff filings by the utilities and tariff notification and implementation withoutinterference from the state government, even under very difficult political circumstances. As a result, theoperating losses of AP's power sector fell in the first half of 2001/02, contributing to the stabilization ofthe state's consolidated fiscal deficit. However, a rapid expansion in the subsidy bill to farmers, as well ascontinuing subsidies to other groups, have limnited the impact of these reforms on the power sector'sbottom line. AP is thus looking into alternative subsidy delivery mechanisms for agriculture which, alongwith other measures such as universal metering, should further improve power sector performance.Rajasthan has also made some progress: metering has increased, electricity tariffs have been increasedtwice over the past three years, and collection efficiency has reached 100%. As a result, power supplyconditions in the state improved and the financing gap of the sector had been reduced by about 20% in thelast two fiscal years. However, the utilities still face severe financial difficulties caused mainly by thehistoric debt burden and tariffs that do not cover the cost of supply. Karnataka is also beginning to focuson measures to reduce theft and increase metering, as well as exploring altemative subsidy deliverymechanisms. And Orissa is making renewed efforts to streamline the regulatory environment and assistdistribution companies to fight theft and clamp down on illegal connections. Progress in UP, in contrast,has been limited. The Bank is also exploring ways to further support state-level power sector reformsthrough partnering with the Gol in implementing its reform-based resource transfer schemes (para. 89). Apower sector strategy note is being finalized to underpin this discussion.

27. A number of projects to support private investment in power generation and distribution in stateshave run into regulatory and other difficulties, and IFC funding has not yet been committed. Obstacles toIFC investments in the sector include an insufficient number of credible local private sector developers,lack of interest by foreign investors and the weak financial position of State Electricity Boards.

28. A major AAA report on India's transport sector (completed May 2002) was prepared withextensive stakeholder participation. The report concludes that the poor performance of India's' transportsector relates to (i) severe financial constraints that are linked to the fiscally strapped position of thecenter and most states; (ii) generally low levels of cost recovery from many types of users (for example,only 45% of railway expenditure is internally generated with market borrowings and budget supportmaking up the balance); (iii) the weak institutional capacity and accountability of transport agencies; (iv)the slow pace of policy reform and the high degree of uncertainty over policy and regulatory frameworks,the unreliability of the legal system in the enforcement of contracts, and exposure to political interferenceand corruption, all of which have served to deter the mobilization of private funding; (v) poor assetmanagement, such as the preoccupation of many transport agencies with new investment at the expenseof adequate attention to maintenance (more than half of national and state roads are in poor conditionlargely due to insufficient maintenance, backlog in rail track renewal amounts to 11,000 km, and manypaved rural roads become unrecognizable just a few years after construction); and (vi) market distortionsarising from subsidies, cross-subsidies, and outdated regulations and price controls. The Bank's transportsector strategy aims to help the GoI address these long-term problems, through (i) reform-based lendingoperations, the bulk of which focus on expanding the capacity of India's trunk road network; (ii)institutional reforms of road agencies to improve public sector accountability and performance; (iii)promoting private sector participation in transport financing, operations and management; and (iv)

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continuing policy dialogue in transport sub-sectors (e.g., ports and railways) where the Bank has noongoing lending operations.

29. Since the CAS, the Bank has committed US$1.8 billion for transport sector operations. At thenational level, the Bank, alongside the Asian Development Bank (ADB), has been supporting the firstphase of the 14,000 lan National Highway Development Program, which aims to link all major cities inthe country through four to six lane routes by 2007. Project implementation is proceeding well, and theinitial outcomes of reform-based lending at the national level are positive. The implementation andmanagement capabilities of the National Highway Authority, the executing agency for this program, havebeen strengthened. Feasibility studies, engineering design and construction works, traditionallyundertaken by the public sector, are now almost all out-sourced to the private sector, regardless offunding. Increasingly, India has been able to attract international firms to compete for and take up largehighway construction contracts under the Bank-financed projects. In order to improve accountability anduser-responsiveness, the GoI is introducing a stakeholder participation mechanism into its decisionmaldng process. Recently, the Gol has requested the Bank's assistance on its Rural Roads Program whichfocuses on the most poorly connected states. Initial preparation has started. The Bank is working closelywith the Gol to develop a generic rural road maintenance policy that aims to address the financial andphysical sustainability issues of rural road programs (para. 37).

30. Through its state highway lending program, the Bank is playing an important role in supportingongoing reforms, including improving the regulatory environment, and modernizing road agencies inprocurement, financial management, strategic planning, supervision, traffic management, information andhuman resource. These reforms have been initiated in some states, for example, commencement ofdepartmental medium-term financial planning in Kamataka linking with the state-wide medium-termfiscal framework, enhanced procurement and works programming in Gujarat, introduction of adepartment-wide modern financial management system in Uttar Pradesh, better asset informationcollection and management in Andhra Pradesh, and passage of a Road Fund Act in Kerala. Reforms willbegin shortly in several other states. In addition to strengthening the efficiency of the public sector, anessential element of reforms is to expand the role of the private sector. Karnataka has handed over themaintenance of its core network of state highways to the private sector through a series of multi-yearcontracts and AP piloted "performance-based contracts" for private road maintenance-both a first inIndia.

31. The World Bank Group supports India's efforts to attract private sector investment to the tollroad, bridge and port sectors through concessions and Build-Operate-Transfer contracts as a means toreduce congestion and inefficiencies, which in turn reduces transport costs and product prices. To fundthese projects, long term debt is typically available from local financial institutions, but equity issometimes difficult to mobilize domestically. IFC has been actively pursuing investment opportunitiesand will continue to do so, particularly in the toll road and port sectors.

32. The telecom sector has been the most advanced in opening up to large-scale private investment,including foreign investment, through competitive new entry. But massive investment needs remain forIndia to increase its teledensity above today's very low level of 3 lines per 100 persons. Given thedownturn in international telecom investments, private investment relies heavily on domestic sources ofcapital. In this context, IFC is playing an important role in mobilizing financing, through equity and loaninvestments, and partial credit guarantees to support bond issues.

33. Since the last CAS, the Bank has completed an urban sector strategy for India that identifiesthree areas for Bank assistance: (i) urban decentralization; (ii) urban governance and management; and(iii) improving resource mobilization and financing systems to help address investment backlogs. TheBank has recently completed a Poverty and Access to Municipal Services Policy Note for AP and begunwork-on an urban reform program in Karnataka. The Water and Sanitation Program (WSP) and otherdonors are assisting the Gol to establish a City Challenge Fund, an incentive-based grant facility that will

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support the transition costs of moving towards sustainable institutional systems of municipal delivery, aswell as an Urban Reform Incentive Fund (para. 89). Since the CAS, IFC has invested in a secondinfrastructure finance company which supports the construction of urban infrastructure.

34. In the urban water and sanitation sector (UWSS), the Bank's strategy since the last CAS hasbeen to shift away from the past emphasis on strengthening specific public utilities towards support forreform to create the conditions for greater private sector participation. The reform agenda includescreating commercial water utilities, reducing price distortions and increasing tariffs, improving the serviceproviders' creditworthiness and establishing new independent regulatory entities. The Gol is preparingguidelines for a regulatory framework for the states on private sector participation in UWSS. At the sametime, several states (such as Karnataka) are engaged in redefining their urban water policy, focusing onefficiency measures and exploring ways to attract private operators in the sector. LFC is exploringopportunities to invest in the sector.

Accelerating Rural Growth

35. The Bank's support through AAA and various projects is contributing to improving thefunctioning of the agricultural research and extension, irrigation and rural road systems in India. Theongoing National Agricultural Technology Project (NATP), the largest agricultural research project in theBank focuses on rationalizing the agricultural research system towards demand-driven, farmer-centeredtechnology development, as well as piloting effective delivery of agricultural extension services in 7states and 28 districts. These pilots have decentralized decision making to the district level andencouraged greater farmer participation in planning and resource allocation. The GoI plans to mainstreamthis successful approach under the Tenth Plan. IFC is considering an investment in private farm servicecenters.

36. Sustainable and more equitable use of increasingly scarce water resources is a major and growingchallenge. Building on policy dialogue, state-level policy notes, and experience of water-userparticipation in the management of surface irrigation systems in AP (the first in India and supported bythe Bank), the Bank's new water sector restructuring projects incorporate support for establishing aregulatory and policy framework for the water sector to deal with inter-sectoral water allocation andmanagement; restructuring water departments to reduce costs and improve skill mix; reallocatingexpenditures from supply-driven asset creation to demand-driven investment and O&M; rationalizingwater charges to ensure long-term financial sustainability; devoting more importance to agriculturalproductivity per unit of water used; shifting planning and management from the single sector approach toan integrated multi-sectoral and river basin approach; and strengthening support services for irrigatedagriculture. These principles are integral in Bank supported water projects in UP and Rajasthan (2002),MP (under preparation) and in ongoing dialogue in AP, Kamataka, Tamil Nadu and Maharashtra.

37. The Bank's dialogue and support for the' rural roads program in India has emphasized theimportance of road maintenance to promote the sustainability of rural roads. Based on the positiveexperience of the Bank's support to strengthen rural roads with focus on maintenance, the Bank isassisting the Gol in formulating a national policy on rural road maintenance. The positive experiencegained in several Bank projects with rural roads components is being integrated into the GoI's RuralRoads Program (para. 29). AP's pilot in road maintenance contracts, supported by the Bank, is beingscaled-up to the entire state.

38. A major challenge in accelerating rural growth is to reform foodgrain policy. Since the last CAS,the steady increase in government procurement prices, coupled with good monsoons, have resulted inburgeoning buffer stocks, expected to exceed 70 million tons in 2002/03, more than three times thestandard level. This has led to rising fiscal costs (estimated at 0.84% of GDP in 2002103). Foodprocurement schemes are largely skewed in favor of a few states and have not addressed the question ofdisparity among states in accessing food stocks. Meanwhile, food insecurity still affects a large share of

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the population. The Bank has continued its dialogue with the government on food policy reform, buildingon the AAA on "Improving Household Food and Nutrition Security in India" (June 2001), but reform hasnot materialized.

39. Rural growth will also be influenced by improved employment and income-generating activitiesin the rural non-farm sector. Jointly with the Gol and DFID, the Bank organized a national workshop on"Rural Transformation in India: The Role of the Non-farm Sector" (September 2001), which has helpedto broaden the understanding of factors affecting the performance of the rural non-farm sector andidentify policies and practices that will promote broad-based and more rapid growth of the sector. Theworkshop findings served as input to the preparation of the Tenth Plan. Policy notes, which identify state-specific policy constraints to more rapid agricultural and rural growth and poverty reduction and analyzethe impact of the GoI agricultural policies on State agricultural performance, have been completed forKarnataka, AP and Maharashtra. An agricultural policy note for UP is under preparation.

III B. SUPPORTING CRITICAL PRO-POOR INTERVENTIONS

40. India's poverty reduction strategy recognizes the importance of government intervention toensure that opportunities for improved livelihood are widely available across the whole spectrum ofsociety. Accordingly, the CAS focuses on promoting education and health for all, and supporting pro-poor rural development, reflecting their critical importance (especially for achieving the MDGs), and theBank's comparative advantage. This sub-section sunmarizes progress on pro-poor interventions.

Promoting Education and Health for All

41. The Bank's main instrument for supporting primary education has been the Gol's DistrictPrimary Education Programn (DPEP) initiated in 1995 and supported by several donors, which hastargeted districts with low levels of female literacy. The DPEP is entering its concluding stage and anevaluation of its impact is being undertaken by the GO and the Bank. To scale up the successful DPEP,the Cabinet approved a broad scheme, the Sarva Shiksha Abhiyan (SSA-Education for All). Theobjectives of SSA, even more ambitious than the MDGs, are to achieve Universal Primary Education by2007 and Universal Elementary Education by 2010, eliminate all gender and disadvantaged social groupgaps, and ensure all children complete eight years of quality education. SSA largely builds upon DPEP,but differs in a few significant ways: it encompasses the whole elementary cycle, will cover every districtin the country that develops an agreed District Elernentary Education Plan (DEEP), encourages public-private partnerships, and will also serve as the umbrella for all Centrally-Sponsored Schemes from grades1 through 8. The states and districts have begun developing the district plans. Key challenges for SSA areto: (i) continue and expand quality improvements; (ii) attract and retain the hardest-to-reach children (forexample, those in isolated areas, working children, and children with disabilities) to schools by addressingeconomic, social and cultural issues; (iii) find modalities to encourage public/private partnerships; and(iv) scale up and sustain governance reforms (for example, by strengthening performance incentives andaccountability, and decentralizing management). A critical role in establishing the DPEP has been playedby the Bank and other external donors, and the Gol has recently indicated potential interest in SSA beingfunded by the Bank and the Education for All Fast Track Fund. IFC has invested in companies using ITand the Internet to deliver educational services.

42. In focus states, the Bank is shifting from a project-based to a sector-wide approach linked withpublic expenditure and governance reforms. The Bank has undertaken analyses of education financingand secondary education-labor market linkages in Karnataka. Using these analyses, the results of othersub-sectoral studies, and the report by the Government of Karnataka (GoK)'s Task Force on Education,the GoK has prepared a draft strategy paper for education, developed action plans for governancereforms, and prepared a departmental medium-term fiscal framework (MTFP) linked with the state-wideMTFP (para. 60). In Andhra Pradesh, the Bank is undertaking studies to suggest ways to operationalizethe education and health goals of the AP Government's strategy document AP Vision 2020 that

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encompasses, but goes beyond, the MDGs. In both cases, the work could help serve as a basis forstrengthening the sectoral content of future adjustment lending (para. 88).

43 The Bank recently completed a comprehensive study on the health sector (June 2001). Thismajor analytic piece, widely discussed in India, benefited from household surveys that provided detailedmformation on the use of health services by income groups, a comprehensive review of the role of theprivate sector in the provision of health services, and the use of public facilities. The report documentsthat for 80% of Indians, nch and poor alike, the private sector is the main and, in some cases, onlyprovider of health services The report also documents in detail the generally poor quality of servicesdelivered by both the public and pnvate sectors. The challenge is to operationalize the report'srecommendations to integrate the pnvate sector in the provision of health services, improve the quality ofservice delivery in both the public and pnvate sectors, and explore the viability of providing the poor withsome insurance against catastrophlc health events The new health systems projects at the state level willbuild upon the report and the lessons learned from the implementation of on-going projects. New areas ofhealth sector reform to be addressed by these projects will include more extensive collaboration betweenpublic and the private health sectors; development of ideas and strategies for including traditional healerswithin the health system, piloting of nsk pooling mechanisms, includmg experimentation withcommunity health insurance schemes; and more explicit targetmg of the poorest sections of society APand Karnataka have already sought independent evaluations of health service delivery, with AP linkingfinancial incentives with performance. A health project under preparation for Rajasthan is explorngcommunity-based health insurance, and networking with informal health providers to enhance access bythe poor; networking is also being explored in the ongoing UP project. Building on the above, and theongoing Gol initiatives, the Bank is working with the GoI to develop strategies to maximize thecontribution of the non-public sector to meeting the Tenth Plan's goals. IFC is considenng investments Inprivate providers of health services.

44. Furthermore, the Bank's strategy has been to support the decentralization of the management ofthe Centrally-Sponsored Schemes in the health sector to the states. The results have been more positive insome programs (for example, Tuberculosis and Reproductive and Child Health) than in others. Personnelchanges and slow clearances in the Central Ministry of Health and the Department of Women and ChildDevelopment have slowed down implementation of some cntical centrally-sponsored Bank-financedprojects, particularly the Integrated Child Development Services and the Malaria Control projects. If thedeterioration in performance of the affected central projects is not quickly reversed, their future will be inquestion. A key Centrally-Sponsored Scheme is the National AIDS Control Program, which the Bank issupporting through the largest AIDS control project that it has financed (the second one for India). Theseprojects have played a major role in shaping a response to the AIDS epidemic, which appears to have hadsome impact, although the epidemic remains a senous development challenge for India. An analytic studyis ongoing to better understand the course of the epidemic and the role of drugs in prevention andtreatment

45 The goals of the Gol as expressed in the recent National Population Policy and the draft NationalHealth Policy are consistent with the MDGs. However, while India is likely to achieve the MDGs forHIV/AIDS and tuberculosis, it is much less likely to do so for maternal mortality, mfant mortality andmalana. In all these areas effective Centrally-Sponsored Schemes are cntical. Improved implementationof a number of Centrally-Sponsored Schemes (such as disease control, women's health, child health andnutntion) at the state level is needed, including, where appropriate, involvement of the pnvate sector. Thiswill require closer coordination between the Centrally-Sponsored Schemes and implementation of statehealth programs

46. The Bank has started to integrate its support for health, nutntion and education programs into avariety of poverty reduction projects. For example, the AP Rural Poverty Reduction Project will be aimedat ensunng the convergence of these critical services for the poorest through introducing mechanisms forjoint planning and resource pooling. At the same time the proposed project will target adolescent girls and

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working children m remote areas through bndge courses, and providing hostels to attract children,especially girls, from remote villages to attend schools. A Chile Development study is underway toexamme the integration of health, education and nutrtion m early childhood development. Another willaddress the health of the urban poor. A study of Household Energy: Indoor Air Pollution and Health,recently completed, shows that indoor air pollution leads to hundreds of thousands of lives lost per year.This and other environmental health issues-such as poor water quality, lack of sanitation, and urban airpollution-are increasingly evident as important aspects of achieving the MDGs.

Accelerating Pro-Poor Rural Development

47. The Gol and state governments have strongly supported community-dnven development (CDD)approaches to reducmg poverty in rural areas, as well as ensunng more sustainable use of naturalresources. Accordingly, the Bank has moved toward mamstreamnng CDD approaches in its recentprojects covenng watershed management, forestry, tank imgation, rural water supply and sanitation, andDistrict Poverty Initiative Projects (DPIP). These projects, building on earlier Bank project experience,have emphasized cross-cuttmg pnnciples such as beneficiary involvement and empowerment, partnershlpbetween the public and non-public sectors (for example, the use of non-governmental organizations andother alternative service delivery providers), mstitutional reforms to strengthen rural local governments,cost recovery and pro-poor targeting.

48. The Bank's mvolvement m rural water supply and sanitation (RWSS) illustrates themainstreaming of CDD approaches. The Bank has assisted the Gol in developing a sector reform strategym RWSS through policy dialogue and reform-based investment lending. The basic pnnciples of the sectorstrategy are: adoption of community-driven approach to service delivery; shifting the role of governmentfrom direct service delivery to facilitation; partial capital cost financing and full O&M user responsibility;and participation of communities and local governments in the management of water resources. Thesepnnciples have been adopted by the Gol's national program-the Rajiv Gandhi National Drinking WaterMission's Sector Reform Pilots covenng 64 districts in 22 states. The two recent RWSS operations(Kerala and Kamataka) support decentralizing decisions and responsibilities to beneficiaries and ruralcommunities to strengthen accountability, efficiency and sustamability. The two projects will directlybenefit 1.5 and 4 million people, a large proportion of which will be rural poor and socially disadvantagedpeople. The Bank is currently reviewing its strategy in this sector to better foster mainstreaming of pro-poor CDD mitiatives within the context of needed sector-specific policy and institutional reforms

49. The Bank has also supported targeted community-based Distnct Poverty Initiatives Projects(DPIP) in AP, MP and Rajasthan. Preparations for the DPIP for Chattisgarh are under way. Integral tothese operations is active participation by vulnerable groups. These projects have begun to yield positiveoutcomes in improved livelihood opportunities and reduced poverty and distress migration. Preparation ofthe AP rural poverty project involves scalmg up the AP DPIP to the entire state based on a comprehensiveapproach including integration of health and education.

50. The trade-offs between rural poverty alleviation and natural resources management have becomeparticularly acute as population growth increases the pressure on forests and marginal lands. Over the lastten years, the Bank has financed first-generation forestry projects and supported to a large extent bettermechanisms to enhance participation of forest-dependent people m forest regeneration. The Bank iscurrently reviewing its strategic framework for further involvement in the forestry sector by providingrenewed emphasis on livelihood issues for poor people living in and around the forest and seeking win-win approaches to the sustamable protection of natural resources. It also seeks to foster more effectivemstitutional arrangements and project design, while providing adequate consideration to the reputationalrisk involved.

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Mainstreaming Social and Environmental Concerns

51. In addition to ensuring due diligence at the project level, the Bank has been collaborating with theGoI on policy issues related to resettlement and indigenous people. The Bank undertook countrywideconsultations in November 2001 on its proposed revised Operational Policy on Indigenous Peoples. Butthere has been relatively little progress on developing a more comprehensive national policy oninvoluntary resettlement, with the exception of Bank support to training and capacity building. The Bankis increasingly working with selected states to integrate analysis of poverty and social development issuesand to better understand the social dimension of economic reforms. At the project level, increasedemphasis is being given to a good understanding of the social prerequisites to ensure poverty reductionoutcomes, especially in projects dealing with natural resources.

52. To address vulnerability to natural disasters, which can have serious negative consequences bypushing large segments of the population into poverty, the Bank's strategy places emphasis on disasterresponse and management. Following the Gujarat Earthquake, the Bank was able to respond quickly torestructure existing projects and provide a new Credit for relief and reconstruction, together amounting toUS$700 million (IDA). Recognizing the importance of disaster mitigation, the projects also had a long-term disaster management component, including developing a modem pre-disaster preparedness and post-disaster response system, piloting risk transfer and insurance, and developing a community-based disastermanagement system. A regional AAA initiative to develop a catastrophic risk insurance facility coveringIndia is near completion. Disaster assistance is also being provided following cyclones in AndhraPradesh and Orissa.

53. The status and roles of women continue to be a development challenge for India (box 1). Variousinitiatives, such as the Country Gender Assessment and the inclusion of gender analysis in project socialassessments, are being planned to mainstream gender issues in the Bank's work. These proposals areoutlined in the June 2001 Bank report "Operationalizing Gender in the India Program." The Banksupports the Rural Women's Development and Empowerment Project (RWDEP) in nine states, and theDPEP directly addresses lower female literacy (para. 41). Gender issues are also being addressed throughAAA work ranging from support to a national discussion held in December 2001 coordinated by the UNInter-Agency Working Group leading to better attention to gender issues in India's Tenth Plan, to aninternational conference (December 2001) organized by the Bank on social inclusion focusing onindigenous peoples and gender issues. A three-day workshop on addressing gender issues in Bank projectpreparation was held in May 2002. The systematic poverty monitoring systems in focus states havespecifically focused on building gender-disaggregated data bases (para. 63).

54. The cost of environment degradation remains high (6-8% of GDP), but a new planning effort isunderway at the national and state levels to mainstream environmental concerns. The draft Tenth Planexplicitly incorporates environmental objectives and requires state environmental submissions, a first inIndia. AP, Karnataka, Gujarat and UP are taking a lead among Indian states to strengthen environmentmanagement, by sharpening the strategic focus of environment-related work in line with health andlivelihood-related MDGs. This is embodied in the strategic environmental analyses (SEA) being orproposed to be carried out by them. These are also improving monitoring and compliance by industrialentities (through infornation disclosure and clear accountability). AP and UP are pilot testing economicinstruments for pollution control, and Kamataka has begun to streamline the environment-relatedregulatory process. While it is too early to gauge results, these initiatives aim at mainstreamingenvironmental concerns into overall policy making. Several Bank-supported environmental projects(approved prior to the CAS) are active on many fronts and have successfully addressed seriousimplementation problems raised over the last two years. The Bank-supported program of strategic studiesand technical assistance is also large and expanding, and is replacing to some extent the emphasis given inthe previous decade to environmental investment projects.

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m C. SUPPORTING COMPREHENSIVE STATE REFORMS

55. India's poverty reduction strategy, as articulated by its Ninth Plan, emphasizes the importance ofstate-level reforms to achieve the twin goals articulated above of strengthening the enabling environmentand supporting pro-poor interventions. Unlike the reforms of the early 1990s, many of the reforms neededtoday, such as in the physical and social infrastructure sectors, are in the domain of the states. The statesalso make up half of the consolidated fiscal deficit-fiscal reform at the state level is of increasingimportance. The logic of selectivity also pushes the Bank and donors, such as DFID and ADB, in thedirection of focusing its efforts geographically in a large country such as India.

56. The Bank's assistance strategy has been reoriented over the last two CAS periods to include anemphasis on states that: (i) have chosen to embark on a comprehensive program of reforms, includingfiscal and governance reforms, and reforms of key sectors such as power; (ii) have expressed interest inentering into a partnership with the Bank; and (iii) have relatively high levels of poverty. This approach offocusing on a relatively small number of states has enabled the Bank to take a holistic approach in thesestates using a mix of instruments (adjustment lending, investment lending and analytic work).

57. The three main states in which the Bank is most active are AP (since 1997), UP (since 1998) andKarnataka (since 2000). With a combined population of about 300 million, these three states account for30% of the poor and 29% of out-of-school children in India. Further, the Bank also has significantdialogue and/or lending roles in a number of other states interested in comprehensive reforms, such asOrissa, Rajasthan and Maharashtra. There has been strong collaboration between DFID and the Bank inAP and Orissa, two of DFID's partner states (para. 86)9. This subsection focuses mainly on progress insupporting comprehensive state reforms in the Bank's three focus states.

Key Reforms and their Outcomes

58. The thrust of the Bank's assistance to the focus states is to support a comprehensive program offiscal and govemance reforms, combined with programs in sectors that are critical to growth and povertyreduction, such as power, irrigation, forestry, health, education and selected anti-poverty interventions. Asthe sectoral initiatives have already been discussed in sections III A and III B, the emphasis here will beon fiscal and governance reforms and the impact of the overall program on growth, poverty and otherdevelopmental outcomes, including the MDGs.

59. The poor fiscal performance of the Indian states is the result of a number of structural factorswhich will take several years to correct. Given the wide socio-economic and political diversity in India,the nature of the problems confronting the focus states has differed considerably across states, as have thesolutions and pace of implementation of the reform programs. Understandably, the results on the groundhave been slow to materialize and have varied significantly across states. Nevertheless, some results arebeginning to appear.

60. Fiscal Reforms. The goals of fiscal reforms are to reduce fiscal imbalance, improve thecomposition of expenditures and enhance public service delivery, thereby increasing the developmentalimpact of government spending. The following are examples of fiscal and public expenditure reformsbeing supported by the Bank and their impact.

* A medium-term fiscal framework (MFP) has been developed by AP, Karnataka and UP.Karnataka has also prepared departmental MTFPs for five key sectors (water, power, roads,education and health) and enacted a Fiscal Responsibility Act-a first in India. Off-budgetliabilities, particularly those of the power sector, have been brought on to the budget and steps arebeing taken to reduce state guarantees. These reforms have shown encouraging initial results,though their sustainability is yet to be established. The consolidated fiscal deficit to GSDP ratio

9 ADB's partner states are Gujarat, Madhya Pradesh, Kerala, Assam and Silkim.17

Figure 2: Consolidated Fiscal Deficit as a percentage of GSDP

g ANDHRA PRADESH KARNATAKA 9 UTTAR

9 8.0 PRADESH8 8

8_ 7.17- 677 6.6 6776.6

6.0 617 6.6 6.7 66 6 5.7 5 6

6

5 5 4.7 5

4 4 4

3 3 3raM ' . 1 1 O UJ 0)m 0 UCO0) 0 ;; ( 5__- 0 .~~~J 0). 2R) C) .j0 0 0 .

O) ~ _ 0) 0) o oN

Note: LE = Latest Estimate.Comparable data on consolidated deficit for other Indian States are not available.

Source: Staff estimates.

has declined in AP and Karnataka, and after falling for two consecutive years in UP it increasedin 2001/02 largely because of the state's inability to pursue power sector reforms (figure 2).Fiscal correction will need to be sustained for several more years to stabilize the debt/GSDP ratio.

Major tax and expenditure reforms have been launched. The states have embarked on reformingthe complex indirect tax system to rationalize rates, broaden the base and simplify andcomputerize tax administration. AP and Karnataka are in an advanced stage of preparation for theintroduction of the Value Added Tax. Expenditures have been controlled and rationalized toincrease O&M and priority spending, and reduce and better target subsidies. Cost recovery hasbeen increased for power, water and other services. AP has strengthened public expendituremanagement, leading to greater clarity in budget formulation and execution. These reforms havebegun to yield impressive results. As figure 3 shows, the three states of AP, UP and Kamatakahave shown considerable improvement in own tax revenue to GSDP ratio in recent yearscompared to the other major Indian states. Their Plan capital outlays to GSDP ratio have alsorisen in recent years, while it has remained unchanged or even fallen modestly in the other majorstates.

Figure 3: Selected Tax and Expenditure Indicators

Change in Own Tax I GSDP ratio between 1998-99 Average Capital Outlays / GSDP ratio between 1998-99 andand 2001-02LE 200142LE

2.0% - 2.5%

1.5% 1 2% 1.4% 2.0% 1.9% 1.7%1.5%

1.0% - 0.8% 0.7% t5% * 1.3%

0.5% - 1.0%

I.0% r --* - 0.5%0.0%1 ____

AP Kamataka UP Other 0.0% - IStates AP Karnataka UP Other States

Note: LE = Latest Estimate.Other states include Bihar, Gujarat, Haryana, Kerala, MP, Wharashtra, Onssa, Punjab, Rajsthan, Tamil Nadu and West Bengal

* A number of procurement and financial management reforms are ongoing. Karnataka became thefirst Indian state to enact the Transparency in Public Procurement Act. Information technology isbeing used extensively to enhance transparency in the procurement process, including placing oftenders on the Internet in the three states. UP has computerized its treasury operations, andsubstantially enhanced the timeliness and quality of financial information, and is now postingfinancial information on the Internet on a monthly basis. UP has also made significant progress indeveloping its computerized payroll system. Karnataka has established institutional foundationsfor modernizing the public financial accountability function by establishing a full-timeController's (Accounts Management) Office to lead these efforts. It is also making progress incomputerizing and networking its treasury and sub-treasury offices. Karnataka is also regularlyposting its monthly accounts on the Internet, substantially enhancing fiscal transparency andmonitoring. Karnataka and AP have taken steps to reduce the backlog of accounts and audits invarious government entities. To develop a medium-term strategy for improving public financialaccountability and management, - State Financial Accountability and ManagementAssessments/Studies are being carried out in Karnataka and AP, and a similar study is planned forUP.

61. Governance and institutional reforns. The Bank's collaboration with reforming states has beenuseful in providing a platform to support cross-sectoral governance and institutional reforms. A numberof reforms are in various stages of implementation across the three states, airned at making governmentssmaller, more effective and more responsive to the needs and demands of citizens. These reforms arehelping lay the foundation for sustained improvements in the fiscal position of the states.

* Civil service reforms have been launched to tackle the problems of fragmented bureaucraticstructures, cumbersome business processes, lack of flexibility in staff deployment, politicalinterference in staff transfers, and low productivity and accountability. States such as Karnatakaare implementing a variety of measures to address these problems. Due to an administrative banthere, premature transfers declined drastically from 50,000 in 2000/01 to less than 17,000 in2001/02. Kamataka has further commissioned an independent evaluation of 13 major departmentsto suggest ways of eliminating duplication, and is piloting mergers and streamlining of a fewdepartments with the objective of extending the exercise to other departments. AP has recentlyestablished a Center for Good Governance with support from DFID, designed to provide analyticsupport for a far-reaching civil service reform agenda. It has also set up a central unit to overseeimprovements in human resource management throughout the civil service. In UP, while therehave been promising steps to create a computerized human resource database that will bothfacilitate rationalization and redeployment and help to curb unauthorized recruitment, problemsof administrative fragmentation and premature transfers remain.

* Combating corruption and enhancing accountability and transparency has been a priority. AP hasadopted a strategy for fundamentally restructuring and expanding its anti-corruption effort andenhancing its independence. AP has also taken vigorous measures to reduce power theft.Karnataka has been active in passing legislation to promote transparency and reduce corruption,including the Transparency in Public Procurement Act, the Right to Information Act, and theIndustries (Facilitation) Act. UP has increased the staffing and funding for anti-corruptionagencies. The number of sanctions for corruption has increased, albeit from a low base.

* Improving the delivery of public services through the streamlining of government transactionshas shown initial results. AP has pioneered the use of information technology for re-engineeringbusiness processes. Its Computer Aided Registration Department, for example, has reduced thewaiting time for stamp registration for deeds and titles from months to less than 30 minutes. It hasset up "one-stop shops" for multiple public services and is computerizing information flowswithin the Secretariat. In both AP and Karnataka, the computerization of millions of farm landrecords has drastically reduced access time to minutes, thereby reducing harassment andcorruption. In UP, there have been visible gains in public access to information through the

19

Internet. In Karnataka, citizens charters initiatives cover many key services (for example,transport and land-related services). Users are invited to participate in setting standards forservice delivery and simplifying procedures. Corruption in the re-engineered transport departmenthas been substantially reduced. The time needed to secure urban land has been reduced from fiveyears to one.

62. In response to improved fiscal management and outcomes, the credit rating profiles of AP andKarnataka have improved. These two states now enjoy more favorable ratings than Gujarat andMaharashtra, which are traditionally considered to be the best managed states in India (figure 4).10

Figure 4: Credit Ratings of Selected India States, 1996-2002

AAA 16

i 14, :

A+ :12 * -

l-1 o ------ o------,o------o-- xj;-~

BBB 8 -

6BB 6 Maharashtra

4-88-

2 -

0.-CRISIL 1996 ,. 1997 1998 1999 2000 2001 2002:Ratings

63. Poverty monitoring, impact evaluation and statistical strengthening. Efforts are well-advanced in UP and Kamataka to improve the information base for better poverty monitoring andanalysis, and similar work has recently been initiated in AP. In UP, a poverty and social monitoringsystem (PSMS) has been established in the Planning Department: the baseline survey has been completedand a follow-up monitoring survey is in the field; GoUP is finalizing its baseline report and willdisseminate the findings widely. In addition, training is being carried out to upgrade field skills andenhance the analytic capacity of UP's Directorate of Economics and Statistics. The Bank's recent UPpoverty assessment has contributed to the policy debate and ongoing dialogue with key stakeholders.Karnataka established a Poverty and Human Development Division (PHDMS) under the Department ofPlanning, and major activities have included preparation of regionally disaggregated poverty estimates forthe state for 1999/00, publication of a chapter on poverty and human development in the Government'sannual Economic Survey, as well as efforts to improve state-output estimation and data processingsystems. Another major activity has been to renew efforts to prepare the Karnataka Human DevelopmentReport, which in the past two years has been used to reallocate government expenditures towards poorerdistricts. In addition, a number of evaluation studies have been launched by various line departmentsunder the government's independent evaluation initiative, which earmarks 1% of plan outlays forevaluations of major schemes. A number of these evaluations have been followed up by actions taken bythe departments to improve the effectiveness of their schemes. GoAP is setting up a Poverty and SocialAnalysis Monitoring Unit (PSAMU) under the State Poverty Eradication Mission, with the mandate todevelop a more integrated strategy for poverty reduction in the state, identify concrete actions and actors

10 Data are from Credit Rating and Information Services of India Limited (CRISIL). CRISIL ratings areavailable for 6 Indian States: the 4 states shown in the figure and Orissa and Tamil Nadu. But since ratings for all theyears (1996-2002) for the latter two states are not available, these two states were not included in the figure.

20

to implement the strategy, and develop a system for monitoring poverty and broader developmentoutcomes (including MDG indicators). The Bank, in coordination with DFID, is providing training andcapacity building in support of this effort and is undertaking joint work with staff in the PSAMU.

Overall Impact on Growth, Poverty and MDGs

64. It is too early to evaluate the overall impact of the Bank's assistance in the focus states on finaloutcomes, such as growth, poverty and other MDGs. It would also be presumptuous to assume that theBank's program could have a determinant impact on these variables, given that Bank lending hasconstituted on average less than 1% of the output in these states. But encouraging results from fiscal andgovernance reforms in the initial stage indicate that the sustainability of these reforms holds the key toaccelerate economic growth and reduce poverty in these states.

65. The recent performance of the focus states in terms of various economic and social indicators isencouraging. Growth prospects have improved, poverty levels have declined, and key social indicatorscritical to India's attainment of the MDGs have either improved or their deterioration has been arrested inall three states (figure 5). Karnataka has become one of the fastest growing Indian states, and schoolenrollments and health and mortality indicators have improved steadily in the 1990s. Poverty declinedmoderately in AP, due largely to slow growth in agriculture. Enrollment rates for boys and girls, however,have improved dramatically in the state. While UP has more poverty and higher levels of deprivation inother dimensions of welfare than most states in India, substantial improvements in school enrollments,IMRs and safe motherhood were recorded in the 1990s. Indeed, UP and AP stand out among the Indianstates in terms of recent progress in improving literacy-especially for women-and raising primaryschool enrollment rates. But it is worth noting that 87 out of every 1000 children born in UP still diebefore reaching their first birthday and only 67% of girls are enrolled in primary school. India's ability toachieve the MDGs will be predicated on' its success in addressing the challenges in UP and other poorstates.

21

Figure 5: Trends in Selected Economic and Social Indicators

ANDHR4A PRADESH KARNATAKA

105 105

93 62 O 190| R7 8 | nE5y19n | 79e3 82

60 4 05

45 4 392

30 z- 18.8 15 5.

15 5 ,52 M0 -

UrTAR PRADESH

105 -Iy1

90 87~~~~~~775 | 67

60 54540.9

M33

30 ~~~~~~~~~~~~~~17 2

15 355150AI

Gmwth Pmay Tobl Gids IMR %OfHeunt r enm. anioL. D1eierls

Ndte: IMR = Intant Mortality Rate; GSDP data from Centa Satistcl Oyanizaton, Gd, and other vanables. See Fgure 1.

Expanding State Reforms

66. The momentum for state reform continues to grow, and several other states have expressedinterest in entering into a reforrm-based partnership with the Bank. Orissa is one state that the Bank hasbeen in dialogue with for several years. Orissa is India's poorest state, and also perhaps the most fiscally-stressed state. It was also the first state to privatize the electricity sector (para 25). Although thisexperiment has not so far yielded positive results, the state has not reversed the privatization policy and isnow taking corrective measures to put the reforms back on track. An adjustment operation for Orissa iscurrently under preparation, pending the Government of Orissa's ability to implement difficult fiscalreforms. Rajasthan is another poor state in which the Bank has completed extensive analytic work. Thecurrent engagement is focused on important sectors, namely power, irrigation, education, health and ruraldevelopment. Maharashtra has the largest industrial base of all Indian states, but wealth is concentratedin Mumbai, and the state has surprisingly high (above-average) levels of rural poverty. At the request ofthe state government, the Bank completed in October 2002 a comprehensive fiscal report that suggests aset of reforms to correct the state's deteriorating finances. Future involvement of the Bank with the statewill be determined with the GoI and depend on the Government of Maharashtra's commitment to initiatecritical reforms.

67. The Bank has continued to support important sectoral reforms in many states in India throughreform-based lending, focusing on projects of high development impact or demonstration effects, as wellas support for social sector projects in India's poorest states including Bihar, provided that corruption andgovernance issues are addressed (see III A and m B). Bank's lending to the three focus states accounts

22

for 34% of new lending, while lending to all other states accounts for 31%, with the remainder of 35%going to the center (para. 77).

68. As discussed above (para. 3), all 15 major states (accounting for 90% of India's population)showed progress in reducing poverty and by and large improving social indicators. However, as better-performing states have made faster progress, poverty and illiteracy have become more concentrated inIndia's large and poorer states. UP, Bihar and MP now account for nearly 50% of India's poor. TheMDGs will not be achieved without widening economic opportunities and overcoming barriers to morerapid poverty reduction and better human outcomes in these poorer states. UP, the largest Indian statewith a population of 166 million, is the state with the largest share of India's poor (21%). UP has been afocus state of the Bank since 1998 (its reform progress is summarized in paras. 60-64). Bihar, with apopulation of 83 million, is the state with the second largest share of India's poor (16.9%). Biharrepresents a particular challenge-a state of extreme poverty, collapse of civil services and near absenceof law and order. The Bank is preparing an analytic study on Bihar in order to arrive at a deeperunderstanding of development challenges facing the state. MP, with a population of 60 millionpopulation, represents the third largest share of India's poor (11.8%). MP is a focus state of ADB andDFID.

IV. BANK GROUP PORTFOLIO

IBRD/IDA Lending

69. Portfolio performance. The active India portfolio is the second largest in the Bank, comprising,at the end of September 2002, 69 projects with a net commitment of US$12.9 billion, and with anundisbursed balance of US$3.8 billion IDA and US$4.1 billion IBRD. Portfolio performance has seen aconsistent and marked improvement, as shown in figure 6. The improvement was achieved throughincreased management attention by both the Bank and the Gol to project performance monitoring.Performance indicators are being used more rigorously in assessing project outcomes andimplementation. Ratings are being shared with the GoI on a monthly basis, and highlighted in missionreports. The annual Country Portfolio Performance Review has paid particular attention to systemicportfolio issues, such as funds flow, audits and continuity of staffing. New projects are reviewed forimplementation readiness, and additional training is provided in procurement, financial management, andenvironment and social requirements. Improved systems are being developed for financial managementand disbursement monitoring, and these show that timely release of project funds has improved.Decentralization of the Bank's procurement, disbursement and portfolio management activities to theNew Delhi Office has helped reduce response times and improve sharing of information with the GoI.Action plans for project restructuring or for problem projects are setting shorter targets and theirimplementation is being monitored more frequently.

23

Fgue 6: Trends in PorFfoio Pezfomne

Prqeds at Rsk FY96-FY02 WxaEITnt Rato FY96-FYO

30 - 25.3 25 21

25 2.8 20 16.4 16. 16.14

156 14.9 is l~15 -11.41

0. 0.~~~~~~~~~~~~~~~~~~~~~~L10 lo 0 6.0

5 5-

0 0 O

1996 1997 1998 1999 ZX) 0301 M 200 1996 1997 1998 1999 200D 2001 2002

70. Major diagnostic work. Building on a series of core diagnostic AAA that had been completedprior to the CAS, additional work has been completed or launched. These include:

. The completion of poverty note/reports for Karnataka and UP respectively, and thecommencement of work to assist the AP government to operationalize its Vision 2020 policydocument that contains and goes beyond key MDGs (para. 42). A national-level povertyassessment is being planned, and a major AAA study has been initiated on MDGs (para. 92).

* The commencement.of the Development Policy Review to be completed in FY03.

* The completion of a Financial Sector Strategy and various policy documents on key reformsoutlined by the FY01 Financial Sector Assessment Program (paras. 22-23).

* The completion of additional two state-level PERs, the initiation of two more (para. 15), andanalysis of debt sustainability and contingent liabilities as priority elements of public expenditureanalysis at the national level (para. 96).

* The completion of the first, second and third phases of the Country Procurement AssessmentReport (CPAR), with the first phase covering the central government, the second phase coveringthree states (UP, Karnataka and Tamil Nadu) and the third phase covering central publicenterprises. The Ministry of Finance (MoF) is considering constituting a working group includingseveral ministries to agree on an implementation plan at the central government level. At the statelevel, findings are being translated into action (for example in Karnataka) and have beendisseminated in several other states leading to more state-level procurement studies (Maharashtraand AP).

* Preparation of State-level Financial Accountability Assessments (SFAAs) for Karnataka and APand planned SFAAs for UP and Orissa. While the CAS proposed a Country FinancialAccountability Assessment (CFAA) in FY02, it was decided to start with a few SFAAs whichcould help better define issues and frame the focus for the CFAA in FY04. Progress inprocurement and financial management reforms in the focus states is summarized in para. 60.

71. Fiduciary aspects of the portfolio. Timeliness in receipt of audit reports has improved;suspension of SOE disbursements due to audit delays was reduced from 12 projects in FY01 to 5 projectsin FY02. Discussions have begun with the C&AG on terms of reference for audits, and the quality ofaudits prepared by private chartered accountants has shown improvement in FY02. In addition,discussions have started with the Gol about improving the funds flow and cash management on Bank-financed projects to support and strengthen GoI's overall funds flow systems while ensuring that projects

24

have adequate resources. By working closely with the MoF, the C&AG, state and project officials, thequality of financial reporting, especially on new projects, has improved.

72. FY02 lending and future IBRD/IDA lending scenarios. The FY01 CAS set out two lendingscenarios for FY02-04: (i) a base case of about US$3 billion per year (US$2.15 billion IBRD, US$850million IDA); and (ii) a low case of about US$1.5-2.0 billion per year (US$1.0-1.5 billion IBRD, and acore IDA program of US$400-500 million). The Bank's proposed response to the Gujarat earthquakewould be additional. Movement between the low-case and base-case lending scenarios was to beregulated by two sets of triggers: self-activating triggers, linked to fiscal and structural reforms at the statelevel; and global triggers linked to overall macroeconomic performance.

73. The self-activating triggers, which the CAS foresaw would automatically lower the lendingprogram if states are unable to sustain basic structural reforms, have indeed caused a substantial reductionin lending volumes. For example, in the case of UP, a planned adjustment operation (US$125 millionIBRD, US$125 million IDA) and a power sector investment loan (US$150 million IBRD) werepostponed due to slow progress in reforms, particularly in the power sector. More generally, slower thanexpected reform movement in the power and urban sectors have caused a substantial reduction in IBRDlending volumes, while IDA funding remained in strong demand, notably to support rural povertyreduction initiatives (e.g., Karnataka) and crucial water resources management reforms (e.g., Rajasthanand UP). As a result, commitments in FY02 (not including the Gujarat Earthquake Project for US$443million IDA), totaled US$1.75 billion (US$893 million IBRD, US$854 million iDA).

74. Three global triggers were identified in the CAS, to be monitored in deciding overall lendingvolumes. Performance under these global triggers has been as follows:

* Fiscal and external balances. The CAS stipulated the triggers for macroeconomic performanceas: (i) improvement in the fiscal balance indicated by a decline in the General GovernmentDeficit; (ii) consolidated public debt falling below 85% of GDP; and (iii) external stabilityindicated by net international reserves above 50% of the money base. The outturn has been asfollows: (i) India's General Government Deficit increased to 10.4% of GDP in 2000/01, and to10.3% of GDP in 2001/02, compared to the 1999/00 baseline of 9.7% of GDP in the CAS 1. Thecurrent forecast for 2002/03 is 10.2% of GDP; (ii) the consolidated public debt rose to 86.4% ofGDP at the end of 2000/01, 91% of GDP at the end of 2001/02 and is projected to increase to94.6% at the end of 2002/03; and (iii) the ratio of net international reserves to the money basereached 86% as of September 2002. In sunmmary, external performance has been very strong, butthe fiscal targets have not been met.

* National structural reforms. The CAS identified four key areas of reforms-external tradeliberalization, banking, deregulation and privatization of public enterprises. There has beenprogress in each of these areas, although in some cases, the pace of reforms has been slow.Details are set out in para. 10.

* Portfolio perfonnance. For this trigger, the CAS set the following targets: problem projects not torise above 15% of projects under implementation, and the disbursement ratio not to fall below17%. The share of problem projects declined from 13% in FY00 to 4% and the disbursement ratioincreased from 18% in FY00 and has been maintained at 20% (see para. 69). Thus, portfolioperformance has been good.

75. India's fiscal deterioration is a source of serious concern (discussed further in the risks section,para. 95). Overall, the mixed performance under the global triggers suggests that India is currently at thelow end of the base case. Consistent with this and combined with the effect of the self-activating triggers,new commitments are currently estimated at US$1.6 billion (US$0.8 billion IBRD, US$0.8 billion IDA)

Revised actuals for 1999/00 show a General Govermnent Deficit of 9.9% of GDP.25

for FY03 and US$1.9 billion (US$1.1 billion IBRD, US$0.8 billion IDA) for FY04 (for the latter year,assuming no significant improvements in performance). Continued demand for financial assistance in thesocial sectors and for poverty-focused rural development programns underpins the planned level of IDAlending, which will still remain well below India's needs, particularly given the country's efforts to movefaster towards achieving the MDGs (para. 92).

76. Distribution of the portfolio. The sectoral distribution of new lending to India for the three fiscalyears FYOO to FY02 is shown in figure 7. Transport constituted 41% of new lending, or US$2.7 billion,followed by rural development and energy. Structural adjustment loans/credits represented 11% of thetotal. New lending for health and education was 9%, considerably less than their combined 26% share ofthe portfolio.

Flgure 7: NewConmiitnehnts bySector,FYOO-02

Rural DevebpmnntEnergy t)hers 15%

14% _ DisastrStructural Adjustmnt 7

Education11% ~~~~~~~~~5%

Healt4%

Transport41%

77. The state-wise distribution of new lending for FY98-02 is shown in table 1. In this period, 34%of new loans/credits went to the states of AP, Karnataka and UP that collectively represent 28% of India'stotal population and 30% of India's poor. 31% of new lending went to other states and 35% to the Gol.

Table 1: State-wise Distribution of New Lending, FY98-02

AP, UP &Kamataka Other States Center Total

Year US$ M % US$ M % US$ M % US$ M

FY98 785.4 2 327.4 11 1,028.8 30 2,141.6FY99 404.1 12 324.7 11 326.0 10 1,054.8FYOO 804.7 2 100.5 3 895.6 2 1,800.8FY01 610.4 18 811.0 27 1,133.9 34 2,555.3FY02 749.7 2 1,439.8 48 0.0 1/ 0 2,189.5

Total 3,354.3 100 3,003.4 100 3,384.3 2/ 100 9,742.0If The Grand Trunk Road Project (US $589 million IBRD), originaHy planned for FY02, was advanoed to FY01.21 Lending to the Center indudes projects that cover multi-states.

26

78. IDA/IBRD Exposure. India is IDA's largest exposure, with IDA debt outstanding of US$20.4billion (21.2% of the IDA portfolio) at the end of FY02. As concerns IBRD, India is the seventh largestexposure. IBRD exposure indicators for India are favorable (see annex B5). Total IBRD exposure hasbeen declining, and at end-FY02 amounted to US$7.02 billion (5.7% of the IBRD portfolio), well belowthe peak level of US$11.2 billion in FY95. With the current lending plans for FY03 and FY04 (para. 75),IBRD exposure is expected to remain at the current level through end-FY04, significantly lower than theUS$9.0 billion projected in the CAS, and well below the current single-borrower limit of US$13.5 billion.(Indeed, these levels of exposure reflect a joint approach by the Gol and the Bank to manage IBRDexposure proactively in the context of a long-term active GoI/IBRD relationship-see CAS para. 131;they compare with a sustained level of IBRD lending at around US$1.4 billion a year that could increaseexposure to close to the concentration limit in the longer term, depending on the pace of actualdisbursements, future cancellations and prepayments, as well as exchange valuation effects.) IBRD debtservice is a small and declining share of exports (less than 2% in FY02), and the share is projected todecline further (see annex B5). While preferred creditor debt service is projected to be about one third oftotal public external debt service, total external debt service is projected to amount to only about 15% ofexports. With continued strengthening of India's external position, total external debt outstanding isprojected to continue to decline as a percentage of both GDP and exports.

IFC Portfolio and Program

79. India is IFC's third largest exposure. As of end-FY02, IFC's portfolio in India consisted ofinvestments in 84 companies, with total exposure of US$661 million for IFC's own account and US$67million for B-loan participants. Of IFC's FY02 commitments, 43% have been concentrated in mid-sizedindustrial companies, with 32% in infrastructure and 25% in the financial sector. Portfolio performancehas been unsafisfactory, largely due to the poor performance of four old investments in the steel andtextiles industries. Non-accruing loans are equivalent to 32% of disbursed principal; total arrears areUS$87 million. Equity loss reserves represent 31% of the disbursed equity portfolio. IFC realizedUS$12.3 million in capital gains in FY01 and US$7.93 million in FY02.

80. To improve the quality of its India portfolio, IFC has intensified project supervision, with theestablishment of a portfolio unit in New Delhi, which supervises about 40 general manufacturing andfinancial markets investments. Being closer to the client and market, EFC is in a better position to monitorits portfolio and work proactively with clients. Increased attention has been given to resolving portfolioproblems and exiting inactive equity positions. In the past twelve months, EFC has managed to exit fromfour inactive equities through negotiations with potential buyers. In three cases, IFC managed to sell itsposition above its cost. In addition, IFC is giving greater attention to credit quality in new investmentsand to structuring projects in ways that provide a return commensurate with the risks. This is particularlychallenging in India, where the regulatory framework is not conducive to standard structures such asequity put options and quasi-equity and restricts the maximum interest that can be charged on externalborrowings and thereby limits the return EFC can obtain.

81. IFC has continued to increase its investments, with commitments of US$233 million in FY01 andUS$139 million in FY02, up from about a total of about US$300 million for FY98-FYOO. IFC made itsfirst Indian rupee loan in FY02. In addition, a pull-back from project lending by Indian financialinstitutions and the downtum in intemational and domestic capital markets has created a new role for EFCin supporting larger Indian corporations that have lost access to financing from other sources. In thecurrent market environment, IFC has a counter-cyclical role in helping these companies raise financingfor restructuring and expansion. While altemative sources of financing remain inadequate, IFC willcontinue to work with these companies, and will seek to leverage the capacity of these large corporationsto finance innovative products and services.

82. However, as discussed above, progress in implementing sector reforms necessary to attractprivate investment in infrastructure, with the exception of telecoms, has been disappointing, and a

27

significant reform agenda remains. Meanwhile, the pullback of international infrastructure developersfrom emerging markets has reduced the availability of foreign sponsors. Recession in the industrial sectorand high real interest rates have led to a decline in new private investment beyond infrastructure. Totalcommitments over FY01-FY03 are likely to fall well short of the level indicated in the CAS (US$1.0-1.5billion).

83. IFC has played an active role in knowledge-sharing in the region, including seminars oninsurance and on small and medium-size enterprise (SME) financing, and in technical assistance tomicroenterprise institutions. A new regional TA facility in Dhaka, co-financed with bilateral donors, willsupport the development of SMEs in the northeast states of India and neighboring countries.

MIGA Program

84. MIGA has intensified its marketing efforts in India (setting up a mobile office in three cities, forexample) to promote Indian SMEs and Indian investment in other developing countries. Foreign investorshave expressed interest in MIGA's coverage of investments in India, largely in the power,telecommunications and medical sectors. MIGA has no outstanding guarantees for projects in India. It hasinsured two projects undertaken by Indian companies in Tanzania and Zambia, facilitating FDI ofUS$203 million. Currently, MIGA has one active contract with US$1 mnillion outstanding from Indianinvestors. Indian investors have continued to express interest in MIGA coverage for their investments inother developing countries and emerging markets, and MIGA anticipates underwriting a project in FY03.

Partnerships

85. Progress has been made in building partnerships with key players-from the Gol and reformingstate governments to the private sector, civil society, external donors and investors. In particular, thedialogue with the Gol has broadened-with Bank advice being sought in new areas such as in financialsector reforms, privatization and voluntary retirement schemes (para. 22). The Bank worked with theNational Institute of Public Finance and Policy, MoF and DFID on the Fiscal Policies to AccelerateEconomic Growth Conference (para. 15), and with the Planning Commission on the Monitoring andEvaluation Poverty Workshop (para. 2). Consultations outside of government circles on Bank policy havegrown in importance: national and regional-level consultations were held recently on the revision of thepolicy on indigenous peoples. The Bank is also actively engaging civil society in preparation andimplementation of a broad spectrum of projects-one of the more interesting cases being the partnershipwith the Society for Promotion of Area Resource Centres (SPARC) in ensuring the rights of railway slumdwellers within the Mumbai Urban Transport Project. NGOs and civil society organizations have beenclosely integrated into the implementation of the Gujarat Earthquake Recovery Program leading to theeffective community participation and monitoring of the reconstruction program. In addition, over thepast year or so, the Bank has collaborated with CII to analyze and disseminate information on improvingthe investment climate (para. 18), with NCAER to examine labor adjustment issues in the context ofprivatization (para. 19), and with the Indian Council for Research on International Economic Relations(ICRIER) and the National Institute of Bank Management to organize a high-level seminar on financialsector reforms in India.

86. Partnerships with other donors have expanded. The Bank has developed strong partnerships withUSAID in UP, and with DFID in AP and Orissa to provide technical assistance and to collaborate on co-financing operations to support comprehensive state reforms. In addition, DFID is providing considerabletrust fund support to the Bank's overall program, enabling a greater focus on the reforms necessary toachieve lasting poverty reduction. At the sectoral level, partnering with other donors-including theUSAID, EU, the Netherlands, DFID, CIDA, UNICEF and WHO-has been particularly important ineducation and HIV/AIDS programs. The Bank is also in dialogue with the Government of Japan toensure exchange of information and appropriate coordination of our activities. As in other countries,Japan PHRD grants are an important source of support to project preparation for eventual Bank financing.

28

In June 2001, ADB and the Bank completed a Coordinated Assistance Strategy for the Road Sub-sector inIndia, that has since been updated by ADB and the Bank. The Bank also participated in an ADB-sponsored high-level donor forum in January 2002 to increase collaboration for supporting the newly-created states and northeastem states. The Water and Sanitation Program (WSP) is an international donorpartnership supported and managed by the Bank. In India, in the context of the WSP, the Bankcollaborates with DFID, SIDA, the Netherlands and other donors in a range of activities including ruraland urban water supply with a formal partnership with the Rajiv Gandhi Drinking Water Mission (para.48) and decentralization activities such as the City Challenge Fund (para. 33). With the support of theSwiss Government, the Bank and the GoI are about to initiate a National Strategy Study on CleanDevelopment. The Bank and the Gol have continued to partner with the GEF and Montreal Protocol,including the world's second largest program to eliminate the production and use of ozone-depletingsubstances. The Bank is also working with KfW to facilitate new GEF support for solar thermal powergeneration. The Bank has worked closely with the UN Inter-Agency Working Group on gender anddevelopment, through setting annual agendas, participating in shared events and carrying out jointlearning exercises.

V. EMERGING ISSUES AND RISKS

Supporting State Reforms and Development

87. While a full assessment is not yet possible, it appears that the shift in the Bank's strategy in recentyears-working with the GoI to support major structural reforms at the state level-is well-founded. Thenumber of reforming states is growing, as is the breadth and depth of reforms in individual states, thoughit should be emphasized that even the leading reforming states are still grappling with very difficultreforn issues and fiscal challenges. To build on the achievements to date, and to carry forward the states-based strategy, a number of emerging issues will need to be addressed, in close partnership with the GoL.The spread of reform among states raises the issue of whether, given administrative budget and staffconstraints, more can be done to maximize the impact of the Bank's involvement, for example, throughgreater coordination between the Bank and other external partners supporting reform at the state level. Arelated question concerns the mechanisms for determining whether new reforming states should beconsidered for Bank lending, as well as for the exit of states that might be lagging in reform efforts.

88. While adjustment lending at the state level has been a very useful instrument for supporting statereforms, its use has not been as widespread as anticipated in the CAS, partly because reforms have notmoved as fast as expected, and partly because of a desire on the part of the GoI to review experience withadjustment lending at the state level. Accordingly, in February 2002, the Gol requested the Bank toconduct a review of its sub-national adjustment lending in India. This review noted that adjustmentlending was still a relatively small component of the overall lending program: 14% in FY00, 6% in FY01and 16% in FY02. The review also made a strong case, based on available evidence, that sub-nationaladjustment lending was starting to show results, with visible progress from participating states in terms offiscal adjustment and governance improvements. (See also section III C above). The future of sub-national adjustment lending in India is currently under discussion between the Bank and the GoL.Meanwhile, efforts are ongoing to strengthen the reforms supported by such operations, for example, tofocus increasingly on reforms which are difficult to reverse, such as legislative changes, and deepinstitutional reforms, to promote sustainability.

89. The increased use by the GoI of reform-based transfers-a very welcome development-raisesthe question of the relationship of Bank lending to these new schemes (for example, the Fiscal ReformFacility aimed at restoring the health of states' finances, the newly created Urban Reform Incentive Fundand City Challenge Fund, and the Accelerated Power Reform Development Program (APRDP), whichprovides soft financing for power sector investments based on reform progress). Preliminary discussionsare underway as to how the Bank can best support these reform-based transfers. In particular, the Gol has

29

asked the Bank to bring international experience to bear in the design of these facilities. Beyond technicalassistance, there may also be financing opportunities, including: technical assistance; arrangementswhereby states can access Bank financing ("upper tranches") when they have achieved a stipulated higherhurdle of reform over and above the "first" level of reform stipulated by, and funded through, the Golwindow; and focusing Bank financing on a subset of states within an agreed and common policyframework.

90. Support for north-eastern and newly-created states. The Gol has requested the Bank andother external agencies to provide concentrated support for the three new states of Jharkhand,Chhattisgarh and Uttarranchal,'2 and for the eight, isolated northeastern states and for Jammu andKashmir. The donor community recognizes the special development challenges facing these states and isincreasingly active in them. The Bank is preparing projects in all three of the new states, and plans toundertake a fiscal assessment of Jharkhand in the upcoming forestry project in that state. With respect tothe northeastern states, the Bank is expanding its portfolio, and is considering extending its financialassistance to the state of Tripura for road and integrated rural development. However, at the same time,the Bank is constrained by security concerns and availability of resources. IFC is also expanding itssupport to SMEs in the northeast (para. 83).

91. These major issues will be an important focus for discussion between the GoI and the Bank overthe coming year, so that agreed steps to evolve the states strategy can be incorporated in the next fullCAS.

Achieving the MDGs

92. This CAS progress report documents the advances made by India in the 1990s towards the MDGsand makes clear the scale of the challenge ahead (para. 3). As stated earlier (paras. 2-3), the key goals ofpoverty reduction and human development are at the core of India's development plans and in turn,constitute an essential thread of the Bank's assistance strategy in India. Over the coming year, to enhanceits effectiveness in pursuing this important agenda, especially given the renewed prominence of theMDGs in the global development dialogue, the Bank will focus on improving its analytical base. Workhas thus been initiated to: (i) obtain a better assessment of MDG achievements at the sub-national andsub-state level and document the considerable heterogeneity that exists in the prospects of individualstates and districts in attaining the MDGs; and (ii) understand the socio-economic and policy determinantsfor achievement of the Millennium Development indicators better. The results of this work will help toformulate, jointly with the GoI, further Bank support for the policies and programs that will need to beundertaken to move faster towards achieving the MDGs and to articulate the coordinated interventionsacross sectors which the next full CAS would support.

Key Risks

93. The FY01 CAS identified a number of risks facing the Bank and its work in India. On thepolitical and programme risk side, the chief issues identified included: (i) the risk of reform derailment;(ii) the possible implications of growing disparities between states; (iii) portfolio risks, including theimpact of fiscal deterioration, the effectiveness of community-based interventions and social andenvironmental risks; and (iv) a risk of the Bank becoming less relevant. Credit and exposure risks wereconsidered fairly small, with the main issue being the possible failure to progressively reduce the fiscaldeficit.

94. Thus far, there has been no indication of derailment of reform; the issue has rather been the paceof reform, as indicated in para. 10 above. So far, the automatic correction to the level of Bank lending inthe face of slow reform at the state level seems to have worked well. States are paying increased attention

12 These new states were created from existing states in November 2000.30

to communication strategies to build consensus for reform, an area which the Bank is increasinglyemphasizing through the work of its external affairs unit.

95. As noted in para. 78, India's external creditworthiness indicators are strong. Nevertheless, thefiscal situation is of significant concern. In addition to the high and growing burden of consolidatedpublic sector debt, now over 90% of GDP, contingent liabilities are also on the rise, mainly in the form ofguarantees (largely due to projects in irrigation and power). There are also large unfunded pensionobligations and recapitalization requirements of weak public-sector banks. These fiscal trends haveimplications for the long-term sustainability of the national debt and the related risks have led the majorinternational credit rating agencies to lower their credit ratings of Indian local currency debt. 13 Withouttough measures to consolidate the fiscal situation and accelerate structural reforms (for example, bycutting untargeted subsidies), the fiscal position is unlikely to improve. Clearly, the longer the fiscaldeficit goes uncorrected, the greater the risk that interest rates are driven to crippling levels and/or anupsurge of inflation is generated-in either case leading to a slowdown or even interruption of growth andpoverty reduction. Over time, such a scenario could pose potentially serious risks to the financial systemby undermining the public's confidence in government support for financial institutions-which is amajor factor in the financial system's current stability. In such circumstances, a spillover into the balanceof payments could not be ruled out, particularly if combined with adverse developments in the globaleconomy such as high oil prices and/or slow growth.

96. The CAS triggers have already mitigated the risks to the Bank in this emerging situation (paras.73-75), and, as mentioned, LBRD exposure at the end of the CAS period is likely to be significantly belowthe level forecasted in the CAS (para. 78). However, the progressively increasing risks posed by thefiscal situation require close monitoring, and an even greater focus of the Bank program of assistance onfiscal and related structural reforms. Analytic work oni debt sustainability and on contingent liabilitieswill also be given priority.

nes D. WolfensohnPresident

By:

Shengman Zhang Peter Woicke

Washington, D.C.November 4, 2002

13 Moody's revised its rating from BA2 (stable) to BA2 (negative), while Standard & Poor lowered its ratingof Indian local currency debt from BBB- to BB+ in September 2002.

31

India CAS Progress ReportAnnex Al

Page I of 2

India at a glance 1 /31/02

POVERTY and SOCIAL South Low-India Asia Income Development dlamond

2001Population, mid-year (millions) 1,033 1,380 2,511 Ute expectancyGNI per capita (Atlas method, US$) 460 450 430GNI (Atlas method, US$bilion) 478 616 1,069

Average annual growth, 1995-01

Population (%) 1.8 1.9 1.9Labor force(X) 2.3 2.4 2.3 GNI Gross

per Ii dmrMost recent estimate (latest year available, 1995-01) capita enrollment

Poverty (% of population below nationalpoverty line) 26Urban population (% oftotal population) 28 28 31Ute expectancy at birth (years) 63 62 59Infant mortality (per 1,000 live birthts) 69 73 76Child malnutrition (% of children under 5) 47 49 .. Access to Improved water sourceAccess to an improved water source (% of population) 88 87 76Illiteracy (% of population age 15+) 42 44 37Gross primaryenrollment (% ofsschool-agepopulation) 101 101 96 India Low-income group

Male 109 109 103Female 92 93 88

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1981 1991 2000 2001Economic ratios

GDP (US$ billion) 188.8 266.4 457.0 477.6

Gross domestic investment/GDP 22.4 21.9 22.9 22.5Exports of goods and services/GDP 6.1 8.7 14.0 13.7 TradeGross domestic savings/GOP 19.1 21.3 20.3 20.7Gross national savings/GDP 20.5 21.3 22.3 22.8

Current account balance/GDP -2.0 -0.6 -0.6 0.3 Domestic Interest payments on external debt/GDP 0.3 1.3 0.9 0.8 Dsti nnvestmentTotal external debt/GDP 12.0 32.1 21.8 20.3 savnngsTotal extemal debt service/exports 11.1 29.2 14.0 11.7Present value of extemal debtGDP .. .. 15.5Present value of extemal debt/exports .. .. 91.2

Indebtedness1981-91 199141 2000 2001 2001-05

(average annual growth)GDP 5.6 6.1 4.0 5.4 5.6GDP per capita 3.4 4.2 2.1 3.6 42 India Low-incomegroupExports of goods and services 6.8 13.6 20.9 9.0 5.4

STRUCTURE of the ECONOMY1981 1991 2000 2001 Growth of Investment and GOP (%)

(% of GDP)Agricufture 37.4 31.5 24.9 25.1 2TIndustry 25.3 26.4 26.9 26.5

Manufacturing 16.3 16.1 15.8 15.5 _Services 37.2 42.1 48.2 48.4 O.. 2 g# 7 98 sI oD o

Private consumption 70.8 67.3 66.5 66.2 --General govemment consumption 10.1 11.4 13.2 13.1 'GD1 e*GDPImports of goods and services 9.4 9.3 16.6 15.4

(average annual growth) 1981-91 1991-01 2000 2001 Growth of exports and Imports (%)

Agriculture 3.0 3.1 -0.2 5.7 40Industry 6.8 6.4 6.3 3.1 30

Manufacturing 7.0 . 7.0 6.7 3.0 2so

Services 6.9 8.1 4.8 6.6 l'7

Private consumption 5.7 4.5 1.7 4.9 o -General govemment consumption 4.2 7.4 6.5 4.9 -ls 9# 97 95 00 01

Gross domestic investment 5.4 8.2 2.0 4.0 Exports eImportsImports of goods and services 5.1 10.5 10.6 4.9

Note: 2001=2001/02 data are preliminary estimates.

The diamonds show four key indicators in the country (in bold) compared with its Income-group average. If data are missing, the diamond willbe incomplete.

India CAS Progress Report

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Page 2 of 2

India

PRICES and GOVERNMENT FINANCE1961 1991 2000 2001 Inflation (%)

Domestic prices(% change) 15Consumer prices iai1 ia3.5 3.8 3...3<Implicit GDP deflator 10.3 13.8 4.1 3.5

Goaerinmnt linance(% of GOP, inctudes current grants) 0 - , , ,Current revenue .. .. 19.9 19.5 as a7 as aa OD orCurrent budget balance .. .. 4.6 -8.2 CP defator OCPIOverall surplusadeficit .. .. -11,3 -11.0

TRADE

(US$ mrillon) s1981 1991 2000 2001 Export and import levels (US$ mill.)

Totsd exports (lob) 8,522 18,266 44,894 44,900 70.000Manutactures 5,214 13,148 34,335 33,128 eo,ooo

Readymade garments 733 2199 5569 4987 sOsO .Gems & Jewellery 849 2738 7384 7306 40 50,toEfl.E

Total imports (dl) 15,020 21,064 69,264 57,600 oe,oieFood 1,474 275 1,443 2,044 20,00 NFuel and energy 5,591 5,326 15,850 14,000 o,0s .

Capita] goods 2,219 4,233 8.941 9,316 a35 00 07 Gs go 00 0l

Exportppiceindexft995=100) 29 54 122 114Import prioe index (t995-100) 29 44 162 15cO EJrEoneS Hirmports

Temiscltrade (1995=100) 98 123 75 76

BALANCE of PAYMENTS

(LUS$ rrillion) 1881 1991 2000 2001 Curent account balance to GDP(%)

Exports d goods and sevioes 11,457 23,288 63,764 65,200 1Software exports 6341 7174

Imports d goods and services 17,666 24,879 75,656 73,700Resource bahance -6,209 -1,591 -11,892 -8,500 |

Nat income 213 -3,830 4,821 -2,600 o|Net current transters 2,314 3,783 12,798 12,500

Current account balance 4,682 -1,638 -2,915 1,400 -i

Finandng hems (net) 1,159 4,237 8,771 10,456Changes In net reserves 2,523 -2,599 -5,856 -11,856 -s

Memo:Reserves induding gold (UJS$ fflion) 4,390 9,220 42,281 54,135Conversion rate (DEC, local'US$) 8.9 24.5 45.7 47.7

EXTERNAL DEBT and RESOURCE FLOWS1981 1991 2000 2001

(US$ million) Compositlon of 2001 debt (US$ mill.)Total debt outtanding and disbursed 22,709 85,421 . 99,433 97,071

IBRD 1,181 8,459 7,079 6,835 G: t951 A 6,835IDA 5,906 14,203 18,888 19,269 G 2 a

Total debt serwoe 1,586 7,861 10,868 9,2821BRD 137 1,170 1,423 1,089 | B:i192IDA 60 242 506 565

Cornpcsilion of net resource lionsOfidaJ grants 602 460 336 384 F: 44,640Otfdical creditors 1,103 2,895 -237 -264 D4,5t8Private credtors 829 1,467 4,103 -1,608Foreign dired investment .. 129 2,346 3,905Portfolio equfty .. 4 2,756 2,020 E: ta.asa

World Bank programCommitments 2.128 2,861 2,244 2,830 A -IsFB E -EilateralDisbursements 1,207 2,184 1,761 1,636 8- IDA 0- Other multlaterel F -PrvatePrincipal repayments 86 669 1,361 1,148 0-lW 0 -Short-termNetlilows 1,122 1,516 400 488 1 _

Interest payments 1t1 744 568 506Net transfers 1,011 772 -168 -18

Development Eoonomics 10/31/02

India CAS Progress ReportAnnex A2

Page I of I

IndiaKey Economic and Program Indicators - Change from Last CAS

Forecast in Last CAS Actual Current CAS ForecastEconomy 1999/00 2000/01 2001/02 2002/03 1999/00 2000/01 2001/02 2002/03 2003/04Growth rates (%)

GDP 5.8 6.0 6.3 6.5 6.1 4.0 5.4 4.8 5.8Merchandise Exports (FOB) 20.9 16.7 9.9 10.0 16.7 20.9 6.6 5.1 5.7Merchandies Imports (CIF) 10.6 17.2 13.2 11.2 12.7 10.6 5.0 7.2 11.5

Inflation (GDP Deflator %) 7.0 6.5 6.0 6.0 4.5 4.1 3.5 4.5 4.8

National accounts (% GDP)Current account balance -1.2 -1.2 -1.4 -1.6 -1.1 -0.6 0.3 0.0 -0.1Gross fixed investment 23.5 23.8 24.0 24.3 21.6 21.9 21.6 21.4 21.9

Public finance (% GDP)Fiscal balance 1/ -11.0 -10.5 -10.0 -9.5 -11.2 -11.3 -11.7 -11.7 -11.4Foreign financing 0.4 -0.1 0.0 -0.7 0.8 0.4 0.4 0.5 0.3

International reserves (US$ million) 2/ 40530 42185 46040 45274 35058 39554 51059 58244 64431(as months of goods imports) 7.5 6;8 6.6 5.8 7.6 8.0 10.6 11.1 11.0

Program FY00 FY01 FY02 FY03 FY00 FY01 FY02 FY03 FY04

Lending (US$ million) 1801 2122 2950 3000 1801 2122 2190 1608 1955

1. Consolidated Non-financial sector. General Government deficits (in percent of GDP) are: 9.9 (1999/00); 10.4 (2000/01); 10.3 (2001/02) and 10.2 (2002/03 proj.)2. Excluding gold. International reserves including gold are: 38032 (1999/00); 42281 (2000/01); 54135 (2001/02); 63750 (2002/03 proj.); 68688 (2003/04 proj.)

India CAS Progress ReportAnnex Bl

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Selected Indicators* of Bank Portfolio Performance and Management(as of September 30, 2002)

Indicator FY00 FY01 FY02 FY03

Portfolio AssessmentNumber of Projects Under Implementation a 77 76 69 69

Average Implementation Period (years) b 4.0 3.9 3.8 3.9

Percent of Problem Projects by Number a, 13.0 7.9 4.3 5.8

Percent of Problem Projects by Amount a, c 12.2 7.6 5.0 6.2

Percent of Projects at Risk by Number a, d 26.0 7.9 5.8 7.2

Percent of Projects at Risk by Amount a. d 28.4 7.6 6.2 7.4

Disbursement Ratio (%) e 17.9 20.9 20.0 3.7

Portfolio ManagementCPPR during the year (yes/no) Yes Yes Yes NoSupervision Resources (total US$000) 7,076 6,102 6,540 1,245

Average Supervision (US$/project) 85 69 76 18

Memorandum Item Since FY 80 Last Five FYsProj Eval by OED by Number 264 41Proj Eval by OED by Amt (US$ millions) 32,589 5,856% of OED Projects Rated U or HU by Number 28.1 19.5% of OED Projects Rated U or HU by Amt 27.0 23.5

a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).

d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only.* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,

which includes all active projects as well as projects which exited during the fiscal year.

India CAS Progress ReportAnnex B2 IBRD/IDA

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Proposed IBRD, IDA and GEF Base-Case Lending Program /a(As of October 16, 2002)

Fiscal US$(M) Strategic Rewards Implementation Risks

Year Project IBRD IDA GEF (HIMIL) /b (HIM/L) /b

FY02 Andhra Pradesh SAL I 125 125 0 H H

Actual Gujarat Emergency Earthquake 0 443 0 M M

Karnataka Rural Water Supply & Sanitation II 0 152 0 H L

Karnataka SAL n 50 50 0 H H

Karnataka Tank Management 0 99 0 M M

Kerala Transport 255 0 0 M M

Mizoram Roads 0 60 0 M M

Mumbai Urban Transport 463 79 0 M M

Rajasthan Water Sector Restructuring 0 140 0 H H

Uttar Pradesh Water Sector Restructuring 0 149 0 H H

Total 893 1,297 0

FY03 Allahabad Bypass 150 0 0 M M

/c AP Community Forestry 11 0 108 0 H H

AP Rural Poverty 0 185 0 H MChhattisgarh DPIP 0 110 0 H M

Tech/Eng. Education Quality Improvement 0 250 0 M L

Food & Drug Capacity Building 0 55 0 M L

Orissa SAL I 75 75 0 H H

Rajasthan Health Systems 50 50 0 M M

/c RCH I Supplement 0 12 0 M M

Solar Thermal 0 0 49 M M

UP Roads 488 0 0 M M

Total 763 845 49

FY04 Andhra Pradesh Power APL II 150 0 0 H H

Andhra Pradesh SAL 1 100 100 0 H H

Disease Surveillance 0 60 0 M L

Gujarat Disaster Mgmt Capacity Building 50 50 0 H M

Karnataka Health Systems 150 0 0 M M

Karnataka Economic Reform Loan HI 125 125 0 H H

Karnataka Urban Sector Reform 160 0 0 M M

Maharashtra Rural Water Supply 0 150 0 H L

Madhya Pradesh Water Sector Restructuring 50 150 0 H H

Madhya Pradesh Forestry 0 105 0 H H

Tarnil Nadu Roads Sector 330 0 0 M M

Tamil Nadu Rural Water Supply 0 100 0 H L

Total 1,115 840 0

TOTAL CAS PERIOD (FY02-04) 2,771 2,982 49

TOTAL IBRD/IDA, FY02-04 5,753

/a This list is indicative; it includes some projects which have not yet been approved by the Government

of India for processing, and is not meant to exclude other projects that could emerge, consistent with the CAS.

/b Indicates whether Strategic Rewards and Implementation Risks are expected to be High (H), Moderate (M), or Low (L).

/c Operations already approved in FY03.

India CAS Progress ReportAnnex B2 IFC/MIGA

Page 1 of I

IFC and MIGA Program, FYOO-02(As of June 30, 2002)

FY00 FY01 FY02

IFC approvals (US$m) 168 413 210

Sector (%)AGRICULTURE & FORESTRY 0CHEMICALS 2 9COLLECTIVE INV VEHICLE 9EDUCATION SERVICES 3FINANCE & INSURANCE 37 46 19INDUSTRIAL & CONS PROD 23 5 32INFORMATION 19 23PRIMARY METALS 3 12PULP & PAPER 7PLASTICS & RUBBER 14TRANSPORTATION & WAREH 4UTILITEES 29 5

Total 100 101 100

Investment instrument(%)Loans 25 17 14Equity 25 13 2Quasi-Equity 3 25 18Other 47 45 66

Total 100 100 100

MIGA guarantees (US$m) 0 0 0

Summary of Nonlending Services India CAS Progress ReportSummary ~~~~~~~~~~~~~~~~Annex B3(As of October 31, 2002) Page I of 2

CostProduct US$000 Audience a. Objective b.

Recent completions (FYO1-FY03) c. Actual Costs

Formal ReportsProcurement Assessment Review 395 G,B KGImproving Investment Climate in India 203 G,D,B,PD KG,PD,PSFinancial Sector Strategy 63 B KGThe Challenge of Old-Age Income Security 254 G,B KG,PD,PSBetter Health Systems for India's Poor 370 G,B,PD KG,PD,PSImproving Household Food and Nutrition Security 160 G,B KG,PSLong-Term Issues in Transport 244 PD KG,PSFinancial Restructuring of State Electricity Boards 107 G,B KGUrban Sector Operational Strategy 34 B KGChiller Sector Strategy 141 G,B KGHousehold Energy: Indoor Air Pollution and Health 360 G,D,B,PD KG,PDAP Fiscal Note 118 G,B KG,PSKarnataka: Financing Education in Context of Econ Growth, & 210 G,B KG

Secondary Education & the New Agenda for Econ Growth G,B KGMaharashtra: Reorienting Gov to Facilitate Growth & Reduce Poverty 250 G,B KG

Informal ReportsPoverty Policy Notes 117 G,B KG,PSGovernance Policy Notes 255 G,B KG,PSSecurities Markets Integrity 278 G,B KG,PSLocal Institutions 156 PD PSPower Sector Reforms - Impact on Poor 113 G,D,B,PD KG,PD,PSUrban Air Quality 87 G,B KG,PD,PSAP Urban Poverty Reduction 33 G,D,B KG,PSKarnataka Rural Policy Review 100 B KG,PSKarnataka Policy Notes 99 G,B KG,PSMaharashtra Agriculture Policy Note 110 B KG,PS

Workshops/Conferences/Technical AssistanceIndia Fiscal Conference & Dissemination Book 297 PD KG,PDVAT Introduction Workshops 212 G,B KGFinancial Sector Conference 206 G,B KG,PDJoint GOI/WB Poverty Workshop 267 PD KGPoverty & Social Monitoring 326 G,D,B,PD KGNon-Farm Employment in Rural Areas 58 G,D,B KGRural Roads Policy Framework 24 G,B,PD KGMicrofinance Review and Dissemination Workshop 158 G,B KG,PDIndia States Forum Book 45 PD KG,PD

Underway/Planned Activities (FY03/FY04) Planned Costs

Formal ReportsDevelopment Policy Review 256 G,D,B,PD KGDebt Sustainability 50 G,B KGContingent Liabilities 75 G,B KGTrade Study 200 G,B KGMDG Assessment 300 B KGPoverty Assessment 250 G,D,B,PD KGKarnataka State Financial Accountability Assessment 137 G,B KG,PSUP State Financial Accountability Assessment 110 G,B KG,PSOrissa State Financial Accountability Assessment 100 G,B KG,PSPublic Enterprise Restructuring, Privatization & Labor Adjustment 150 G,B,PD KG,PS

a. Government (G), Donor (D), Bank (B), Public Dissemination (PD)b. Knowledge Generation (KG), Public Debate (PD), Problem-Solving (PS)c. Beginning fourth quarter FY01, subsequent to last full CAS

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Summary of Nonlending Services(As of October 31, 2002)

CostProduct US$000 Audience a. Objective b.

Formal Reports (cont.)

Fiscal Decentralization 401 G,B KGDecentralized Organizations 152 B KG

Rural Service Delivery 150 G,B,D KG

Evaluation of District Primary Education Program 100 G,B KG

Child Development 306 G,B KG,PS

Key Issues on AIDS 310 G,B KG,PS

Urban Health Issues 166 B KG

Rethinking Agricultural Subsidy Schemes 231 B KG

Highway Sector Financing Study 93 G,B KG

Urban Governance and Finance 207 G,B KG

Urban Air Pollution / Clean Air Initiative 46 G.B,PD KGRural Energy 559 G,B KG

Access of the Poor to Modern Fuels 93 G,B KG

Strategy for Reform in the State Power Sector 107 G,B KG

AP Growth Strategy (Vision 2020) 120 G,D,B,PD KG,PSAP HNP Strategy (Vision 2020) 74 G,D,B,PD KG,PSAP Education Strategy (Vision 2020) 234 G,D,B,PD KG,PS

UP State of Environment 28 G,D,B,PD KG

Informal ReportsFSAP Follow up 52 GB KG

Judicial and Legal Reform 100 G,B KG,PS

Country Gender Assessmeat 122 G KG.PSNatural Calamity Insurance 80 GB KGPSRural Finance Approach Paper 200 G KG, PS

Private Health Services for the Poor 100 G,D,B,PD KG,PS

Benefit Sharing of Irrigation Subsidies 110 GB KG,PS

Forestry Policy Issues 83 B KG,PS

Analysis of Fiscal Issues in Selected States 256 G,B KGStae-level Investment Climate Diagnostics 157 G,B KG,PD

Karnataka Agricultural Risk Management Options 52 G,B KG,PS

UP Rural Policy Review 76 B KG,PS

Tamil Nadu Fiscal Study 75 G,B KGPD,PSBihar Fiscal Study 75 G,B KG,PD,PS

Workshops/ConferencesfTechnical AssistanceNational Environmental Mgt. Policy TA 85 G KG,PSProcess Agent Sector Strategy TA 140 G KG,PS

States Forum ll 206 G,D,B,PD KG,PDState Rural Decentralization 443 G,D,B,PD KG,PDAP Vision 2020 Poverty/Social Monitoring TA 196 G KG,PS

AP Vision 2020 Environment TA 250 G KG,PS

Karnataka Education Workshops 77 G,D,B,PD KG,PD

Kamataka Environmental Mgt. Framework TA 114 G KG,PS

UP Environmental Mgt. Framework TA 240 G KG,PS

a. Government (G), Donor (D), Bank (B), Public Dissemination (PD)b. Knowledge Generation (KG), Public Debate (PD). Problem-Solving (PS)

India CAS UpdateAnnex B4

Page I of 2

India - Key Economic Indicators

Actuals Estimte ProjectedIndicator 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05

National accounts (as % of GDP)

Gross domestic product' 100.0 100.0 100.0 100.0 100.0 100.0 100.0Agriculture 27.7 26.2 24.9 25.1 24.2 24.0 23.4

Industry 26.5 26.0 26.9 26.5 26.6 26.6 26.7

Services 45.8 47.8 48.2 48.4 49.2 49.4 49.8

Total Consumption 81.3 79.5 79.7 79.3 79.8 79.5 79.6Gross domestic fixed investment 21.4 21.6 21.9 21.6 21.4 21.9 21.9

Government investment 6.3 6.4 6.8 6.3 6.4 6.6 6.6Private investment 15.1 15.2 15.1 15.3 14.9 15.3 15.3

Exports (GNFS)b 11.5 12.0 14.0 13.7 14.2 14.9 15.5Imports (GNFS) 14.1 15.1 16.6 15.4 16.2 17.2 17.8

Gross domestic savings 18.7 20.5 20.3 20.7 20.2 20.5 20.4

Gross national savings' 20.3 22.5 22.3 25.2 24.6 24.7 24.4

Memorandum itemsGross domestic product 413909 445224 456993 477622 502954 536219 571138(US$ million at current prices)GNI per capita (US$, Atlas method) 420 440 450 460 480 510 530

Real annual growth rates (%, calculated from 1993 prices)Gross domestic product at market price 6.5 6.1 4.0 5.4 4.8 5.8 5.8Gross Domestic Income 5.4 5.1 2.9 5.4 4.9 6.3 6.4

Real annual per capita growth rates (%, calculated from 1993 prices)Gross domestic product at market price 4.6 4.2 2.1 3.7 3.2 4.3 4.5Total consumption 1.3 0.4 0.7 3.2 4.0 4.5 5.4Private consumption -0.4 -1.4 -0.1 3.2 3.8 4.2 5.4

Balance of Payments (US$ millions)

Exports (GNFS)b 47484 53251 63764 65200 71300 79868 88321Merchandise FOB 34298 37542 44894 44900 48800 54168 61310

Imports (GNFS)b 58565 67028 75656 73700 81402 92000 101919Merchandise FOB 47544 55383 59264 57600 63400 71200 78676

Resource balance -11081 -13777 -11892 -8500 -10102 -12132 -13598Net current transfers 10280 12256 12798 12500 13014 13000 13260Current account balance -4345 -5080 -2915 1400 167 -1461 -3065

Net private foreign direct investment 2462 2155 2346 3905 3400 3600 4000Long-term loans (net) 5918 4781 8133 -1872 3803 199 4389

Official 980 1068 -237 -263 1029 1423 785Private 4938 3713 8369 -1609 2775 -1223 3605

Other capital (net, incl. eors & ommissions) 187 4546 -1708 8423 2250 2600 3300Change in reserves" -4222 -6402 -5856 -11856 -9620. -4938 -8625

Memorandum itemsResource balance (% of GDP) -2.7 -3.1 -2.6 -1.8 -2.0 -2.3 -2.4Real annual growth rates ( YR93 prices)Merchandise exports (FOB) 2.8 16.7 20.9 6.6 5.1 4.7 7.8

Manufactures 1.9 19.2 24.9 8.6 4.4 3.8 7.2Merchandise imports (CIF) 3.1 12.7 10.6 5.0 7.2 11.5 9.9

contd...

India CAS Progress ReportAnnex B4

Page 2 of 2India - Key Economic Indicators

(Continued)

Actuals Estimate ProjectedIndicatcr 1998/99 1999/00 2000/01 2001/02 2002103 2003/04 2004/05

Public finance (as % of GDP at market prices)'Current revenues 19.1 18.9 19.9 19.5 20.3 20.4 21.0Current expenditures 26.2 27.2 28.4 27.7 28.5 28.3 28.0Current account surplus (+) or deficit (-) -7.0 -8.3 -8.6 -8.2 -8.2 -7.9 -7.1Capital expenditure 2.7 2.9 2.8 2.9 3.0 3.0 3.0Foreign financing 0.3 0.8 0.4 0.0 0.9 0.9 0.7

Monetary indicatorsM3/GDP 56.2 55.7 59.5 65.6 67.6 69.0 69.4Growth of M3 (%o) 19.2 9.9 15.6 20.2 12.8 13.2 11.5Private sector credit growth 52.2 25.7 61.9 61.0 40.6 53.8 46.2total credit growth (%)

Price indices( YR93 =100)Merchandise export price index 96.9 90.9 90.0 84.4 87.3 92.5 97.1Merchandise import price index 117.5 121.4 117.5 108.7 111.6 112.5 113.1Merchandise terms of trade index 82.5 74.9 76.6 77.6 78.2 82.2 85.8Real exchange rate (US$/LCU)f 72.4 71L0 75.5 ..

Consllmerprice index (% change) 12.7 3.4 3.8 3.3 4.5 4.8 4.7GDP deflator (% change) 7.4 4.5 4.1 3.5 4.5 4.8 4.7

a. GDP at factor costb. 'GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Consolidated non-financial public sector.f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

India CAS Progress ReportAnnex BS

Page I of 1

India - Key Exposure Indicators

Actuals Estimate ProjectedIndicator 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05

Total debt outstanding and 97637 98313 99433 97071 100553 100752 105142disbursed (TDO) (US$m)3

Net disbursements (US$m)a 3320 676 1120 -2362 3482 199 4389

Total debt service (TDS) 12084 10110 10738 9657 11503 14607 11279(iJS$m)a

Debt and debt service indicators

(%)TDO/XGSb 166.3 148.4 127.9 122.5 118.3 106.7 102.0TDO/GDP 23.6 22.1 21.8 20.3 20.0 18.8 18.4TDS/XGS 20.6 15.3 13.8 12.2 13.5 15.5 10.9

MIRD exposure indicators (%)

IBRD DS/public DS 12.5 16.4 14.6 12.7 13.1 10.0 13.9Preferred creditor DS/public 23.6 30.0 26.6 25.6 26.0 19.8 28.3DS (%)c

IBRD DS/XGS 2.3 2.1 1.8 1.4 1.4 1.3 1.2IBRD TDO (US$m)d 7990 7816 7079 7015 6728 6967 7266

Share of BRD portfolio (%)d 7.1 6.4 5.8 5.7 5.5 5.7 6.0IDA TDO (US$m) 18562 18930 18888 19269 19479 19626 19695

IFC (US$m) 801.7 686.3 677.7 804.0 782.0 782.0Loans 569.1 436.0 411.9 512.0 498.0 503.0Equity and quasi-equity' 232.6 250.3 265.8 292.0 284.0 279.0

MIGA

MIGA guarantees (US$m) .. .. ..

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

term capital.

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

Bank for International Settlements.

d. Includes present value of guarantees. The numbers shown under the projections are from FINCR and areon World Bank Fiscal Year basis.

e. Includes equity and quasi-equity types of both loan and equity instruments.

India CAS Progress ReponAnrnx B6 IBRD

Page I of2

Status of Bank Group Operations (Operations Portfolio)(As of September 30, 2002)

(368 PROJECTS CLOSED)

ACTIVE PROJECTS Difference Between

Last PSR Expected and Actual

Supervision Rating Original Amount In US$ Millions Disbursements at

Project ID Project Name Develonment ImplementationFlscalYear IBRD IDA GRANT Canel. Undisb. Orig. FrnObiectives ProFress Revd

P045051 2NDNATLHIV/AIDSCO S S 1999 191.0 101.0 30.8

P049301 A.P. EMERG. CYCLONE S S 1997 50.0 100.0 19.0 14.2 37.8 14.7

P073094 AP COMM FOREST MANG S S 2003 108.0 113.1

P045049 AP DPEP S S 2000 111.0 97.0 13.0

P049385 AP ECON RESTRUCTURIN S S 1998 301.3 241.9 227.3 168.3

P035158 APIURIGATIONIM S S 1997 175.0 150.0 141.6 129.8

P049537 AP POWER APL I S S 1999 210.0 65.9 65.9

P010522 ASSAM RURAL INFRA S S 1995 126.0 29.9 36.2 49.6

P010480 BOMBAY SEW DISPOSAL S S 1996 167.0 25.0 22.0 36.7 60.2 43.5

P069376 CFC PRODTN SECTOR CLOSURE ODS ml S S 2000 83.0 45.6 -3.0

P010464 DISTRICT PRIMARY ED (DPEP) S S 1995 260.3 46.4 63.0 17.6

P035824 DIV AGRC SUPPORT S S 1998 79.9 50.0 79.9 67.3 30.3

P035821 DPEPII S S 1996 425.2 61.8 8.9

P038021 DPEP I(BUIAR) S S 1998 152.0 109.1 101.0

P036062 ECODEVELOPMENT S S 1997 28.0 20.0 8.2 9.1 20.9 2.7

P043728 ENV CAPACITY BLDG TA S S 1997 50.0 0.9 12.0 16.9

P010566 GUJARAT HWYS S S 2001 381.0 325.5 95.5

P071244 GRAND TRUNK ROADS S S 2001 589.0 542.8 77.8

P074018 GUJARAT EMERGENCY EARTHQUAKE S S 2002 442.8 423.9 77.6

P010485 HYDROLOGY PROJECT S S 1996 142.0 19.6 19.0 61.2 37.5

P067330 IMMUNIZATION STRENGTHENING PROJI S S 2000 142.6 56.3 0.3

P059501 IN-TA for Econ Reform Project S S 2000 45.0 39.9 9.3

P055456 IN-Telecommunications Sector Reform TA S S 2000 62.0 57.9 40.1

P010463 INDUS POLLUTION PREV S S 1995 143.0 25.0 68.3 31.8 101.7 8.9

P067216 KAR WSHD DEVELOPMENT S S 2001 100.4 101.5 8.5

P070421 KARN HWYS S S 2001 360.0 333.9 22.9P071033 KARNTANKMGMT S S 2002 98.9 104.4 -0.1

P050653 KARNATAKA RWSS II S S 2002 151.6 153.6 0.2

P049477 KERALA FORESTRY S S 1998 39.0 18.7 13.8

P055454 KERALA RURAL WATER SUPPLY S S 2001 65.5 61.6 6.8

P072539 KERALA STATE TRANSPORT S S 2002 255.0 245.0 -6.0

P067543 LEPROSY L S S 2001 30.0 22.9 3.6

P010461 MADRAS WAT SUP 11 S S 1995 275.8 189.3 11.8 201.1 11.8

P050651 MAHARASHHEALTHSYS S S 1999 134.0 110.1 70.8

P010511 MALARIACONTROL U U 1997 164.8 108.0 110.0

P069889 MIZORAM ROADS S S 2002 60.0 59.2 -0.9

India CAS Progrsis ReportArnx 6 IBRD

Page 2 of2

P059242 MP DIST. POVERTY INITIATIVES S S 2001 110.1 105.8 19.0P050668 MUMBAI URBAN TRANSPORT PROJECT S S 2002 463.0 79.0 545.3 12.5P009946 NAT. HIGHWAYS II S S 1992 153.0 153.0 2.7 21.3 13.3 13.3P009972 NATIONALHIGHWAYSEPROJECT S S 2000 516.0 435.9 110.2P010561 NATLAGRTECHNOLOGY S S 1998 96.8 100.0 106.7 81.8P031829 ODSII-CONSUMPTONPHASEOUT S S 1995 50.0 25.0 -0.4P010496 ORISSA HEALTH SYS S S 1998 76.4 62.1 38.7P035170 ORISSA POWER SECrOR U U 1996 350.0 60.0 126.9 186.9P010529 ORISSA WATER RESOURCES S S 1996 290.9 70.6 90.5 22.9P035173 POWERGRIDE 5 S 2001 450.0 341.3 45.3P055455 RAJDPEPII S S 2001 74.4 71.2 3.3P038334 RAlPOWERI S S 2001 180.0 151.9 37.4P040610 RAJ WATER SECTOR RESTRUCTURING S S 2002 140.0 140.3 -2.1P045050 RAJASTHAN DPEP S S 1999 85.7 57.3 62.9P010505 RAJASTHAN DIST. POVERTY S S 2000 100.5 95.2 25.6P049770 REN EGY II S S 2000 80.0 50.0 118.8 22.9P010531 REPRODUCTIVE HEALTHI S S 1997 260.3 81.2 75.2 64.4P044449 RURALWOMEN'S DEVELOPMENT S S 1997 19.5 14.4 16.1 -2.1P035825 STATE HEALTH SYS U S HS 1996 350.0 59.5 100.8P009995 STATE HIGHWAYS I(AP) S S 1997 350.0 117.8 102.8P010476 TAMIL NADU WRCP S S 1995 282.9 25.0 44.3 111.7 45.0P050658 TECHN EDUC m s s 2001 64.9 58.2 10.7P050637 TN URBAN DEVII 5 S 1999 105.0 29.6 2.4P010473 TUBERCULOSIS CONTROL S S 1997 142.4 91.6 103.4P010484 UP&UttaranchalRURALWATER S S 1996 59.6 7.2 21.9 29.1 21.9P050667 UPDPEPIHI S S 2000 182.4 88.2 34.8P035169 UP FORESTRY S S 1998 52.9 12.1 13.5P050657 UP HEALTH SYSTEM S S 2000 110.0 103.6 21.8P035172 UP POWER SECTOR RESTRUCTURING PPU S 2000 150.0 62.7 13.7P050646 UP SODIC LANDS I S U 1999 194.1 123.1 69.2P050647 UTTARPRADESHWATERSECTORRESnlS S 2002 149.2 149.8 9.8P035827 WOMEN & CHILD DEVLPM S S 1998 300.0 184.1 73.7P041264 WTRSHD MGMT HU.LS H S S 1999 85.0 50.0 82.6 41.3

Total 6,087.4 7,078.6 153.0 422.3 7,862.0 3,288.4 382.1Total disbursed (IBRD & IDA) 42,882.5

of which has been repaid: 15,336.0Total now held by IBRD & IDA 35,016.7Amount sold: 133.8

of which has been repaid: 133.8Total undisbursed 7,862.0

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.

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India CAS Progres Repoi

Annec 88 IFCPage 20of4

MIS intemnational Finance Corporation AS Of: 09/30/2002Statement of IFCs Held and Disbursed Portfolio

Updated Monthly Amounts In US Dollar Millions

Country: India Page 2

EprN M IMB~~~~~~~~~~~~~~~~~

2002 01984 E.r MAd.1tr 0 0 0 0 0 0 0 01995 rF ranital 1.25 4.39 0 0 1.25 4.39 0 01986/1992/199311994 rs 0 0 0 0 0 0 0 02001 C. idFrs0 0 0 0 0 0 0 01988/1994 (' KN MDuhafta 0 0 0 0 0 0 0 02001 nTILEaet 0 2.39 0 0 0 2.39 0 01994/1997 ciz0 7.45 0 0 0 7.45 0 0

QLU=G=-Lw 0 0 0 0 0 0 0 0i1994/1998/2000I2001 Global Tn--t 0 9.88 5.00 0 0 9.88 50 01983/1984 £irautlm 0 0 0 0 0 0 0 01994 fiam=bw~ua 0 7.31 0 0 0 7.31 0 01986 Muiaral rIag- 0 0 0 0 0 0 0 01985 rg,iad Hr,gi 0 0 0 0 0 0 0 01987 clulzaablaUnada, 0 0 0 0 0 0 0 01989/1991 CiAamLJ1aZ 0 0 0 0 0 0 0 0'1971111987/1991I`1993 1=0 .0.00 0 0 0 .0.00 0 01990 HnEL. 0 0.28 0 0 0 0.28 0 01988 Mam Nmeda 0 0 0 0 0 0 0 01987 HIndusiqan 0 0 0 0 0 0 0 01998 IME 0 2.30 0 0 0 1.37 0 01995 IA VA IFY POWF; 0 0 0 0 0 0 0 02001/2002 I=~ 0 0 0 0 0 0 0 01990 IccN0 0 0 0 0 0 0 02001 IrIQI-QF 0 0 0 0 0 0 0 .01994 lCICl1-IL, 0 0 0 0 0 0 0 01995/200 lCir-SIC2FllAa 0 4.87 0 0 0 4.87 0 0199 1r.VIL 0 0 0 0 0 0 0 01998 iDs0 15.48 0 0 0 15.48 0 . 02001 JIL .80 3.09 0 0 0 2.08 0 01990/1993/1994I1998 It A F 0 8.04 0 0 0 8.04 0 02000 I.LAES 0 0 0 0 0 0 0 01992/1995 JL AEq vQ 0 1.05 0 0 0 1.05 0 01995 I5 ~0 0 0 0 0 0 0 01997 iIC.C'iaaa 0 0 0 0 0 0 0 01981/1986/1991/1993/1998 1TW &.gnnda 0 0 0 0 0 0 0 02000 IntIhga Rmeun 0 15.00 0 0 0 0.61 0 01998 IneI.lra n#k.E ng 0 7.32 0 0 0 6.72 0 01967 indIaEzaIaat 0 0 0 0 0 0 0 01988/990/199-4 lnnI *n-AJ~a 0 0.86 0 0 0 0.88 0 01982/1987 IediannRaxg 0 0 0 0 0 0 0 02001 Indiaa.Saamlasit 10.50 0 0 0 6.00 0 0 01993/1994/1996 inda.BRama 20.25 11.90 0 0 20.25 11.90 0 01996 Jnrijg 1 0 4.34 0 0 0 4.34 0 01996 b"Ahaintg 0 0.00 0 0 0 0.00 0 01992 WdUYLkGA19= 0 0.01 0 0 0 0.01 0 01992 Ind"%VE 0 0.81 0 0 0 0.61 0 01992 InoTr in 0 0.62 0 0 0 0.62 0 02001 1111aLEn1= 0 0 0 0 0 0 0 01992/1994/1997 Ianat nd,seda?da 30.35 13.73 0 0 30.35 13.73 0 01989/1995 .tSInfl.igd a 0.40 0 0 0 0.40 0 01967 nvho0 0 0 0 0 0 0 02001 jIaZak 0 0 15.00 0 0 0 15.00 01961 KSRl1umns 0 0 0 0 0 0 0 01958 KIdaskat 0 0 0 0 0 0 0 0

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India CAS Pmgress Repout

Amnex 6 IFcPage 4 of4

MIS International Finance Corporation As Of. 09130/202Statement of IFC's Held and Disbursed Portfolio

Updatod Monthly Amounts In US Dolla Muons

Counby India ~~~~~~~~~~~~~~Pae 4

1997 o 2.11 o 0 o 2.11 0 02000 Mn R SA 0 O O O 0 0 0 O1988 W1 0 0 0 0 0 0 0 01997 w&M.MaUna1 0 0.03 0 0 0 0.03 0 02002 Wamhoa 0 2.00 0 0 0 0.67 0 01986 Whlm' 0 0 0 0 0 0 0 0196911970 ZuadAgr 0 0 0 0 0 0 0 01994 Zu MitZ Ftineun 0 0 0 0 0 0 0 a

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India: Country Assistance Strategy Annex B7

Page I of 11India Country Program Matrix (FY02-04)

INDIA'S POVERTY REDUCTION STRATEGY WORLD BANK GRoup ASSISTANCE DeveopEm ent Progress Indicators/BenchmarksStrategic Diagnostic Strategies and Measures Bank Group Role Instrument% PartnersObective

A. STRENGTHENING THE ENABLING ENVIRONMENT FOR DEVELOPMENT AND GROWTH

Al. Improving Government Effecdveness

Ala Fiscal * High deficits * Improve fiscal * Work closely with * Ongoing portfolio of fiscal * IMR A Significant state reform efforts andReform * Deteriorating discipline at central and state reforming states to support adjustment/restructuring operations in AP, (national issues) reduced fiscal deficitscomposition of expenditure levels via consensus building comprehensive economic UP, and Karnataka, and TA credit to support * ADD F Number of refonnmg states growing.Improved * Tax revenue-to-GDP and incentives for reformn and fiscal reform programs economic reforms (acdive on fiscal Reforns are deepening and deficits arefiscal falling; cost recovery is (c.g. fiscal responsibility * Provide TA for * New programmatic adjustment issues in Gujarat. starting io come down in some states. Centralmanagement low legislation, link of additional reform imnplementation and support and technical assistance for reform MP, Kerala) government deficit is notfalling.is crincal to * Many states face high Go1 financing to state budget support towards the prograrns in states such as Karnataka, UP, * UK DFI) * Fall over time in consolidated publicproviding indebtedness and a irmplementation of reforms) short term costs of reform AP and Orissa (TA for sector debtVGDP ratiogovernment liquidity crisis - * Improve the expenditure * Intensify dialogue on * AAA to help institutionalize medium- economic and P'Not being achievedwith the undermining their mix to link fiscal pOlicies the complex fiscal issues term fiscal frameworks and good public fiscal reforms, * Inproved expenditure mix,financial developmental with growth and poverty facing the central expenditure management in reforming states and collaboration emphasizing high-priority developmentmeans to effectiveness reduction govemment * Public expenditure review to address with the Bank in expendituresfulfll its * Reduce subsidies at national issues AP and Orissa) * Evident in some reforming states.development both central (food, fertilizers) * Policy dialogue, workshops and * Higher tax/GDP ratio and morerole. and 'state (power, irrigation) conferences at state and national levels efficient tax system, including VATlevels * Public finance capacity building implemenitation* Inplemertt tax reform, * Evidenu in some reforming states. VATincluding broadening of the postponed to 04103, but beter progress beingtax base made with preparation.* Better cost recovery for serviceprovision.* Evident in some reformting stawes, and insome casesfor Gol

Ailb * Governments over- * Rationalize and * Work closely with * Ongoing and ftiure * CIDA * Reorientation of the state away fromGovernance stretched and falling to streamline organizational reforming states to support adjustsnenrestauctiring operations and * UK DFID areas where credible private sectorReform provide services structures and business governance and public policy dialogue in focus states to address * USAID alternatives existeffectively; characterized processes management reform in the cross-cutting govemance reforms (urban F- Gol & some states running successfid[he success by cumbersome structures, * Improve humran context of broader * Institutional issues will also remain decentralization public enterprise privatization orof fiscal excessive regulations and resource management and structural adjustment central to sectoral investrnent operations and and governance) restructuring prOgrasu.a4justment red tape development * Closely integrate dialogue (e.g. environmental governance * ADB * Improvements in service delivery independs on * Poor expenditure * Improve the quality of reforms in core systems issues in UP) * Ford critical areas (e.g. education, power, health)improving management leading to public expenditure and procedures with * AAA: National work on governance Foundation P' Difticidt to assess comprehensively, butpublie sector fiscal deficits, improper programming and financial institutional development issues, procurement assessment, financial apparent in sone leading reforming states.effectiveness allocation of scarce management initiatives at the sector accountability assessment * Improved transparency and publicand overall resources and waste * Encourage strengthened level (e.g. in environmental * Focused policy dialogue and TA as disclosure, e.g. via freedom of informationgovernance. * Too many staff in legislative oversight and monitoring & compliance) support to Gal legislation, e-governance, pubbc disclosurepositions with limited greater participation/oversight * Provide information * WBI: Support in reaching out to all of polutants)value-added of civil society about promnising examples levels of government E Spreading to more states.. Bureaucracy * Develop and implement of public sector reform in * IFC: Support to efficient private sector * Improvements in civil serviceincreasingly subject to monitorable indicators for India and abroad involvement and pioneering investments in efficiency and productivity.political interference, measuring government * Provide high quality states willing to undertake the necessary . . Difficult to provide comprehensive

India: Country Assistance Strategy Annex B7Page 2 of 11

Country Program Matrix (FY02-04)

INDIA'S POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress Indicators/Benchmarks

Strategic Diagnostic Strategies and Measures Bank Group Role Instruments PartnersO bjective __ _ _ _ _ _ _ _ _ ___ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

including frequent effectiveness technical and analytical steps toward privatization assessment. Promising initial steps made intransfers of officials * Strengthen support to broaden the severalfocus states.* Need for greater accountabitity and public debate on . Strengthened public expenditurepublic financial responsiveness at local levels, governance reform issues programming and financial management andaccountability, while enhancing local * Assist reforming accountabilitytransparency, and integrity autonomy state governments with * Some initial moves made (e.g., expanding* Public enterprises are * Accelerate privatization restructuring/privatization scope of budget, moving to medium termoften a fiscal burden and or disinvestment from cufrent of public enterprises; bring expenditureframework improvinginefficient slow pace in lessons from predictability of cash releases infocus states,

international experience conputerizing and networking treasury inUP/Kamataka).* Improved public perceptions of theprobity and integrity of the civil service.. Corruption investigations have increasedsignificantly in mostfocus siates; severalstates working to provide a baseline againstwhichfuture progress can be measured.

Alc * While accountable * Strengthen local * Work with interested * In urban, ongoing portfolio is minimal, * United * Improved local service delivery.Decentral- local governments can government, in both financial states to strengthen urban with no current operations to strengthen local Nations Agencies * Inprovements being seen in rural waterization improve serice delivery, and admninistrative respects, and rural decentralization government; Portfolio to be strengthened by (decentralization and sanitation service delivery and prinary

most local governments as a key aspect of improving and improving local TA for policyfinstitutional reforms, proposed is a key theme of education.Decentraliz- lack the capacity to assume service delivery and governance and Gujarat, AP and Karnataka urban projects UNDAF * Increased financial and administrativeation to oeoal an expanded role accountability management * Analytical work on AP urban poverty framework) autonomy of local governments.governments * Enhance the livability of * Support effective and reduction strategy and decentralizadon for * DFID) *A few reforming states are addressing therepresents a cities through strengthened inclusive decentralization the urban sector * The strengthening offiscal and administrativepowerful decentralization and well- by empowering local * TA to assist with design of conducive Netherlands decentralization to local governments.opportunity to managed urban governments communities, especially in financing arrangements and expand use of * Enhanced participation, transparencyimprove * Improve effectiveness rural areas . City Development Strategies in selected and accountability in urban government.service of rural local govenmments' * Undertake analytical states * Bank-supported governance activity indelivery, delivery of anti-poverty work to deepen our * In rural, ongoing portfolio includes Karnataka beginning to have an impact atresponsive- programs and other services understanding in selected decentralzation and capacity building the state level, but it is too early to measure.ness and * Introduce performance- states, share lessons across initiatives at local levels, (e.g. DPIPs in MP,accountability based funding for urban and states, and bring in lessons AP and Rajasthan). Future support to include

nurl local governments of international experience. open-ended and single-sector community-Key issues include: roles based rural projects (e.g. state forestry, ruraland functions of the 3 water supply projects, AP Rural Povertylevels of rural local Reduction Project); also possible projectgovernments; roles and aimed directly at strengthening ruralfunctions of local decentralizationgovemments vis-a-vis line * Dialogue in selected states, including asagencies and user group; part of fiscal/governance reformsimprove local taxation and * Analytical work in interested states tocost recovery; improve further decentralization and address keyaccountability to local issuesconstituents * WBI: training and institutional capacity

building to facilitate decentralzation to localgovemments

India: Country Assistance Strategy Annex B7

Page 3 of 11Country Program Matrix (FY02-04)

INDIA 'S POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress Indicators/BeniarkaStrategc Diagnosdc Strategies and Measures Bank Group Role Instaents PartnersObjective . .

A2. Promoting Prvate Sector Led Growth

A2a Provision * Deficiencies and * Expand capacity and Finance the * Ongoing: Grand Trunk Road * ADB * Better maintained national highwaysof High deterioration of India's improve serviceability of preparation & Improvement Project, Third National * Confederati and road network in selected states.Qualily road network national highways and state implementation of national Highway Project, Kamataka, Kerala, on of Indian *- NHAI examining their maintenanceInfrastructure * Poor performance of roads highways and state road Mizoram, AP and Gujarat state highway Industries mnethods on national highways. In AP, roadpublic road agencies * Implement institutional projects in selected states projects and MUTP * JBIC network in good condition has increasedIn tranport, * Inefficient mulfi- reform in national and state * Support development * New lending support of about one * State from 60% to 80%.the public modal integration of road agencies of long term strategy for national highway project and one state road Chambers of * Greater emphasis on performance-sector needs transport system * Better integrate the transport sector project per year Coramerce and based road management and accountability tomore . Poor performance transport system * Promote institutional * AAA, on road transport efficiency and Industry road users.resources a and inadequate capacity of * Promote the private reforms identified in highway financing * State lo In AP, 900 km of stare highways nowtoplay its role domestic construction sector construction industry institutional action plans * IFC: Fiance pioneering investments trucking and bus under performance-based maintenancemore industry and private investment and for NHAI and selected whenever the enabling environment is operator contracts. Greaterprinve sectoreffkiently. operations in the sector state PWDs, and promote adequate. associations participation in Road Fund Board achieved

private sector involvement in UP. NHAI has established an Advisory* Provide strategic Group of Lrternal Stakeholders.advice-and encourage * About 1500 km of national highwaysknowledge sharing improved to 4-lane standards.* Encourage policy W About 900 krn of narional highways beingreforms that remove upgraded to 4-lanes.impediments to * About 2000 km of state roads improveddevelopment of to 2-lane standards.construction industry, and F Over 600 km of state roads improved to 2-appropriate lane standards in AP. 2-laneing of severalformulation/use of contract hundred km of staoe roads on-going insizing and selection criteria Gujarat. Contractsfor about 260km

awarded in Karnazaka.* Reduced travel time and transport costs,improved road safety.io Too early to measure, but results of Bank-

financed works are expected to besigniflicant.* Implementation of institutionaldevelopment action plans in NHAI &selected state PWDs.lo In initial stages in NHAI, Karnsataka,Gujarat, Keral and Mizoranm* Improved cost effectiveness of roadagency investmnents and greater participationof the private sector.* Greater private-sector participation andcost-effectiveness being achieved in NHAI,AP, Karataka, Gujarat, Kerala, andMizoram.

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Country Program Matrix (FY02-04)

INDIAus POVERTY REDUCTION STRATEGY WoRLD BANK GROUP ASSISTANCE Deveopnsnt Progres IndleatrsJBaenehnarksStiatqlc Diagoc Stratqeies and Measures Bank Group Role Instruments rsObjective _..

Power * Deep power sector * Unbundling of State * Support power sector * Ongoing portfolo of power sector * PPIAP 4 Reduced fiscal drain of the powercrisis, with state utilities at Electricity Boards (SEBs) reform in committed states operations in Orissa, AP, UP and Rajasthan (multi-donor sector.

In power, bankruptcy (separating generation, * Assist in establishing * Technical assistance support for sector facility) W Liule improvement to date; most statesurban * High transmission transmission and distribution) strong regutlatory reforms in Karnataka and other selected * DFID continue to detenorate although some havei,tftrunrure and distribution losses underway in many states as a frameworks, with multi- states, stabilizedand water * High subsidies to step towards private sector year tariff trajectories * Investment in the nahonal transmission * ADB * Better cost recovery for power viasupply, and agriculture sector involvement, in particular where prices reflect costs grid and renewable energy, ' CIDA appropriate tariff structures, lower subsidiesSlecom- * Low access and privatization of distribution to more closely and * AAA and policy advice for multi-year * KflW and cross-subsidies and reversal in culture ofmunucations, considerable bottlenecks bring down theft and losses agricultural power tariffs and other regulatory issues and other * USAID non-payment-a proper throughout India * Orissa is the first state subsidies are paid by analysis to support the debate on power * SDC * Tariff increases and reboalancingenvironenut * Industrial demand to actually privatize its entire government sector refonsi Also work on issues of rural GEFimplemented in some states, with significantforprivate constrained by high prices distribution sector * Finance transnission power and access. increases in agriculture and donestic tariffs;inveshnenl and unreliable * Establishment of and critical pre- * IFC: selected investments in reforing * DANIDA but extent of subsidy remains substantial.and supply(many opt for independent regulatory privatization distribution states, with high priority on supportig Culture of non-payment gradually improvingmanagement captive generation) bodies-now established in investments newly privatized distribution companies. in some states (e.g., AP & Rajasthan - whereis needed nearly all major states * Support to the * Additional investment support to collection efficiency is now over 98%), but

national transmission captive, co-generation, renewable energy, sustainability still to be establishedcompany, and development energy-efficient power projects and other * improved quantity and quality ofof national power market private projects selling power to third parties supply of power in reforming states to* Provide IPC support support development.to pioneering private *0,Limited progress in improving quantityinvestments in states with due to high cost of new sources of power;strong commitment to targeted investments under Bankfinancedsector reforns projects have improved the quality of supply* Promote in Haryana and AP.environmental benefits e.g. * Reduced nanamission and distributionfrom feasible renewable losses in reforming states.energy altermatives * Loss assessments in progress; loss levels

stabilized and starting to decline in somestates.* Creation of the enabling environmentfor private sector investmenLloRegulatoty conunissions in place in moststales, but inveslor perception of investmentrisk remains higk* Increase in appropriate use ofrenewables and development of local skillsand renewable energy products.1By end 2001, renewable energy (excludinghydroplants > 25 MW) had increased to3.4% of India's power generation; localmanufacturing of renewable energy systemshas dranatically increased* Substantial progress oncommercialization of distribution inreforming states* Some progress (e.g., Delhi) but long tern

I sustainability remains to be proven.

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Country Program Matrix (FY02-04)

INDIA'S POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress IndicatorslflenchnarkaParutttersStrategic Diagnostic Strategies and Measures Bank Group Role Inslruments

O biective _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Urban water * Urban water supply * Separate urban water * Bring in international * Ongoing portfolio of urban water * ADB * Greater private sector participadon insupply and and sanitation in crisis, policy and service provision experience about urban sector operations in Maharashbra and Tamil * Multi- urban services, especially water, leading toinfrastructure with state and local utilties functions reforms and private sector Nadu donor Water and reduced fiscal burden and increased coverage

at bankruptcy * Reduce dependence of participation in urban * New lending(credit support for Sanitation and quality.* Inadequate water sector on state subsidies and water Karnataka Water, Gujarat Urban, Karnataka Program * No significant increase in privateservice coverage & poor establish independent * Finance advisory Urban Capacity Building and Munrbai Urban * USAID provision but many urban local bodieswater quality regulatory framework for services for design of PSP Transport Project (MUTP) * UK DFID (UlBs) are tumning to private sectorfor* Weak regulatory water tariff setting transactions * AAA: Dissemination, consensus * ADB nanagenment of solid waste with great effect.framework and water * Reform institutional * Seek up-front building and distance learning activities to * AusAID * Improved service deivery and aecess toresources management framework by restnscturing agreement on key policy help reforming urban bodies to implement * SPARC urban infrastructure for all, especially thepractices public entities and creating and institutional reforms to private sector solutions (Society for poor.* Cities characterized commercially viable water ensure sustainability (e.g., * IFC: Equity participation/guamantees Promotion of l-Anecdotal evidence suggests no mnajorby overcrowding and utilities cost recovery) in reforming states, local currency financing Area Resources improvement. Urban Reform Fund and Citypollution * Repeal Urban Land * Assist with urban * Provide TA to prepare disaster Centrs) ChaUenge Fund should help reform.* Gap between demand Ceiling Act and improve reforms and provide large- recovery/mitigation strategies and * Bankable cities, with increased linkagesand supply of basic urban functioning of urban land scale financing to urban investmets to commercial financial systems.services has widened markets and property sector reformers * IFC: Guarantee facility as part of *'Attenpts to improve the creditworthiness* Lack of bankable regulation * Finance the ongoing EL&FS project, with future financing of cities in Gujarat delayed by recentprojects and inappropriate * Strengthen preparation of integrated of demonstration projects political events. Continuing progress inborrowing facilities for creditworthiness of ULBs urban transport systems strengtheningfinancial capacity of ULBs ininfrastructure services * Develop conducive * Support resettlement Tamil Nadu.* Urban local bodies framework for local and rehabilitation of * Improved urban transport infrastructurenot creditworthy borrowing and techniques for project affected people and * MUTP promises to improve urban public* Poor urban transport credit enhancement the development of greater passenger transport in Mumbai Some 10,000systems and facilities * tmprove capacity for local capacity to handle project-affected households, who are mostlyfound in most major cities preparing bankable urban safeguard issues slum dwellers and squatters, have already

service investments attractive been resettled and received higher standardsto the private sector of housing with improved amenities.* Develop integratedurban transport systems

India: Country Assistance Strategy Annex B7Page 6 of 11

Country Program Matrix (FY02-04)

INDIA'S POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress Indicators/BenchmarksPartners

Strategic Diagnostic Strategies and Measures Bank Group Role Instuments

Telecommun- * Low * Introduce competition * Support development * Ongoing Telecommunication Sector * CIDA * Pro-competitive policiesications telecommunications into long distance and of regulatory framework, Reform TA Project (Telecom Project *-Progress has surpassed expectations.

coverage international voice services including spectrum * AAA, including policy notes on private funding work on Sweeping new Comnuinications Convergence* Limited success in * Privatize public sector management sector particpation and regulation policy options Bill currently under review by Parliament.mobilizing privately companies * Selected investments * IFC: Investments in cellular and fixed- for expansion of * Spectrum frequencies assigned withinfunded network expansion * Mobilize full potential in private sector service line telephones, international gateway rural networks) 15 days.* No competition for of the private sector providers to address operators and domestic fiber optic backbone *0'Plannedfor January 2004. Some actionsmost telecom services problems of limited last- infrastructutre are currently underway.

mile access, and poor * Teledensity of 17% by 2005; Ruraldomestic and international teledensity of 4% by 2010bandwidth * Competition and sinplified regulatory

framework in the proposed Convergence billwould enable rapid rollout. Thus chances ofmeeting these targets look bright.

e Connections in all villages; telephoneson demand by 2002* Out of approximately 607,000 villages,only 323,000 have at least one publictelephane booth. Telephone on demand likelywon't be achieved until 2005/2010.:

A2b * Never regulated to * Rural deregulation to * Promote competitive * Ongoing Portfolio includes multi-state * ADB * Increased area under irrigation, andAccekrated the extent of industry, but raise agricultural productivity and efficient agricultural watershed project, National Agriculture * DFID productivity per unit of waterRural Growth agriculture still suffers and rural incomes. Review markets Technology Project and UP Diversified * Multi- No Gol and several states supporting

from a plethora of and elimination of controls in * Emphasize the Agricultural Support Project; water resource donor Water and increases through investments in surfaceIs criticalfor regulations the domestic market for crucial nature of consolidation projects in Haryana, Orissa and Sanitation irrigation and measures to improve on-farmnreducing * Agricultural growth agricultural produce agricultural technology Tamil Nadu; irrigation and road Program water use efficiency. Umitedprogress inIndia's high in the 90s was about 3%, * Expand rural generation projects/components in AP and UP * The reducing inefficient electricity subsidiesfor

level of rural simnilar to that in the 80s, infrastructure through * Build consensus on * New lending/credit support to Netherlands irrigation.poverty. but below government increased public investments key policy and institutional Kamataka and AP watershed projects; * Improved cost recovery for operation

target of 4% and reforms. reforms Karnataka Tank Irrigation project; UP, and maintenance (O&M) of irrigation* There is a surplus of * Other rural development * Fund poverty- Rajasthan and MP Water Sector systemsgrains: public storage reforms cover rural credit, targeted investments in Restructuring rural road program PMGSY * Several states are raising water userlevels are well above land reforms, development of rural infrastructure * AAA: State rural policy reviews; charges and transferring O&M to water userbuffer requirements rain-fed areas and (irrigation, drinking water conference on rural non-farm economy and associations. Maharashtra water charges* Input subsidies to exploitation of groundwater supply and sanitation, rsral roads policies, and study on legal and adjusted to coverfull O&M and some capitalagriculture (fertilizer, potential, agricultural support natural resource regulatory frameworks for land; policy cost. Slow progress in water collectionpower, water) are services management and dialogue and workshops to support reform efficiency.unsustainable * Improve inter-sectoral agricultural support dialogue and implementation at the national * Increased water supply and sanitation* Augmenting the water resources planning, services) linked to reforms level, and in states, communities and coverage in rural areas.stock of rural infrastructure allocation and regulation, and in service delivery watershed basins * Progress in inplementing national ruralis key for accelerating rural sustainable delivery and use . Support agricultural * IFC: Possible investments in key water supply & sanitation program has beengrowth. of water for irrigation growth with emphasis on agribusiness activities, where the private slow. Bank supported projects in UP,* Low rural non-farm * Improve surface holistic development of sector has played a lmited role (e.g. food Uttaranchal, Kerala and Karnataka toemployment drainage and flood rainfed areas, using supply chains, warehouse industry) benefit 6.5 im people.

* Increasingly scarce management watersheds as the basis * Policy on rural road developmentwater resources * Help to raise formulated.

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INDIA'S POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress Indlcators/BenecmiarksPartnersStrategic Diagnostic Strategies and Measures Bank Group Role Instuments .

Objective__ _ _ _ _ _ _ _ _ _ _

productivity and * Endorsed by govts in Haryana, AP, Assam.sustainability of water Under preparation in UP, Punjab, J&K,resource use, including Uttaranchal. Natwonal road maintenancecost recovery policy under preparation with Bank

assistance.

Improved rural road financing andmaintenance* Gol Rural Roads Program, integratingpositive experiences on maintenance gainedfrom Bank projects, now being implementedRoad fund established in UP. Progress onmaintenance managemnent systenu in AP &UP.* Higher levels of village connectivity inworst connected states.0- 10,000 Ian of rural roads being upgraded

to all weather standards in 8 states.

A2c * India more integrated * Bring trade barriers * Engage with central * IFC: Investments in the financial * Private * Lower trade barriersCompetitive- into the world economy, down to East Asian levels government on national restructuring of selected second-tier sector * QRs dismantled; tarifflevels reduced butness in but FDI levels low and * Further domestic issues (e.g. trade manufacturing and service companies; companies, renain high.Industry and trade barriers high liberalization and efforts to liberalization and investments will often be in local currency, industry * Increased levels of FDIServices * India has benefited improve the investment deregulation, labor using guarantee of loans from domestic associations and * Increased FDlflows; less restriction of

from reduction in licensing climate, including: (i) markets). financial institutions or using swap financial sector foreign ownership.Sustained and regulation, but aboltion of small-scale * Work with central arrangements institutions * Increased speed of clearances by stategrowth in business environment stiUz reservations in critical export andi selected state * Facilities to be established with * DFID, governments.private unpredictable, areas and phasing out in other governments on improving financial institutions to provide long term CIDA, SDC, *' Improvements in some states (AP,inufutry and discretionary and areas; (ni) deregulation in investment climate. financing and access to export finance G17 supported Karnataka, Maharashtra).services wil burdensome. Investment labour markets; (iti) * Assist second-tier * InfoDev support for various IT technical * Improved feedback on investmentbe critical to climate varies across completion of dismantling of companies to modernize applications for the poor education climate from surveys.reducing states. administrative prices; (i) and become internationazly * Ongoing Portfolio of Third Technician programs during * A survey of India 's investment climate andpoverty. * 90s saw expanded reduction of clearance delays competitive. Education Project; Industrial Pozlution 1990s surveys in 10 states, conmpleted, withfindings

role for the private sector, and harassment of businesses * Support enterprise Prevention, Energy Efficiency. * Partnership disseminated in workshops. Wilt provide theThough some parts of the by excessive inspection restructuring and * Future lending/credit support: with Montreal basisforfollow-up surveys.economy are booming requirements - actions by privatization efforts. proposed operation to finance severance Protocol: world's * Acceleration in the pace of successful(e.g., Ml'), many sectors both central and state * Support the financial payments for PSU workers with the objective second largest enterprise privatization and reforms.have excess capacity and governments required restructuring of of facilitating enterprise privatization; Sub program to * Signifficant progress: $1.9 bn raisedfrommany firms are over- * Develop clear strategies fundamentally viable sector Program in Technical Education. eliminate 30 sales in FY01/02 & FY02/V3 to date.leveraged. to streamline restructuring & companies in partnership * AAA: Policy notes, including work on production and * Higher placement levels and shorter* Central government privatization procedures at. with local institutions. business environmentfinvestment climate for use of ozone- lead times in placement for technicalhas streamlined state level and address labor * Facilitate greater selected states; Economic Updates; Labor depleting education graduates, and higher enrollmentsdisinvestment procedures; adjustment issues. access to finance by SMEs Market study; policy dialogue on reforms in substances from women and members of disadvantagedPrivatization of PSUs has * Encourage growth * Promote policy and technical education groupsgathered momentum; but opportunities in knowledge- institutional reforms in * TA/dialogue with interested states on * Gol and several states have initiated somechallenges remain at state- based industries (e.g. technical education, improving environmental monitoring and reforms. Signijicant increase in enrollmentlevel. Serious labor information technology, including greater compliance. of women in all states that have Bank-adjustment issues could biotechnology) mobilization of resources assisted projects.also arise. * Improve quality and from the private sector, and I_I_I_I

India: Country Assistance Strategy Annex B7Page 8 of 11

Country Program Matrix (FY02-04)

INDuI'S POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress Indicators/Benchmarks_ _ ~~~~~~~~~PartnersStrategic Diagnostic Strategies and Measures Bank Group Role Instruments

O hjective ___ __ _ _ ___ _

* Limited access to relevance of technical from the private sector, andbusiness development and education by better more participation offinancial services for networking, institutional women and disadvantagedSMEs. reform, and extra-budgetary groups.* India has large stock resource mobilization * Support forof skilled labour, but * Improve environmental innovative applications ofquality of technical compliance. information andtraining below the first tier communicationis poor. technologies to help the* Industrial poUution is poorincreasing. * Bring in international

experience withenvironmental monitoringand compliance.

A2d * Banidng: 40% of * Reduce fiscal deficit to * Support gradual * IFC: Investments in private banks and * IMF * Ufniorn regulatory treatment ofFinancikl deposits invested in reduce crowding out of disinvestment of financial institutions; support for the use of * ADB financial institutions, irrespective of theirSector government debt leading to private sector government and removal innovative market instruments; selective * Financial ownership; better market discipline.Development crowding out of private * Improve legal and of constraints to private credit enhancements to promote market sector companies -Not achived - continued regulatory

sector judicial framework to reduce investment in banking acceptance of longer-term debt and industry forbearance andfinancial supportfor publicAlthough * High non-performing NPAs * Help restore * Investments in housing finance associations financial institutions.India's assets (NPAs) relative to * Improve mobilization of soundness of state financial companies and pilot securitization of * Grass-root * Gradual fall of government stake infnancial lending to private sector long-term funance for private institutions and strengthen mortgages to assist in the creation of a micro-finance commercial bankingsector is * State financial sector development regulatory and supervisory secondary mortgage market providers and Po Nol achieved; legislation pending.relatively institutions and * Upgrade quality of capacity * Investments and TA for commercially community- * Improvements in banking performance,stable, a cooperatives are drain on commercial banking services * Support debt market sustainable raicrofinance providers based financial including reduction in non-performing assetsd(7iit and state budgets * Increase the outreach of development * Ongoing portfolio of projects to help institutions 0 Net NPAs of public banks reduced tounfinished * Debt recovery is credit and financial services * Promote the growth rural self-help groups to utilize rural banking 6. 7% of total advances (6.2% for entireagenda difficult due to poorly to the poor of housing finance industry (e.g. AP DPIP) banking system) in FYOO/O1. Steps taken toremains. functioning legal systems * Scale-up successful * Support private * Future lendingtcredit support to a strengthen creditors' rights andfacilitate

* Capital Markets: small grass-root micro- contractual savings pilot project to enhance access to credit for recovery of NPAs by the newly created AssetLong term debt market finance providers institutions community infrastructure through Reconstruction Company of India, Ltdunder-developed * Assist initiatives to community-based financial institutions Increasedforeign ownership allowed, which* Development of reform financial * AAA: Monitoring of sector, analytical will bring in better banking practices.secondary debt market cooperatives and broaden advice through policy dialogue, workshops * Strengthened capacity of financialconstrained by existing the provision of financial (e.g., on financial sector reforns, pension institutions to extend rinancial servicestaxes and regulations services to the poor, refonns), policy notes and reports (e.g., on W Restructuring of DFIs will stengthen their* Housing finance primatily micro-insurance, establishing a regulatory level playing field capacity. Opening of baing sector tounderdeveloped payments and pensions for financial institutions, strengthening greater FDI will strengthen thefinancial* Lack of contractual * Test innovative corporate governance of banks, improving sector. Growth of NBFls offering mortgagesavings institutions concepts and products in the legal system for debt recovery) and TA to finance etc.* Microrinance: provision of microfinance govermnents and regulatory institutions. * Smooth (and scandal-free) functioningOutreach still embryonic of securities makets. * Some progress in improving fictioning

and transparency of narkets, but regulationneeds strengthening.

Creation of secondary mortgage market. Legislation passed to facilitate

India: Country Assistance Strategy AnnexB7Page 9 of 11

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INDIA's POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress IndicatoralBenchtnarks

Strategic Diagnostic Strategles and Measures Bank Group Role Instruments PartnersObjective

securitization.* Improved credit access for the poor

* Little progress.

B. SUPPORTING CRITICAL PRO-POOR INTERVENTIONS

B1. Promoting Education and Health for Al

Bla * Enrollment rates are * Support for universal * Support efforts to * Ongoing Portfolio of 7 DPEP projects * Tne * Implementaton of new generation ofEleentary rising for elementary elementary education as a improve education quality covering 15 states; Netherlands Bank projects to support universalEducation education and the gender fundamental right and access * New lendkIngcredit support: With dte * UK DFID education.

gap is falling. But even * Decentralize planning, * Reduce out-of-school final project in the DPEP series of projects * EU * Gol indicated potential interest in SSASubsidies to today only 79% of India's supervision and management children, particularly girls now being implemented, modes of * UNICEF being funded by the Banlc and theprinary elementary school age- through local bodies and children from socially subsequent support depend on reaching 'Education For Al'fasr-rrack initiative.education are group (age 6-14) are * Mobilize local disadvantaged groups, and agreement on support for GoI's new New state education strategies,as pro-poor as enroled. With literacy at communities, and use encourage innovations to Education for All program and on tde Bank possibly supported by the Bank.the best of the just above 65%, there is a advocacy and media attract working children to role in interacting with state governments in *" Significant progress infoudaatingprograms long way to go. campaigns school education detailed reform strategies in K.amataka anddiredced * Education resources * Build stronger * Encourage a shift in * AAA: work on selected state education AP. SirAilar dialogue being initiated in UP.explicitly at and performance partnerships with NOOs composition of public sectors (Karnataka, AP and UP), evaluation * By 2004, 90% enrollment rate of 6-14fighting inadequate * Provide new expenditures towards of the impact of DPEP, secondary school age group; gender gap halved to 4.5poverty. * State governments opportunities for the poor and elementary education issues, continuing analyses of private percetage points.

are main financiers of disadvantaged * Gol has decided to education (espeially aided schools), early o No data on enrollment indicator since theeducation, but state-level * Provide options to end District Primary childhood development and possibly on 5Yh round National Sanple Surveyseducation strategies are attract working children Education Program information technology in education (1999100), but targets will not be reached ifweak (DPEP) and to launch a * IFC: Possible investments in private recent trends, as measure in National

bigger program of educational institutions Sample Surveys, continue.Education for All building * Higher Grade 5 and 8 completionon its success rates and achievement scores

lo-Recent studies indicate low (below 70percent) grade five completion rates, butwith imiprovements across most states. Nonational survey of achieverent.* Increased share of public expendituresto elementary education.*' The share of state governments' totalexpenditures on elementary education hasremained virtually constant in recent years,but Gols budgetary allocation forelermentary education increased by 20percent in 200)2103 compared to previousyear.

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INDIA'S POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress Indicators/Benchmsarks__________ ~~~~~~~~~~~~~~~~~PartnerStrategic Diagnostic Strategies and Measures Bank Group Role lnstrtrments

Objective __._ .Blb Health * Disease burden and * Integrate different * Focus on health * Ongoing portfofio of state health * WHO * Restructuring of centrally sponsored

nutritional problems health and nutrition services; issues of priority to the systems projects in Orissa, West Bengal, * UNICEF schenes/projects to promoteHealh and remain high better utilize existing poor, including child Psnjab, Maharashtra, Andhra Pradesh, * UNAIDS decentralization.nutrition * TB is on the rise; the facilities health, reproductive health Karnataka and UP; central government * USAID * Results have been more positive in someindicators in spread of HlV/AIDs could * Decentralized platming and communicable disease programs to combat HIV/AIDs, TB, malaria, * EU programs (e.g., TB, leprosy, HIVIAIDS andIndia are low, become a threat to India's and program implementation control, especially new leprosy, blindness and under-nutrition. * UK DFID Reproductive and Child Health) than inwith future * Special attention on threats (HIV/AIDS) * New lending/credit support to ftnance * DANIDA others (malaria and Integrated Childenormous * Substantial variations HIVIAIDS * Assist in developing state health systems in Rajasthan and Tamil * AusAID Development Services).gaps between in health care services capacity to manage public Nadu; central government projects on * CIDA * Increased integration between variousthe poor and across the population health programs effectively integrated disease surveillance and health health and nutrition programs in AP,the better-off (e.g. in surveillance and capacity building (food and drug control); Kamataka and UPfood and drug control) at cross-sectoral interventions for improving * Marginal increase in integration in thesecentral and state levels health and livelihoods of the poor (e.g. states.* Aid in developing maxinizing health benefits in state water and * Comprehensive health policies/visionmore efficient, effective sanitation projects) statements prepared by states covered byand sustainable health * AAA: Completion and dissemination of new health systems projects.systems at the state level major sector work on public/private roles in hRajasthan & Taonil Nadu, the two newi Continue to focus on health, and household energy; air pollution health system project states, are developingwomen and other and health study, study on the health status of health policies/vision statemnents that will bevulnerable groups the urban poor, and support to policy reflected in project design.* Increased focus on: dialogue with both the center and selected * By 2004: (i) reduce under-5 mortality(i) decentralization; (ii) states rate to g0 per 1000; (ii) reduce matemalpublic/ private partnerships * IFC: Possible investmnents in private mortality rate to 400 per 100,000 live births;in health; (iii) healthcare companies and (iii) increase access of eligible couplesenvironmental health to contraceptive services to 64%issues *.Interim assessments on progress are not

available. lIndia needs to accelerateprogress to achieve MDG /tealth indicaters.

B2. Accelerating Pro-Poor Rural DevelopmentDirectly * About 75* of the * Strengthen rural * Support innovative * Ongoing portfolio of DPIP projects in * DANIIA * Increase in income of the poorattack rural poor are in rural areas infrastructure and expand projects which can, by AP, Madhya Pradesh and Rajasthan; Sodic * DFID * Updated data since last CAS not yetpoverty and * The poor in general access to basic services (such their demonstration effect, land reclamation project in UP; AP, Kerala * GEF availableenhance have little or no access to as water supply and help improve the design and UP forestry projects plus Forestry * EU * Increased cost effectiveness andsocial assets and are dependent sanitation) in a manner which and implementation of Gol Research Education and Extension Project; * JBIC improved targeting of programsprotection in on wage labor. benefits the poor. Anti- and state-sponsored anti- mral water and sanitadon projects in UP, * SIDA b Gol and states havefurther improvedrural areas * Specific groups are poverty projects need to be poverty schemes, and thus Kamataka, Kerala; muld-state watershed * UN targeting offood assistance to the poorestthrough particularly vulnerable: restructured to provide an improve the rural safety- development and Eco-Development projects; Agencies households. Progress in reducing operatinginnovative, there are both gender and effective safety nct, with net Rural Women's Development and * nte costs and leakages has been slower. Bankeommunity- caste based disparities in increased local participation, * Various sectoral and Empowerment Project; Gender-thematic Netherlands DPIP projects provided targeted assistancebased rural access to economic social mobilization, and multi-setoral approaches supervision to be undertaken for nural SDC i/l selected states.initiatves. resources and services transparency can be adopted, but with development portfolio * Iterationa * Greater capacity of rural conununities

* India spends heavily * Improved and common principles: (i) * New lending/credit support includes I NGOs o to plan and implement sustainable activitieson anti-poverty prograsns sustainable natural resource often a programrnatic conmmunity-driven rural water and sanitation inluding * Bank supported projects in several statesin rmral areas, but the management is key, since so approach will be most programs (multi-state, in support of Rajiv OXPAM, CARE are building the capacity of ruralefficiency and efficacy of many of the poor are useful; (ii) involve and Gandhi Mission on rural water supply and A- -1 _-_7 conununities to plan and implement activities

India: Country Assistance Strategy Annex B7Page 11 of 11

Country Program Matrix (FY02-04)

INDIA'S POVERTY REDUCTION STRATEGY WORLD BANK GROUP ASSISTANCE Development Progress Indicato rBendmark

Strategic Diagnostic Strategies and Measures Bank Group Role mensartnersObjective

these programs are dependent on forests and empower beneficianes samtation and state projects in Maharashtra Action Aid, Save in rural water supply and sanitahon,questoned. waste lands ind a decentralized and Tamil Nadu), AP Rural Poverty, Madhya the Children, warershed development and management,

* Target intiatives to approach; (iii) use NOOs Pradesh and other state forestry projects, Ford and commwutyforest management, imgatzonwomen and other and alternative service Ka;nataka Watershed Project, and possible MacArthur managemerL: sodic land reclamation, etc.disadvantaged groups providers; (iv) support fsture DPIP initiatives Foundations, * Increased participation of women and

complementary * AAA: Analysis in selected states on: WWF the disadvantaged mn decision making andinstitutional and polcy anti-poverty programs,decentralization, and * MYRADA, attaining benefitsreforms, (v) promote cost natural resource-poverty lnkages. Periodic SEWA, and * The increased paricpatzon of women andrecovery; (vi) target to the survey-based reviews of the effectiveness numerous other the disadvantaged has been integral to Bankpoorest areas and most and inclusiveness of project-based user- NGOs supportedprojects across several states. Invulnerable groups; (vii) groups. Rural water supply and sanitation IWDP n, 900 womnen's self help groups haveintegrate interventions for strategy. been organized.maximum inpact * Collaborative rural poverty reduction * Greater land reclamation, forest* Maximize the strategies regeneration and biodiversity protctionenvironmental and social * UP Sodic Project H has helped reclaiin benefits of improved hectare of sodic lands. Several states arewater, forestry, land, and increasingforest regeneration via joint ordrought management commwuntyforestry. Gol isfinaliwtgthrough projects and National Biodiversity Strategy and Actionexpanded policy analysis. Plan

B3. Community Driven Urban DevelopmentInitiate work * Urban poverty * Adapt comnuinuty-based * Promote demand- * Future lendingicredit support for AP * ADB * Increased scale for successfulin increasingly unportant, as approach which has been very driven and commnunty led Urban Poverty Reduction * AusAID commumty-based urban untiativeseonunuity- urban areas projected to successful in rural areas to development of urban * Analytical work on AP urban poverty * UK DFID * Gujarat is implementing scaled-up slumdriven grow more quickly work in urban areas services reduction strategy * Netherlands upgrading through ULBs.development * More than 20% of * Learn from what has * USAIDin urban urban dweDlers hve in worked and scale it up * Indiaareas. slums, with higher (experience in other donor- Housing

numbers mn largest cities backed projects; strong Developmenturban women community Financegroups in some states) Corporation* Explore sustamnable (HDFC)financing mechanisms,inchuing credit for

-comunity mfrastructure