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Countries and Regions Country Assistance Plans Document
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Country Assistance Plans - India : III. Sector Strategies
C. ADB’s State-level Operations67. States in India have considerable autonomy and play a crucial role in the delivery of social services (particularly public health, family welfare, social security, education, housing, and urban development) and the provision of infrastructure (particularly power, irrigation, flood control, and transport). The states are also responsible for executing Central Government policies and programs, including those for alleviating poverty. While economic reforms introduced since 1991 have contributed substantively to enhanced efficiency, competition, and the potential for higher economic growth, the initiatives have been concentrated almost exclusively at the national level, with the pace and depth of reform generally lagging at the state level. The states' public finances have come under severe pressure, resulted in increasing deficit in the current account, compression of capital outlays, and contributed to the worsening of the consolidated fiscal deficit. Moreover, states are increasingly facing the potential of a domestic debt trap, with new borrowings needed for debt-service payment on outstanding obligations. Without concurrent and strong measures at the state level, especially with regard to improved fiscal performance and sectoral policy reforms, the effectiveness of Central Government reforms and their impact for sustainable development will be limited. The states therefore need to adjust to policy changes and the modified incentive structure at the center to facilitate center-state coordination and to fully benefit from the outward- and market-based orientation of the development process. The Government is encouraging states to undertake comprehensive reform programs, and to seek external assistance as "additionality" to normal transfers 9. 68. To support this policy, a key feature of COS is a shift in ADB activities towards support for comprehensive economic and structural reforms in selected states. The primary criteria for state selection are: an evident commitment to policy reforms; an urgent need for assistance as reflected inter alia in social and infrastructure indicators; a satisfactory record of project implementation; capacity to service the loan; and, in view of the holistic approach to reform, the absence of major assistance from other funding agencies. The focus of ADB assistance is on support for macroeconomic reform and fiscal consolidation to improve public saving and enhance resource mobilization; increased efficiency in resource use through rationalization of unproductive expenditure and restructuring and divestment of state-owned enterprises; strengthening local government and improving good governance; and policy reforms in key physical infrastructure sectors, especially power, the major cause of fiscal hemorrhage in most states. The state-level operations also focus on fostering human development through support for reallocation of budgetary resources to social sectors, particularly health and education, and thereby enable addressing vital cross-cutting concerns on a sustainable basis. Moreover, the subnational focus of ADB's operations will enable it to maximize the developmental impact of its assistance, not only in terms of the direct impact on the participating states, but also in terms of the positive demonstrational effect on other states as well as on private investors. Notwithstanding, the current inaccessibility of India to concessional lending also constraints ADB's operations at the state level. 69. In accordance with ADB's current strategy, it is expected that over the medium term up to one half of the annual lending to India will be made available for state-level operations. The balance of ADB's lending to India will be made to national agencies with countrywide operations. However, to strengthen ADB's catalytic role, only those states with commitment to reform, particularly in the areas of fiscal consolidation and policy reform in infrastructure sectors, will be eligible for subprojects financed through the national agencies. In this way, ADB's assistance will be available to reforming states not included for state-level operations. Gujarat was the first state chosen for ADB's state-level operations and a loan and TA program was approved in 1996. ADB assistance so far has focused on improved public resource management, preparation of the Power Sector Reforms Law and revision of electricity tariff regime, and establishment of the Gujarat Infrastructure Development Board as the first infrastructure project development facility of its kind in India. In 1997, Madhya Pradesh was selected as the second state on the basis of the selection criteria mentioned earlier. TA has been provided to the state in support of public finance reform, including taxation and expenditure management, for strengthening the financial and administrative capacity of local governments, and for Madhya Pradesh power sector development. The Madhya Pradesh Public Resource Management Program Loan was approved in December 1999. ADB's future lending program includes further loans for both states including Madhya Pradesh Power Sector Development, and Private Sector Infrastructure Facility at National and State Level. Support is also envisaged for Madhya Pradesh in the area of improved maintenance and extension of the state highway network, as well as an Urban Poverty Reduction project in the state. 70. Following initiation of state-level operations in Gujarat and Madhya Pradesh, discussions with the state government of Kerala were held to assess suitability of Kerala as a third focal state. In accordance with the selection criteria indicated above, and in view of the strong political consensus on the need and urgency of reform as well as the state government's commitment to reform implementation and progress already made, Kerala has been selected as ADB's third focal state, and Government concurrence to the selection was given in early 2000. Appropriate interventions following ADB's approach adopted in Gujarat and Madhya Pradesh have been included in the loan and TA programs. These comprise the Public Resource Management Program and a Power Sector Development Program for Kerala, programmed for the years 2002 and 2003, with advisory and preparatory technical assistance being processed in 2000 and 2001, respectively. ___________________
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