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p. 5 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government’s Development Strategy III. ADB’s Development Experience IV. ADB’s Strategy V. ADB’s Assistance Program VI. Risks, Performance Monitoring, and Evaluation

Country Strategy and Program 2003-2006: India

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IV. ADB’s Strategy

A. Key Development Challenges

27. To sustain poverty reduction, the 10th Plan targets a high growth rate of 8% per year, requiring a very high rate of investment. However, the Government is faced with increasing fiscal pressures, which critically constrain investment, at the center and in the states. Hence, strong fiscal consolidation is a necessary precondition for high growth. A lower capital-output ratio, part of the 10th Plan strategy, is another requisite for high growth. However, a proactive program of second-generation structural reforms is needed at the macro level as well as within individual sectors to enhance efficiency. The 10th Plan attempts to address this issue. The huge investment requirements of the 10th Plan imply a leading role for the private sector, which accounts for about three fourths of India's GDP. This is particularly important for improving the poor quality of infrastructure, which is a major impediment for growth. However, fiscal pressures, continuing policy distortions and policy uncertainty in some sectors, bureaucratic inefficiency and corruption, and weaknesses of the financial sector are among the various disincentives that have harmed business confidence and private investment. Creating an enabling environment for the private sector is thus another major development challenge. The 10th Plan also emphasizes that high growth is a necessary but not sufficient condition to reduce poverty, especially human poverty, and identifies social development as another urgent challenge. Finally, growing interregional disparities are cause for serious concern. The 10th Plan points out that a high overall growth rate along with slow progress in the more populous states implies a large increase in interstate inequality, with serious adverse consequences for poverty, regional imbalance, and national harmony.

B. Strategic Focus

28. This is the first operational strategy proposed for India after the adoption of ADB's PRS in 1999, and its incorporation in the long- and medium-term strategic frameworks. Mainstreaming poverty reduction is, therefore, the central organizing theme of the new strategy. Achievement of the MDGs by 2015 in Asia will depend significantly on outcomes in India, given its large size. Fortunately, the country is one of few on track to meet the MDG target on income poverty reduction. However, India has lagged behind in some social indicators. Accordingly, the 10th Plan increases the allocation of resources for social services by about 80%, and proposes steps to improve the delivery of these services. Clearly the Government, other development partners, and ADB will have to work together to meet the MDGs. The 10th Plan (Figure 2) provides a useful framework for the division of labor among different development partners in this shared enterprise. The division of labor has to be based on the comparative advantage of different development partners-their assistance instruments (market-based loans, concessional loans, and grants)¹⁴; core competencies; and past development experience in the country and region-thereby enabling each donor to focus on its area of strength.

Figure 7: Asian Development Bank's Operational Strategy

29. The strategy developed on the basis of these considerations is illustrated in Figure 7. It draws on all three pillars of ADB's PRS: pro-poor growth, social development, and good governance. Pro-poor growth is the main strategic pillar for reducing income poverty. The strategy will support the Government's high-growth agenda through assistance for fiscal consolidation, private sector development, and infrastructure development. The strategy will also support the Government's emphasis on pro-poor growth by extending assistance to agriculture and rural development. Since most of the poor depend on this employment-intensive sector, expanding ADB operations to it will greatly strengthen the poverty-reducing impact of the ADB assistance program. Support for pro-poor growth will be further strengthened by extending ADB's state-level operations to some of the poorer states. Human poverty reduction will mainly depend on social development, including urban social infrastructure projects and state-level interventions to strengthen delivery of pro-poor social services. Social development will also be addressed through health and environmental protection projects in the energy sector and socially inclusive interventions in transport sector projects. Finally, although ADB's financial assistance is relatively small compared to total investment in India, the assistance program will be significantly leveraged through strong governance components, such as policy reform and capacity building, to maximize the development impact of every dollar of assistance through increased efficiency and productivity. The main sector and thematic priorities of this strategy are summarized below:

1. Fiscal consolidation. The most important challenge in achieving high growth during the 10th Plan is a major fiscal turnaround. ADB assistance for fiscal consolidation was earlier confined to the focal states. In the new CSP, assistance will be significantly strengthened for fiscal policy reforms, improved tax administration, and other fiscal management measures of the central Government.

2. Infrastructure development. Consensus is now emerging within the development community on the strong nexus between infrastructure and poverty reduction (Box 6). The ADB program will emphasize investments in publicly provided infrastructure such as upgrading/rehabilitating road systems, water transport, railways, hydrocarbons, and power, where investment will be directed to removing key bottlenecks where private investment is not forthcoming. Physical investments will also be combined with policy reforms and capacity building, which are as important as physical investment in improving infrastructure.

3. Private sector development. Since the private sector has to play a leading role in achieving growth targets, ADB's strategy will focus on promoting an enabling environment for private sector development through (a) financial sector interventions to improve financial intermediation and resource mobilization; (b) policy reforms to remove impediments to private investment, domestic and foreign; (c) investment in public infrastructure, which also facilitates private investment; (d) public-private partnerships; and (e) investments in private sector projects.

4. Agriculture and rural development. Expansion of ADB operations to agriculture and rural development is arguably the most important feature of the new strategy to mainstream poverty reduction. Since most of the poor depend on this sector, the poverty-reducing impact of employment-intensive growth in agriculture and other rural off-farm activities will be immediate, deep, and widespread. Drawing on lessons learned from ADB's vast development experience in rural Asia¹⁵, ADB assistance in these areas will complement the 10th Plan's focus on promoting equitable growth through sustainable agriculture and rural development. Assistance will range from support for irrigation and other rural infrastructure to agricultural research, development of private agribusiness, and policy reform.

5. State-level operations. These operations will be continued under the new strategy. Public resource management program loans will be combined with capacity-building components to improve the delivery of pro-poor services at the state and local government levels. The Government has also requested extension of state-level assistance to some of the poorer states to help contain growing interregional disparities, especially in the remote northeastern states. The Government is keen to strengthen connectivity to these states and draw them into the mainstream of development. Accordingly, the new strategy provides for extension of state-level operations to some of the poorer states, especially in the northeast, where governments are committed to reforms. This will help strengthen the poverty-reducing impact of the new strategy. New focal states will have to meet the following criteria (i) have higher-than-average poverty incidence, (ii) be new states or states important for regional cooperation, (iii) exhibit a strong commitment to reform, and (iv) have the capacity and willingness to take loans from the central Government on terms it determines, which is confirmed by the central Government.

   Box 6: Infrastructure Development and Poverty Reduction
   
   A large body of evidence in India and elsewhere, including studies by the Asian Development Bank (ADB), Department for International Development (DFID), United Kingdom, International Food Policy Research Institute, Overseas Development Institute, and the World Bank¹⁶, shows the strong poverty-reducing impact of infrastructure development. The infrastructure-poverty linkage is mediated through the indirect route, via growth-poverty relationship, and through the direct route as illustrated below.
   
   
   
   Regarding the indirect route, available studies show a strong relationship between high growth and poverty reduction in most fast-growing Asian economies, which is confirmed by studies on India. The second part of this link is the relationship between infrastructure development and growth, which is also confirmed by numerous studies. The interim report of RETA 5947 indicates a strong direct linkage at the local level between infrastructure and poverty through improved incomes and better access to social services in areas covered by a project.
   
   Three principles characterize the emerging consensus within the development community on the strong nexus between infrastructure and poverty reduction, which are being built into the "infrastructure development" component of ADB's India strategy: (i) an infrastructure investment program must combine large national projects with local infrastructure projects; (ii) while public investment will remain the main source of infrastructure development, and should receive enhanced assistance from funding agencies, assistance can be leveraged to promote public-private partnerships in infrastructure; and (iii) the "hardware" of investment projects must be leveraged by improved governance-through policy reforms and capacity building-to maximize their development impact.
   
   A special feature of infrastructure projects in ADB's India strategy is that they will be used to address social and environmental goals.

6. Regional cooperation. Increased focus on the northeast fits well with ADB's program of promoting economic cooperation in SASEC, consisting of Bangladesh, Bhutan, India, and Nepal, since the northeastern states share common borders with these countries. The northeastern states are also close to or have borders with Myanmar and the People's Republic of China. The region could thus be repositioned as India's gateway to East and Southeast Asia, which will also fit well with ADB's emerging agenda of linking the various subregional programs such as SASEC and Greater Mekong Subregion (GMS) into larger regional aggregates.
7. Social development and environmental protection. Human Poverty will be addressed through direct and indirect interventions to promote social development and protect the environment. This approach is in line with the 10th Plan, where most of the monitorable indicators relate to improvement in social indicators. ADB's intervention strategy to attain these goals will include urban social infrastructure projects such as supply of potable water, sanitation, and sewerage, which will directly improve public health, especially women's health. ADB's assistance for physical infrastructure will also systematically address relevant social issues such as the spread of HIV/AIDS, transport safety, trafficking of women and children, and livelihood programs for poor communities in project areas. The objective is to go beyond ADB's policies on resettlement and indigenous peoples to ensure that in addition to promoting growth, all ADB interventions, including growth projects, are socially inclusive and proactively address the social obligations of the development community. Energy projects will use environment-friendly sources of power such as renewable energy and hydropower, be energy-efficient, and promote the use of cleaner fuels to protect the urban environment. Finally, ADB's state-level operations will focus on improved public provision of education and health services, which are under the jurisdiction of state governments, through decentralization and improved and participatory management of these services at the local level.
8. Good governance. The last and, in some ways, the most important strategic priority in the new CSP is governance, which is a leveraging instrument cutting across all other components of the strategy. Good governance will considerably enhance the total developmental impact of ADB's assistance program. ADB's operational strategy to support the Government's efforts at effective governance has four elements: (i) fiscal consolidation at the central government level; (ii) sector-level policy reforms combined with capacity building for better service delivery in the sectors where ADB is active; (iii) state-level fiscal policy reforms combined with interventions to strengthen state and local governments to ensure greater accountability, transparency, and efficiency in service delivery, especially for pro-poor services; and (iv) an important innovation in the new strategy-core governance interventions such as reform in the administration of justice, which will play a key role in the next generation of reforms.

C. Progress on the Poverty Reduction Partnership Agreement

30. The poverty reduction partnership agreement (PRPA) will incorporate the CSP strategy for poverty reduction and the Government's PRS as reflected in the 10th Plan. In line with ADB business processes, the agreement will be signed after Board endorsement of the CSP. There has been significant progress in preparation of this agreement. National poverty analyses and other related studies were completed during 2001 and early 2002. State-level participatory poverty assessments were subsequently undertaken in all the focal states, involving extensive discussions with diverse groups of stakeholders, including the Government, donor agencies, NGOs, civil society, representatives of local governments, representatives of private sector, and the poor. The outcomes of these studies, the Government's PRS, and their implications for the CSP were discussed at the High-Level Forum on Poverty Reduction Strategy jointly organized by the Planning Commission, Government of India, and ADB on 14 February 2003, in New Delhi. The following conclusions emerged:

1. Growth in India over the past decade resulted in sustained poverty reduction; targeted interventions by themselves have had mixed results in the past.
2. Strategic investments in infrastructure are important for sustained poverty reduction.
3. Adequate infrastructure combined with good governance is essential to ensure effective delivery of social services.
4. Key sectors must be reformed.
5. The importance of investments in the agriculture and rural sectors, including access to credit, to facilitate growth has been borne out by these studies (Appendixes 2 and 3 A).

These conclusions are reflected in the 10th Plan and CSP (chapters II and IV).

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