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p. 6 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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V. ADB's Assistance Program

A. Overall Assistance Level

31. The main theme of the new strategy is mainstreaming poverty reduction. Based on ADB's comparative advantage, this will be primarily addressed through growth. The strategy is designed to support not only high growth but also equitable, pro-poor growth in line with the 10th Plan. Growth interventions will be complemented by social development interventions to support the 10th Plan's emphasis on human poverty reduction alongside income poverty reduction. Also, the Government has indicated that it looks to ADB, among development partners, to play a leading catalytic role in supporting the next generation of policy reforms and build capacity for improved governance by introducing international best practices. Building in these new priorities will require an expansion of ADB operations to subsectors that are especially important for equitable growth, social development, and improved governance, in addition to the sectors focusing on high growth, reforms, and private sector development. State-level operations will also be adjusted to mainstream poverty reduction, by improving delivery of pro-poor social services and by extending coverage to a few more focal states that are poor but have also indicated a strong commitment to reforms.

32. Thirty-three loans to India are proposed for 2003-2006, for a total amount of $7.5 billion, or approximately $1.9 billion per year. The loan pipeline will increase moderately from $1.67 billion in 2003, to $1.84 billion in 2004, $1.96 billion in 2005, and $2.05 billion in 2006 (Appendix 1, Table A1.10. Concept papers are in Appendix 4.)¹⁷. This enhanced program is based on an assessment of India's future needs, past performance, and absorption capacity. In terms of needs, the level and composition of operations proposed is the minimum needed for ADB to lead, in partnership with other agencies, in providing the 2003-2006 time slice of investment and capacity-building assistance that India needs to be on track to attain MDGs. In terms of past performance, an average growth rate of 6.5% over 1993-94 to 1999-2000 effectively reduced poverty incidence from 36% to 26%. Although growth is lower now, India is still a fast-growing economy. India's portfolio performance has also generally been good in terms of disbursement and contract awards. Finally, although much remains to be done in economic reforms, the progress achieved during the past decade has been significant in industry and trade policy, the financial sector, telecommunications, civil aviation, ports, and roads (Box 1). Regarding absorptive capacity, the current account balance of payments has turned around from large deficits to a modest surplus since 2002. India's foreign exchange reserves of over $70 billion also fully cover about 14 months of imports (equivalent to about 13 months of imports net of short-term debt commitments). With a prudent debt service ratio of 14% and a debt-GDP ratio of only 21%, India could easily absorb the additional ADB assistance. In terms of sectoral allocations, transport projects would account for about 45% of the pipeline, and energy projects for another 24%. About 13% consists of urban social infrastructure projects, and 11%, financial sector projects. Projects in agriculture and natural resources amount to 4% of the pipeline, while public finance and core governance interventions make up the balance of 3% (Figure 8). Poverty intervention projects account for 42% of the lending program by number of projects, and 36% by lending volume.

Figure 8: Sectoral Breakdown of Lending and Nonlending Program, 2003-2006

33. The lending pipeline will be supported by nonlending assistance, including a TA grant pipeline of about $49.5 million, including subregional projects, over 2003-2006 (Appendix 1, Table A1.11. Concept papers are in Appendix 5). Of this, $25.8 million will be funded by ADB, while the rest will be through cofinancing. Grant projects will also be funded under the Japan Fund for Poverty Reduction, depending on processing and approvals. The nonlending assistance will include assistance to prepare investment projects as well as advisory and capacity-building TA and ETSW. Project preparatory TA will amount to about 65% of the total TA; advisory and capacity-building TA, to 35%. It will complement the lending program by supporting policy reform and building institutional capacity.

34. Delivery of the expanded program will be contingent on continued performance at the country and sector levels. At the country level, program delivery will be monitored against 10th Plan targets and MDG level. At the sector level, assessment will be based on accomplishment of reform milestones and performance of ADB's portfolio. If slippage is significant, the program will be adjusted accordingly.

B. Sector and Thematic Priorities and ADB Assistance ¹⁸

1. Fiscal Consolidation

35. In the past, assistance for fiscal consolidation was primarily directed at mobilizing more resources and rationalizing public expenditure at the state level in Gujarat, Madhya Pradesh, and Kerala. These operations will be extended to new focal states as explained in para 45 below. The Government has also prepared a road map of tax reform, to be implemented in a phased manner. Improved tax administration will be a key element of this reform package and has been initiated with the FY2003 budget (Appendix 3 G). ADB assistance for this critical reform is included in the pipeline.

Table 1: Fiscal Consolidation Projects

2. Infrastructure Development

36. Road Sector. ADB's country assistance provides a large pipeline of road sector projects that are primarily directed at strengthening rural-urban connections, linking poor rural producers to markets in towns, cities, and ports (Appendix 3 H). This approach is illustrated in Maps 1 and 2. Map 1 shows the high-priority Golden Quadrilateral Project and North-South and East-West Corridors, which constitute NHDP, targeted for completion in 2007. ADB is investing in the program along with the Government and other development partners such as the World Bank and Japan Bank for International Cooperation (JBIC). Map 2 shows the hinterland of the North-South Corridor passing through ADB's focal state, Madhya Pradesh, along with components of the state road system in which ADB is investing. These state roads, in turn, are linked to district and rural roads through which the final connectivity is completed between rural producers and their distant urban markets. ADB is also investing in rural roads through the Prime Minister's rural road development program.

View Maps:

• Map 1: National Highway Development Program
• Map 2: Madhya Pradesh State Road Sector Development Program

37. None of ADB's road projects will invest in new roads. All the road projects will upgrade and/or rehabilitate existing roads to maximize the efficiency of capital use. Another major feature of the road sector pipeline is a programmatic approach firmly linking a road map of reforms with a succession of investments. Accomplishment of one round of reforms and investments will be the trigger for the next round. Road management practices will be improved to ensure proper road maintenance. Promotion of public-private partnerships through Build-Operate-Transfer (BOT) private sector road projects, where feasible, will constitute some key features of the reform program. Road investments will also be designed as socially inclusive projects. These social features will include enforcement of better safety standards; education of truck drivers, a high-risk group, on HIV/AIDS; containment of trafficking in women and children; and livelihood projects for resettled communities. Finally, some road sector projects will support the Government's policy of strengthening connectivity to the northeastern states and promote regional cooperation under the SASEC Program.

Table 2: Road Sector Projects

38. Railway Sector. The railway sector has lagged behind many other infrastructure sectors in modernization and reform (Box 1). A string of accidents in recent years has also highlighted the problem of railway safety. Indian Railways thus developed the Sector Development Reform Program (SDRP), supported by an ADB TA. This is important since the future of Indian Railways is closely linked to that of the country's poorest people, millions of whom depend on the massive rail network for cheap transport, livelihood, and supply of basic commodities. SDRP covers 10 years and contains an institutional reform program and an investment plan (Appendix 3 H). ADB provided a loan in 2002 to support SDRP. A second loan is proposed in 2006, to be followed by more loans in the future, subject to accomplishment of reform milestones. These loans will combine support for institutional and policy reforms with priority investments. A key feature of investments will be completion of existing high-priority projects long past their completion dates rather than financing of new projects.

Table 3: Railway Sector Projects

39. Inland Waterways Sector. ADB will provide its first loan for the sector in 2004, to be followed by a second loan in 2006, and possible loans in the future, subject to sector performance. The loan will improve and strengthen the inland water transport system to serve as an energy- and cost-efficient mode of transport, especially linking producers in remote and poor regions with their markets in the towns, cities, and ports (Appendix 3 H). Moreover, the loan will combine physical investments with sector reforms to strengthen the Inland Waterways Authority of India, promote public-private partnership in the sector, and restructure the Central Inland Waterways Corporation. These projects will also strengthen subregional cooperation by reactivating the inland waterway linkages between India and Bangladesh.

Table 4: Inland Waterways Sector Projects

40. Power Sector. ADB's strategy is to assist the Government's power sector reform program, especially in focal states (Appendix 3 I). Under the 1996 strategy, power sector reforms were supported in Gujarat, Madhya Pradesh, and Kerala. Under the new strategy, reform assistance will be extended to the new focal states, Assam and Chhattisgarh. These reform interventions will be complemented by investments to protect the environment, including run-of-the-river-type hydropower projects, with minimal adverse social/environmental impact, to raise the share of hydropower in overall generation; and investments in renewable energy, rural electrification, and projects to improve energy efficiency.

Table 5: Inland Waterways Sector Projects

41. Gas Sector. ADB's strategy focuses on improving the urban environment by switching domestic and commercial users as well as urban road transport to a cleaner fuel in several Indian cities (Appendix 3 J). The gas sector program will also strengthen regional cooperation by facilitating cross-border flow of gas. Opportunities are also being explored for possible ADB investments in the private sector.

Table 6: Gas Sector Projects

3. Private Sector Development

42. ADB's private sector development strategy entails five types of interventions (Chapter IV, Figure 7): (i) interventions in the financial sector to help efficient resource mobilization for private investment, (ii) investments to improve infrastructure to remove a major deterrent to private investment, (iii) reforms to create an enabling environment for private investment in infrastructure, (iv) public-private partnerships, and (v) direct investment in private sector projects from ADB's private sector window. This section focuses on financial sector assistance (Appendix 3 K), public-private partnerships, and ADB's private sector operations. One of the major impediments to private sector investment in long-gestation infrastructure projects is the missing market for long-maturity domestic currency bonds. In the absence of such domestic long-term financing, the private sector has had to rely mainly on external financial sources. However, since revenues will be mainly in local currency, the currency mismatch entails a high level of foreign exchange risk. ADB is preparing a domestic currency long-term bond issue that will significantly reduce the risks arising from maturity and currency mismatch. This highly innovative intervention is the first such multilateral agency initiative in India. It is also the first such project for ADB and is expected to catalyze the development of a long-maturity domestic bond market through ADB's initial benchmarking.

Table 7: Financial Sector and Public-Private Partnership Projects

43. Despite past reforms, an important agenda of reforms remains unfinished in the banking subsector and capital markets (Chapter I, Box 1). ADB will continue to focus its assistance on capital markets, having provided extended loan and TA for reform and development of the capital market in the past. Several ongoing TA projects will be followed up by further TA through a cluster approach, covering consolidation and demutualization of the stock market, systems for monitoring and surveillance of the derivatives market, and development of a framework to reform the pension system. These will be followed by a capital market development program loan in 2006. The loan is subject to further evaluation by the government based on past findings and the results of ongoing assistance as well as sector work. ADB will also promote public-private partnership by providing lines of credit assistance to public sector apex institutions, which will on-lend through other financial intermediaries to finance private sector infrastructure investments, small and medium enterprises, and the rural community. Finally, ADB's Private Sector Operations Department (PSOD) has adopted India as a priority destination for direct investments in the private sector, and these operations are now gathering momentum. Over the medium term, PSOD will continue to explore opportunities for investment in infrastructure and the financial sector. In infrastructure PSOD will consider investments in power, hydrocarbon, transport and telecommunications. Moreover, restructuring proposals which would result in saving/benefits being passed on to the end user in the form of lower tariffs could also be considered. In the financial sector, PSOD will consider investments in deteriorated asset reconstruction; bank reconstruction; housing finance, including mortgage backed securitization; securitization of receivables; SME financing; micro finance; venture capital and private equity funds. ADB investments in the private sector will be greatly facilitated by the proposed domestic currency bond issue (para 42).

4. Agriculture and Rural Development

44. The rationale for ADB's entry into this sector under the new country strategy has been discussed in chapters II and IV. Agriculture and rural development being a new area of assistance for ADB in India, the initial program will be limited to a few key interventions. In agriculture/natural resources ADB will address two areas in the medium term: (i) water resource management for irrigation development in a selected state and (ii) agribusiness development. ADB assistance will improve water resource infrastructure and management in the state of Chhattisgarh to enhance farm productivity. The project will be implemented in selected river basins and small- and medium-scale surface water and tank systems, with strong, demand-driven stakeholder involvement, ensuring long-run operation and maintenance sustainability. In agribusiness, ADB will first assess and prioritize opportunities for agribusiness investment and growth with a strong private sector focus. Then an investment project will be prepared to diversify and increase value-addition in agriculture, create jobs, and raise farm and nonfarm incomes in rural areas. ADB will also help prepare a sector development program to improve support services by diversified farm and agribusiness enterprises, and help redefine the Government's sector interventions to make agriculture market-driven, with investment and growth driven by the private sector (Appendix 3 L). Infrastructure such as rural power and rural roads are critical for agricultural growth and the development of rural off-farm activities. Rural roads and rural electrification are, therefore, included in ADB's assistance program. Finally, lack of access to credit is a serious constraint, especially for small farmers who make up most of the rural population. Distortions and capacity constraints have rendered rural credit systems ineffective. Consequently, a program on rural financial sector restructuring and development is also included in the ADB assistance program.

Table 8: Agriculture and Rural Development Projects

5. State Level Operations

Table 9: State Level Projects

45. The rationale for ADB's state-level operations is discussed in chapter IV, along with the criteria outlined under the new strategy for the selection of new focal states. State-level operations will now be extended to three states which meet the required criteria-Chhattisgarh, Assam, and Sikkim. This will be in addition to operations in the existing focal states of Gujarat, Madhya Pradesh, and Kerala. These operations will consist of three broad components in varying combinations, depending on the needs of individual states: (i) assistance to improve public resource management; (ii) reforms and capacity building in infrastructure sectors at the state level, including urban infrastructure, power, and roads; and (iii) improved delivery of pro-poor social services. Typically, public resource management programs will include (i) new tax and nontax measures to enhance state revenues, (ii) debt restructuring to reduce the burden of debt servicing, (iii) rationalization of wasteful public expenditure and the associated restructuring of government departments, and (iv) enhanced allocation of resources for social services (Appendix 3 G). Closely related to such public resource management is the restructuring of state enterprises, especially the state electricity boards and state transport corporations, to reduce the fiscal burden of the losses of these enterprises; and rationalization of municipal finances. Assistance for these reforms will be combined with physical investments in power transmission/distribution at the state level, state highways, and urban social infrastructure. Finally, assistance, including the introduction of effective and participatory systems of management, will be provided to build capacity at state and local government levels to improve delivery of pro-poor social services such as education and health. State level operations will account for 45% of the total number of loan projects and 36% of the total volume of programmed lending.

6. Regional Cooperation

46. In addition to national projects, the assistance program for India includes four subregional projects in transport and energy sectors totaling $750 million.

Table 10: Subregional Projects

7. Social Development and Environmental Protection

47. ADB's assistance strategy to reduce human poverty is summarized in chapter IV (Figure 7). The strategy includes assistance to develop urban social infrastructure, other infrastructure projects or state-level operations aimed at social/environmental goals, and use of growth projects infrastructure to address social and environmental goals.

48. Urban Social Infrastructure. The 74th constitutional amendment of 1992 has strengthened the functions and responsibilities of urban local bodies (ULBs) to deliver urban services such as water and sanitation and improve urban infrastructure. However, the devolution of resources to the ULBs is not commensurate, and their capacity to raise their own resources is limited. This fundamental mismatch between the social service responsibilities of ULBs and their inability to raise resources has led to steady deterioration in the delivery of services. The problem is compounded by the lack of adequate professionally qualified technical staff for municipal management, especially in the small- and medium-sized towns (Chapter III, Box 3). ADB is thus developing new approaches to integrated urban development in consultation with the Government. Although a detailed exercise is still ongoing, the broad contours of the future intervention program are now clear (Appendix 3 M). It combines reform and capacity-building components with investments in urban infrastructure in Madhya Pradesh, Kerala, Assam, and other northeastern states. The reform components will include property tax reform as well as improved and more participatory management of municipal governments, covering financial management, computerization, and simplified/transparent administrative practices involving local stakeholders. The design of these projects will be linked to performance of participating municipalities in alignment with three financial incentive schemes recently launched by the Government: Urban Reforms Incentive Fund, City Challenge Fund, and Pooled Finance Development Facility for small ULBs. The physical investment components of the integrated urban development projects will focus on bankable revenue-generating projects in water supply, sanitation, and solid waste management. However, these will be combined with components to improve provision of urban services for the poor, drawing on ADB's experience in ongoing projects. Finally, in selected towns and cities that are viable tourist spots, ADB will include tourism projects for urban renewal.

Table 11: Urban Social Infrastructure Projects

49. Other Social and Environmental Interventions. The urban sector program addresses urban environment and public health issues. Energy sector projects also aim to protect the environment. These include renewable energy development, rural electrification, hydropower development, the gas-based Kolkata Clean Fuel Project and Urban Clean Fuel Project. The third group of projects that directly address social development goals includes the governance modernization and fiscal reform projects in ADB's focal states. The projects are designed, among other things, to shift state-level public expenditure in favor of social services, particularly pro-poor services. Finally, ADB will provide direct grant assistance to meet urgent social challenges such as the trafficking of women and children. Human trafficking needs to be stopped through an aggressive campaign in which governments and international agencies cooperate. ADB is examining the use of its trust funds to help address this and other urgent social problems in India. ADB will also use its physical infrastructure projects to address social goals. A good example is the Livelihood Program for Indigenous People in Orissa, which is linked to an ADB railway sector project. Improved safety standards will be an integral part of all ADB transport projects in roads, railways, and inland water transportation, while education programs on HIV/AIDS for truck drivers, a high-risk group, will be included in all highway projects.

8. Good Governance

50. Governance interventions are a major feature of the new strategy (Appendix 3 C). The strategy to address governance in ADB operations is discussed in chapter IV. Projects supporting fiscal consolidation, sector reforms, and governance improvement at the state level have been discussed above (para 35-49). ADB's new strategy is now introducing core governance interventions to improve administration of justice and support some aspects of civil service reforms. The justice system is grossly overloaded and urgently needs modernization. Improvement in some aspects of capacity building of the central and state civil services will also be supported.

Table 12: Core Governance Intervention Projects

C. External Funding Coordination and Partnership Arrangements

51. Details of external assistance provided to India by development partners are in Appendix 1, Table A1.5. ADB closely coordinates its operations with the World Bank, International Monetary Fund, UNDP, and major bilateral development partners. In its 2001 Country Assistance Strategy, the World Bank envisaged supporting India's 9th Plan goal to strengthen the enabling environment for growth and to support critical interventions of special benefit to the poor and disadvantaged. A strong synergy exists between the World Bank's strategy and ADB's strategy, and the two organizations continue to closely coordinate their interventions. A coordinated assistance strategy for roads was jointly developed by ADB, World Bank and the Government, which is now under implementation. The two organizations have agreed to follow a similar approach for other sectors, and now coordinate their state-level interventions in their respective focal states. The World Bank's road and health programs in Assam, for example, will be synchronized with ADB's Public Resource Management Program. The country directors of the two organizations hold quarterly meetings to review the status of coordination in operations of common interest.

52. Bilateral assistance provided in partnership with ADB has been particularly valuable for strengthening the poverty reduction focus of ADB's India operations, given India's lack of access to concessional Asia Development Fund (ADF) resources. Among the bilateral development partners, DFID and ADB have developed a strong partnership. One of the highlights of such cooperation is the establishment by DFID of a £20 million United Kingdom Cooperation Fund (Poverty Focused) for Technical Assistance in June 2001. ADB's Modernizing Government and Fiscal Reform in Kerala is another excellent example of development partnership. A grant from the Government of the Netherlands is helping to strengthen pro-poor service delivery under the program. Similarly, JBIC and ADB are exploring possible cofinancing in roads (development of National Highway 31 A from Siliguri in West Bengal to Gangtok in Sikkim) and minor irrigation. The United States Agency for International Development's (USAID) South Asia regional initiative to promote subregional cooperation in energy, led by the USAID India mission in New Delhi, is cooperating closely with the energy component of ADB's SASEC program. USAID also has a program to support fiscal reform in selected states, which will closely coordinate with ADB's state-level fiscal programs. The European Union has also decided to focus on selected states and coordinate its assistance with ADB. ADB and Australian Agency for International Development (AusAID) are working together on ADB's social infrastructure projects in the northeastern states. Similarly, the Government of Canada is processing grant assistance to complement ADB's proposed urban development project in Madhya Pradesh to provide improved infrastructure services for the urban poor. Germany is also active in some of ADB's strategic sectors such as social infrastructure, power, and hydropower. ADB and Germany are thus holding regular consultations to improve aid coordination. Finally, Denmark and ADB have agreed to explore the possibility of using Denmark's Mixed Credit Program to augment ADB's infrastructure loans.

53. ADB will continue to actively pursue cofinancing from official and commercial sources to address the thematic and sectoral priorities of ADB operations in India, and soften the overall interest cost of project financing. ADB will also explore opportunities for use of its credit enhancement products for commercial cofinancing. Consultations with the development partners are conducted continually, at the project level as well as for country programming, including the preparation of this CSP. Since the beginning of the CSP process ADB has intensively consulted its development partners on the new strategy through several rounds of meetings with individual partners as well as with all the funding agencies as a group¹⁹. The consultations culminated in a final briefing for all development partners at the end of the CSP Mission on 22 January 2003, where the director general of South Asia Regional Department (SARD) briefed all the funding agencies on the understandings reached between the Government and ADB, and responded to queries about the strategy and specific cooperation opportunities. Such coordination meetings are also organized from time to time around specific themes involving the Government and development partners. Thus, in February 2002, the Ministry of Finance and ADB organized a workshop on externally aided projects, which brought together officials from 12 states and all the major development partners to discuss and coordinate external assistance to these states. Similarly, ADB participated in a World Bank-led conference on decentralization. ADB staff also participated in several UNDP-led workshops and conferences on MDGs.

D. Indicative Internal Resource Requirements

54. An initial experimental assessment has been undertaken of the resources required to deliver the India CSP program. Preliminary estimates indicate that the annual average staff time requirement, inclusive of headquarters staff, resident mission staff, and consultants, would range from 2,100 to 2,200 staff weeks, or approximately 50 staff years. Delivering the CSP will also involve about 550 missions totaling 3,750 mission days. On staffing requirements, the initial assessment indicates that the estimated gap is higher than the average overtime of 20-25%, a level normally applied to overtime assumption. Actual staff resources required for the CSP program depend on a number of factors such as the flexibility in shifting staff and staff consultant resources within the South Asia Department (SARD), and internal adjustments in response to changes in the scheduling of various programs. Requirements in a particular year may vary, depending on readiness of project processing and implementation over 2003-2006. Recruitment for vacant positions will be accelerated, as also the improvement of skills-mix requirements and vacancy management, and redeployment of staff resources, where necessary. With these efforts, the shortfall of staff resources to implement the CSP is expected to be manageable. In the meantime, an ongoing exercise is analyzing the work program and resource allocation. A more realistic assessment of overall staff resource requirement at the ADB-wide level will be pilot-tested in conjunction with the 2004 budget process, when the staff time coefficients are reviewed and updated in the third quarter of 2003.

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