Regions and Countries

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p. 2 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Level

Country Strategy and Program Update 2005-2007: India

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II. Implementation of the Country Strategy and Program

A. Progress in Poverty Reduction

9. Accomplishment of the MDGs will depend largely on India’s success in attaining these goals because of its large share of the global poor. The Government’s poverty reduction strategy was presented in the 10th Plan which was approved in late 2002. ADB then finalized the 2003 CSP for India in April 2003 to support the 10th Plan, which set a high growth target of 8% to induce rapid reduction in income poverty and attain ambitious human development goals, more demanding in some cases than the MDGs. Growth has now picked up and exceeded the target in FY2003, although it was below target in the first 2 years of the 10th Plan. A strong correlation between growth and poverty suggests that poverty has declined significantly during the past year.⁶ Regarding performance on human poverty related MDGs, the latest available data suggest significant improvement in several education and health indicators. However, India lags behind in other indicators, especially gender-sensitive indicators such as maternal mortality or the gender gap in secondary education, and the high incidence of human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS) and other infectious diseases (Appendix 1, Table A1.1). Unless the social development effort is stepped up, several human development indicators may fall short of target.⁷ The 10th Plan has accordingly proposed an increase of almost 80% in public social expenditures. The new Government has stressed its resolve to energetically pursue the goals of poverty reduction through shared growth, equity, and inclusive social development (Box 1). This CSP Update (CSPU) is expanding specific components of the CSP to help strengthen the Government’s efforts.

B. Progress in the Country Strategy and Program Focus Areas

10. The basic strategy of assistance for poverty reduction in the 2003 CSP rests on the three pillars of pro-poor growth, social development, and good governance (Figure 1). Pro-poor growth is the main strategic pillar for reducing income poverty. It is being promoted through assistance for fiscal consolidation, private sector development, infrastructure development, and agriculture and rural development. Human poverty reduction mainly depends on the pillar of social development. Also, the CSP has extended ADB’s state level operations to some of the poorer states to strengthen its poverty reducing impact. Finally, ADB’s financial assistance is modest considering India’s size, its needs, and its own investment program. Strong governance components and introduction of international best practices across all sectors are therefore essential to leverage and maximize the development impact of ADB’s financial assistance through increased efficiency. Developments since the 2003 CSP on specific aspects of the strategy are discussed below.

11. Private sector development. The private sector accounts for three fourths of both GDP and investment in India. Development of the sector is therefore critical for growth, and hence poverty reduction through growth. The sector has grown rapidly over the past two decades, supported by wide-ranging reforms since 1991, and has remained buoyant during the past year. Nevertheless, the sector is still constrained by poor infrastructure, policy distortions in many markets, bureaucratic controls, and corruption. ADB’s strategy to support private sector development is designed to selectively address these constraints, seamlessly blending direct investment in the private sector with assistance for the public sector to promote a marketfriendly environment. In implementing this strategy, ADB continues to invest heavily in infrastructure, provide assistance for infrastructure-related policy reforms, and promote innovative approaches to public-private partnerships. It has also provided significant assistance for capacity building and reforms in the financial sector. ADB floated the first domestic currency bond issue in early 2004. In addition to continuing focus on rationalizing capital market regulations and deepening of the securities market, the private sector development program will also include interventions for poverty reduction. These include pension reforms for the informal sector, rural finance, finance for small and medium enterprises (SMEs), and agribusiness development. India is also now a priority destination for ADB’s private sector operations. After a gap of 5 years, direct private sector investments increased significantly since 2003, with $177 million invested in four projects. Going forward, private sector investments and public-private partnerships will continue to focus on infrastructure and the financial sector. The financial sector will include investments in asset reconstruction companies and financing or guarantees for municipalities and infrastructure funds.

12. Infrastructure development. Infrastructure investments, including roads, railways, inland waterways, power, urban infrastructure, and rural water management systems, remain the backbone of ADB assistance, accounting for more than 80% of the 2005–2007 loan program. The transport sector is the largest and most successful component of ADB’s assistance program. The Government has often remarked on ADB’s impressive record in this sector. Strong connectivity to link poor rural families to social services and markets in cities, towns, and ports is the organizing theme for the sector. In the national highways subsector, ADB is pursuing a programmatic approach, together with the World Bank and the Government. The main program goals are to further strengthen project development and implementation capability, enhance private sector participation, strengthen operation and maintenance (O&M), and reform the organizational structure of the National Highway Authority. In the state roads subsector, several loans are programmed for 2005–2007 in addition to ongoing projects in Madhya Pradesh and Chhattisgarh. The main reform initiatives to be addressed are rationalization of overstaffed public works departments and adequate funding of maintenance. In the rural roads development program, the first loan is proceeding well, and a second loan is scheduled for 2004. In the railway subsector, progress on the first project approved in 2003 is satisfactory. Further interventions will be linked to accomplishment of the reform milestones established in the medium-term framework for ADB support to the Indian Railway Reform Program 2002–2010. Inland waterways is a new subsector for ADB operations in India, and there have been start-up delays. The first loan has been postponed until 2005. Development of capacity and appropriate institutional arrangements to attract private investors are the key reform issues in the subsector.

13. In line with ADB’s Energy Policy 2000 guidelines, and the Government’s Power for all by 2012 program, assistance for the energy sector has six main priorities: (i) power sector reform; (ii) promotion of higher efficiency and low-carbon power sources, e.g. run-of-the-river-type hydropower projects and renewable energy; (iii) expansion, de-bottlenecking, and optimization of transmission and distribution systems; (iv) institutional strengthening to implement reforms required by the Electricity Act of 2003; (v) promotion of private sector participation; and (vi) encouraging energy conservation, and ensuring environmental and social sustainability. ADB’s power sector strategy and operations will continue to be implemented through both national and state-level interventions, particularly in poor states that are committed to reform. At the national level, ADB has provided support for nationwide sector reforms in the past through assistance to national entities. Future assistance will focus on strengthening the national transmission grid through the National Power Grid Corporation and in development of more efficient, low-carbon power generation through agencies such as the National Thermal Power Corporation and technical assistance for clean development. State-level assistance will focus on sector restructuring, including private sector participation, and critical investments to support improvement of efficiency, system reliability and increased distribution coverage, including rural electrification. Following up on past assistance for power sector reforms and investments in Gujarat, Madhya Pradesh, and Assam, future interventions will include West Bengal, Uttaranchal, the northeastern states, and possibly Kerala. In the gas subsector, a planned public sector gas distribution project has been converted to a private sector project to be implemented by joint venture companies. ADB will continue its association with both the private sector and the public sector, especially to develop the national gas transmission grid.

14. ADB’s recent experience in the urban sector has been particularly encouraging. Viewed as a problem sector prior to the 2003 CSP, the Government and others now see ADB operations in the sector as highly successful, thanks to innovative approaches introduced in both advanced and less advanced states. For example, in Karnataka, an advanced state, ADB contributed to the development of the Karnataka Urban Infrastructure Development Finance Corporation (KUIDFC) as a model agency in municipal financing. KUIDFC has now planned to leverage strong private sector involvement in basic urban services through a new loan modality. Similarly, after initial start-up delays the Rajasthan Urban Infrastructure Development Project is having a major impact on Rajasthan’s urban development.⁸ ADB’s urban sector projects generally combine infrastructure development with targeted poverty reduction components and strong elements of municipal governance and policy reforms. The 2005–2007 program will continue with such projects in several less-developed states in the northeast, Uttaranchal, and Jammu and Kashmir, drawing on past experience. In particular, this includes early capacity building support for the project management unit (PMU) prior to loan approval, which can save about 18–24 months in implementation time.⁹

15. Agriculture, water resource management, and rural development. India’s food requirements are expected to rise steeply during the next two decades, in terms of both gross amount and quality, at a time of seriously increasing stress on land and water resources. Thus, high priority has been given to these areas under the 10th Plan and the NCMP, which has outlined what the Prime Minister has called a New Deal for Agriculture, focusing specifically on poor farmers in less-developed states. ADB’s 2003 CSP shares the same goals, and prioritizes interventions to accelerate rural prosperity. The key agendas of ADB’s support to the sector, are: (i) water resources management for irrigation and (ii) agribusiness development. Given that this is a new sector for ADB in India, the 2005–2007 program will support the initial operation, consolidation, and expansion of the sector strategy. In particular, ADB operations will facilitate implementation of the National Water Policy 2002, through integrated water resources management for sustainable utilization of water resources at the river basin level. The proposed Integrated Irrigation Development Project will complement the Government’s ongoing Accelerated Irrigation Benefits Programme. In addition, to support balanced regional development and the CSP’s focus on the northeastern states, the Assam Integrated Flood Control and River Erosion Mitigation Project will be considered to help the Government prepare and implement a comprehensive and affordable program to address the unpredictable shifts of the Brahmaputra river. These shifts result in erosion of its banks and severe flooding, adversely affecting the economy and ecology of the northeastern region. Another strategic priority is development of agribusiness as a major source of rural non-farm employment and income. This will include postharvest handling, processing, marketing, and related commercial activities, as well as reforms to create an enabling environment for agriculture development led by the private sector. The ADB assistance program also includes other rural development projects such as a series of rural roads projects, and rural finance (discussed elsewhere in this section).

16. State-level operations. State-level interventions continue to be an important component of ADB assistance to India. Starting with Gujarat, the concept of focusing on particular states was extended subsequently to several other states. Lately, the Government has strongly emphasized that state-level operations should be directed toward the poorer states and regions, that have lagged behind in growth and MDG indicators, a policy consistent with the 2003 CSP focus on poverty reduction. Hence, the CSP has extended this concept to poorer states. Essentially the concept entails focused assistance, including a series of policy loans to support reforms, to maximize development impact in a state that has a higher than average incidence of poverty, and where there is evidence of commitment to reforms. Typically, this includes assistance for fiscal consolidation, but this is not essential if the state’s finances are relatively robust, e.g., Chhattisgarh. With this emphasis on the poorer states, assistance is being gradually reallocated from low-poverty states like Gujarat and Kerala to high-poverty states like Assam, Madhya Pradesh, Chhattisgarh, Sikkim, Uttaranchal, and West Bengal. While it is useful to concentrate assistance in a limited number of states to optimize the development impact, investment loans may also be selectively provided to states like Rajasthan and Karnataka, where ADB has had a long-standing partnership in the urban sector, or special cases like Jammu and Kashmir and the northeastern states. Close coordination is required among all interventions in a given state to ensure consistency, as there may be cross effects among different loans.

17. Focus on the northeast region. A new dimension in ADB’s operations introduced in the 2003 CSP is a special thrust in the northeastern region, partly responding to the Government’s request to help bring this underdeveloped region into the mainstream of development, and also because a thrust in the northeast supports ADB’s efforts to promote cross-border regional cooperation with several neighboring countries. ADB is already providing significant assistance to Assam and Sikkim. Based on extensive field consultations during the past year, a strong pipeline has been developed for the whole region for the 2005–2007 period. Most of the northeastern states are individually too small to absorb stand-alone ADB loans, and they are also closely interlinked, requiring assistance for integrated development of the whole region. However, capacity and experience in implementing large multilateral projects in the region is limited. Hence, capacity building will be a major focus of assistance.

18. Inclusive social development. The 10th Plan lays great emphasis on closing “the alarming gaps in social attainments, even after five decades of planning.”¹⁰ Providing support for such inclusive social development is a particular challenge for ADB since most ADB products for India are less competitive for the social sectors.¹¹ The 2003 CSP has adopted a novel approach to meet this challenge, using physical infrastructure projects and other economic projects to address social goals. This approach is now being applied in many sectors, often with the help of cooperation funds from other bilateral partners. The urban development program directly addresses public health issues by providing safe drinking water, sanitation, waste management, slum upgrading, and livelihood development components.¹² The energy sector program aims to protect public health and the environment by promoting efficient use of clean fuels and clean power. Road projects are being used to include HIV/AIDS awareness campaigns for truck drivers, a high-risk target group, and to help check human trafficking. A project with road safety components has been programmed to help contain the incidence of road accidents. A livelihood development project for indigenous peoples in 20 villages of Orissa is also being prepared, for implementation through local nongovernment organizations (NGOs). The financial sector program is developing a pension system for labor in the informal sector. Also, recognizing the importance of ensuring appropriate labor standards, workshops are being programmed on labor practices in civil works contracts, starting with the transport sector. Finally, state level public resource management program loans are being used, among other things, to enhance the share of education and health in public spending, and to improve the delivery of pro-poor social services through decentralized and participatory management of these services.

19. Governance and fiscal consolidation. The 10th Plan underlines the importance of improving governance in order to get better development results for a given level of development spending. This is particularly important for ADB assistance, which is modest for India’s size and relative to its own development effort. In this context, assistance for good governance has a key leveraging role in maximizing the development impact of ADB’s assistance. In line with the 2003 CSP, ongoing projects and the 2005–2007 program support good governance at four levels. First, India’s low tax:GDP ratio is a major challenge for macroeconomic management and fiscal consolidation. Modernization and improvement of tax administration is critical for enhancing tax buoyancy. ADB is providing technical assistance to improve the administration of federal taxes. Second, ADB is providing assistance for comprehensive fiscal reforms in several states. Third, physical investments are being combined with sector reforms to optimize the impact of investments. Finally, as a core governance intervention, technical assistance is being provided to help strengthen the justice administration system, to be followed by further interventions in the 2005–2007 program.

C. Highlights in Coordination of External Funding and Partnership Arrangements

20. The federal government announced new guidelines for external bilateral assistance in September 2003. Under the new guidelines, bilateral assistance through government-togovernment channels will continue from the European Union, Germany, Japan, Russia, the United Kingdom, and the United States. Other bilateral partners have been requested to channel their assistance through multilateral agencies, universities, authorized NGOs and autonomous institutions. ADB is consulting many of its bilateral partners on how it can help implement this new arrangement. ADB’s cooperation with multilaterals and bilaterals ranges from information sharing and coordination of assistance to cofinancing and cooperation fund assistance in sectors and thematic areas where ADB is active. For example, in the field of financial sector and private sector development, ADB coordinates with the Department of International Development (DFID), Germany, Japan Bank for International Cooperation (JBIC), the United States Agency for International Development (USAID), and the World Bank; in transport, with DFID, JBIC, and the World Bank; in energy, with the Canadian International Development Agency (CIDA), DFID, Germany, and USAID); in urban development, with the Australian Agency for International Development (AusAID), CIDA, DFID, France, and JBIC; in agriculture, irrigation, rural development, with DFID and the Food and Agricultural Organization; in governance, with DFID and USAID; in state level operations, with AusAID, CIDA, DFID, European Union, Netherlands, USAID, and the World Bank; and in regional cooperation, with JBIC and USAID. Appendix 1, Table A1.5, gives more details.

21. Cooperation is particularly close between ADB and the World Bank, the two largest providers of external assistance to India. The World Bank’s 2004 draft Country Assistance Strategy reflects many approaches in common with ADB’s 2003 CSP, and many sectors and areas of shared interest. There is a natural division of responsibilities based on products, with World Bank’s IDA assistance directed at social sectors and grassroot rural development. There is also an element of agreed separation of geographic focus. In sectors of shared interest such as infrastructure, financial sector, and state-level fiscal consolidation, there is coordination through frequent consultations both at the Country Director’s level and in individual sectors, harmonized strategies, and common road maps.

22. ADB’s focus for grant cofinancing in the 2005–2007 program will be with DFID, through the United Kingdom Cooperation Fund for India, which will be replenished in 2004. Cofinancing through this cooperation fund and shared interests in state-level operations has led to a strong partnership between ADB and DFID, which was recently formalized through a partnership arrangement. ADB is also seeking additional grant funding for selective interventions from Germany, Japan, USAID, and through existing bilateral channel financing agreements administered by ADB. Official cofinancing will be explored further, particularly with Germany for the energy and financial sectors (SME and rural finance), and Japan for the transport, energy, and urban development sectors. ADB will also seek to leverage commercial cofinancing through application of ADB’s credit enhancement products, including guarantees and risk-sharing arrangements. Possible applications include capital market issues by blue chip public sector undertakings in infrastructure and urban municipal financing.

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6. On the growth: poverty correlation, see ADB. 2003. Country Strategy and Program- India - 2003-2006, Manila (chapter 1B and Appendix 3A). Actual estimates of poverty from national surveys are available only every 5 years. The last survey was in 1999–2000. The next survey is scheduled for 2004–2005.
7. World Bank. 2004. Attaining the Millennium Development Goals in India: Role of Public Policy and Service
   Delivery. Washington D.
8. ADB. 2000. Rajasthan Urban Infrastructure Development Project. Manila (Loan 1647).
9. For example, ADB. 2003 Madhya Pradesh Urban Water Supply and Environmental Improvement Project. Manila (Loan 2046).
10. Planning Commission. 2002. Tenth Five Year Plan (2002-2007). India
11. India does not have access to ADB’s concessional window, while it has access to substantial concessional International Development Association funds from the World Bank, and considerable grant funds from large bilateral donors. Consequently, the Government prefers to use ADB assistance for economically viable growth projects.
12. Examples include the Japan Fund for Poverty Reduction (JFPR)-financed rural livelihood program linked to Loan 1826 (ADB. 2001. Gujarat Earthquake Rehabilitation and Reconstruction Project. Manila) and slum upgradation through a rainwater harvesting program linked to Loan 1647 (ADB. 1998. Rajasthan Urban Infrastructure Project. Manila).

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