ADB Support to Public Resource Management in India

Date: September 2007
Type: Evaluation Reports
Country:
Subject:
Evaluation
Series: Special Evaluation Studies

Description

For three and a half decades after independence, the gross domestic product growth of the Indian economy was low at 3.5% per year. However, in the latter half of the 1980s, it quickly accelerated to over 5%. Economic liberalization provided the initial spur for this growth, but an expansionist fiscal stance of the central government and a hike in public sector wages in 1989 consolidated it. The gross fiscal deficit of the center and states steadily increased from 5.9% in 1984 to 9.4% in 1992, and outstanding liabilities of the central and state governments relative to gross domestic product rose from 46.4% in 1983 to 61.4% in 1992. By the early 1990s, this fiscal expansion-led growth became inherently unsustainable. The fiscal imbalance spilled over into balance of payments and, exacerbated by a sharp increase in oil prices caused by the Gulf crisis, an economic crisis was triggered in the country.

In the mid-1990s the Government of India revised its policy to allow multilateral development banks to support state governments' fiscal consolidation reforms. From 1996-2004, ADB approved program loans totaling $825 million to support public resource management programs of four state governments-Gujarat, Madhya Pradesh, Kerala, and Assam. All four policy loans had common structural features, with interventions addressing revenue generation, expenditure compression, and encouraging private sector participation in service delivery, particularly infrastructure. All loans were accompanied by technical assistance projects (a total of 12 TA grants valued at $6.96 million). The study assesses these four programs, identifies lessons and good practice standards.

Summary of findings

The Public Resource Management Program is rated as "successful" based on the following assessments:

  • ADB's public resource management program in India was rated relevant. The three completed policy-based loans and associated TA were rated relevant, with the ongoing Assam program being potentially relevant. The national-level TA, which focused primarily on tax administration capacity development, was also rated relevant.
  • The program, including the national- and state- level TA, was rated effective. Although revenue and fiscal deficits showed significant interstate variations, the change over the past decade is positive, particularly in the past 2-3 years. Value added tax is expected to enhance states' own revenue. The programs improved revenue legislative and regulatory frameworks, and administration systems and procedures. Public enterprise reforms had varied success, with a number of poorly performing enterprises merged, divested, or operationally closed; but improving corporate governance was less effective. Perhaps the most effective and far-reaching measures have been the small number of critical legal, policy, and institutional reforms establishing power and port sector regulatory authorities and attracting significant private sector, and ADB, investment in the power and transport sectors in particular.
  • Overall, the public resource management program is rated likely sustainable, although the sustainability of individual policy and technical interventions is mixed. By providing state governments with an opportunity to chart their direction, and by improving institutional capacity to implement complex fiscal reforms, the public resource management program has helped to change attitudes to reform, and is increasing the likelihood that the broader reform agenda will be sustained.

Lessons

  • Effective political economy analysis will improve reform design.
  • There is no blueprint, but there is a sequence to reforms.
  • Coherent application of design tools is needed to achieve development results.
  • Developing "soft" capacities is necessary to sustain reforms.
  • Reform actions supporting anticorruption efforts should be explicitly identified.
  • Clarity in the roles of resident mission and headquarters staff in sustaining policy dialogue during implementation will improve effectiveness.
  • Mechanisms are required to monitor ADB Board concerns. The study identifies strengths to build into design, weaknesses to avoid, opportunities upon which to capitalize, and threats and risks to mitigate from the experience of the India programs.

Recommendations

  • Sufficient time and resources are required for policy dialogue and communications campaigns involving all stakeholders in formulating and implementing long-term fiscal reforms.
  • Program design should be internally coherent, focusing on key elements of the government's fiscal reform agenda, avoiding broader governance reforms until fiscal consolidation measures are in place.
  • Sufficient TA resources should be made available over the long term to respond to the changing nature of reform processes.
  • Implementation arrangements should be based on existing institutional structures and provided with adequate resources, including technical advice.

Contents

  • Executive Summary
  • I. Introduction
  • II. Public Resource Management Context and Framework
  • III. Evaluation Findings
  • IV. Conclusions
  • Appendixes