Countries and Regions

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p. 9 of 20 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Infrastructure B. Social Infrastructure and Environment C. ADB’s State-level Operations D. Governance Dimensions of ADB Operations E. Gender Dimensions of ADB Operations F. Private Sector Operations IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - India : III. Sector Strategies

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A. Infrastructure

1. Energy

36. India's power sector, which is dominated by public utilities, suffers from inadequate investment and resulting shortage of power supply. Electricity demand is projected to increase by a further 54 percent during the Ninth Plan period, necessitating an increase in generating capacity by about 65 percent to meet this additional requirement. While feasible capacity addition is likely to be below requirement, special emphasis will need to be given to reducing losses in electricity transmission and distribution, improving energy efficiency, and implementing other demand side management measures. Further attention will also need to be directed towards early completion of ongoing projects, improvement in investment prioritization through development of power system master plans and, as a crucial step for financial sustainability, the rationalization of electricity tariff structure. In addition, the possibility of regional energy exchange could be pursued further (see para. 81).

37. A key problem facing the power sector is the deteriorating financial performance of the state electricity boards (SEBs) due primarily to the failure of state governments to pay the cost of subsidies on power sold to farmers at well below production cost. In December 1996, the Central Government and state governments reached consensus on sector reforms under the Common Minimum National Action Plan for Power (CMNAPP), recognizing the need for restructuring of the SEBs; the delegation of powers from central authorities to the states; establishment of independent regulatory commissions; rationalization of tariffs; and encouragement of private investment in all functional areas. However, progress to date in implementation of the CMNAPP has been very slow.

38. Following approval in July 1998 of the Electricity Regulatory Commissions Act, a Central Electricity Regulatory Commission (essentially for tariff rationalization of central utilities and inter-state power projects) and several State Electricity Regulatory Commissions (SERCs) have been established. However, since the Act does not contain provisions for power sector restructuring, states that are undertaking comprehensive sector reforms needed to introduce their own electricity reform acts (Andhra Pradesh, Haryana, Karnataka, Orissa, Uttar Pradesh) or are in the process of introducing such legislation (Gujarat, Madhya Pradesh). As a result, only few of the SEBs have been unbundled/corporatized. Efforts have also been made to encourage increased private sector involvement in both power generation and distribution through modification of the regulatory framework, establishment of a Private Investment Cell in the Ministry of Power, and the setting up of a High Powered Board to monitor clearances. Moreover, in March 1998, the Government also delegated authority to states to clear investments in fully foreign-owned power plants up to a maximum value of Rs15 billion ($320 million) without referral to the Foreign Investment Promotion Board. Nonetheless, the main impediment in fostering private sector participation in the power sector remains the SEBs' severe financial difficulties, which prevents them from assuring payments for power contracted from the independent power producers.

39. ADB's strategy in the power sector is to leverage its assistance to support comprehensive reform of the institutional and regulatory frameworks at the state level, within an appropriate national power policy, by emphasizing restructuring and commercialization of the SEBs; rationalization of power tariffs; establishment of independent regulatory commissions; and improvement in demand management and efficiency. Further assistance will be provided for capacity building, focusing particularly on improving the capacity for undertaking power system least cost development planning and tariff studies; improving the public-private sector interface, including preparation of power purchase agreements between state agencies and independent power producers; and the commercialization of distribution operations. These reform efforts, particularly at the state level, will assist in improving public resource management and lowering subsidies, thereby freeing resources for enhanced social sector allocation and poverty reduction. Consistent with its focused lending strategy, ADB will concentrate its efforts on policy reforms and development at the state level through loan and TA operations in Gujarat, Madhya Pradesh, and Kerala. Sectoral development program loans have been included in 2000, 2002, and 2003, respectively. Recent experience has shown that the process of reform and restructuring will take time and require support over a longer period. To this end, the program also includes project preparatory technical assistance (PPTA) for follow-up loans in Gujarat and Madhya Pradesh. In addition to continued support for policy reforms, these projects are expected to support the upgrading and privatization of distribution including in rural areas, and, in the case of Madhya Pradesh, an extension of rural electrification. At the national level, ADB will also support power sector reforms in other selected states through its proposed loan to the Power Finance Corporation. Given the ability of companies such as National Thermal Power Corporation to raise funds, and the significant potential interest of the private sector in investment in power generation, ADB support for thermal power generation is expected to come primarily through the ADB's private sector window.

40. The hydrocarbon (oil and gas) sector is critical to India's economic growth as it meets direct energy needs, fuels power generation, and provides the raw material for downstream industries. India now depends on petroleum products and natural gas for over 50 percent of total final energy demand, compared with about 35 percent in the 1980s. The country is increasingly dependent on imported crude oil and petroleum products, accounting for 20-25 percent of total imports in the last few years. In keeping with the thrust of Government's overall deregulation and liberalization efforts, significant reforms were introduced in the hydrocarbon sector including deregulation of imports and marketing of certain petroleum products; greater marketing autonomy for gas distribution companies; private investment in development of oil and gas fields as well as in refining; development of a more transparent pricing structure for oil and gas producers; and creation of the Directorate General of Hydrocarbons (DGH), which has regulatory and supervisory responsibility over public and private sector exploration and production. Another significant development was the reform of the pricing of petroleum products and natural gas. In 1997, the Government decided to dismantle the administered price mechanism for petroleum products in a phased manner by FY2002. The Government also revised the gas pricing by linking the consumer price for natural gas to a percentage of the prevailing prices of a basket of fuel oils, and further review of the pricing formula will be undertaken to bring the price of gas on full parity with fuel oil. However, further structural reforms in the hydrocarbon sector, particularly within the natural gas subsector, are needed. These include the operationalization of the Gas Regulatory Authority; move to a market-based structure for gas pricing; development of an adequate domestic gas infrastructure such as a natural gas grid and LNG facilities to ease transport and delivery bottlenecks; the opening of gas transmission to competition; and the adoption and enforcement of environmental regulations. 41. ADB has played a lead role in supporting policy and institutional reforms within the hydrocarbon sector, particularly through the Hydrocarbon Sector Program Loan, and in the institutional strengthening of the Directorate General of Hydrocarbons through TA on Hydrocarbon Exploration and Production Database and Archive System. The program loan aimed at developing an efficient and competitive hydrocarbon sector in India through policy reforms and structural changes focusing on increased private sector participation; enhancement of the regulatory framework; removal of price distortions; and divestment of government equity in public sector enterprises. Most of the elements of the reform agenda were achieved, except the partial divestment of the Government's holding in the Oil and Natural Gas Corporation. Given the progress in policy and regulatory reforms, the private sector is expected to increasingly take the lead role in meeting investment requirements in the hydrocarbon sector. To this end, ADB support will focus on the catalytic role for private sector investment through its private sector window, and has identified a number of projects in the liquefied natural gas (LNG) sector. Nonetheless, particularly within the gas subsector, some public sector investment in selected areas may still be needed over the medium term in accordance with the ADB-funded National Gas Development Master Plan. ADB assistance could also be provided to support cross-border construction initiatives for hydrocarbons within the subregional context (see para.81).

42. The ADB regards support for improved energy efficiency as an important component of its support for energy sector reform and development. While most ADB-supported interventions for policy and regulatory reforms and power sector restructuring, including subsidy removal and tariff rationalization, will contribute to increased energy efficiency, the ADB has also been supporting improvements in energy efficiency more directly through two loans: the Industrial Energy Efficiency Project (approved in 1994), and the Renewable Energy Development Project (approved in 1996). The former, which provided a line of credit through the Industrial Development Bank of India to support investment contributing to energy efficiency, has progressed well and will be completed in 2000. Building on the experience gained in this project and in line with importance attached by the Government to the further improvement in energy efficiency, a follow-up sector development project is proposed for the year 2002. Under its Renewable Energy Development Project, the ADB is providing assistance to the Indian Renewable Energy Development Agency for developing renewable energy projects. Although disbursement was initially slow, it has since picked up, and a review of the loan is envisaged in late 2000 to assess whether similar projects could again be included in the pipeline. Other energy efficiency and environment related projects in the pipeline include pollution control for the Taj Trapezium Project proposed in 2001, as well as individual environment support related components in the Gujarat, Madhya Pradesh, and Kerala Power Sector Development Programs. An ADB-supported TA on coal beneficiation was completed in 1998. The TA clearly indicated the potentially important energy efficiency and environmental benefits and the likely commercial viability of such operations, enabling the private sector to play a key role in its development. The TA, however, also notes the need for the Government to rationalize coal pricing as part of the evolving framework. ADB will address this issue through policy dialogue, support for the envisaged sector development project, and its catalytic role in private sector investment.

2. Transport and Communications

43. The availability of efficient and integrated transport systems provides important impetus for sustainable economic growth and more balanced regional development. However, resource constraints for network expansion and maintenance of existing infrastructure, and the lack of transport sector planning in an integrated manner, have increasingly posed bottlenecks to further development in India. The Government is directing special attention to this issue, and has initiated the process of formulating an integrated national transport policy, focusing on the inter-modality of the various transport modes (viz., road, rail, airways, and waterways) and their institutional and regulatory frameworks for enhanced private participation and effective public-private partnerships. ADB will support the transport sector development objectives through assistance for high priority national highways development; commercialization of operation through public-private interface; and restructuring and increased commercial orientation of Indian Railways. As catalyst for enhanced regional cooperation, ADB will also support improved transport interconnectivity between the countries in the South Asian Growth Quadrangle (i.e., Bangladesh, Bhutan, India, and Nepal; see also para. 80), particularly improved road and rail links, as well as the development of inland water transport systems.

44. Road transport has emerged as the dominant mode of transport in India, accounting for about 85 percent of passenger traffic and a substantial share of freight movement, particularly for transport of non-bulk items over short distances. Responsibility for the development and maintenance of national highways rests with the Central Government, while state highways, and district and village roads are the responsibility of the state governments concerned. The growing traffic volume has put mounting pressure on the transport infrastructure and led to inadequacy of the existing road network, which is increasingly reflected in severe traffic congestion, poor maintenance, slow speed, high air and noise pollution, and a large number of accidents. This has been compounded by limitations on the absorptive and implementation capacity of public sector agencies.

45. To alleviate some of the constraints, the National Highways Authority of India (NHAI), established in 1988, became fully operational in 1995 with overall responsibility for the implementation of improvements to the national road network and increasing private participation in the roads sector. Moreover, a National Highways Policy was announced in 1997, inter alia addressing critical issues on private investment in this sector, and outlining the public-private sector focus in roads sector development. Under the policy, the Government will carry out all preparatory works for projects identified for private participation, including preparation of detailed feasibility studies, acquisition of rights-of-way, environmental clearances and resettlement. Private concessions will be determined by competitive bidding, with a concession period of 30 years and transfer to the Government thereafter. Government-acquired land will be made available on a long-term lease basis. The Government has already prepared a National Highway Development Program (NHDP) to interconnect the four largest metropolitan cities of Calcutta, Chennai, Delhi, and Mumbai. In addition to establishing an enabling framework and improving transparency, resource mobilization has been improved through imposing a levy on motor spirit in the FY1999 budget and a one rupee per liter diesel tax in the FY2000 budget, yielding about Rs50 billion ($1.1 billion) of revenues annually. Fifty percent of the proceeds of the diesel tax will be used to support rural connectivity; the balance of the diesel tax, and the proceeds from the levy on motor spirits will be transferred to a central road fund, to be used for development of state roads (30 percent) and for the development and maintenance of national highways including the above-mentioned NHDP (70 percent). To encourage private sector participation, model concession agreements have been prepared, and private road ventures enabled to raise up to 35 percent of the cost of highway projects in the form of external commercial borrowings. So far, about 20 projects-mostly bridges, bypasses, and rail/road over bridges-involving an investment of Rs10 billion ($213 million) have been taken up under build-operate-transfer (BOT) scheme.

46. ADB has played an important role in the development of policy and institutional frameworks of the road sector through its TA support and related policy dialogue. ADB assisted in establishing and capacity building of NHAI, and its 1997 agreement with the Government on a new Road Sector Assistance Plan reflects essential features of the evolved National Highways Policy. In accordance with the COS, ADB assistance will focus on the removal of bottlenecks and rehabilitation of the existing road network within the high-density corridor, particularly Delhi-Mumbai-Chennai transport corridor, and support for improvement in road safety. Additionally, it will emphasize policy reform to promote private sector participation and initiatives to attract private sector funds such as through BOT and public-private partnership (PPP) arrangements. To this end, three projects that seek to promote PPP in highway development have been included in the program. As part of its efforts for greater regional cooperation (see paras. 80-82), ADB will also support the upgrading of the North-South Corridor in West Bengal; a pre-feasibility study has already been undertaken.

47. Most major state highways and district roads are in urgent need of widening and upgrading. There is also a need to develop sustainable maintenance systems. Since policy reforms to support infrastructure development are an important component of ADB assistance for public resource management in its focal states, support for improvements in state roads would provide an effective complement to other state-level initiatives. Support for state road development would also foster rural development through enhanced market access, improve economic activity, and thereby reduce poverty. As part of its state-level operations, ADB will support the development of the secondary (state) highways network in Madhya Pradesh, to foster further policy and institutional strengthening within the enabling framework established under ADB's public resource management program, and to catalyze their impact on poverty alleviation.

48. Although being the primary and most economical mode for hauling bulk commodities such as coal, ores, and foodgrains, particularly over long distances, railways is facing stiff competition from road transportation. In effect, its share in the total movement of passengers and goods has declined over the years mainly due to Indian Railways' (IR) inability to expand capacity. Inadequacy of the existing institutional and regulatory setup of the railway sector, outdated technology and equipment, and a tariff policy of substantial cross-subsidization of passenger traffic by freight movement have also led to diversion of traffic to roads. As a result, IR is unable to meet the increasing transport demand generated by higher economic growth and to mobilize sufficient funding for its expansion and modernization. Unless addressed, these factors will impose a high cost on India's transport sector, prevent full utilization of the comparative advantage of railways within a multi-modal system, and thereby affect regional development and constrain growth.

49. ADB's policy dialogue with the Government and IR has therefore focused on the restructuring of IR and commercialization of its operations. Initial assistance under ADB TA was completed in December 1997, recommending implementation of a sector development reform program comprising institutional and policy reforms together with priority investments. Further policy discussions are being undertaken as part of the proposed Railway Improvement (Sector) Project, addressing inter alia organizational reform including hiving off of non-core activities through privatization and/or public-private partnerships; rationalization of the tariff structure; and technology upgrading and modernization. This Project will take into account the recommendations of the Expert Group on Railways, constituted by the Government in December 1998. The long-term plan for comprehensive restructuring of the railways sector may require further ADB support. The need for such assistance in the context of satisfactory progress on reform implementation will be assessed through subsequent TA.

50. Prolonged and excessive government control, low performance in cargo operations, low labor productivity, and poor reliability of services have adversely affected the competitiveness of the ports sector. Related problems include insufficient replacement investment, lack of modernization of cargo handling facilities, and an inadequate institutional and regulatory framework. Responding to these weaknesses, the Government has taken steps to reform the sector. In 1996-1997, guidelines for private sector participation were issued, increased financial and administrative power for capital expenditure and staffing were delegated to Port Trusts, and a Tariff Authority was constituted through amendment of the Major Ports Act of 1963. The Government also introduced a corporatization policy as an intermediate step towards privatization of ports. ADB has supported these initiatives through policy dialogue as well as financial and technical assistance. Ongoing support focuses on the commercialization of Mumbai and Chennai Port Trust operations, corporatization of selected major ports, strengthening of private sector participation in development of the port sector, and promulgation of guidelines on port tariffs for application by major port trusts for both common user port facilities and private sector operations. Complementing these initiatives, ADB is increasingly focusing on intermediate and small ports that are under state government responsibility. Such support would be linked to ADB's state-level operations. ADB may also participate in the development of private sector ports through its private sector window. Assessment of possible future ADB loan interventions will be based on trade-transport links within a multi-modal transport structure. In this context, TA is also planned for the year 2002 to assess the potential of inland waterways as an energy efficient, environmentally clean, and economical mode of transportation, both for India and the subregion, and to identify the scope for possible private sector involvement.

51. Although India has a large telecommunications network, under-investment coupled with the sector's rapid growth has resulted in a large unmet demand, limited coverage, and heavy concentration in the urban regions. The Government's National Telecommunications Policy of 1994 enabled the granting of licenses to private operators for basic telephone services in direct competition with the Government's Department of Telecommunications (DOT), and private companies were allowed to provide services with value added, such as mobile phone and paging services. A new telecommunications policy was announced in early 1999, opening national long distance services to competition, allowing multiple operators for basic services, and switching from the fixed license fee system to an entry fee plus revenue-sharing arrangement for new entrants to basic, cellular, and paging services. The new policy has also reiterated the regulatory role of the Telecommunications Regulatory Authority of India (TRAI), which was established in 1997. In order to effect separation of service providing functions from policy and licensing functions, a separate Department of Telecom Services (DTS) has been set up in October 1999. To supplement the efforts of DTS in telephone, fax, and other services, and to enhance competition in providing the basic telephone services, companies registered in India are being licensed to operate and maintain the basic services. Six companies have so far signed licensing agreements. Although the new policy enhances competition in the sector, several structural issues remain to be addressed. In particular, licenses will continue to be granted only for compartmentalized services (e.g. cellular, cable, internet), rather than allowing multiple services. Moreover, although corporatization of DOT was preponed to October 2000, other structural reforms such as the dismantling of the state monopoly on international long-distance services still need to be effected.

52. ADB has so far provided support for the extension of the telecommunications network through two telecommunications loans. Efforts by ADB to directly support the expansion in rural telecommunications, however, were unsuccessful, as the Government requested withdrawal of the Rural Telecommunications loan in view of DOT's preference for indigenous technology. ADB has also provided a TA for capacity building of TRAI. In view of the rapid technological change and the resulting commercial opportunities for private sector investment, ADB's future involvement in the telecommunications sector will likely be limited to support through its private sector window. Moreover, opportunities for ADB private sector lending could also arise in India's emerging information technology sector.

3. Finance and Industry

53. The industrial sector has performed well under the more liberal economic policies adopted in the early 1990s. Delicensing industry and trade, and liberalizing the investment and exchange rate regimes have raised allocative efficiency, lowered production cost, and increased competitiveness. Sustaining this performance will depend in large part on tackling India's serious infrastructure constraints and continued progress in fiscal and financial sector reforms, so as to ensure that adequate resources are available to service the demands of the corporate sector. Continued strengthening and further development of the financial and capital markets, complemented by reform of public finances, is therefore important for maintaining macroeconomic stability and for raising the efficiency of domestic resource mobilization to meet the investment requirements of the corporate sector and the vast demands for infrastructure financing.

54. Although significant progress has already been made in reforming the financial sector and in developing the domestic capital market, there is a need to further deepen existing reforms, notably in respect to the long-term debt market encompassing institutional sources of long-term funds such as insurance companies, pension and provident funds, mutual funds, and housing finance. In view of the Government's objective of gradually liberalizing the external capital account, progress in strengthening the domestic financial system and the Reserve Bank of India's oversight capabilities will also be essential. To this end, the Second Financial Sector Committee, chaired by M. Narasimham, has prepared a blueprint for future reforms. The Government has already started to implement its recommendations, including increasing the capital adequacy ratio above the international norm proposed by the Bank for International Settlements, tightening prudential asset classification and income recognition norms, and reforming rural credit by strengthening regional rural banks and reforming cooperative institutions. Other important recommendations of the Committee include a complete review of banking laws, the integration of the lending activities of non-bank finance companies with commercial banks, and a clearer separation of ownership and management as well as reexamination of the issue of public ownership of the banking system.

55. ADB has played a lead role in supporting the Government's financial sector and capital market reforms through two loans, the Financial Sector and the Capital Market Development Program Loans, both of which were deemed to have been successful. Reform efforts included deregulation of interest rates, relaxation of credit controls, and adoption of international accounting and prudential regulations, as well as entry of private sector financial institutions and restructuring including recapitalization of public banks. Reforms of capital market included strengthening of the Securities and Exchange Board of India as the principal market regulator, improving market access by private investors and institutions, liberalization of investments of insurance companies and provident and pension funds, and establishment of an automated national securities depository. The Government has taken further measures to boost capital market development through passing of the Securities Law (Amendment) Bill to facilitate the introduction of derivatives trading based on stock index futures, and by the passing of the Insurance Regulatory and Development Authority (IRDA) Bill in 1999 to strengthen the regulatory framework and to promote private sector participation in the insurance sector.

56. Given the importance of a well-functioning financial sector and capital market to India's economy, both in terms of its contribution to the growth of private sector activities and the development of infrastructure, ADB will continue to take a lead role in supporting policy, regulatory, and institutional reforms. Building on the success of ADB's earlier interventions, ADB advisory support will focus mainly on the further development of the domestic primary and secondary securities market. To this end, several TAs will be implemented during 2000-2001, inter alia addressing (i) regulatory and institutional reforms and capacity building of pension funds, the insurance sector, and the mutual funds industry; (ii) the development of a secondary debt market; and (iii) debt recovery. This will assist development of new sources of long-term finance for both industry and infrastructure, and will complement other ADB interventions such as Housing Finance II and Private Sector Infrastructure Facility at National and State Level.

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