Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 39305-IN

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT FOR

A PROPOSED CREDIT IN THE AMOUNT OF SDR 42.5 MILLION

(US65 MILLION EQUIVALENT)

AND

A PROPOSED LOAN IN THE AMOUNT OF US$135 MILLION

TO

THE REPUBLIC OF INDIA

FOR

A FIRST HIMACHAL PRADESH DEVELOPMENT POLICY LOAN AND CREDIT

August 23,2007

Poverty Reduction and Economic Management Sector Unit India Country Management Unit South Asia Region

This document has a restricted distribution and may be used by recipients on ly in the performance o f their off icial duties. I t s contents may no t otherwise be disclosed without W o r l d Bank authorization.

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INDIA - GOVERNMENT FISCAL YEAR April 1 - March 3 1

BBNDA

CAT css CAAA CAS D G P E M P

GDP GO GoHP Go1 GP GSDP H P HPSEB HRTC H P D P L

IADA I A S IBRD

IDA IPC IT1

Rs. 1 U S $ l .oo

CURRENCY EQUIVALENTS (As o f July 3 1,2007)

Currency Unit: Indian Rupee

US$0.0245 Rs. 40.44

ABBREVIATION AND ACRONYMS

Baddi-Barotiwala-Nalagarh Development Authority Catchment Area Treatment Centrally Sponsored Scheme Controller o f Aid, Accounts and Audit Country Strategy Director General o f Police Environment Master Plan

Gross Domestic Product Government Order Government o f Himachal Pradesh Government o f India Gram Panchayat Gross State Domestic Product Himachal Pradesh Himachal Pradesh State Electricity Board Himachal Road Transport Corporation Himachal Pradesh Development Pol icy L o a d c r e d i t Industrial Area Development A c t Ind ian Administrative Service International Bank for Reconstruction and Development International Development Association Indian Penal Code Industrial Training Institutes

IMC

IT J V MTEF M T F P MDG NHPC

O&M P R I P H C PSE P T A RE ROC RTI R K S sc

S J V N S L L SPCB

TFC VAT

Industry Management Committee

Information Technology Joint Venture M e d i u m Term Expenditure Framework M e d i u m Term Fiscal Plan M i l l enn ium Development Goals National Hydroelectric Power Corporation Operation and Maintenance Panchayati Raj Institution Primary Health Center Public Sector Enterprise Parent Teacher Associations Revised Estimates Regional Operations Committee Right t o Information Rog i Kalyan Samitis Sub Center

Satluj Jal Vidyut N i g a m Special Local Laws State Pollut ion Control Board

Twelfth Finance Commission Value Added Tax

Vice President: Country Director:

Sector Director: Sadiq Ahmed, SASPF Sector Manager: Task Managers:

Praful C. Patel, SARVP Isabel M. Guerrero, S A C I N

Kapi l Kapoor, AFMZM / Dipak Dasgupta (Acting), SASPF Mohan Nagarajan and Ananya Basu, SASPF

FOR OFFICIAL USE ONLY A PROPOSED

FIRST HIMACHAL PRADESH DEVELOPMENT POLICY LOAN AND CREDIT TO THE REPUBLIC OF INDIA

TABLE OF CONTENTS

I . INTRODUCTION ................................................................................................................. 1

I1 . COUNTRY CONTEXT ........................................................................................................ 2 Recent National Developments and their Implications for HP ........................................... 2 Developmental Outcomes in Himachal Pradesh ................................................................. 5

A . B .

I11 . H P ’ S REFORM PROGRAM AND THE PARTICIPATORY PROCESS .................... 10 Creating Fiscal Space and Improving Public Financial Management .............................. 11 Promoting Key Sectors for Growth. Employment. and Revenue Mobilization ............... 20 Promoting the Institutional Framework for Environmentally Sustainable Development . 27 Strengthening Governance and Public Administration., ................................................... 29 Improving the General Business Environment for Private Sector Participation .............. 32 Public Consultations and Participatory Process ................................................................ 34

A . B . C . D . E . F .

I V . BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ....................................... 34 Link to India’s Country Strategy ...................................................................................... 34 Collaboration with other Development Partners ............................................................... 35 Relationship to other Bank Operations ............................................................................. 36 Lessons Learned ............................................................................................................... 37 Analytical Underpinnings ................................................................................................. 38

A . B . C . D . E .

V . THE PROPOSED OPERATION ...................................................................................... 38

Policy Areas ...................................................................................................................... 39 A . B .

Objectives and Sequencing ............................................................................................... 38

VI . OPERATIONAL IMPLEMENTATION ......................................................................... 40 A . B . Implementation. Monitoring. and Evaluation ................................................................... 42 C . Fiduciary Aspects ............................................................................................................. 42 D . Disbursement .................................................................................................................... 43 E . Environmental Aspects ..................................................................................................... 43 F . Risks and Mitigation ......................................................................................................... 44

Poverty and Social Impacts .............................................................................................. 41

ANNEXES

Annex A : Annex B: Annex C: Annex D : Annex E: Annex F: Annex G: Annex H :

Letter o f Development Policy with Program Policy Matrix Fiscal Summary for HP Action Plan for Completion o f Catchment Management Activities Terms o f Reference for Environment Master Plan Public Information Notice (IMF) Statement o f Loans and Credits India at a Glance Map: India . Himachal Pradesh (IBRD 35401)

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

HPDPLl Task Team (In Alphabetical Order)

Ananya Basu Ashish Bhateja Daniel M. Sellen Inderbir Dhingra Jyoti Sriram Judith K. Plummer Mohan Nagaraj an Neha K a u l Puj a Vasudeva Dutta Raj eev Ahuj a Rajni Khanna Richard Damania Rohi t M i t t a l Sangeeta Goyal Shiny Jaison Sonia Chand Sandhu Suhail Kassim Sunil Kumar Khosla Syed I. Ahmed Tanuj Mathur Tapas Paul Vikram K. Chand Vikram Raghavan

David Rosenblatt Lili Liu Narahari Rao SteDhen Howes

Senior Economist, SASPF Senior Procurement Specialist, S A R P S Senior Agriculture Economist, AFTAR Private Sector Development Specialist, SASPF Program Assistant, SASPF Senior Financial Analyst, SASDE Senior Economist, SASPF Research Analyst, SASPF Social Protection Economist, SASHD Health Specialist, SASHD Senior Economist, SASPF Senior Environmental Specialist, SASDN Financial Analyst, SASDE Education Economist, SASHD Program Assistant, SASPF Senior Environmental Specialist, SASDN Private Sector Development Consultant, SASPF Senior Energy Specialist, SASDE Lead Counsel, LEGES Senior Financial Management Specialist, S A R F M Senior Environmental Specialist, SASES Senior Public Sector Management Specialist, SASPF Senior Counsel, LEGES

Peer Reviewers (In Alphabetical Order)

: : Lead Economist, PRMED : Principal Economist, ADB : PrinciDal Economist. A U S A I D

Lead Economist and Sector Leader, LCSPR

PROGRAM SUMMARY FOR A PROPOSED

FIRST HIMACHAL PRADESH DEVELOPMENT POLICY LOAN AND CREDIT TO THE REPUBLIC OF INDIA

Borrower

Implementing Agency

Amount

Terms

Tranc hing

Description

Benefits

R i s k s

Republic o f India

State o f Himachal Pradesh

Credit: SDR42.5 mi l l ion (US$65 mi l l ion equivalent) Loan: US$135 mi l l ion

Credit: Standard IDA terms; 35 years maturity with 10 years o f grace. Loan: Payable in 20 years including 5 years o f grace period; at the standard interest rate for LIBOR-based variable-spread U S Dol lar single currency loans.

The loan and credit proceeds for the operation would be disbursed in two equal tranches o f U S $ 67.5 mi l l ion and SDR 21.25 mill ion, respectively. The operation i s designed so that al l key actions for the first tranche have been taken prior to Board Presentation. Disbursement o f the second tranche i s expected in FY 2008-09, conditional on fulf i l lment o f the prior actions for the second tranche.

The proposed operation supports the medium term program o f the Government o f Himachal Pradesh (GoHP). The overarching objective o f the proposed loadcredit i s to support the implementation o f critical structural, fiscal, and administrative reforms needed to achieve sustainable and rapid economic growth and inclusive development over the medium term, while sustaining the environmental heritage o f the state. The priority areas for the operation will be fiscal adjustment and promotion o f environmentally sustainable development-with particular reference to the development o f hydropower. The overall program wil l also support reforms to enhance growth and employment, and improve governance and public administration. The proposed operation, consistent with CAS objectives, supports measures to institutionalize fiscal stabilization and to sustain rapid economic growth in one o f India’s major “special category” states. Fiscal reforms and measures to strengthen financial accountability should reduce the state’s dependence on debt financing, while increasing fiscal space for development expenditures along with their efficiency. Support to environmentally sustainable development will help to protect the state’s precious natural resource base, f rom which i t derives i t s comparative advantages in sectors l ike tourism, and hydropower. Improvements in governance and administrative effectiveness combined with growth-enabling reforms should lead, over time, to increased private investment and productive j o b opportunities for the educated population, along with expanded access to improved basic services, particularly for the remote areas. Bank support for the program i s complemented by reform-linked assistance from Government o f India (GoI). The proposed operation faces four key risks. First, implementation may be slower than planned because o f institutional capacity constraints. Second, non-adherence to the targets set in the Medium Term Fiscal Plan (MTFP) could derail the state’s adjustment path, and affect future tranche release. Third, there could be a reputational risk for the Bank from perceived negative impacts on the environment f rom support for the Government’s planned

I Operation ID Number

hydropower development. Fourth, elections for the State’s Legislative Assembly are due in early-2008. Several steps have been taken to reduce the r isks involved. First, to help alleviate capacity constraints, the Bank i s seelung to ensure that significant technical assistance i s available to fo l low through o n the reform measures supported by the proposed operation. Close attention i s also being paid to sequencing the reforms in such a way as to avoid an overloaded agenda which would strain implementation capacity. Second, enactment o f the Himachal Pradesh Fiscal Responsibility and Budget Management Act, 2005, reduces the risk o f deviating f rom the fiscal correction path. Linking o f Bank assistance as wel l as central government debt rel ief to the achievement o f annual fiscal adjustment further strengthens the incentives for the GoHP to adhere to the MTFP. Third, to mitigate any reputational risk, the Bank will continue to ho ld regular consultations with stakeholders to address any concerns, and will emphasize that the proposed operation will help GoHP embark o n an environmentally sound path to hydropower expansion. Fourth, broad ownership o f the principal objectives o f the program has been built among key stakeholders, through extensive consultations that are ongoing. The reform program addresses HP’s development priorities over which there i s broad consensus. Careful consideration has also been given to political economy factors in the design o f the reforms, and their sequencing, and tr anching . IN-P 105 124

PROGRAM DOCUMENT FOR

A FIRST HIMACHAL PRADESH DEVELOPMENT POLICY LOAN AND CREDIT TO THE REPUBLIC OF INDIA

I. INTRODUCTION

1. Located in Nor th India, Himachal Pradesh (HP) i s a small mountainous state bordering Punjab, Haryana, Uttarakhand, and Jammu and Kashmir. With a geographical area o f 55,673 sq. k m s and population o f 6.6 mill ion, HP accounts for 1.6 percent o f the national geographical area and about 0.6 percent o f India’s population. I t i s one o f India’s leading states in terms o f human development, and, has some o f the best indicators in terms o f gender equality and access to services. Moreover, in recent years, HP has achieved economic success in the form o f higher growth rates than the rest o f the country- powered by rapid expansion o f the secondary and tertiary sectors which collectively account for more than 80 percent o f the Gross State Domestic Product (GSDP). H P n o w has a per capita income o f just under US$ 800 per capita which i s slightly higher than the national average-although by comparable international standards, i t remains quite low.

2. HP i s a unique state because o f the success i t has achieved over the past three decades, despite severe structural disadvantages o f relative remoteness, environmental fragility, and a diff icult hill terrain which raise costs o f service delivery-all characteristic o f Himalayan states in India. Nevertheless, in order to sustain this progress, the state faces some diff icult transition challenges, especially to create jobs for a rapidly growing and educated labor force, and unlocking the potential for private sector led growth in high-value tourism and niche manufacturing and other sectors, whi le addressing key fiscal and environmental sustainability issues. If successful, this strategy will have important demonstration effects for many other hill states in India facing similar circumstances.

3. I t i s notable that, since the formation o f H P as a state in India in 1971, successive state administrations have focused on overall progress-with particular attention to social and human development, which are areas where HP has emerged as one o f the leaders in the country. Building upon the state’s recent success, the government seeks to achieve the twin objectives o f sustainable growth and inclusive development over the medium term. The state’s past enviable track record i s testimony to the ability o f i t s people and government to forge a social consensus and compact necessary to achieve such goals.

4. The Wor ld Bank has been approached by the Government o f Himachal Pradesh (GoHP) through the Government o f India (GoI) to become a partner in i t s development effort, and support a developing program o f pol icy and institutional reforms. In light o f i t s articulated development objectives, GoHP has signaled willingness to adopt and continue reforms in key areas to create fiscal space to finance critical investments, promote private sector development, encourage sectors where the state can compete effectively by playing to i t s natural strengths, strengthen governance and public service delivery, conserve and protect i t s environmental heritage, and further improve social outcomes-as indicated in the Budget Speech for 2007-08. To help underpin HP’s reforms, the Bank has been requested by both GoHP and the Go1 to provide support in the form o f development policy lending in support o f the government’s medium term reform program. This document details the reform program o f GoHP and proposes Bank support through a loan o f US$ 135 mi l l ion and a credit o f SDR 42.5 mi l l ion (US$ 65 mi l l ion equivalent), commensurate to the reform process and sequenced appropriately so as to manage the r isks involved.

5. The structure o f the Program Document i s as follows. Section I1 summarizes the recent developments at the national level and their implications for HP. I t reports o n HP’s recent development outcomes. Section I11 describes GoHP’s overarching reform program, and Section IV outlines the Bank’s

1

program in HP. Section V discusses the specific components o f HP’s pol icy and institutional reform program supported by the First Himachal Pradesh Development Policy Loadc red i t (HPDPL 1). Finally, Section V I describes implementation o f the proposed operation. Annex A contains a description of GoHP’s program in i t s Letter o f Development Policy (LDP).

11. COUNTRY CONTEXT

A. Recent National Developments and their Implications for HP

6. Rapid growth and poverty reduction. Acceleration in economic growth has propelled India onto the global stage as an emerging economic giant. After slowing f rom 2000-01 to 2002-03, Gross Domestic Product (GDP) growth has resumed i t s rapid rate, and the country has experienced an average annual GDP growth rate o f over 8 percent during the past three years.’ The expansion has been resilient in the face o f volatile o i l prices and slowing growth in the United States. The momentum i s expected to continue in the near term, with GDP growth rate projected above 9 percent for 2006-07. Notwithstanding recent global capital market events, India’s growth remains broadly based and i s not excessively affected by the current downturn in capital inflows following global shifts in risk assessment. Growth i s supported by robust consumption, investment, and exports. India’s GDP per capita growth rate since 1991 puts the country in the ranks o f the top ten fastest-growing countries in the world. The acceleration in economic growth has coincided with mill ions o f Indians moving out o f poverty, and the poverty head count ratio has fallen f rom 36 percent in 1993-94 to 28 percent in 2004-05.

7. Thriving services, improving performance in industry, and lagging agriculture. The growth surge has been fuelled primarily by rapid and robust growth in the services sector-which has grown at an annual average rate o f 9 percent since the 1990s, contributing nearly 69 percent o f the overall average growth o f the economy in the period between 2002-03 and 2006-07 and, in the process, expanding the share o f services in GDP to 55 percent. More recently, industry, expanding by nearly 10 percent over the last three years, has jo ined services as an engine o f growth. Consequently, industry’s share in GDP has risen to 26 percent-but more gradually than services when viewed over a longer period. On the other hand, agriculture growth has lagged and has been volatile: growing at just 2.3 percent in the five-year period ending 2006-07. Consequently agriculture’s share in GDP has declined to 19 percent in 2006-07 from 22 percent in 2002-03.

8. Growth has been supported by wide-ranging, gradual reforms. India continues to reform i t s economy gradually, and, at the same time, expand the scope to cover larger parts o f the economy. India’s trade and investment regimes have become considerably more favorable: the average external tar i f f for nonagricultural goods has been reduced below 10 percent, and i s committed to reaching East Asian levels; foreign investment has been permitted in most sectors o f the economy; and the country has taken a more proactive stance in trade negotiations. Weekly inflation as measured by the Wholesale Price Index had r isen above 6 percent driven by supply side factors, but has dropped to 4.05 percent as o f the week ending August 4, 2007. India’s monetary authority’s response to the spurt in inflation has been creditable, adjusting pol icy instruments to manage liquidity and signal higher costs o f borrowing, improving the depth o f the financial sector, and allowing greater flexibility in the management o f the exchange rate. Fiscal pol icy has also responded to the inflation spurt by adjusting customs and excise rates. A long with other structural reforms to improve the investment climate, trade reforms and greater openness have led to increased competition and induced efficiency-enhancing microeconomic restructuring o f f i rms . The latter, in turn, has generated more robust and durable growth o f the Indian economy in recent years. The aggregate investment rate in the economy had also climbed to 33.8 percent o f GDP in 2005-06, f rom about 23 percent in 2001-02, much o f i t due to greater private investment that i s financed by higher domestic savings o f 32.4 percent o f GDP.

Th is is also appreciably faster than the 6 percent annual growth in the 1980s and 1990s, and 3.5 percent earlier

2

9. India’s macroeconomic situation remains strong. The external position o f India’s economy has improved dramatically. The rapid growth o f exports and high volume o f remittances have resulted in a comfortable balance-of-payments situation (and foreign exchange reserves o f US$ 229 b i l l ion as on August 10, 2007). An increasing trade deficit expanded the current deficit to 1.1 percent o f GDP (US$ 9 billion) in 2005-06 by neutralizing the strong f l ow o f remittances and services export proceeds. However, capital inflows remain buoyant, and the capital account surplus was nearly US$ 24 b i l l ion in 2005-06. India’s vulnerability to an external crisis i s therefore l imited by i t s record level o f reserves, equivalent to more than 7 months of imports and exceeding India’s gross external debt. India’s gross external debt was about 15 percent o f GDP as o f end 2006-07, and i s expected to decline further. The fiscal position o f state and central governments has continued to improve and the general government (states and central governments combined) fiscal deficit has fallen fkom more than 10 percent o f GDP in 2001-02 to about 7.4 percent in 2005-06. General government debt remained high-although declining-at nearly 83 percent o f GDP in 2005-06. The key downside macro r isks facing the Indian economy in the short t e r m are higher o i l prices, inflation, rapid credit growth, and a slowdown in the global economy, although they are unlikely to derail the overall momentum.

10. India’s pr imary challenges now include improvements in public service delivery. The recent economic performance i s also creating new challenges. Whi le India’s economic and social performance has been impressive o n many counts, i t has also been uneven. For example, many dimensions o f health provision-the prevalence o f children with complete immunization against childhood diseases, percentage o f women with timely visits f rom auxiliary nurses and midwives, and percentage o f children delivered in public institutions-have worsened between 1998-99 and 2002-03. Similarly, both maternal mortality rates and the under-five mortality have hardly improved. In the area o f elementary education, there has been an impressive decline in the number o f out-of-school children-from 25 m i l l i on in the early 2000s to 13 mi l l ion by 2005-but quality issues are n o w becoming more central. Similarly, the availability o f infrastructure-power, water, roads-is under severe stress and may constrain future growth. As the problem o f aggregate poverty has gradually retreated, much o f the stubborn disease burden and rural poverty i s attributable to environmental factors and resource degradation. Demographic change coupled with rapid growth has fueled increased demands and pressures on l ife-giving natural resources-water, air, soil-that are vital to sustaining development in the near term.

11. Addressing imbalances across regions, sectors, and households. According to the Bank’s India Development Policy Review (2005), one o f the central challenges facing India i s to extend the benefits o f rapid growth to more regions, sectors, and people. Nearly three-fifths o f India’s poor (some 150 mi l l ion people) n o w l ive in four states: Bihar, Madhya Pradesh, Orissa, and Uttar Pradesh. Although these states are growing at modest rates, they are increasingly lagging the rest o f the country in investment, manufacturing, and income. At the sectoral level, agriculture employs nearly 60 percent o f the labor force, but contributes less than 20 percent o f GDP. At the same time, the combined impact o f the growing rural-urban divide and rising inequality within urban areas has resulted in disparities across households and people. Whi le H P has l o w poverty and i s not a lagging state, the primary sector s t i l l contributes almost 70 percent o f employment while accounting for less than a quarter o f GSDP.

12. Incentives for state-level reforms. While efforts to address the fiscal consolidation have begun to show impressive results, progress has been less even across states and expenditure efficiency remains a critical issue. The problem i s more acute at the state level, since Indian states are responsible for delivering major services and carrying out important functions in many critical sectors (e.g. education, health, agriculture, rural roads). Many states suffer f rom a high debt to Gross State Domestic Product (GSDP) ratio. This creates a fiscal space issue for critical development expenditure as debt servicing preempts a large share o f government resources. One o f the policy planks for the Go1 to create fiscal space for growth enabling expenditure and restore fiscal sustainability has been to accept the recommendations o f the Twelfth Finance Commission (TFC) for the period 2005-10. Under the TFC’s terms, almost al l major Indian states have passed fiscal responsibility legislation committing themselves

3

to eliminating their current deficit and reducing fiscal deficit to 3 percent o f GSDP by 2008-09.* In return the states have received an incentive package consisting of: (i) the restructuring o f GoI’s debt to the states at a lower rate o f interest o f 7.5 percent per annum, and (ii) write-off o f annual debt repayment to Go1 linked to staying on track to meet the revenue deficit elimination target set for 2008-09.

13. The implications of TFC for HP. The Go1 guidelines to states for providing access to i t s ‘states debt consolidation and rel ief facility’ (DCRF) requires states to put in place Fiscal Responsibility Legislation and frame their fiscal correction path. GoHP has enacted the Himachal Pradesh Fiscal Responsibility and Budget Management Ac t (HPFRBMA), 2005, and tabled i ts Med ium Term Fiscal Plan (MTFP) for the period 2007-08 to 2011-12-providing a credible expenditure framework that i s in compliance with the TFC’s requirement o f elimination o f the revenue deficit by 2008-09 and reduction o f the gross fiscal deficit to 3 percent o f GSDP by that yeare3 By enacting the HPFRBMA, 2005, GoHP has received access to the DCRF o f the Go1 structured by the TFC.4 Under this, Rs. 8.24 b i l l ion o f Go1 loans carrying an interest rate o f 7.5 percent repayable over 20 years were restructured. Consequently, GoHP wil l benefit f rom a reduction in interest expenditure to the extent o f Rs. 1.35 b i l l ion over the period 2005- 06 to 2009-10 on outstanding Go1 loans. HP i s also eligible for write-off o f Rs. 0.41 b i l l ion in annual repayment o f Go1 loans over 2005-10 if i t stays on i t s fiscal correction path.

14. Other impacts of TFC recommendations. The TFC’s recommendations impact HP’s finances in several other ways:

There i s an increase in tax devolution to the states f rom 29.5 percent to 30.5 percent o f the net proceeds o f a l l shareable central taxes and duties. H P ’ s share in shareable central taxes and duties other than service tax has been fixed at 0.522 percent. This i s lower than the share awarded to H P by the previous Eleventh Finance Commission at 0.683 percent. In service tax, H P ’ s share has been fixed at 0.529 percent as opposed to the earlier 0.692 percent. HP also gets significant grants fkom the centre under the TFC in support o f i t s non-plan revenue deficit. Over the period 2005-06 to 2009-10, GoHP will receive Rs. 102 b i l l ion on this account. T h i s provides significant central government support to GoHP’s finances.

The terms o f support f rom the centre to the states have changed. Based o n TFC recommendation, Go1 now passes o n the official development assistance to states o n the same terms and conditions as it receives them. However, for “special category” states l ike HP, Go1 has recently restored the pre- TFC formula o f passing on official development assistance in a grant to loan ratio o f 9O:lO.’ The 10 percent which i s a loan will be passed o n to the state in accordance with applicable policies o f GoI.

The TFC has provided for a range o f special purpose grants including grants for maintenance o f roads and public buildings, education, health, and forests, conditional o n states maintaining the base spending level in real terms. HP i s eligible for special purpose grants in the areas o f roads, public buildings, and forests, but has been excluded from education and health because o f a reasonable

Revenue deficit i s the difference between total revenue receipts and current expenditure. See Annex B for details on the MTFP. One of the policy planks for the Government o f India to accelerate fiscal consolidation at the subnational level has been to put

in place a range of schemes to support reforms at the subnational level. I t s Fiscal Reform Facility (FRF) provided additional funding to states during 2000-05 on the basis o f improved fiscal performance. Its debt swap facility for all states operated between 2002-05 enabled Himachal Pradesh to restructure i t s debt portfolio with lower cost borrowing to the extent o f Rs. 35 billion, saving interest expenditure o f about Rs. 1.5 billion per annum. The carrying cost of debt therefore declined from 14 percent o f the on-budget debt stock in 2001-02, to 11 percent in 2005-06 (RE).

“Special category” states are those having characteristics like strategic border locations, hilly terrain, inadequate infrastructure, large tribal population, and limited resource bases compared to development needs. There are eleven “special category” states in India.

4

profi le o f expenditure in health and education. TFC grants in the health and education area favor states with a l o w expenditure profile.

B. Developmental Outcomes in Himachal Pradesh6

State Background and Context

15. HP has some distinctive characteristics that set it apart from other Indian states. First, it i s a relatively young state in the Indian union. The state, currently comprising 12 districts, was granted full statehood in 1971. Second, HP i s a small state both in terms o f area and population. Of the population o f about 6.6 mill ion, 90 percent s t i l l reside in rural areas. In terms o f area, i t ranks seventeenth among India’s states and union territories-and i s one-sixth the size o f Rajasthan, India’s largest state. Third, it i s geographically different f rom most Indian states located in the plains. HP i s largely mountainous, but exhibits extraordinary biological diversity. Except for a few pockets bordering Punjab and Haryana, altitudes span from 400 meters to almost 7000 meters above sea level. O f the aggregate geographical area, almost two-third i s officially classified as forests. The hilly terrain and forest cover contribute to l o w availability o f land for traditional agriculture, and net sown area i s only about 15 percent o f the total. The population density in the state-at around 110 per sq. km.-is lower than the national figure o f 320 per sq. km., largely due to relatively l o w and scattered population in the hill and forest areas.

16. Opportunities and constraints arising from uniqueness. HP’s unique characteristics present important development opportunities which on the one hand the state can exploit, but which also impose several constraints o n the other. The salubrious climate, abundant water resources, cultural heritage, and natural touristy ambience can contribute to the expansion o f important sectors l ike horticulture, tourism, and hydropower. Simultaneously, HP faces development challenges arising f rom i ts high elevation, topography, and resource dependence-as wel l as f rom a changing and more competitive international environment. The state’s mountainous terrain and remoteness o f much o f the population increase the difficulties o f infrastructure development, urbanization, market-oriented agriculture, and efficient public service delivery. Costs o f service delivery and infrastructure construction are relatively high-and contribute to fiscal pressures for the government. For example, broad estimates by the Bank suggest that converting a single-lane road to double-lane in the hills costs about twice what i t costs in the plains. The ability to diversify the economy i s limited by rugged topography and poor market access, which render large scale industrialization more costly and diff icult than elsewhere in India. HP also confronts common environmental problems-such as pollution, soil degradation, and declining forest quality-but with i t s high level o f dependence on natural resources and the fragile Himalayan ecosystem, i t i s especially vulnerable to the consequences o f environmental decay. Accordingly, i t i s recognized that i t may be more diff icult for HP to meet i t s development challenges on account o f i t s size and other constraints. Therefore, Go1 has given HP the status o f a “special category” state in recognition o f these unique constraints, under which the state receives special central grants and incentives.

17. Contributors to success. H P has several significant achievements in terms o f economic growth and social development, in spite o f i t s natural constraints. Supportive government policies, a transparent and accessible administration, a peaceful political environment, and central support have contributed to the state’s development. In particular, f rom a focus o n building transport and infrastructure facilities immediately after i t s formation in 1971, H P has gradually assigned priority to expenditures in the social sectors, which has considerably expanded the availability o f basic social infrastructure and amenities, and helped build an educated and healthy population. H P has achieved per capita social sector expenditure which i s currently about double the all-States average in India. The init ial infrastructure investments have also started yielding dividends in terms o f higher growth. The state has benefited f rom wise leadership throughout the decades o f i t s existence-and that, in turn, has been based o n strong public support for

This section is based o n the recently completed economic report, “Himachal Pradesh: Accelerating Development and Sustaining Success in a Hill State”, prepared by the Wor ld Bank (2007). See Section IV (E) for details.

5

policies that have encouraged social development, and delivery o f public services. Central assistance to HP as a “special category” state has been important in the process, but primarily because the state has managed it wel l to further development.

18. Recent growth and diversification. The state experienced slower growth than the rest o f the country during the 1970s and 1980s (Figure 1). Over the last decade, however, HP has achieved higher levels and growth rates in income compared to the average Indian state, and the economy i s showing increasing signs o f diversification (Figure 1). The secondary and tertiary sectors have expanded more rapidly than the primary sector-partially in response to tax exemptions and special incentives that have attracted investment in these sector^.^ In contrast, the share o f the primary sector has dwindled from 32.1 percent o f GSDP in 1993-94 to 21.4 percent in 2005-06--comparable to the Indian average o f about 19.6 percent (Figure 1). Despite i t s natural constraints, HP currently has a per capita income which i s more than 8 percent higher than the national average.

Figure 1: Kccerit Kconomic Grotrth and lX\errificatiori 120300

A F 0 c

90000 A

A i * . L A‘ 4 60000

I oi !2 n

All-India ;; 30000 a

I * 07 J A HP

I 1 P , T i -- -,--,-- 2 0

Source. Statistical Abstractr, Go WP.

19. Differences in sector growth rates. Although HP has grown faster than the rest o f the country recently, this follows two decades o f slower growth-and the state needs to consolidate and sustain this performance if this i s to become a “steady state equilibrium”. On one hand, sub-sectors l ike manufacturing, communication, and banking have grown particularly rapidly since the 1990s. T h i s i s partly a result o f special Go1 incentives to industry in HP due to i t s status as a “special category” state. On the other hand, HP has been unable to tap the full growth potential in sectors l ike tourism, in which it has significant natural advantages to compete effectively in a global economy.

20. Constraints to industrialization. Manufacturing has grown at over 10 percent annually in recent years, partly as a result o f special central industrial incentives noted above. Since the announcement o f the Special Incentive Package by Go1 in 2003, the state has received investment proposals o f close to Rs. 200 b i l l ion (including new units and expansions o f existing units) with proposed employment o f more than 280,000 persons. More importantly f rom a growth perspective, actual investments in the state have increased by more than 50 percent since 2003-from Rs. 31 b i l l ion to over Rs. 46 b i l l ion in September, 2006. However, investments are concentrated in the border districts near Punjab and Haryana-and less in the interior and remote districts, reflecting the natural constraints o f the state’s hill geography. Additionally, the new investment realized in the state i s about 8 percent o f the investments o f Rs. 192 b i l l ion that have actually been approved by the state since 2003. The main concern i s that even these new

Historically, the boost to industrial development came in the early 1980s when a host o f incentives were announced by the centre and state. The recent major incentives to industries in HP come in the form o f GoI’s Special Incentive Package o f 2003 and GoHP’s New Industrial Policy o f 2004 which provide, among other things, a five-year tax holiday and ten-year excise relief to existing and new industries (revised to expire in 2010), and capital investment subsidies to new industries in notified locations and to old units in case o f substantial expansion. These have elicited an increase in investments.

6

investments may dry up once the sops are phased out in 2010, unless steps are taken to improve the state’s own business environment to encourage the private sector. A rapid survey conducted by the Wor ld Bank also suggests that private sector f i r m s regard inappropriate s lu l l s o f available workers and lack o f roads as key constraints to operating in HP.’

Opportunities for Productive Employment

21. Issues around productivity o f employment. An important issue for the state i s to enhance opportunities for productive employment. Though aggregate unemployment rates in H P are lower than national averages, at 2.9 percent compared to 7.3 percent, there i s evidence that the productivity o f employment may be low.’ First, despite i t s declining importance, the primary sector s t i l l accounts for almost 70 percent o f employment, but generates less than 22 percent o f GSDP. Second, the employment figures conceal underemployment or disguised unemployment. In 1999-00, 6.3 percent o f rural and 4.4 percent o f urban workers reported being available for additional work. In addition, 5.2 percent o f workers reported availability for alternative work, suggesting dissatisfaction with their current employment. There i s a need to transition workers out o f subsistence agriculture to more productive employment by creating suitable opportunities in the non-farm sector. The transition i s already happening, with increasing deployment o f incremental workers in construction, manufacturing, and sectors associated with tourism- while agricultural jobs are o n the decline.” The pace o f the process, however, needs to be speeded up.

22. Mismatches in ski l ls , expectations, and location. Even while industry representatives cite lack o f s lu l l s as a key constraint to private sector development, unemployment rates in HP tend to rise with education levels-and unemployment rates among graduates are about 10 percent. This suggests a mismatch between the s lu l ls being imparted through the formal education system and those required by the upcoming industries. Other than the sk i l l s gap, f ield discussion reveal that there are other “mismatches” as well. First, there i s a mismatch in location, in that: (i) many o f the new jobs created in the developing industrial belt bordering Punjab and Haryana require relatively l o w level skills, and the educated youth o f HP are over-qualified for these manual jobs; and (ii) poor infrastructure facilities and living conditions in the industrial belts may be deterring native Himachalis f rom migrating to these areas in search o f employment, and act as impediments to mobil ity. Second, there i s a mismatch between industry requirements and workers’ expectations, in that industry finds it easier to hire and train secondary pass-outs, and even use migrants f rom neighboring states. As a consequence, the demand for more qualified non-technical graduates and post-graduates being produced by the HP education system i s limited. Moreover, l imi ted f ie ld interviews suggest the educated youth o f HP are more interested in jobs in the public sector-which currently employs about 85 percent o f organized sector workers. Given the l imited scope for public sector employment, GoHP recognizes the importance o f generating suitable private sector j o b opportunities.

Poverty and Human Development

23. Superior indicators of human development outcomes and access. HP’s performance in reducing poverty has been highly satisfactory, despite the challenging environment it faces. In 2004-05, HP had the lowest poverty headcount rate in the country after Punjab, at 11.6 percent, and poverty has declined much faster in H P since the mid-1990s compared to the rest o f the country (Figure 2). HP’s per capita real consumer expenditure i s almost a third higher than the national average, and it has superior indicators o f human development outcomes and access than the rest o f the country on most indicators (Figure 2). Moreover, the state i s o n track to achieve-r has already achieved-most o f i t s Mi l lennium Development Goals (Table 1). The key issue in the state i s n o longer about access to social services as in

* “Himachal Pradesh: Accelerating Development and Sustaining Success in a Hill State”, World Bank (2007).

lo See World Bank (2007) for details. Th is i s as per 1999-00 National Sample Survey figures.

7

many other states-but about improving their quality. Understandably, however, there are remote areas in the hilly terrain where service delivery costs are higher, that suffer f rom insufficient access.

Figure 2: Superior H u m a n Development Performance in HP compared to National Averages 80 1

74 65 1

1 45 3

li A

I 61 3

42 0 40 7 44 0 Hirnachal Pradesh

AAll India Averages

-7 --- nized 6+ Literate % Households with Institutional

Piped Water % Deliveries % e Survey, from Dev and evelopnient data

___ Table 1: Summa __. )I _______ Status of K e y .\Iillennium Dewlopml it Goals for HP R I D < ; Stateiiient HP's Hcceirt Performtrice Likelihood of' Attaining S I D G

Halve, between 1990 and 2015, the proportion o f the poor.

Achieve universal primary education by 2015.

Eliminate gender gaps in education by 2005.

Reduce infant arid child mortality rates: by two-thirds betneen 1990 and 2015

Access to reproductive health services for all by 2015.

Reduce by half the propoi-tion o f people without safe drinking water between 1990 and 201 5

Poverty has declined from 27 4% in 1993-04 to 11 6% in 2004-05

Cntollment for 6-10 year-olds has risen from 93% to 97% betneen 1993-94 and 1999-00, and for 1 I - I 4 yea-olds from 88% to 94%

For 6-10 year-olds, female and male enrollment rates were 97% in 1999-00

For 11-14 year-olds, female to male enrollment ratio has gone up from 902 in 1993-94 to 938 in 1999-00

n from 60.1 per 1,000 in 1992-93 to 42 4 per 1,000 in 1998-99 IMR has fallen from 55.8 per 1 .000 in 1992-93 to 3fi pel 1,000 lit 2005-0(,.

Births attended by a health professional have gone up from 25 6% in 1992-93 to 50.2% in

Population nittiout access to iafe water has fallen from 42.4% in 1992-93 to 22 6% in 1998- 99.

2005-06

Note: Likelihood o f attaining MDGs based on linear uroiections from available time seriec

Already achieved

On track.

Already achieved.

Possible by 2008

On track.

Unlikely. Projected to be just under 75% in 2015, compared to a target o f 100%.

Already achieved

ata ('National Samule Survey and - I *

National Family Health Survey) from national surveys, most recent available years. Poverty numbers from Dev and Ravi (2007), based on National Sample Survey.

24. Vulnerability and inclusion. Even though less than 10 percent o f the population i s classified as poor, HP faces issues in terms o f vulnerability o f the population. Absolute poverty i s not a major issue by itself-but this i s based on relatively l o w estimates o f the poverty line. However, vulnerability estimates for the state suggest that the l ikelihood o f households falling into poverty in the near future i s higher than the proportion o f households currently poor-especially in rural areas. I t i s estimated that about a fifth o f the population could slip into poverty within the next three years if the state's good economic performance cannot be maintained."

Vulnerability i s estimated from National Sample Survey 1999-00 data. The expected future poverty status o f a household i s obtained by comparing the predicted future per capita consumption with the current poverty line, with predictions based on

8

25. Lower socio-economic gaps than national averages. HP i s one o f the best developed Indian states in terms o f gender equity o f social indicators. However, there are some indications o f differential outcomes and access for social, economic, and geographic categories. Indicators generally tend to be worse for households that are poorer, have less educated members, without regular employment, with high dependency ratios, and live in remote areas. I t i s very important to note, however, that socio- economic differentials are lower in H P than in most other Indian states, and are not always consistently systematic in any one direction. In some cases, indicators for women in HP are actually better than for males-like primary enrollment rates (Figure 3). The state’s 28.7 percent Scheduled Castes and Tribes (SC/ST) population do have weaker indicators than non-tribal groups-but are s t i l l better than national averages (Figure 3).

Figure 3: Better Indicators for Women and SC/ST in HP compared to National Averages

120%

80%

40%

A

GER 2003-04 Girls

1- ---r - -- -r- 7 ” - I __ 00% Primary ~ Middle , Secondary ~ Higher

India

I Primary Middle 1 Secondary 1 Higher

I HP

0

76 All

65.5%

.5%

DHP SC

100% i HP

80% 4 I

60%

HR

AF pJ

x UT

I

I 1

40% I

1 20%

ANC PNC I

Source: Enrollment da (ANC) and Post Natal Haryana (HI?), Punjab

01. 1,iteracy rates for 2001, C) froin NSSO Morbidity & ranchal (IJT) and All India (

Census of India Data on womcn avaihng Ante Natal Care lth Care Surbey, 60th Round, for women aged 15-50 from

1

26. Mostly developed infrastructure despite geographical constraints. The state has achieved impressive expansion in infrastructural facilities such as electrification, banking, post office facilities, and teledensity.” More than 95 percent o f households in the state have access to electricity, compared to the national average o f 88 percent for urban and 44 percent for rural households, and almost al l villages in HP

regressions o f consumption expenditure on household characteristics Vulnerability incidence (1 e , whether or not a household i s vulnerable) i s obtained by comparing the mean vulnerability (estimated as the probability o f being poor at least once in the next years) o f the household with a threshold value o f 0 50 See Chaudhuri (2000) Whi le this approach has lirmtations as i t i s not based on panel data, i t does indicate that the state cannot afford to be complacent about i t s achievements in poverty reduction The national vulnerability rate (excluding Bihar due to data issues) i s 54 percent, compared to 22 percent in HP

Based on these measures, a recent news magazine survey ranks HP as second only to Punjab among Indian states See “The Leaders’ Last Hurrah”, India Today, September 1 1,2006

9

are e1e~tr i f ied. l~ Power generation in the state has been growing at 6-7 percent annually in the 2000s, and per capita consumption o f electricity in the state i s 83 1 kWh per annum, as against the national average o f 613 kWh and an average o f 565 kWh for the Northern region. Consumers get power almost 24 hours a day,14 and a l l consumers are metered. Compared to a national average o f 8.6 telephones per 100 population, the figure for H P was 12.5 in 2004-second only to Kerala. Whi le there are only 0.70 primary and 0.25 secondary schools per 1000 population in India o n average, corresponding figures for HP are 1.81 and 0.34-implying wider coverage o f educational institutions. Likewise, in health, while a single Sub Center (SC) and Primary Health Center (PHC) caters to 5085 and 31954 people in India on average, figures for HP are much lower at 2651 and 12488 people re~pect ive ly . ’~ However, there are issues around road connectivity and transport in the hill state. Poor quality o f the state’s main arterial roads i s recognized by the state to be a particularly important issue.

111. HP’S REFORM PROGRAM AND THE PARTICIPATORY PROCESS

27. Limits to state-led development. HP’s recent achievements mask several challenges for the state. HP’s achievements have been largely led by the public sector, influenced by i t s status as a “special category” state which entitles i t to liberal central government grants and, more recently, industrial investment incentives. On the one hand, the soft budget constraint f rom the devolution regime, combined with farsighted planning, has proved beneficial in making H P a leading “special category” state in India in terms o f development performance. On the other hand, this resulted in high debt, and, more importantly, excessive reliance on public-sector-led development. HP’s public-sector-led development has certain limits, and the financial f lows from the central government would depend on future Finance Commission recommendations. The special tax incentives that have promoted industrial growth are also due to be phased out gradually by 2010. At the same time, past success has raised expectations o f economic development which could be diff icult to fulfill, unless GoHP undertakes reforms and devises alternate strategies to move the state f rom being a provider to a facilitator and regulator. HP must take advantage o f new opportunities to tackle the state’s development challenges.

28. Sustaining success through important transitions. HP realizes that, to a great extent, the state may be reaching the limits o f i t s traditional model o f growth and social development: one that i s heavily dependent o n public spending, financed by borrowing and central assistance. The sustainability o f HP’s success for the future will depend on addressing three major transitions that the state faces: (i) the growth strategy in HP must evolve f rom one that i s s t i l l far too heavily dependent o n public expenditures and debt-to an increasing focus o n growth led by the private sector; (ii) productive employment opportunities must be created for HP’s young and increasingly educated labor force, so that reliance on the public sector for employment opportunities goes down; and (iii) the state’s environment and natural resources must be managed well to contribute to effective development in a sustainable manner. Underlying these transitions i s the upfront need to sustain recent improvements in the state’s macroeconomic performance.

29. Overall state vision and strategy. The state’s overall strategy i s articulated in i t s plan documents. The Approach Paper to H P ’ s Eleventh Five Year Plan (2007-12) presents the overarching objectives o f the state as faster and sustainable growth, and inclusive development. HP’s articulated medium t e r m development priorities recognize the state’s unique challenges and opportunities. The government aims to achieve an annual growth rate o f 8.5 percent during the Eleventh Plan. The state seeks to focus more on capitalizing on i t s comparative advantage, by increasing the productivity and economic value o f i t s natural assets, and specializing in sectors where it can compete effectively in a globalized economy.

l3 HP, despite rough terrain, difficult weather conditions and limited working season, achieved a village electrification rate (defined as availability o f at least a single point connection in a rural habitation) o f 100 percent as far back as 1988. l4 T h e state experienced energy shortage o f one percent and a peak shortage o f five percent in FY2006. l5 Most data in this paragraph from www.indiasVat.com, which compiles data f rom official sources and national surveys

10

30. Priority areas in the GoHP program. The priority areas for the government, given i t s development challenges and successes, are: (i) creating fiscal space to fund the state’s development vision; (ii) exploiting the untapped potential in sub-sectors l ike hydropower and tourism in an environmentally and economically sustainable manner; and (iii) protecting the state’s environmental wealth, and improving the overall institutional approach to environment management. These areas are supported by measures to improve governance and public administration, and promoting private sector development for faster growth and productive employment. For the relatively wel l developed social sectors, fiscal space will free up room for priority expenditures to promote inclusive development. The government’s efforts and forward looking strategy in the priority areas are described in br ief below, and elaborated in Annex A in the LDP.

-r

A. Creating Fiscal Space and Improving Public Financial Management

- 45%

- 35%

- 25%

15%

31. Key challenges. T h e major constraint faced by the state i s creation o f fiscal space to finance the development vision while moving towards a fiscally sustainable position. About 65 percent o f GoHP’s expenditure has been committed to salaries, pensions, and interest payments in the last two years-among the highest in Indian states-squeezing the fiscal headroom for operations and maintenance (O&M) and capital expenditure. GoHP carries debt stock o f about 74 percent o f GSDP (including o f f budget borrowing)-and has the second highest per capita debt in India, which strains debt servicing ability.

Recent Developments and Future Targets under the Medium Term Fiscal Plan

32. Recent signs o f fiscal recovery. GoHP’s finances show encouraging s igns o f fiscal recovery (Annex B). Recent measures that have helped to achieve this include: (i) increased non tax revenue from the sale o f power f rom royalty andor equity share with the commissioning o f the 1,500 MW Nathpa Jhakri power project in 2004-05;16 (ii) higher tax revenue from the introduction o f the Value Added Tax (VAT) since 2005-06; (iii) expanded central grants under the TFC award in 2005-06; and (iv) compression o f expenditure f rom 32 percent o f GSDP in 2002-03 to 28 percent in 2006-07 (RE). These measures have brought the annual fiscal deficit down from over 12 percent o f GSDP in 2002-03 to about 4 percent in 2006-07 (RE). The current defici t has declined from nearly 8 percent o f GSDP in 2002-03 to 0.6 percent in 2006-07 (RE), and a primary deficit has been converted into a primary surplus (Figure 4). HP’s fiscal strategy i s aimed at maintaining this adjustment in order to achieve fiscal sustainability, and create necessary headroom for priority expenditure at the same time.

16%

12%

8%

4%

0%

-4%

Figure 4: HP’s Key Fiscal Indicators-Progress Over Time (All variables, except interestpayments to revenue receipts, are expressed as a % of GSDP)

+Fiscal Deficit Debt Stock (LHS)

1

+ Revenue Deficit Primary Deficit , *‘\ = ,*

L_ ---a ‘+* r \ *

* *

+Interest to Revenue Receipts (RHS)

Source: Finance Department, GoHP. 2006-07 figures are Revised Estimates. Debt stock follows the GoHP definition.

Twelve percent o f the power produced by the station i s given to the state free as royalty for the use o f state’s water resources and a further 25 percent o f the power produced i s allocated to the State, at cost, on account o f the state’s 25 percent equity share in the project. Dividend i s also paid by the station to the State in proportion to its 25 percent equity holding.

16

11

33. Fiscal Responsibility and Budget Management Act. GoHP’s fiscal pol icy i s underpinned by systemic reforms aimed at improving the quality o f fiscal adjustment. The fiscal management i s institutionalized by the Himachal Pradesh Fiscal Responsibility and Budget Management (FRBM) Act o f 2005. The FRBM commits GoHP to conducting fiscally sustainable policy and annually tabling a Medium Term Fiscal Plan (MTFP) that reduces the current deficit by two percentage points o f revenue receipts until revenue balance i s achieved. The FRBM also requires the state to reduce i ts outstanding guarantees o n long term debt, until it can cap outstanding risk weighted guarantees at eighty percent o f total revenue receipts.

34. Adjustment under the MTFP. GoHP has prepared an MTFP for 2007-08 that articulates the government’s medium term fiscal objectives and strategic priorities consistent with the FRBM, and sets clear milestones for f ive years beginning 2007-08 (Annex B). This MTFP has been accepted by a Cabinet Resolution, and will also be shortly tabled before the Legislature. The current MTFP i s consistent with the FRBM and TFC recommendations, and targets elimination o f GoHP’s current deficit in 2008-09 and reduction in the ratio o f gross fiscal deficit to GSDP from 4.3 percent in 2006-07 to 2.2 percent by 201 1- 12 (Figure 5). The share o f debt to GSDP i s targeted to reduce to 47 percent by 201 1-12. Going forward, GoHP will execute i t s budget to meet the 2007-08 M T F P targets, and prepare the 2008-09 budget in alignment with the MTFP targets for that year. In order to meet the MTFP targets, GoHP has adopted or proposed several reform measures to enhance revenues, control expenditures, and manage debt.

Figure 5: Improving Deficits and Declining Debt under MTFP - Fiscal Deficit Debt Stock (LHS) r 30%

y r 7 IC m Q) 0

0 0 N N N N

d r

6 6 N N

3 2 3 0 H 0

y c m z r

8 0

yc CJ

0 0 0 N 0 N N 0 N 8

F

N 0 0 N

3 Source: Finance Department, GoHP. 2006-07 figures are Revised Estimates, subsequent years are MTFP projections. Negative defici t denotes surplus. Deb t stock follows the GoHP definition.

35. Consolidated fiscal deficit. Based on currently available information-including financial information f rom the Himachal Pradesh State Electricity Board (HPSEB)-the consolidated fiscal deficit i s expected to decline f rom 11.1 percent o f GSDP in 2006-07 (RE) to 2.1 percent o f GSDP by 201 1-12, on account o f a robust improvement in HPSEB’s projected financial position and a steady decline in GoHP’s non-power fiscal deficit. O f the total adjustment o f 9 percent in the consolidated fiscal deficit over the period, 6.7 percent would be o n account o f improvement in HPSEB’s finances.”

36. Stress tests o f debt trajectory projected under MTFP. Four stress tests were conducted for the debt trajectory projected under the current M T F P prepared by GoHP. In the steady state, real interest rate i s in i t ia l ly assumed at 5.5 percent-stabilizing to 5 percent f rom 2008-09 onwards. Real GSDP growth begins at 8.5 percent, and moves gradually towards a long term growth rate o f 7 percent by 2016. Real interest rate i s assumed at 5.5 percent until 2008, dropping to 5 percent thereafter. As the reference scenario, under steady state conditions o f the MTFP, i f projected forward to 2020, debt to GSDP ratio should decrease to about 35 percent. Table 2 below shows the state’s l ikely debt trajectory under different scenarios o f shocks. First, a shock to GSDP growth o f 2.5 percent in 2010-11 and 2011-12

l7 See Annex B.

12

could slow the reduction o f debt to GSDP to 37.9 percent by 2020. Second, a decline in central transfers o f an order o f 5 percent annually f rom 2010-11 onwards, will raise the 2020 debt to GSDP ratio to 46.1 percent. Third, an interest rate shock o f 3 percentage points in 2010-11 and 2011-12 over the baseline will have a marginal impact on the 2020 debt stock, increasing it to 38.4 percent o f GSDP. In the improbable event o f simultaneous materialization o f a l l three shocks, the projected debt to GSDP ratio increases over the baseline by nearly 16 percent o f GSDP in 2020-to 51.2 percent compared to the reference case o f 35 percent. T o maintain the original debt trajectory in the face o f such shocks, the state would have to generate higher primary surpluses. Whi le these stress tests show hypothetical scenarios, they do indicate that the state needs to stay on a strong fiscal correction path over the medium t e r m to achieve i t s MTFP.

Decline in central transfers starting 2010

Interest rate shock in 2010-1 1 and 201 1-12

Decline in central transfers plus interest rate shock plus shock to growth in 2010-11 and 201 1-12

Shock to growth rates in 2010-lland 201 1-12

74 58 55.8 46.1

14 57.8 47.4 38.4

74 61.1 61.4 51.2

Measures to Enhance Own Revenues

37. Recent tax reform measures. Unl ike other Indian states, H P has a small tax base resulting f rom l o w levels o f industrialization, higher dependence on agriculture which i s relatively untaxed, and a small population. Regardless, however, GoHP has proactively embraced nationally coordinated tax reforms such as the introduction o f state level Value Added Tax from April 1, 2005, and reduction in stamp duty on property transactions to 5 percent in l ine with the requirements under the National Urban Renewal Mission. These reforms have by and large been successful in most Indian states-with VAT in particular resulting in overall revenue gain o f 14 percent in 2005-06 and over 20 present in 2006-07, mainly f rom greater compliance and improvement in tax administration. Reduction in stamp duty across Indian states has also seen an increase in properly valued and registered transaction resulting in an increase in stamp duty revenue o f over 20 percent. The state i s also unique in having several taxes (including VAT and state excise) administered by the Excise and Taxation Department-thus providing a strong nucleus for a single revenue agency.

38. Tax revenue reforms. T o improve tax revenues, GoHP has announced several encouraging measures in i t s 2007-08 Budget to raise i t s own tax revenue from 5.9 percent o f GSDP in 2005-06 to 6.5 percent by 2011-12. If successful, the state's dependence on central government grant transfers will decline f rom 15.2 percent o f GSDP in 2005-06 to 11.8 percent by 2011-12. The measures will correspondingly lead to improvement in own revenue effort f rom 8.6 percent o f GSDP in 2005-06 to 9.1 percent o f GSDP by 20 1 1 - 12. K e y revenue measures announced by GoHP are as follows.

9 For the motor vehicle tax regime, GoHP proposes to generate additional resources o f at least Rs. 55 mi l l ion through: (i) introducing a higher Motor Vehicles token tax on vehicles older than 15 years; and (ii) increasing Motor Vehicles token tax rates to target an additional growth o f at least 6 percent in motor vehicles tax-take over 2006-07 (RE) from the new tax measures. This has been accepted by the HP Cabinet on June 11, 2007, through official notification. Additionally, the Transport Department i s to initiate studies to examine h o w to improve motor vehicle taxes and fees, including the use o f ad valorem

'* The Excise and Taxation Department administers VAT, State Excise Duty, Luxury Tax, Passenger and Goods tax and Toll tax.

13

taxes for al l new vehi~1es. I~ GoHP has also liberalized the licensing rules for private bus operators, effective financial year 2007-08, and that should see an increase in permit and registration fees, the annual token tax, and the special road tax.

9 T o plug leakages in the collection o f luxury tax by hotel owners, the government has approved a new luxury-tax arrangement based on minimum occupancy to replace the previous system o f a flat tax o f 10 percent on hotel room rent. To this end, the government has issued a notification dated August 6, 2007, moving to a luxury-tax arrangement based on 30 percent minimum occupancy. By this, the government expects greater tax compliance, and this wil l also relieve the burden o f maintaining detailed accounts and undergoing detailed assessment.

9 GoHP will explore the possibility o f switching from a specific to an ad valorem excise duty structure for liquor depending o n the experience with a new license fee system to vend liquor based on minimum guaranteed off-take that i s being put in place from 2007-08. The system, as presently structured, has specific excise duties on liquor and licensing to vend liquor classified in eight categories, with sub- categories. GoHP will adopt suitable reform measures in the 2008-09 budget based on the recommendations f rom an assessment o f the excise tax structure o n alcohol and licensing regime.

9 GoHP will undertake an external evaluation o f Value Added Tax implementation, with a v iew towards strengthening VAT administration to maintain tax buoyancy. The introduction o f VAT in 2005 raised growth in sales tax revenue by 34 percent in 2005-06-but i s projected to grow by a slower rate o f 7 percent in 2006-07 (RE). Although VAT i s the main own tax source, gains f rom this may dry out following two years o f implementation if i t s administration i s not strengthened. The yield fkom this tax has to be raised at least to the national average o f 3.7 percent o f GDP. As a f i rst step, GoHP i s undertaking computerization o f VAT administration, which i s expected to commence this fiscal year. Furthermore, GoHP will undertake an external evaluation o f VAT implementation that could include value chain analysis, VAT assessment, system o f refunds, use o f nationally harmonized definition o f goods, fraud risk analysis, VAT threshold limit, etc. The results o f the evaluation will be used to further strengthen VAT administration.

9 Studies shall also be initiated to explore further areas for increasing tax buoyancies-through introduction o f new tax measures and the Services Tax that i s l ikely to be devolved to state governments by GoI.

9 The stamp duty rate for registration o f land sale transactions will be reduced from 8 percent to 5 percent effective in 2007-08, so as to check evasion and the undervaluing o f property transactions. GoHP has already reduced stamp duty in April 2005 to 8 percent f rom the then prevailing 12 percent. As a further measure to strengthen administration in the near future, GoHP will introduce franking machines to plug leakages in stamp duty revenue. In HP, at present rates, stamp and registration duties amount to a potential tenth o f property value, higher than in most other states.20 Stamp duty reform i s therefore a significant measure, and will expectedly result in an increase in registered property transactions, create a more active land market, and make the state more attractive for investment.

39. Non-tax revenues from hydropower. Given that HP i s a small state, i t s tax base i s limited. Accordingly, non-tax revenue needs to be expanded, with the major source identified as the development

Non-transport vehicles are subject to one time tax, while transport vehicles are subject to an annual tax. In addition, HP levies a special road tax on transport vehicles. The current level o f the one time tax i s 2 percent on the price o f personal vehicles such as cars and 1.5-3 percent on the price o f two wheelers. T h e one time tax i s considerably lower than in other states where i t could range between 6 percent and 8 percent o f the price o f the vehicle. Transport vehicles are charged an annual specific tax depending on the nature o f the vehicle. 2o In addition to the 8 percent stamp duty, registration fee under the Indian Registration Act, 1908, as applicable to HP, at the rate o f 2 percent on the value o f consideration, subject to a maximum o f Rs.25, 000 is also levied. Most states levy only 1 percent registration fee.

14

o f state’s natural hydropower potential that will help make the state a net exporter o f electricity. GoHP has taken important steps to increase non-tax revenues-from the sale o f power obtained as royalty and/or equity share f rom hydropower, as mentioned above. The potential o f this sector to generate future revenues for the state government cannot be over-emphasized. Basic back-of-the-envelope calculations suggest that revenues f rom the sale o f royalty power and/or a share o f the power generated proportional to equity invested by GoHP in hydro projects with other partners-e.g., Go1 in the case o f Satluj Jal Vidyut Nigam Limi ted (SJVN), together with dividends, could be more than 37 percent o f HP’s current level o f own revenue receipts and more than double the current level o f own non-tax revenues by 20 12- 13.

40. Non-tax revenues from user charges. Efforts need to be broad based beyond hydropower resources to make critical services provided by GoHP self sustaining. However, rationalization o f user charges i s challenging which makes the pace and magnitude o f revision more difficult, and this has to be calibrated. There i s scope for raising royalty f rom user charges, in particular. A major policy issue in the Department o f Irrigation and Public Health (IPH) i s a huge gap between funds collected for irrigation and drinlung water schemes, and the cost o f operating and maintaining these schemes. This i s due to a near- zero rate o f hnk ing water charges, coupled with very l o w charges for both f l ow irrigation and lift i r r i g a t i o n 4 v e n after irrigation charges were revised in June 2005. Although the stated pol icy i s to revise irrigation and water charges by 10 percent annually, this i s rarely implemented. Presently, user charges cover less than 2.5 percent o f the O&M charges in IPH. There are instances where user charges have been subjected to roll-backs based on populist decisions, such as in the health sector. An institutional mechanism that can periodically decide on appropriate user charges i s required.

41. Analysis of user charges. As a f i r s t step to improving cost recovery, GoHP proposes that selected administrative departments shall undertake a review of user charges. This review-especial ly irrigation, drinlung water, health, transport, minor minerals royalty-is being initiated. Reform measures to rationalize user charges will be adopted based on the recommendations-to reduce impl ic i t subsidies and to improve sustainable financing o f O&M o f public investment. GoHP already charges a “green fee” f rom tourists to Manali. I t plans to introduce this in other tourist destinations, and use the funds so collected for environmental conservation activities in ecologically vulnerable tourist areas. As a further measure to strengthen the links between service provision and cost recovery, GoHP wil l constitute a ‘Tu@ Committee ’ by 2009-10, to regularly determine user charges for various services l ike transport, education, health, water, and irrigation, and advise GoHP accordingly.

42. Beneficiary participation in irrigation and drinking water schemes. In order to improve efficiency and quality, the state i s taking important steps to devolve control (and costs) o f both services to beneficiary groups. Guidelines have been prepared to transfer total or partial responsibility o f drinking water schemes to Gram Panchayats. Similarly for irrigation, IPH has drafted guidelines to transfer responsibility o f tertiary canals or small schemes to water user groups. GoHP has begun to pi lot devolution o f irrigation and drinking water schemes to beneficiary groups (ie., water user associations and Gram Panchayats, respectively)-in conjunction with training to enhance the capacity o f these user groups. The proposal to transfer operations o f below sector storage tanks and complete rural water supply schemes was approved on January 17, 2006. Subsequently, GoHP has developed official guidelines for devolving schemes to beneficiary groups, and these guidelines have been issued to f ie ld functionaries for implementation. Piloting o f this program has begun recently. As o f July 21, 2007, operations o f 17 Irrigation Tubewells and 12 F l o w Irrigation Schemes had been transferred to Farmer Development Societies (Krishak Vikas Sanghs). As o f July 2 1,2007,771 Drinkmg Water Supply Schemes had been or are in the process o f being handed over to Panchayati Raj Institutions-f the 101 1 identified for transfer. In addition, the state has already announced a participatory strategy involving Water User Associations and Gram Panchayats (GPs) to participate in planning and execution o f irrigation and drinking water schemes respectively. This could be practiced for al l new projects wherein the government provides technical and one-time financial support to the GPs or beneficiaries to develop their own water resources.

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Measures to Improve Expenditure Composition

43. Targeted improvements in expenditure composition. Simultaneously, the government appreciates the need to improve expenditure composition towards capital outlay and critical non-wage O&M. As a f i rs t step, the MTFP has committed that GoHP will: (i) contain share o f salary expenditure to total expenditure to 30 percent by 2011-12; (ii) reduce interest expenditure to revenue receipts to 17 percent by 201 1-12; and (iii) and increase non-wage O&M and capital outlay by at least 4 percentage points and 8 percentage points o f total expenditure by 201 1-12 (Figure 6). Achievement o f these targets will be critically dependent o n the reforms implemented.

Figure 6: Improving Expenditure Composition under GoHP MTFP 2004-05 2011-12 I

9 5% Pensions and Retirement Benefits I# Subsidies and Transfers 0 interest Payments

3 0% Other Revenue Expenditure Q Non Wage O&M 0 Capital Outlay and Net Lending

17 7% I Source: Finance DeDartment. GoHP. All numbers as aercentaee o f Droiected exDenditures under MTFP. I

44. Measures to create fiscal space and improve expenditure effectiveness. GoHP has announced several reform measures in this area. These actions are projected to result in a decline in the expenditure to GSDP ratio f rom 28.2 percent in 2006-07 (RE) to 26.6 percent in 2009-10 as per the current M T F P o f the government.

45. High salary bill. H P has one o f highest ratios o f government employees (regular and non-regular) per 100 o f population, at 3.5-although, excluding the Education Department which accounts for 35 percent o f government employees, this ratio i s about 2.3. O n one hand, this has helped HP to achieve one o f the best indicators o f human development in the country. O n the other hand, this has contributed to wages and salaries talung up about 35 percent o f state expenditures-which i s one o f the highest in the country. W h i l e the total size o f the c iv i l services (excluding PSEs and local bodies) has grown about 30 percent between 1990 and 2003, work-charged employees have grown 613 percent while part-time employees have grown some 212 percent. Regardless o f the reasons behind HP’s burgeoning c iv i l service, the fact remains that the state can n o longer afford the resulting wage and pension bill, amounting to 50 percent o f the state’s revenue receipts, thus crowding out much needed capital and non-wage O&M expenditures.

46. Ban on recruitment. As a step towards addressing the salary bill, GoHP has reinforced a ban on recruitment (contract, part-time, daily wagers), except with the prior approval o f the Finance Department and the Cabinet and such approval to be granted only for functional posts-via of f ic ia l instructions on expenditure control dated June 13, 2007. Creation o f posts will be allowed only for posts which are justified as functional by the respective departments. GoHP wil l provide baseline data for contract, part- time, and daily wage employees as o f March 3 1 every year for monitoring purposes.

47. Medium Term Expenditure Framework. GoHP will expand performance budgeting by initiating departmental Medium Term Expenditure Frameworks (MTEF) in a few key departments, such as Education, Health, Public Works, and Irrigation and Public Health. GoHP has already issued instructions

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dated June 11,2007, to the concerned departments-with broad guidelines to prepare MTEFs for 2007-08 to 201 1-12 that will result in better prioritization o f expenditure.

48. Domestic power subsidy. For 2007-08, this shall be capped at 2006-07 levels. Subsidies and transfers account for about 7 percent o f total expenditure, up from 5 percent in 2003-04. GoHP’s subsidy to the Himachal Pradesh Electricity Board (HPSEB) was Rs. 2.45 b i l l ion in 2006-07 (RE)-which i s relatively small in quantum compared to other states.’l GoHP has reduced the power subsidy to Rs. 1.5 b i l l ion for 2007-08.

49. Pension reforms. Pensions are an increasing fiscal burden, having risen f rom about 8 percent o f expenditure in 2002-03 to over 9 percent at present. In August 2006, the state introduced a Contributory Pension scheme for new employees jo in ing service after M a y 15, 2003, and it follows the Go1 pattern o f contributions.’* However, the impact o f the new pension scheme wil l be fe l t over the longer term, and, till then, the state will have to contend with pension expenditure under the Defined Benefit scheme for employees hired prior to M a y 15, 2003. GoHP wil l create a fund for financing Defined Benefit pension scheme with an init ial corpus o f Rs. 0.5 bi l l ion that will be enhanced over time-and also undertake pension l iabil i ty and cash f l ow projections with respect to c iv i l service with a v iew to medium term reforms.23 Furthermore, the contributory pension scheme wil l be gradually extended over subsequent years to cover newly hired pensionable c iv i l servants in Urban Local Bodies, Universities, Public Sector Enterprises, Statutory Boards, etc.

50. Other measures. In order to identify non-merit subsidies for gradual phase out, a Core Group wil l also be set up under the chairmanship o f the Chief Secretary. GoHP wil l also work on developing a sustainable medium term plan for universities and private educational institutions to determine grants-in- aid. GoHP will develop maintenance plans for f ixed assets such as roads, buildings, and equipment for funding purposes, and link annual funding to the plans. GoHP will set up an institutional mechanism in the form o f an Expenditure Review Committee to undertake rol l ing annual reviews to identify unproductive programs, and rationalize and improve efficiency o f existing programs.

Managing Debt and Contingent Liabilities

5 1. Recent measures to manage debt. GoHP has been classified as a debt stressed state by GoI.’~ In order to better manage i t s debt, GoHP has actively prepaid, restructured at lower interest rates, and swapped debt. Between 2002-03 and 2004-05, GoHP has swapped Rs. 36.41 b i l l ion o f debt. Additionally, the TFC has restructured Rs. 8.24 b i l l ion o f Go1 loans at a lower interest rate o f 7.5 percent, repayable over 20 years. The state has already taken an important step by malung it mandatory to report under the FRBM a Budgetary statement that presents ‘contingent liabilities arising out o f borrowings by PSEs and Special Purpose Vehicles and other equivalent instruments where l iabil i ty for repayment i s on the state government, a l l claims and commitments made by the state government having potential budgetary implications’.

52. MTFP targets for debt reduction. Over the period 2007-08 to 201 1-12, GoHP proposes to replace Rs. 16.8 b i l l ion o f high cost debt with coupon rates o f 10 percent and above. Debt that carries coupon

” The power subsidy essentially finances the revenue loss to the HP State Electricity Board on account o f the difference in the tariff recommended by the Himachal Pradesh Electricity Regulatory Commission and the implemented tariff. T h e scale o f the subsidy i s small in HP as compared to other states (e.g. Andhra Pradesh and Tamil Nadu). HP does not provide free power to any category o f consumer, unlike several other states. ’’ The employee contributes 10 percent o f Basic Pay and Dearness Allowance towards his pension benefits and the state matches the contribution. 23 Projections w i l l be initiated for Statutory Boards, Corporations, Universities and Aided Institutions, and Local Bodies and the D C scheme i s proposed to be extended to cover new pensionable staff in these agencies. 24 A state is classified as “debt stressed” b y Go1 if i t s interest payment to revenue receipt ratio i s equal to or greater than 20 percent.

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rates 10 percent and above constituted about 19 percent o f outstanding debt stock at the end o f March 31, 2007. Approximately 45 percent o f the debt will be repaid between 2007-08 and 2011-12. GoI’s framework for external borrowing by “special category” states provides for pass through o n a basis o f 90 percent as Go1 grant and 10 percent as loan. In effect, this provision will result in substitution o f debt by grants o f amounts GoHP would have otherwise borrowed-and i s equivalent to debt write-off. The proportion o f debt to GSDP will therefore decline f rom 74 percent in 2005-06 to 47 percent in 201 1-12. As GoHP’s fiscal situation improves, i t s interest expenditure to revenue receipts ratio will also decrease from 24 percent in 2005-06 to 17 percent in 2011-12.

53. Fiscal implications of PSEs. HP has 23 Public Sector Enterprises (PSEs) that employ close to 50,000 people. More importantly f rom a resource f low perspective, however, the annual support to PSEs by way o f direct subsidies i s not too high. GoHP has kept annual subsidies to these enterprises at a relatively l o w level o f Rs. 0.4 b i l l ion in 2006-07, down from Rs. 0.48 b i l l ion in 2005-06. M u c h o f this i s given to Himachal Road Transport Corporation (HRTC) on account o f the state’s social responsibility o f providing public transport services on unviable routes. On the other hand, contingent liabilities in the form o f outstanding guaranteed borrowings by state-owned PSEs i s high-at about Rs. 35.5 b i l l ion or about 14 percent o f GSDP as on March 3 1, 2006. The government also carries significant fiscal r isks f rom the accumulated losses incurred by PSEs. As of March 2006, the total past accumulated losses o f these enterprises was about Rs. 9 b i l l ion or 3.5 percent o f GSDP. The HPSEB and HRTC are the two largest PSEs, accounting for nearly 80 percent o f the employees and 70 percent o f the accumulated losses.

54. Proposed short term reforms to lower off budget borrowings and contingent liabilities. The 2007-08 budget has announced that risk-weighted state guarantees for loans will be capped at existing levels. A Finance Department notification has been issued, dated July 13, 2007, amending the HPFRBM rules o f 2005, reducing the cap on r i s k weighted guarantees to 40 percent o f total revenue receipts o f the preceding year, f i o m the existing 80 percent. With proper risk weighting o n existing guarantees, GoHP will meet the guarantee ceiling. GoHP presently reports guarantees o n an equal weighted basis-but will begin reporting risk-weighted guarantees as required under the FRBM by the next fiscal year. This will help minimize exposure to loss-making state-owned enterprises and boards, while malung the award o f guarantees strategic in furtherance o f development objectives. All o f f budget borrowing will be eliminated, and the state has already consolidated Rs. 25 b i l l ion o f i t s o f f budget borrowings in i t s books by taking over their debt servicing, although this i s not reflected in the Finance Accounts. Over the medium term, GoHP wil l also institute a mechanism to evaluate contingent risks o n an ongoing basis, and begin disclosing, budgeting and accounting for these.

55. Proposed medium term reforms to lower off budget borrowings and contingent liabilities. The state will continue reforms in this area during subsequent years. GoHP tends to finance losses o f PSEs by restructuring PSE operations and, sometimes, strategic asset sales. GoHP has generally stopped supporting loss-making PSEs though state-guaranteed borrowings. In the medium term, GoHP will put in place a set o f formal rules to govern eligibil i ty o f PSEs, cooperatives, and statutory boards for government guarantee. W h i l e these PSEs as o f today are not imposing a huge annual cash subsidy burden on GoHP, the loans extended to some corporations and guarantees given to others may result in a future fiscal l iabil i ty. Over the medium term, GoHP proposes to take a fresh look at PSEs and initiate a reform strategy, as wel l as establish a set o f formal rules to govern eligibil i ty for state guarantee by state-owned enterprises, cooperatives, and statutory boards.

Improving Public Financial Management and Procurement

56. Improving budget formulation and execution. Consistent with i t s commitment to fiscal transparency and restoration o f fiscal indicators to sustainable levels over the medium term under the FRBM, GoHP has initiated reforms in the systems and processes o f budget formulation and execution. While the existing budget system i s functional, reforms are required to achieve the development vision o f

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the state and to adapt institutional arrangements to support the fiscal strategy. The key challenge i s to ensure that a comprehensive resource framework and a medium term perspective guide the three objectives o f budget management: (i) aggregate fiscal discipline in line with the MTFP; (ii) strategic policy decisions by GoHP within the constraints o f the MTFP; and (iii) stimulating the efficient use o f public funds. GoHP has proposed actions to address each o f these areas. Beginning 2008-09, GoHP will present a Fiscal Policy Paper to the Council o f Ministers outlining linkages between government policies and outcomes to get broad agreement over budget contours, and setting department ceilings for expenditure in a multi-year framework. Along with the MTEFs being initiated in four key departments and inputs o f the Expenditure Review Committee, l ine departments are expected to make strategic choices among different programs-advancing the government’s development objectives. In subsequent years, GoHP intends to improve budget documentation to provide clearer links between pol icy priorities and goals, budget allocations and performance. Measures to strengthen internal and external oversight and procurement, as detailed below, will stimulate expenditure efficiency over time.

57. Assessment o f public financial management. GoHP simultaneously seeks to modernize and strengthen public financial management and procurement systems to improve the efficiency o f public spending. A Preliminary Assessment o f the Public Financial Management and Procurement Systems in HP was undertaken by the Bank as part o f preparation o f the H P Economic Report; this assessment suggests that the framework for public financial accountability in HP i s generally sound, although in need o f modernization in several areas which GoHP must address. I t s current strengths include: (i) timely approval o f budgets; (ii) exercise o f transaction level controls over budgeted expenditures; (iii) regular and timely preparation and reconciliation o f monthly and annual accounts; (iv) regular external audit, and timely availability o f reports; and (v) legislative oversight over matters reported in audits through fol low up by the Public Accounts Committee.

58. Agenda for change. Despite several achievements, some key areas require strengthening for the state’s public financial management system to assist expenditure effectiveness, and support GoHP’s medium term fiscal and governance program-as denoted by a preliminary assessment o f Public Financial Management and Procurement. The need for reform i s particularly evident in the area o f budget execution procedures, including weaknesses in internal controls. I t i s necessary to complete the ongoing computerization o f treasury systems, strengthen the internal audit system, and have more effective legislative oversight and timely fo l low up on audit observations. In response to the preliminary assessment, GoHP has outlined an agenda for further strengthening financial management and procurement and prioritized the fol lowing actions from the year 2007-08 onwards: (i) modernize the Himachal Pradesh Financial Rules, 197 1, in line with the General Financial Rules (GFR), 2005, o f GoI, to strengthen internal controls; (ii) reinforce the responsibility and accountability of Heads of Department (HOD) to ensure more effective utilization o f resources and strengthen internal controls; (iii) conduct a Public Financial Management and Accountability Assessment (PFMA) using the Public Expenditure and Financial Accountability (PEFA) framework with Wor ld Bank assistance to review PFM arrangements including select PSEs; (iv) complete treasury computerization and r o l l out coverage to the sub-district level; (v) constitute a working group to work out an internal auditfunction in terms o f scope, coverage, and focus, with a v iew to moving towards a ‘risk based’ audit approach as opposed to a transactions based audit approach, and streamline the audit function in Urban Local Bodies (ULBs); and (vi) reduce backlog o f Util ization Certificates and audit o f ULBs, and (viii) create a database o f serious audit observations, to be monitored by a high level State Audit and Accounts committee.

59. Strengthening public procurement. Public procurement in HP i s governed by Procedures & Rules for the Purchase o f Stores, which i s an appendix to the Himachal Pradesh Financial Rules. These are maintained by the Controller o f Stores under the Industry Department, and relate to procurement o f goods. W h i l e the Store Purchase Organization i s the nodal agency for negotiation o f rate contracts, there i s an increasing effort to decentralize department-specific purchases to the respective departments. Procurement takes place amidst a large number o f controllers and overseers. Improving oversight o f

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procurement involves rationalizing control as well as increasing the ability o f the government and the private sector to monitor performance. The challenge in H P i s to integrate procurement into a well defined PFM system. GoHP proposes to fo l low such an approach that will focus on integrating procurement with planning, budgeting, accounting and auditing. The reform will work towards instituting a modern procurement law to guide procurement activities in government and developing an e- procurement strategy implemented to improve procurement outcomes in the state. Procurement assessment o f select entities will help identify areas o f focus to improve overall procurement effectiveness. This will lead to improved procurement performance over the medium term.

B. Promoting Key Sectors for Growth, Employment, and Revenue Mobilization

Tapping Hydropower Resources Efficiently and Sustainably

60. Key challenges. GoHP puts a high priority on judicious exploitation o f the unrealized hydropower potential in an efficient manner. The state has huge untapped hydropower potential on account o f five perennial rivers, representing about 13 percent o f the total hydropower potential estimated for India. This assumes particular significance, not just as a source o f renewable and l o w carbon “green energy” that can help alleviate power shortage in India’s Northern Electricity Grid, but also as a critical source o f non-tax revenue for the state as discussed above. However, to realize this potential, it must be harnessed sustainably with due regard for the associated impacts. This i s particularly important as environmental resources in the state provide the foundation for i t s economy. GoHP has started to recognize that one o f the most challenging dimensions o f sustainable hydropower development i s the management o f the environmental impacts. I t i s now particularly keen to ensure proper implementation o f environmental management activities, given that the earlier track record o f the state’s agencies in timely implementation o f these activities has not been encouraging.

61. Plans for rapid development o f hydropower. The pace o f exploitation o f the hydropower potential in the state has increased over the last few years, with 6545 MW o f the total potential o f about 20,000 MW already harnessed, and another 6500 MW already allocated or under implementation. GoHP targets development o f 59 percent o f the state’s aggregate hydropower potential by 2012. Thus, the momentum i s expected to increase further as several new planned projects become operational as per GoHP’s own plans. The state, keeping environmental concerns in mind, has recently cancelled 462 h4W o f projects. Most o f the remaining identified sites/ projects are also already in the process o f award through a process o f global competition.

62. Institutional structure of the power sector. The Himachal Pradesh State Electricity Board (HPSEB), a public body create.d in 1971 under the Electric Supply A c t (1948), continues to have a monopoly in electricity transmission, distribution, and supply. Inter-state sales account for over a third o f HPSEB’s total sales, while agriculture accounts for less than one percent. The state has had an independent functioning regulatory commission-the Himachal Pradesh State Electricity Regulatory Commission (HPERC)-for the power sector since 2001. I t has issued five tar i f f orders to date, the latest one being in April, 2007. The HPERC has taken a number o f initiatives including establishing an improved consumer grievance redressal mechanism, enhanced public hearing procedures, and the introduction o f economically sound tariff-setting principles.

63. Importance of development o f hydropower resources. GoHP has followed a mixed model o f development o f the state’s hydropower resources through: (i) the state sector, by HPSEB directly; (ii) central companies l ike the National Hydroelectric Power Corporation (NHPC) and NTPC; (iii) joint venture (JV) with Go1 (Satluj Jal Vidyut Nigam Limited or SJVN); and (iv) private sector companies l ike the Jay Pee and Bhilwara groups. GoHP i s entitled to earn royalty, in the form o f 12 percent o f power generated by the project free o f cost, for the use o f i t s water resources by the hydropower projects. In addition, in case o f jo in t venture, GoHP also has an entitlement o f additional power proportionate to their

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equity stake at the regulated tar i f f that it can either use within the state or sell to other states. The revenue earned through the sale o f royalty and equity power that has already started f lowing in i s expected to provide significant resources to the state in the coming years. This highlights the importance o f managing the hydropower development as well as the utilization o f the consequent revenue earned in a well planned manner for the state’s overall development.

64. Future vision for development o f hydropower resources. HP has recently notif ied a new Power Policy with special emphasis on accelerating the devel+opment o f the untapped hydropower potential through both public sector developers as wel l as private investment. Under the new Power Policy o f GoHP, the royalty f rom hydropower projects has been fixed at 12 percent o f power generated by the project free o f cost for the f i rs t 12 years o f project operation, 18 percent o f power generated by the project free o f cost for the next 18 years, and 30 percent o f power generated by the project free o f cost after 30 years o f project operation. Subsequently, after 40 years o f operation, the project reverts back to the state free o f cost. The state has also retained the right to take up equity in the new hydropower projects. GoHP has recently set up a new generation company, the Himachal Power Corporation (HPC) to undertake implementation o f hydropower projects in the state. It has been proposed that a number o f new projects that had been either earlier allocated or are s t i l l unallocated be transferred to this new entity.” GoHP has announced that the remaining projects will be allocated on a priority basis. However, given the challenges being faced on hydropower development, the pace o f development needs to be judiciously and prudently managed with appropriate institutional mechanisms to support the desired outcomes and ensure that development i s sustainable.

a) Measures to Promote Sustainable Development of Hydropower

65. Constraints to sustainable development of hydropower. I t i s particularly important that the state develops i t s hydropower resources in an environmentally sustainable manner. Injudicious exploitation o f the state’s hydropower resources can pose a threat to the state’s natural resources. As the development o f the significant hydropower potential o f H P advances to a mature stage under i t s planned expansion, concerns pertaining to optimal planning for the development o f the state’s river water resources and the long-term sustainability o f this development will come to the fore. The project-based approach currently in use by the state (and throughout India) will be inadequate to address these concerns. With the entry o f the private sector as wel l as a number o f relatively new public sector agencies into hydropower generation, H P i s increasingly experiencing the situation where projects in the same river basin are assigned to a number o f different public and private operators. This approach to allocating projects could eventually give rise to controversy or conflict, as the differing owners/operators could have different priorities for the quantum o f exploitation o f the water resource available to them, and there may be differing views on the actual use o f the water held by local communities, environmentalists, and other interest groups. Eventually, as the revenues earned from sale o f power generated f rom these hydropower projects become significant, it i s normal to expect the emergence o f competing views o n the use o f these revenues in the context o f the public discourse o n the budget. At the same time, HP has a l imited track record in implementation o f hydropower projects o n i t s own through state agencies. The state sector has only a small share in the hydro capacity currently operational. There have been delays in implementing projects. Further, the role o f the state’s agencies (notably the Forest Department) in planning and implementation o f the environment management activities-like Catchment Area Treatment (CAT) plan, compensatory afforestation, etc.-related to hydropower projects have been hampered by lack o f adequate capacity and ski l ls , contributing to sluggish pace o f implementation with a significant portion remaining unfinished by project commissioning. I t i s critical that the state strengthens i t s institutional mechanism for preparation, implementation, and monitoring environment management activities, and also puts in place appropriate accountability mechanisms to ensure that these activities are completed before the projects are commissioned (and are then subject to ongoing monitoring)-so that HP’s precious natural resources are managed well.

25 See Para 67.

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66. Strengthening institutions for sustainable hydropower development. GoHP appreciates that the development o f hydropower should be in consonance with environmental safeguards, as injudicious exploitation can pose a threat to the state’s natural resources. Implementation o f most o f the environment management activities falls within the domain o f the state and, HP i s taking several measures to strengthen i t s institutional structures for the planning, implementation, and monitoring o f environmental management activities. Sustainable harnessing o f hydro-potential will require moving away from fragmented and piecemeal assessments to a comprehensive and planned evaluation o f opportunities and risks that take account o f the cumulative and sequential effects o f expansion. In particular, the state i s designing an accountability mechanism for preparation and implementation o f C A T Plans in a time bound manner. It should also be recognized that the prioritization o f CAT Plan implementation i s based on the fact that, f rom the viewpoint o f different stakeholders, including hydropower developers and the local communities, accelerated implementation o f the CAT Plan i s critical.

9 As a f i rs t step, the state has prepared and agreed on implementing a time bound Action Plan for? (i) completion o f priority catchment management activities in four large hydropower projects, with identified timetable, funding requirements, funding sources for the activities, and implementation and monitoring responsibilities, in the short term; and (ii) preparation and implementation o f r iver basin level Catchment Area Treatment (CAT) plans, for sustainable development o f hydropower, for a l l major river basins, starting with the Satluj basin, in the medium to long term. In the short term, GoHP has identified four large hydropower projects-Nathpa-Jhakri, Baspa, Rampur and K o l Dam-for which it will facilitate completion o f the outstanding catchment management activities (Catchment Area Treatment and Compensatory Afforestation) over the next three years, starting from current financial year. Given the l imited capacity o f the forest department, the state has also decided to outsource implementation o f some o f the activities (civil works, etc.) under the C A T plan to either the project implementing agency or other contractors, with the objective o f accelerating their implementation. In the medium to long term, the state has drawn up plans for preparing river basin level C A T plans for al l major river basins, starting with the Satluj basin. Once the basin-level CAT plans are prepared and ready for implementation, a l l the remaining project-specific plans shall be integrated into them-and, until then, the individual C A T plans will continue to be implemented. All basin-level C A T plans wil l be based on high quality disaggregated GIs-based baseline data o n forest cover and quality, erosion intensity, and s i l t load. HP also plans to develop this baseline within a specified time period through utilization o f the services o f the Forest Department, and engaging consultants as required.

9 In order to manage these processes, GoHP, as the steward o f these significant resources, i s looking to move beyond the present planning paradigm based on the individual project to a more holistic approach to development based on river basin management as a whole, that incorporates the environmental and social aspects as integral to the process o f development. In this respect, GoHP i s undertaking a study for the Satluj river basin for the optimal and integrated development o f power with consultant support funded by Public Private Infrastructure Advisory Facil ity (PP1AF)-and the agreed findings f rom this study wil l form the basis for further pol icy measures. The study would demonstrate the methodology for optimization o f hydro-development in the Satluj basin with the goal o f facilitating coordinated and sustainable development by private and public sector developers, with due consideration for the environmental and social impact o f river-basin-wide development. The optimization study will cover environmental and social implications o f multi-project development, including, but not l imited to: (i) implications for water resource management; (ii) catchment area treatment plans; (iii) potential cumulative impact on natural forests and other protected areas; (iv) social impacts arising f rom multiple projects; and (v) communication and public outreach issues. Further, the different hydropower developers on Satluj River have come together and established a “Forum o f Hydropower Producers o f Satluj Basin”in order to achieve common goals and objectives for harnessing the hydropower potential o f

26 See Annex C.

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the Satluj basin in an eco-friendly manner, and to ensure the development o f the area.27 This positive development has been recognized by GoHP in i t s new Power Policy.

9 In parallel, the state i s planning to undertake an assessment o f the skill and capacity gaps existing in the different state agencies for undertaking the environmental management activities and will then prepare a plan for building up capacity for implementation and supervision.

67. Determining environmental flows. GoHP recognizes that numerous environmental r isks need to be considered as early as possible for developing sustainable hydropower in the state. HP i s the only state in India to adopt a hydropower development policy, which attempts to internalize the environmental externalities, and provides some guidance for managing the various environmental risks-such as maintaining water quality and in-stream flow, conservation o f aquatic and terrestrial biodiversity, conserving and providing for water flows for downstream uses including ecological f low requirements, managing erosion, sedimentation, and catchment degradation, etc. GoHP and the HP Hydropower Policy recognize the need for additional research and effort to develop specific guidance and implementation capacity in al l these areas in the short to medium term. HP i s also the only state to mandate an in-stream f low o f a minimum o f 15 percent o f the lean f low o f the rivers, downstream o f any diversion or dam on any river in the state (including for projects constructed earlier). However, there i s scope to better estimate this f low based o n more scientific research and estimation methods. GoHP recognizes this, and i s aware that scientific studies are required to develop site- or river-specific standards for in-stream flows, and also that there i s a need to develop capacity to implement and monitor the in-stream f low mandate. As a step in this direction, GoHP has proposed to conduct a study to determine a methodology for estimating sitehiver-specific optimal environmental flows-which i s a technically demanding task.

68. Benefit sharing mechanisms. GoHP recognizes that local communities are the most directly affected by the development o f hydropower projects-especially through disruption to social and economic l i fe during the construction phase, and in some cases physical displacement. I t i s because o f the disproportional impact o n local communities, sometimes including the permanent loss o f the use o f the water for other purposes (at specific locations), that benefit-sharing mechanisms have been developed as a means o f ensuring sustainable and equitable development, and o f ameliorating potential opposition to development that could emerge in their absence. In i t s efforts to ensure sustainable, equitable and socially acceptable development o f the state’s rivers under the new Power Policy, HP has put in a provision for developers to set aside 1.5 percent o f the project cost towards local development under a Local Area Development Committee (LDAC). In addition, there are other alternatives that the state can consider for benefit sharing,28 and different models that GoHP could consider to help build local communities’ and local administration agencies’ capacity to manage revenue streams and decide o n development priorities. As a step towards better benefit sharing, a strategy study, described below, will include suggestions on developing suitable mechanisms for local communities to ensure sustainable and equitable development.

b) Measures to Promote Efficient Development of Hydropower

69. Possible risks in developing hydropower through the Himachal Power Corporation. As described above, HP has been following a mixed model o f development o f the hydropower resources. Recently, however, following the establishment o f the Himachal Power Corporation, it has been proposed that a number o f new projects that had been either earlier allocated or are s t i l l unallocated be transferred to this new entity for development. This new approach can have significant challenges for the state, and i t would be worthwhile for GoHP, strategically, to evaluate the r isks and benefits involved in following this model, in comparison with the corresponding risks and benefits f rom the alternative models. These

*’ The members of the forum are - Bhakra Beas Management Board (BBMB), NTPC Ltd, HPSEB, SJVN, Jai Prakash Hydropower Limited (JPH), Himachal Sarong Power Limited., and Nuzivedu Seeds Ltd. ** For example, HP could consider providing a share in the specific project benefit streams over time through setting aside a share out of the free power royalty for the local communities.

23

include: (i) possible crowding out o f funding for priority sectors with the state’s resources committed for contribution to equity or raising debt for development o f the new hydropower projects; (ii) inadequate resources and capacity for implementing the new projects, thereby affecting the pace o f hydro development; and (iii) the possibility offiscal strain in the event o f need for GoHP to bear the off-take and p r i c ing r isk for the power generated from these projects, especially considering the very competitive tariffs projected f rom the proposed coal-based ultra mega power projects.

70. Improving state’s hydropower planning and management capacity. In response to these challenges, GoHP i s planning to undertake a strategy study for: (i) developing a framework for the state for building hydropower projects (through state / central / private / JV route, or a combination) and for optimizing the revenues on account o f royalty / equity power f rom these projects to the state, while minimizing investment needs and r isk ; (ii) suggesting a framework for utilization o f part o f the revenues, accruing to state f rom the hydropower projects, for accelerating and sustainable, equitable, and socially acceptable development o f the state’s hydropower resources; and (iii) suggesting alternative ways for benefit sharing with the communities. Recommendations f rom this study will be discussed and, once agreed, implemented during subsequent years. GoHP i s also planning to enhance their regulatory capacity to ensure that any new hydropower projects get built as per good practice standards o f construction, and that aspects l ike dam safety, underground works stability, floods management etc. are appropriately addressed by a l l developers.

71. Issues around the efficiency o f HPSEB. HPSEB, which had been suffering financial losses until FY06, has n o w started to show a cash surplus-driven mainly by the significant increase in revenue from inter-state sales (Figure 7). The Board s t i l l needs to improve internal systems and efficiencies, especially focusing o n addressing the challenges arising from: (i) high‘ interest payments o n HPSEB’s outstanding debt o f Rs. 26.35 b i l l ion in 2005-06, with annual debt servicing o f Rs 4.69 billion, or 26 percent o f total revenue;” (ii) transmission and distribution losses o f around 23 percent in 2004-05, which, though l o w compared to some other states, could be reduced further; and (iii) an employeeikwh-sold ratio which i s among the highest in India, implying possible over-staffing (Figure 7). In addition, central to the reform o f the institutional structure o f the power sector in HP i s the need to comply with the Electricity Ac t (2003) to improve the effectiveness o f HPSEB and to upgrade the human resource capacity that lies at the heart o f the sector’s institutions. Under the Electricity A c t (2003), states were to restructure their state electricity boards by segregating the transmission function f rom the power trading function. GoHP i s yet to decide o n an appropriate model for HPSEBa3’

Figure 7: Financial Challenges facing HPSEB I Employee Cost per Unit of Sales Within State

4 HPSEB Profit before Tax (Rs. Billions) ,e Employee Cost per Unit of Total Sales / 2004-~’2005-06 I E 0.9

Am 5

2001-02 2002-03 2003-04 0.6

0- e 0.3

0 #’----

, A i m C

3

Source: Data f rom HPERC Tanff Order, 2006-07. Right panel shows costs for various State Electricity Boards.

72. Implementing the Electricity Act of 2003. HPSEB has initiated the process o f separating i t s accounts into the three segments o f the power supply chain (generation, transmission, and distribution).

*’ T h e Debt Service Ratio has improved from 0.03 in FY02 to 0.49 in FY06. 30 GoHP has received an extension from Go1 till December 2007.

24

While implementing the requirements o f the Electricity Ac t (2003), including on the restructuring, the state can benefit from the experience o f similar states that have already implemented or are implementing the provisions o f the Act. HPSEB currently has staff strength o f slightly more than 26,000, but the large work force notwithstanding, i t faces an acute shortage o f the professional and technical ski l ls. I t will be critical for GoHP to ensure that the sector management i s focused on inducting professional and technical s h l l s to keep up with this rapidly evolving business environment. GoHPBPSEB will provide implementation plan for enhancing the effectiveness o f operations o f HPSEB under the Electricity Ac t 2003-and begin implementation o f the plan this fiscal year.

73. K e y challenges. Despite the state's geographical and environmental advantages that should make it an attractive tourist destination, the tourism sector has been growing at an annual rate o f 6.4 percent since 1993-94, which i s marginally lower than aggregate GSDP growth rate o f 6.7 percent for the state. The sector faces several constraints in the nature o f poor connectivity in the form o f underdeveloped roads and small airports unsuited to major commercial airlines, inadequate facilities for high end tourists, slow place o f implementation o f new projects even compared to other hill states, lack o f inter-departmental coordination to develop the sectors, and generally l ow participation o f the private sector in the high end tourist market. HP i s one o f the few Indian states receiving tourists per year greater than i t s total population o f 6 million-but intake i s confined largely to low-end and domestic tourism, while foreign tourists account for only 3.1 percent o f annual intake. This i s better than the national average o f 2.3 percent foreign tourists in 2004, but states l i ke Kerala have achieved higher shares o f foreign tourists l ike 5.6 percent. The trade, hotels, and restaurants sub-sector related to tourism contributes about 8.5 percent o f GSDP at present. On a per-arrival basis, this contribution works out to be lower in HP than nationally and in states which have worked on developing their tourism potential (Figure 8).

60% , Figure 8: HP's Challenges in Tourism India HP r 15%

I I Kullu Manali

L" I"

1999-00 2000.01 2001-02 2002-03 2003-04

Foreign Tourists in WP in Millions Domestic Tourists in HP in Mil

--_ 2 2 '

a o

1 ; 12% I

r

12 3 9 ' 8 0

- --..

Source: klotcl occupancy rates and tounsr intakes from India Tourisni Statistics, 1004. Data for trade, hotels, and restaurants as a share o f GSDP are in real terms, from the Bank's live states database. Contribution to GSDP per tourist obtained from aggregate tourism receipts and total arrivals.

74. Importance o f the sector. GoHP specifically recognizes that tourism i s a sector that can prove vital for the state's long term growth and employment-largely on account o f tourism being a labor intensive sector where HP has immense potential on account o f i t s environmental, climatic, and natural heritage. The sector also has the potential to absorb educated workers. Planning Commission estimates show that

25

an investment o f Rs. 10 lakh in tourism creates 47 jobs-thus making the sector particularly important in the context o f HP’s stated objective o f creating productive work opportunities for educated workers.

75. Current vision for the sector. GoHP’s stated objective i s to develop the state’s tourism sector as a prime engine of economic growth, and to position itself as a major global destination by 2020. The state has a Tourism Policy in place, framed in 2005. The target i s to increase the contribution o f tourism to GSDP to 15 percent by 2020. This Policy has some good thinking and the right statements o f intent. I t focuses o n developing better intersectoral coordination, upgrading infrastructure facilities, marketing H P effectively as an attractive tourist destination, investing in training for tourism services, and promoting activity-based tourism. In particular, the Policy recognizes the need to promote the private sector, and strengthen tourism in an environmentally sustainable manner. However, the Policy needs to be updated. It i s also not o n schedule in terms o f implementation targets defined in the Policy. The Policy needs to more clearly define financial targets, achievement targets, and modes o f financing in order for i t to be effective as an implementation guide for al l stakeholders. In spite o f GoHP’s stated commitment to tourism development, an inter-departmental consensus on i t s importance also needs to be strengthened. Accordingly, GoHP proposes to update the Tourism Policy, and would include, inter alia, a detailed value chain analysis o f the sector to identify policy problems in private participation in tourism, and a time- bound Act ion Plan and implementation responsibilities, to make it more actionable and effective.

76. Tourism Development Board. A multi-departmental HP Tourism Development Board (HPTDB) has been set up under the chairmanship o f the Chief Minister, to promote the sector-and it was operationalized in 2005 with a v iew to minimizing bureaucratic hurdles in tourism development. The HPTDB i s supposed to formulate pol icy guidelines for tourism development, and advise GoHP o n matters relating to regulation and licensing. The Tourism Policy recognizes that tourism development in H P i s under-funded relative to other states, but better coordination and integration among departments including Public Works, Transport, Irrigation and Public Health, Power, Forests, Environment, Urban Development, and Town and Country Planning-which can contribute to better infrastructure and civic amenities-will help development. The state hopes to achieve this through the HPTDB, which has representation f rom various l ine departments. At the same time, in order to develop and implement this vision, the institutional mechanism-including inter-departmental coordination-has to be improved. The HPTDB i s an apex body that could take the institutional lead-but i t must be activated in a meaningful way, with clear mandates and regularized meetings. I t must lead in facilitating a political consensus amongst a l l constituencies about the importance o f tourism, and clearly communicate to al l the stakeholders that tourism i s a priority sector. The Executive Body o f the HPTDB has almost 100 members, which makes it unwieldy. The organization, composition, and mandate o f the HPTDB will be evaluated, and changes introduced i f required and as appropriate. GoHP also proposes to involve and consult with c i v i l society groups in developing tourism-especially in i t s p lan to certify and classify tourist facilities, and organize specialized tourist events l ike annual fairs, etc., in the medium term.

77. Regulation and clearances. In order to minimize bureaucratic delays for the private sector, GoHP has introduced single window clearance for tourism projects. However, the system has to be made more efficient to attract more investment. The H P Registration Tourist Trade Ac t was passed in 2002, in order to allow for chechng and inspecting hotels and travel agencies against over-charging or substandard services. GoHP also plans to promote tourism through strengthening the capacity o f Hotel Associations to conduct inspections, classifying tourist units by facilities provided to ensure value for money to tourists, and strengthening Tourist Police by training 500 police and home guards in tourism-related matters l ike safety for tourists.

78. Recent measures to improving air connectivity. The airports at Shimla, Dharamshala, Pathankot, and Kullu are not well-connected to other Indian cities, and can only take ATR 42 aircraft. There are 56 helipads in the state, but they are not used for regular commercial services. Moreover, travel time from Delh i to Singapore or Bangkok i s ha l f o f that required to reach Shimla by surface transport. In order to

26

overcome this constraint, the government i s loolung to improve air connectivity. The Airlines Authority o f India has opened the expanded runway and new terminal o f Kangra Airport at Dharamshala, and Air Deccan (a major domestic airline) has operated i t s f i rst flight in April, 2007. A proposal to develop Bhuntar airport i s pending with the Ministry o f C iv i l Aviation and Airports Authority o f India. The runway o f the Kullu Airport i s to be expanded by building a bridge o n a river near the terminal, and connecting it to the runway. An airport i s planned at Mandi. Since expansion o f airports are a medium term option requiring financial resources, encouraging regular helicopter and chartered flights- especially in conjunction with major private hotel chains-are also part o f GoHP’s plan to improve accessibility. A proposal for helipads and helicopter services has been developed, and i s currently awaiting clearance from the Ministry o f Finance.

79. Promoting the private sector. In order to directly encourage the private sector, GoHP i s directly inviting private parties to establish facilities in the state. GoHP has already tendered for expressions o f interest for the development o f seven properties, broadly suggesting usage-like go l f courses, health facilities, hotels, etc-in conformity with GoHP’s priorities. Shortlisting i s in process, and bids are likely to be approved this calendar year. GoHP i s also planning to involve the private sector in the construction o f three ropeways: Dharamshala-Triund, Manali-Rohtag-Solan, and Kullu-Bijli Mahadev. The bid process for this will be initiated shortly. Over the medium term, the state plans to upgrade Kangra and Bhuntar airports to allow for larger aircraft, as wel l as develop helipads and helicopter connectivity.

C. Promoting the Institutional Framework for Environmentally Sustainable Development

80. K e y challenges. HP’s r ich and varied natural heritage presents both opportunities and challenges to i t s development strategy. Natural resources are a critical, if underutilized, engine for accelerating growth and poverty reduction. HP’s key growth and revenue drivers in the medium term are critically dependent on the state’s natural resource base. At the same time, resource dependence renders the economy highly vulnerable to the consequences o f environmental degradation-and recent environmental developments have been worrying (Figure 9). W h i l e some environmental degradation inevitably accompanies growth, inaction or failure to balance the environmental costs o f development with the benefits will have particularly serious consequences for the state-whose opportunities l ie in sectors l ike horticulture, tourism, and hydropower which depend o n the environment. Given HP’s unique geographic situation and small resource base, protecting r i ch natural resources assume greater importance than in other states.

I Figure 9: Recent Environmental Degradation in HP I 20

16 ui

5 12 u 0 0 8 -2

4

0

Source: 1991 1993 1995 1997 1999 2001 2003

Data from GoHP and State Pollution Control

” 232 z

2 .Y 9

g 228

i 220

224

U U c 216 :: 2 212

Board.

SPMlO Concentration, u g h 3 (LHS) A SO2 Concentration, u g h 3 (RHS)

A

A A

k k

A k

A A

4 5

3 5 3 0

3 0

2 5

2 0

c Q

N 0 0 N

81. Commendable new initiatives. HP has introduced several measures to address the growing threats to i t s fragile ecology, although there remain issues around implementation. These initiatives include: (i) broadening the State Pollution Control Board’s (SPCB) regulatory role to include environmental auditing, micro/macro level environmental planning by which zoning atlases have been completed for f ive districts, the preparation o f district level industrial siting guidelines, and industrial estate planning studies; 31

3 1 The five districts are Shimla, Kullu, Kangra, Kinnaur and Chamba

27

(ii) establishment o f a Special Area Development Authority to implement the approved notified development plans; (iii) implementation o f a ban on polythene bags o f certain dimensions with effect f rom June, 2004; and (iv) segregation o f non-biodegradable waste.32

82. Fragmented approach to environment management. Environmental management i s an interdisciplinary field requiring cross-sectoral decisions and coordination for effective management, in the absence o f which most development activities can induce significant and irreversible changes with adverse environment implications. However, the current approach to environmental management in H P i s fragmented and i t i s treated as a “clearance” requirement to be obtained from, for example, the Forest Department or the State Pollution Control Board. There are also examples o f inter-departmental disagreements in HP on environment-related issues. Problems tend to be addressed retrospectively only when they become highly visible. There i s no mechanism for facilitating cross sectoral coordination, and so there are high risks that decisions taken in one sector (e.g. industry location) may compromise the economic potential o f other activities (e.g. tourism). Current development patterns raise concerns about the efficiency, competitiveness, and sustainability o f resource use-especial ly given the fragility o f the state’s resources. Prudent economic management calls for environmental issues to be fully integrated into economic policy and mainstreamed in various sectoral activities-especially in sectors where activities can have significant impacts o n the eco-system.

83. Improving institutions to manage environmental assets. The state recognizes the need to sustain i t s environmental resources-beginning with a move from the current fragmented approach to environment management to an institutionalized system. Such an approach will facilitate better inter- departmental coordination to ensure convergence o f environmental objectives, minimization o f intersectoral conflicts, and better integration o f environmental goals into planning. Particular attention i s proposed in the Eleventh Plan to the maintenance o f quality forest cover, even while promoting access o f rural communities to this important livelihoods resource. GoHP i s committed to improving environmental management.

84. Establishment of an Environment Department. Even in a state l ike HP, whose growth potential i s critically l inked to the environment, there i s n o strong or well-established Environment Department. The Environment Department i s at a very nascent stage o f establishment, till recently housed as a small, one-member wing within the Science and Technology Department, and not geared to influence development decisions f rom an environmental perspective. Recognizing the importance o f environment, GoHP, in i t s Budget announcement, has proposed to form a Department o f Environment and Pollution Control, as per terms o f reference issued by the Ministry o f Environment o f Forestry in GoI. A comprehensive Government Order (GO) has already been notif ied by GoHP o n April 13,2007, providing details for the formation o f the department itself, i t s staff and equipment composition, and functions for each o f the subset departments: Science and Technology, Biotechnology, and Environment and Pollution Control. This department will help promote inter-departmental coordination to ensure convergence o f environmental objectives and minimize intersectoral conflicts, and help to capitalize on the state’s comparative advantages and use environmental resources as growth drivers.

85. Capacity building, ski l ls assessment, research, and development. An urgent need has been noted for conducting a capacity assessment for the new Department o f Environment and Pollution Control. The assessment would review staffing / skill mix, equipment, knowledge and resource requirements, as well as identify functions to be performed by the Department and those to be outsourced. I t has been further emphasized by GoHP that the state’s extremely fragile Himalayan eco-systems warrant a strong capacity for research and development in priority areas such as adaptation strategies for glacial melts due to global warming; preservation o f pasture lands and wetlands (Ramsar sites); r iver basin issues impacting environment flows, aquatic l i fe and impacts o n livelihoods. Recommendations o f the assessment / study

Draft “State o f the Environment Report”, Himachal Pradesh, Coordinated and prepared by State Council for Science, Technology & Environment, Sponsored by the MoEF.

28

would be implemented as a priority. In the context o f GoHP’s specific needs o f balancing green cover and maintaining the “health” o f forests, the need for further research in the area has been recognized by GoHP. GoHP will work on preparation o f guidelines to strengthen the Compensatory Afforestation programs using scientific criteria (e.g. biodiversity offsets, restoration biology).

86. Developing an Environment Master Plan. The government i s committed to strengthening better environmental planning and management in the state. With a long term perspective, GoHP has indicated i t s intention to prepare an Environment Master Plan for the state to foster inter-departmental coordination and include environmental considerations as key planning tools. The Master Plan will support development goals, providing a holistic view o f the growth-generating potential o f natural resources, as wel l as their limits and carrying capacity. As a f i r s t step, a time bound Terms o f Reference (TOR) for the Master Plan has been prepared by GoHP.~~ The TOR include an operational mechanism for the Environment Master Plan, identifying execution, accountability, monitoring, and enforcement procedures, and roles for other departments such as Transport, Forestry, Tourism, Hydropower, Industry, Urban Development, Town and Country Planning, and Public Works-to be coordinated by the Environment Department. The components o f the Environment Master Plan would include detailed resource inventory covering a l l environment parameters; trend analysis o f environment degradation; vulnerability assessment to establish zones; and appropriate development criteria to guide development and optimize resource utilization. The activity will be outsourced, under GoHP supervision. Once prepared, i t s implementation would be piloted, beginning with fragile areas and gradually scaling up to state level.

87. Public participation in environment decision making. GoHP i s keen to strengthen community involvement mechanisms, to enhance environment performance, accountability, and improve regulatory compliance. Since GoHP has already established Local Area Development Committees in each district, i t has been agreed that three pi lot “community environment monitoring mechanisms” would be initiated through these Committees in the near term. In addition, grievance redressal mechanisms will be established by project proponents to increase their environment responsibility and public accountability.

88. Improving muck and debris disposal. GoHP recognizes that i t i s important to prevent muck and eroded material (resulting f rom construction work, especially roads) f rom being indiscriminately deposited o n the hill slopes-damaging forests and ultimately adding to the s i l t load. Instead, a l l muck and debris generated from construction works should be disposed at the designated sites-which must be protected against breach or erosion, and used for productive purposes (such as village grounds, real estate, parlung spaces, gardens, etc.) after disposal i s complete at a particular site. As a f i rst step, the Urban Development Department (UDD) will identify and assess feasibility (including environmental and social impact assessments) o f muck disposal sites within urban areas and in the urban fringes. The Public Works Department (PWD) will similarly identify suitable disposal sites al l along roads in a phased manner-starting with national and state highways, major district, other district roads, and village roads. The Forest Department will assess and clear these sites for muck disposal. The identified sites will be notified, and protection works for these sites will be implemented using rural employment guarantee or other similar schemes in subsequent years. The procedures/mechanisms developed under HP States Roads Project can be an example that GoHP could follow for similar works.

D. Strengthening Governance and Public Administration

89. Key challenges. H P has many achievements to i t s credit: rapid improvements in human development indicators over time, a tradition o f openness in government, and relatively l o w levels o f corruption. The Transparency International indicators identify HP as the second least corrupt state in India. Yet, there i s room to improve transparency and accountability, especially in issues relating to

33 See Annex D.

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recruitment and transfers. Developing a coherent strategy to address these challenges i s an important element in sustaining the state’s positive past record in human development.

Addressing Staffing Issues

90. Functional reorganization. GoHP has issued instructions dated June 7, 2007, to a l l departments and Public Sector Units, to furnish data to the Department o f Economics and Statistics identifying posts which are vacant, surplus, and vacant and surplus. Posts vacant for more than three years are to be recorded as well. This exercise i s expected to be completed by September, 2007, as per the official instructions. This information will help functional reorganization in subsequent years. A manpower/functional review in five departments-Public Works, Irrigation and Public Health, Forests, Health, and Education-will also be undertaken. Based o n the recommendations o f said review, GoHP will prepare a time bound Act ion Plan to improve the organizational structure o f the departments, and implement it.

91. Outsourcing in major departments. The Education Department has f i l led some 4,065 vacant positions, with teachers appointed on contract at a lower rate o f remuneration, by Parent-Teacher Associations (PTAs). Although the proportion o f such appointments i s relatively small compared to the large number o f teachers in the state (about 75,000), the role o f PTAs i s significant because it enhances teacher accountability, reduces the need to transfer teachers as P T A appointments are school-based and thus non-transferable, and heightens P T A involvement in school management generally. Urban Local Bodies (ULB) have started outsourcing the collection and transportation o f solid waste-Shimla has asked an NGO, Center for Development Communications (CDC), to take over collection and transportation in two wards out o f 25, and plans to extend this pi lot to other wards over time. The Department o f Irrigation and Public Health (IPH) has recently asked a private party to handle a large rural drinlung water supply scheme in Hamirpur covering 214 habitations with a combined population size o f almost 100,000. All O&M o f this lift scheme has been handed over to the private construction contractor for f ive years, talung pressure o f f the department.

Improving Administrative Efficiency

92. Recent reforms to improve administrative efficiency. Important steps have been taken to improve the recruitment process-the Subordinate Selection Services Board, for example, can no longer destroy records after three months, as was the practice in the past, and the Board i s beginning to use Information Technology (IT) to enhance transparency o f functioning. Secretariat reform in fi le movement i s a priority, and GoHP has introduced a computerized fi le monitoring system in 2004.

93. Simplifying f i le management. Improving administrative efficiency through better f i le management i s a goal for GoHP. W h i l e GoHP has introduced a computerized fi le monitoring system in 2004, few Secretaries and their officers are actually using the system to reduce delays and cut pendency. Section officers in particular are not well trained in the use o f computers. The use o f the single-file system across government i s limited, with only Rural Development and Panchayati Raj, Vigilance, Planning, and Economics and Statistics being the directorates where it has been introduced. GoHP wil l focus on the use o f change management tools to better equip staff for the wider use o f e-governance in the Secretariat.

94. Key measures on file management. GoHP has agreed that the single-file system wil l be extended to at least f ive Directorates under the operation-Labor and Employment, Transport, Tourism and C iv i l Aviation, Information and Public Relations, and Social Justice and Empowerment-in addition to the ones already o n the system. A notification dated August 17, 2007, has been issued to this effect. GoHP has also expanded use o f REFNIC-which i s a fi le traclung software-by departments for a l l f i le management and traclung functions in Secretariat. An administrative order has been issued dated June 1, 2007, outlining time bound expansion o f the implementation o f REFNIC in the Secretariat so as to reach

30

100 percent usage by October, 2007. Data as o f mid-July shows that expansion i s actually proceeding faster than given in the order.

95. Improving stability of tenure. Transfers are an important issue, and GoHP supports enhancing tenurial stability. The average tenure (in their current posts) o f Principal Secretaries and Secretaries in HP i s currently a mere 14 months; tenures for Deputy Commissioners are marginally better, at 17 months, but s t i l l well below the two-to-three year minimum tenure set by HP’s transfer policy.34 Given the high turnover among senior staff, GoHP i s seeking to improve the tenure and stability o f c iv i l servants to promote effective implementation o f programmes by enforcing the tenure o f a minimum o f three years for some positions and two years in others, consistent with HP’s transfer policy, whi le discouraging politicization o f transfers and recruitment.

96. Committee on Minimum Tenures. GoHP has issued an official notification dated June 15, 2007, setting up a state committee to review minimum tenures o f Indian Administrative Service (IAS) o f f i ce rs4ha i red by the state Chief Secretary. This committee will exercise the functions outlined in a Go1 notification issued by the Department o f Personnel and Training, which amended the I A S (Cadre) Rules on August 24, 2006.35 All I A S transfers that fall below the prescribed minimum tenure for the post (three years in some cases and two years in others) will be subject to review by the committee.

97. Capping transfers. A yearly cap on transfers o f three percent o f actual worlung strength o f departments will be implemented, and an official notification capping transfers by cadre has recently been issued, dated June 11, 2007. Monitoring data will be collected by the Department o f Personnel-as per official instructions dated July 7, 2007, to al l departments, to provide data o n transfers o n a bi-annual basis. I t was agreed that: (i) GoHP will monitor average minimum tenure by post for the IAS, as per Go1 norms; (ii) monitoring o f departmental cadres will be based on cadre strength; (iii) promotional transfers, transfers to newly created departments, and transfers on account o f a post being declared surplus would be excluded; and (iv) the figures would be published o n the Department o f Personnel’s website. This monitoring system will be publicly available through the internet.

Improving Transparency and Accountability

98. Recent reforms. HP i s one o f the few states in India to have enacted legislation to address corruption in public service delivery providing j a i l terms and fines for officials and non-officials for a series o f offenses such as corruption in the award and execution o f contracts, including contract splitting; manipulating muster rolls or measurement books; supplying sub-standard goods to government; adulterating medicines or manipulating their purchase; charging illegal fees; lending to fictitious persons; maintaining false records; and absenting oneself f rom public duty. The Right to Information (RTI) Ac t was passed in 2005. Under the RTI, GoHP has strengthened the office o f the State Information Commissioner. All state Departments are being encouraged to post a l l the required information under the RTI Ac t on their respective websites, so that the common citizen can access a l l relevant information pertaining to departmental schemes. HP has an independent Ombudsman (Lok Ayukta) in place, with the power to investigate allegations o f corruption relating to public servants (including politicians and ministers). There are significant e-governance initiatives under way, including land records computerization, and the Information Technology Department currently handles over forty projects.

99. Aggressive implementation of the Right to Information Act. Usage o f the RTI has generally been low, and there i s room for improvement. Under the RTI, GoHP has strengthened the office o f the State Information Commissioner. All state departments are being encouraged to post al l the required information under the RTI A c t o n their respective websites, so that the common citizen can access al l

34 A senior I A S officer in HP i s l ikely to enjoy about the same truncated tenure as one in Punjab or Jharkhand.

Indian Police Service (Cadre) Amendment Rules, 2006. GoHP has already issued such a GO in the case o f the Police Department, specifying in detail the functions as envisaged in the 35

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relevant information pertaining to departmental schemes. The process will be initiated by proactive suo- motu disclosure o f information to be carried out in at least five major Departments with a large public interface, which will be identified by GoHP. This will be duly scaled up to other departments.

100. Stepping up e-governance initiatives. E-governance has enormous potential in HP as a tool for simplifying transactions and m a l n g it easier for citizens to access government services. GoHP plans to implement land records computerization in 88 tehsils and integrated service center kiosks in al l tehsils in Shimla District, starting with at least seven services. This will be scaled up to other districts during subsequent years, along with business process re-engineering initiatives as necessary.

E. Improving the General Business Environment for Private Sector Participation

101. Key challenges. GoHP seeks to provide an enabling framework that promotes the private sector. Better infrastructure and relevant s lu l l s development (as indicated by the business climate survey) for the workforce can reduce constraints to private sector participation, and, help reduce pressure o n the public sector for employment opportunities-which could lead to a virtuous cycle in terms o f freeing up additional fiscal resources for productive use. Accordingly, the Plan places priority on developing connectivity in the state, and improving the quality o f i t s main and arterial roads. A vital thrust o f GoHP’s program i s to tackle the problem o f sk i l l s mismatches-through support to sectors which can generate productive employment and by grooming educated youth with market-oriented s lu l l s required to enhance employability.

102. Addressing the s k i l l s mismatch. The state i s workmg on revamping the education system with an eye on employability. T w o o f the key issues in this employment process have been recognized as English language s k i l l s and computer literacy. T o enhance computer literacy, GoHP has reduced fees for underprivileged sections o f society, and the Information Technology Department i s striving to ensure that within the next financial year, a l l Universities and Government colleges will be equipped with suitable computer laboratories which will have internet connectivity. GoHP has already introduced English from Class One in the government primary schools. A special task force shall be set up to prepare a road-map for the use o f English as a medium o f instruction in government schools, which will comprise reputed educationists. Furthermore, GoHP i s seeking public private cooperation in the planning and operations o f technicalhocational education in the state. GoHP has implemented the Industry Management Committee (IMC) concept at the Industrial Training Insti tutes (ITIs) with private participation. The Private Universities Ac t was passed in 2006 to allow establishment and regulation o f higher education institutions in the private sector. GoHP i s loolung for private sector partners who can use the state’s existing educational facilities to conduct technical and vocational courses that can improve employability o f the youth-with the private party to guarantee some minimum percentage o f placements for students who take the offered courses. Such innovative measures can reduce the burden o n the government, and help improve marketability and employability o f educated youth.

103. Removing infrastructural constraints. Simultaneously, the state i s seeking to step up efforts to alleviate infrastructural constraints, especially in rural areas and around the upcoming industrial agglomerations. Improved connectivity could help attract the private sector to remote districts. Since most secondary and tertiary sector industries tend to come up in an urban environment, promoting the development o f urban infrastructure can also help to improve the business climate. GoHP has recently set up a development authority for the emerging BaddiBarotiwala-Nalagarh industrial area to draw up a master plan for the planned development o f the area. Similar agencies are being planned for other fast developing industrial areas as well. Shimla has been selected for financing under GoI’s Jawaharlal Nehru Urban Renewal Mission, and a Memorandum o f Agreement has been signed with GoI. GoHP has also launched i t s own scheme for urban renewal with an init ial corpus o f Rs. 0.3 bil l ion.

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104. Upgradation and expansion of roads networks. T h e state i s attaching priority to upgrading and maintaining National Highways, and seeking declaration o f some o f the important state highways as National Highways. As state highways and major district roads are important core roads linlung national highways and rural roads, the state has sourced external funding from the Wor ld Bank for their upgradation and maintenance o f these roads. Providing connectivity to villages will receive utmost priority, and GoHP i s committed to providing road links to almost al l unconnected Panchayats by March, 2008.

105. Addressing the s k i l l s mismatch. Given that one o f the key constraints to private sector development as wel l as productive employment for educated youth i s the s lu l l s mismatch, GoHP i s seelung to assess and project the s k i l l needs o f the secondary and tertiary sectors; better match the provision o f technical and vocational training opportunities to market opportunities; and improve the general quality o f education with a view to increasing employability. The state proposes to undertake a study on s lu l l s mismatches and shortages in HP. This will be an important step, since the extent o f s k i l l gaps and mismatches in the state i s unclear at present. This constrains evidence-based pol icy reforms. The study would include a skills-mapping exercise, to identify particular sectors which would emerge in the near future, so that s k i l l requirements could be projected. Based on this, the state needs to come up with a sk i l l s development strategy to bridge current and future sk i l ls shortages and s lu l ls mismatches- worked out in consultation with industry, workers, and educators. It should be noted that i t i s not proposed that GoHP take the lead on s k i l l development-but that the study provides grounding for policy-based reform, including on private sector involvement. The Terms o f Reference for the study has already been prepared, and the work for the study has already commenced.

106. Improving transport facilities to raise connectivity. As part o f a strategy to make available public transport to rural areas, GoHP has announced a licensing scheme for a l l investment applications, where at least 60 percent o f the bus route i s for rural roads. T o make full use o f the high investment made in roads construction, the licensing regime will be liberalised to grant more permits to the private sector for plying o f buses. This new pol icy i s a “win-win’’ o n many accounts. There shall be more direct and indirect employment avenues for the unemployed youth. Through better transport opportunities, the state economy shall benefit substantially, especially in sectors such as agriculture, horticulture, and tourism. The state’s tax revenues will also gain in terms o f enhanced consumption o f diesel, spare parts usage and higher collection o f road tax. The role o f HRTC will continue to remain important, especially for the interior and far flung areas o f HP.

107. Infrastructure development in industrial areas. Though the Baddi-Barotiwala-Nalagarh Development Authority (BBNDA) has been set up to oversee infrastructure development in the area, there are issues o f funding and co-ordination. GoHP wil l implement measures to synergize efforts under the BBNDA, the Industries Department, and other relevant agencies-to avoid duplication in planning and implementation o f industrial area development o f BBN area. A proposal for development o f worker housing in the BBN area, based o n public private partnerships, will also be implemented. The Industrial Area Development A c t (IADA) to facilitate planned industrial infkastructure development through the creation o f industrial area authorities in priority locations i s expected to be enacted by June, 2008. It i s also envisioned that measures would be taken to strengthen the BBNDA and other IADAs through additional funding.

108. Effect o f business facilitation measures. GoHP wil l also undertake a study to evaluate the effectiveness o f business facilitation measures at the state and district level. Measures l ike the single window facility have been in operation in the state for several years-and GoHP would l ike to assess i t s effectiveness and identify remaining bottlenecks. Recommendations f rom the study could inform subsequent reforms.

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F. Public Consultations and Participatory Process

109. Consultations around the reform program. H P has benefited f rom a transparent and accessible administration. HP’s plan document, which presents the overarching reform program, i s discussed in the state Legislature, and i s posted on the government website. For purposes o f the current program, a stakeholder workshop was organized in September, 2006, attended by c iv i l society, academia, and local NGOs-to discuss the reform priorities and options. All the major reform measures to be implemented have been disclosed through the media in the past few months. Decisions taken by the government o n the pol icy agenda have also been announced through the media and other public channels.

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. Link to India’s Country Strategy

110. Strategic importance of the HP operation. HPDPLl has strategic value at the national level for Go1 and the Wor ld Bank, for at least two reasons. One, this i s the f irst time in India that comprehensive institutional reforms for environment management are being attempted through a Bank DPL. Two, success o f a private sector led growth strategy in H P would have a strong demonstration effect on other special category states, and would show that there i s a way out o f excessive dependence on the public sector and central support. Success in this operation would also provide a valuable learning experience for other states r i ch in natural resources seeking to harness their development potential sustainably, and demonstration effects f rom this loan could have far reaching implications for the development pattern o f similar states.

11 1. Value added of Bank engagement. Bank interventions can make a significant difference to the reform program in the state. Although the state had been performing well in recent years, i t s continuing development would be vulnerable if the state i s unable to sustain i t s macroeconomic performance. There i s a broad consensus emerging in H P on the need to transition to a more private-sector-led environmentally sustainable growth path-to avoid slipping into poverty in the medium term. Bank involvement could support this by helping HP to strengthen i t s overall fiscal situation, improve public financial management, promote environmentally sustainable development, and harness the potential o f i t s two most valuable sectors-hydropower and tourism. In addition, this project would provide a f irst opportunity for the Bank to support a “special category” state in reducing i t s heavy reliance on public centrally-funded support. As per GoHP request, the Bank will also bring in international expertise and technical assistance in areas l ike hydropower, tourism, and environment. These provide an adequate rationale for staying engaged with H P over the medium term by supporting the DPL request.

112. Importance o f the HP operation in the national context. K e y pol icy focus areas for the proposed operation include sustainable hydropower development and environmental sustainability. Both are important issues in the national context. Compromised river flows in H P could have implications for the downstream states. Given that HP has 13 percent o f the total hydropower potential estimated for India, this can help alleviate the power shortage in India’s Northern electricity grid. Yet, given India’s federal structure, these issues cannot be dealt with by the central government alone, but require active intervention by the state government. Since hydropower i s a national priority, and the CAS supports the Bank’s re-engagement in the hydropower sector, the special focus o n sustainable development o f HP’s hydropower resources strengthens the case for Bank involvement.

113. Specific importance o f Bank involvement in terms o f environmental issues. The Bank i s supporting a number o f measures to strengthen institutions for environmental sustainability-both overall, and with particular reference to the development o f hydropower. Specifically, i t should be noted that the operation does not support expansion o f hydropower p e r se-but, rather, measures to make GoHP’s own plans for hydropower expansion more sustainable as described below. In fact, the Bank’s

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engagement in this area i s likely to lead to more positive environmental outcomes than would otherwise have been possible in this area.

114. Thrust areas under current India Country Strategy. The key objective under the India Country Strategy (CAS), discussed by the Board on August 26, 2004, was to maximize and leverage diverse resources o f the Bank Group to dramatically scale up i t s impact. Since 1997, the India CAS has included a focus on states undertaking comprehensive reforms, in order to support the leaders o f change and to serve as a catalyst to the state-level reform process. With the concentration o f poverty and poor social indicators in a few states, the 2004 India CAS sought to open up new opportunities for engagement with India’s poorest states, while retaining an essentially reform and performance-based approach to the states. State-level DPLs continue to remain an important part o f the Bank program.

115. Request from HP for budgetary support. GoHP has sought Bank assistance in the form o f budgetary support for a comprehensive reform program. This request has been endorsed by GoI. It i s recognized that, while HP i s not one o f India’s largest or poorest states, i t faces various challenges and constraints on account o f i t s size and location, as described earlier-n account o f which it i s regarded by Go1 as a “special category” state, deserving o f central assistance. In particular, relatively high costs o f service delivery impose costs on GoHP which other governments o f states located in less hilly terrain would not face.

116. Consistency o f operation with CAS principles. First, one o f the strategic principles o f the 2004 India CAS i s to selectively target l imited resources to activities where assistance i s welcomed, and can be most effective. The additional financing that the Bank can provide will help ensure that high-priority expenditures are protected rather than crowded out at a time o f fiscal stress. I t also provides financial backing for the state’s reform program and will enable H P to finance the direct costs o f reforms as wel l as to substitute cheaper for costlier debt. The concessional terms o f Bank assistance would enable HP to achieve a more rapid decline in i t s debt service burden than would otherwise be possible. Second, the focus o f the 2004 India CAS marks a departure f rom the earlier approach o f a comprehensive involvement in a l imi ted number o f states (the “focus states”). There i s a shift towards cross-cutting dialogue with a wider range o f states. Given that H P i s the f i r s t o f India’s eleven “special category” states that has approached the Bank for support to i t s reform program through a DPL, this presents a unique opportunity for the Bank to diversify i t s operations into this group.

117. Support to DPLs under CAS Progress Report. The India CAS Progress Report, circulated to the Board in March 2007, highlights that Bank support to DPLs in several states has contributed not only to improvements in their fiscal performance, but more importantly, to growth, poverty reduction, public sector reforms, and governance. HP faces similar challenges and priorities going beyond achievement o f fiscal sustainability-in terms o f accelerating growth, improving public service delivery, and promoting environmental sustainability. Thus HP i s an appropriate candidate for Bank assistance, and the proposed operation i s listed in the CAS Progress Report. In addition, multiple pipeline operations in HP described below imply that Bank investment lending i s set to expand in HP over the next few years. The proposed budgetary support operation can be particularly important in developing and strengthening the broader institutional structure and enabling environment-which any specific investment operation would find diff icult to address.

B. Collaboration with other Development Partners

118. Working with external partners. The work o f the Wor ld Bank group has been coordinated or leveraged with that o f external partners in most sectors. Generally, coordination has worked wel l through informal communication, complemented by periodic overview discussions. During the current CAS period o f FY05-FY08, the Wor ld Bank i s committed to proactively looking for opportunities to ensure cooperation with external partners. In particular, DFID has worked together with the Bank on direct

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budgetary support operations in Andhra Pradesh and Orissa. There i s considerable overlap in the areas o f activity between the Wor ld Bank and the Asian Development Bank-with both institutions having a substantial and growing engagement in infrastructure and energy, and also in adjustment lending at the state level. In particular, a Natural Resource Management Society has been established in HP in order to coordinate various programs and projects o f development partners relating to agriculture, watershed management, irrigation, and forestry.

119. Consultation with donors in HP. The H P D P L l will also build partnerships with external donors. The Japan Bank for International Cooperation (JBIC) i s currently active in HP, and i s supporting the “Swan River Integrated Watershed Management Project’”-which i s a project for integrated watershed management in Una district. The project components include afforestation, erosion and flood control, and improvements to terraced fields. In addition, the Japan International Cooperation Agency (JICA) i s providing technical assistance in agriculture; the German Agency for Technical Cooperation (GTZ) has some projects and technical assistance ongoing in areas l ike eco-development, irrigation, and capacity building for PRIs; and DFID has some non-lending technical assistance in the forestry sector. The Bank team has obtained DFID Trust Fund support to finance some technical activities and studies under the proposed DPL-in the areas o f tourism, hydropower, environment, and skill development, which will involve external expertise. Consultations are planned and ongoing with development partners in the state, and will continue over the course o f the operation.

The proposed D P L operation has been discussed with JBIC.

C. Relationship to other Bank Operations

120. Limited size o f the existing portfolio. The Wor ld Bank has l imited presence in HP at present, with a total portfolio o f US$ 126.8 mill ion, including state share in central projects. Bank-funded watershed development has been ongoing in the state for more than fourteen years. Currently, the Mid-Himalayan Watershed Development .Project i s one year into implementation, and already shows promising results with respect to assisting communities in sustainably managing their natural resources and developing livelihoods. This project, with an allocation o f US$ 60 mill ion, i s i t s e l f a follow-on to the successhl Integrated Watershed Development project, which concluded in September, 2005, In addition, there are national projects in hydrology and rural roads, where the allocation for HP i s US$66.8 mill ion.

121. Expanding engagement. However, the Wor ld Bank’s engagement i s expanding in area l ike state roads, hydropower, rural livelihoods, and environmental management. Excluding the DPL, projects in the pipeline exclusively for Hp amount to about US$ 930 mill ion. The HP Afforestation Project (US$ 4 mill ion) has been approved for inclusion in the portfolio o f the Wor ld Bank’s Bio-Carbon Fund, which will provide carbon finance pursuant to the Kyoto Protocol to induce communities to plant and preserve forests. The HP States Roads Project (US$220 mill ion) has been approved by the Bank in June, and will provide support to reforms and expansion in the roads sector. At the project level, the Bank, i s partnering with the Satluj Jal Vidyut Nigam (SJVN) for the Rampur Hydropower project in HP. The Rampur Hydropower project (US$ 400 million), being implemented by SJVN, has been appraised recently and will be presented to the Bank Board in September 2007. Go1 has also requested Bank to support the Luhri Hydroelectric Project (US$ 650 million). The project i s proposed to be implemented by SJVN, for which the necessary agreement i s yet to be signed between S J V N and GoHP.

122. Hydropower and environment. Several initiatives in these key sectors complement the DPL. The Bank’s hydropower development engagement in India and in H P i s proceeding o n several levels, considering the multiple roles played by various players active in the field o f hydropower development. Go1 has requested Bank’s assistance in instituting suitable international technical and sustainability practices in hydropower development in the Himalayan region, the home o f much o f India’s untapped hydro resources. At the state level, the Bank, through a technical assistance initiative, i s working with

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GoHP o n issues related to optimizing river basin development, particularly hydropower, and minimizing the cumulative impacts o f several developments.

D. Lessons Learned

123. Past experience. The current operation benefits f rom several important lessons drawn from policy- based lending in Uttar Pradesh, Orissa, Andhra Pradesh, and Karnataka, and also f rom the Wor ld Bank’s wider experience in adjustment lending.

9 DPLs can help push necessary reforms in a macro context which individual investment operations may not be able to address-and which can provide an enabling environment for subsequent investment projects. In particular for this operation, a number o f departments are involved in implementation o f the environmental management actions, and such multi-department coordination i s l ikely better achieved through a DPL rather than a sectoral approach. I f the state has to develop i t s untapped hydropower potential in an environmentally sustainable manner, strengthening the institutional capacity o f the state agencies for implementation and monitoring o f environment management activities-an area on which there has been limited focus in the past-is crucial. Further, any efforts towards better mitigation o f adverse environmental impacts will help subsequent hydropower projects. The need for the improvement in the capacity to implement Catchments Area Treatment (CAT) Plans-which i s a key prior action for the operation as described below-is a lesson learnt f rom the earlier Nathpa Jhakri project. DPLs are also wel l suited to encouraging broader and more holistic evaluations o f hydrological developments. Piece-meal and project specific approaches fai l to capture the cumulative and conflicting consequences o f multiple developments. T h i s i s particularly important for HP, given the scale o f GoHP’s envisaged expansion o f hydropower.

9 Lessons from past experience suggest the need for a broad view of reforms. Fiscal adjustment i s inadequate o n i t s own, and a complementary focus on other key areas i s needed for the success o f the program. These lessons have been incorporated into the design o f the H P program, including choice o f areas to support and phasing o f reforms. Even though one o f major focus areas o f the f i rs t operation i s on fiscal adjustment, promotion o f environmentally sustainable development and development o f the state’s hydropower potential are complementary focus areas, given the importance o f environment and the hydropower potential in HP’s context.

9 The operation recognizes that reforms are more l ikely to succeed with strong ownership on the part o f the state government. GoHP already has in place a vision for the future, as articulated in i t s plan documents. I t has shown particular keenness in approaching the Wor ld Bank for assistance in building a program, and introducing reforms to achieve this vision. In particular, GoHP has been proactive in discussing and internalizing some important recommendations f rom the Bank’s analytical work described below-and announcing reform measures along with the 2007-08 budget. These measures are detailed subsequently, and show strong commitment to reforms o n the part o f the state.

9 Adjustment programs need to show sensitivity to local conditions. This i s particularly important in HP, where the state does face significant difficulties o n account o f remoteness and terrain-and the operation has been careful to pick up on issues l ike environment and sustainable development o f hydropower which are critical in HP’s context.

9 Experience to date has confirmed the usefulness o f supporting the medium term program of the government. While this approach arguably entails higher administrative costs for the Wor ld Bank, the process contributes to good incentives-and provides for continuity in the pol icy dialogue with states. Accordingly, the HP operation has been designed to support the government’s own program in a multi- year framework.

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E. Analytical Underpinnings

124. The Bank has prepared an Economic Report on H P titled “Himachal Pradesh: Accelerating Development and Sustaining Success in a Hill State”. This was based on close consultations with GoHP, and c iv i l society groups. The Economic Report has identified challenges in areas, including: (i) creating fiscal space to fund HP’s development vision; (ii) promoting institutions for environmentally sustainable development; (iii) tapping the potential in sectors l ike hydropower in a sustainable manner; (iv) improving governance and service delivery; (v) promoting private sector development through addressing s h l l s mismatches that would also promote suitable employment opportunities for educated youth; and (vi) enhancing the quality o f human development services. The proposed operation i s based primarily on GoHP’s development challenges and reform program, as analyzed in the Economic Report.

125. In addition, the operation has drawn from existing literature o n the state. Documents l ike various issues o f the Economic Survey o f HP, and the Himachal Pradesh Development Report (2005) prepared by the National Planning Commission have guided the preparation o f the reform program.

126. The operation has been informed by in-depth studies in particular sectors. For environmental issues, this operation has been guided by a Draft “State o f the Environment Report” o f GoHP, several unpublished reports, and a sparse peer reviewed literature on the environment in HP. Environmental assessments prepared under past Bank projects-including the Mid-Himalayan Watershed Development Project and the State Roads Project-have informed environmental aspects o f the proposed operation. For the tourism sector, a consultancy study was undertaken specifically to understand challenges and opportunities-and guide the reform program. Analytical work undertaken during the f i rst tranche will be relevant for any subsequent tranches and operations.

V. THE PROPOSED OPERATION

A. Objectives and Sequencing

127. Development objective. The overarching objective o f the proposed HPDPLl i s to support the implementation o f critical structural, fiscal, and administrative reforms needed to achieve sustainable and rapid economic growth and inclusive development over the medium term, whi le sustaining the environmental heritage o f the state. The priority areas for the operation-in accordance with GoHP’s own reform program described in Section 111-will be fiscal adjustment, and promotion o f environmentally sustainable development, with particular reference to the development o f hydropower. The overall program will also support reforms to enhance growth and employment, especially in the private sector, and improve governance and public administration. Whi le human development i s an important area for support in most DPL operations, HP’s outcomes are more impressive than in many other states. In order to concentrate o n a few priority reform areas having the greatest l ikely development impact, the focus o f this operation i s on strengthening the policy framework to ensure long-lasting development benefits in the critical areas o f fiscal recovery, environmental sustainability, and development o f important sectors with untapped potential. Human development outcomes in HP being among the better ones in the country, this i s not a critical priority area for the current operation.

128. Tranching. Since the government has adopted a medium-term program, the Bank’s support will be provided in two equal tranches o f US$ 67.5 mi l l ion and SDR 21.25 mill ion, respectively. The second tranche will be released after an assessment o f whether the reform program i s on track, based on milestones agreed at the first tranche. I t i s to be noted that, as per the current schedule, the second tranche o f the operation i s l ikely to be released only after the state elections early next calendar year. Any subsequent operation will be processed on the basis o f the strength o f the overall program and the legitimate financing needs o f the state.

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B. Policy Areas

129. The operation i s designed so that a l l key actions for the f i rs t tranche have been taken pr ior to Board Presentation. This section describes the specific measures that form tranche release conditions, and their implementation status. Disbursement o f the second tranche i s expected in FY 2008-09, subject to fulfillment o f the conditions for the second tranche. Eight pr ior actions were agreed upon at pre- appraisal, a l l o f which have been met as described above in Section 111. Relevant paragraphs in the preceding section o f the document where these actions are discussed are also cross-referenced.

P r i o r Actions for Release o f the First Tranche

130. HP has taken the fol lowing pol icy and institutional actions under i t s Program, for which the Bank i s expected to release the f i rst tranche o f the loadcredit in support o f the Program.

Creating Fiscal Space to Finance the State’s Development Vision

P HP has prepared an MTFP covering the period FY 2007-08 to FY 201 1-12 with the objectives, inter alia, o f increasing i t s own tax revenue through higher tax effort, and controlling the wage bill, and has taken a number o f measures to implement the MTFP for FY 2007-08, including:

o Introducing a higher Motor Vehicles token tax o n a l l vehicles older than 15 years (Para 38, Bullet 1);

o Increasing Mo to r Vehicles token tax rates to target an additional growth o f at least 6 percent in motor vehicles tax take over 2006/07 (RE) from the new tax measures (Para 38, Bullet 1);

o Introducing an optional luxury tax regime for hotels requiring a flat payment based on a 30 percent minimum hotel room occupancy (Para 38, Bullet 2);

o Noti fy ing a ban o n recruitment in the government (contract, part-time, daily wagers), except with the prior approval o f the Finance Department and the Council o f Ministers, and such approval to be granted only for functional posts. (Para 46).

P HP has amended the rules o f the HPFRBMA o f 2005 to progressively reduce risk-weighted guarantees for each FY to below 40 percent o f the total revenue receipts o f the preceding FY, and has announced a framework to eliminate o f f budget borrowing (Para 54).

k HP has issued instructions to prepare a departmental Medium Term Expenditure Framework in each o f the following key departments: Education, Health, Public Works, and Irrigation and Public Health (Para 47).

P HP has piloted devolution o f irrigation and drinhng water schemes to beneficiary groups (Le., user associations and Panchayati Raj Institutions, respectively), in order to achieve increased efficiency and reduce operations and maintenance costs (Para 42).

Sustainable Development of Hydropower

P H P has formulated a time bound Act ion Plan for managing the environmental aspects o f hydropower development focusing, inter alia:

o In the short term, on completion o f priority catchment management activities in four large selected hydropower projects in accordance with a specified timetable, identifying funding

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requirements and sources for implementing the activities, and setting out implementation and monitoring arrangements (Para 66, Bullet 1, and Annex C).

o In the medium to long term, on preparation and implementation o f river basin level Catchment Area Treatment (CAT) plans for sustainable development o f hydropower for a l l major river basins, starting with the Satluj basin. (Para 66, Bul let 1, and Annex C).

Promoting the Institutional Framework for Environmentally Sustainable Development

k H P has issued a GO to establish a Department o f Environment and Pollution Control, Science and Technology, and Biotechnology, with details o f staffing and functions, in order to improve the effectiveness o f environmental management, protect vulnerable ecosystem services, and enhance sustainability o f development in the State (Para 84).

k HP has finalized a time bound Terms o f Reference for preparing an overarching Environment Master Plan for the State (Para 86, and Annex D).

Strengthening Governance and Public Administration

b HP has taken a number o f measures for improving the functioning o f government, including inter alia:

o Init iating a review to identify a l l surplus, vacant, and vacant and surplus posts (including posts that have remained vacant for three years or more) in government and public sector units (Para 90);

o Introducing outsourcing in three major departments (Irrigation and Public Health, Urban Local Bodies, and Education) (Para 91);

o Implementing the minimum tenure determined by Government o f India for Indian Administrative Service ( IAS) cadre posts in the State (three years for certain positions and two for others); constituting a committee on minimum tenure pursuant to the Indian Administrative Service (Cadre Rules) 1954 (as amended in August 2006) regarding proposals for transfers o f I A S officers; and disseminating tenure information relating to I A S officers through the government’s website (Para 96);

o Curtailing transfers o f government employees to ensure that such transfers are contained on a yearly basis at n o more than six percent o f the cadre strength o f government departments and disseminating information about such transfers through the government’s website (Para 97);

o Introducing a single-file system in five additional directorates and formulating a time-bound plan for expanding the implementation o f REFNIC (file management and tracking software) by a l l departments in the State secretariat (Para 94).

Conditions f o r Release o f the Second Tranche

13 1. The requirement for the release o f the second tranche o f HPDPL 1 will be the following:

k Satisfactory progress by GoHP in carrying out the overall GoHP Development Program, as set out in the Letter o f Development Policy (and the Policy Matrix).

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Maintenance o f a satisfactory macroeconomic pol icy framework by the state-in particular, prepare 2008-09 budget in line with agreed MTFP, and execute the 2007-08 budget to meet MTFP targets for that year.

Complete a review o f user charges in the Departments o f Irrigation, Drinking Water, Health, Transport and M ino r Minerals Royalty; and adopt measures to rationalize user charges, reduce impl ic i t subsidies, and improve sustainable financing o f operations and maintenance o f public investment.

Progress in implementation o f the Act ion Plan o n catchment management activities for the identified four hydropower projects in the short term, and preparation o f river basin C A T plan for Satluj river in the medium to long term, in accordance with the timeframe set out in the Act ion Plan.

Complete Satluj River basin study, and prepare a time-bound Act ion Plan based o n the agreed recommendations o f the study, for the improved coordination and optimization o f sustainable hydropower development in the Satluj River basin.

Progress in preparation o f Environment Master Plan in accordance with the timeframe set out in the in the Terms o f Reference.

Satisfactory progress in implementing the pol icy on minimum tenures and containing transfers referred, including satisfactory operation o f the monitoring system referred to therein.

Prepare manpower and functional review in five identified departments (PWD, IPH, Forests, Health, Education), prepare time-bound Act ion Plan based to improve the organizational structure o f the departments, and carry out init ial implementation o f recommendations including functional reorganization and abolition o f identified surplus posts.

132. The program wil l be reviewed by the Bank at a date mutually agreed with Go1 and GoHP, in or before September, 2008. At that review, for release o f the second tranche, the macroeconomic framework would be considered satisfactory if the Revised Estimates for 2007-08 released by GoHP along with i t s Budget in March, 2008, are in conformity with the MTFP targets for 2007-08 (Annex B). In addition, the Budget Estimates for 2008-09, released by GoHP along with i t s Budget in March, 2008, would need to be in conformity with the MTFP targets for 2008-09 (Annex B). Furthermore, the Bank will review the completion o f the other actions required for the release o f the second tranche.

133. If at the review it i s determined that GoHP has met the conditions, the Bank wil l release the second tranche. If, on the other hand, GoHP has not met the conditions for release o f the second tranche, the Bank will give a ninety day notice period to GoHP to meet the conditions. If they are not met within the ninety day notice period, the second tranche will be cancelled by the Bank. In making the assessment, any unforeseen or extraordinary circumstances beyond GoHP’s control will be taken into account. The closing o f the operation will be March 3 1,2009.

VI. OPERATIONAL IMPLEMENTATION

A. Poverty and Social Impacts

134. Policies supported under the operation are not l ikely to have significant poverty and social consequences, on poor people and vulnerable groups. Poverty i s already l o w in HP, and social indicators are among the best in the country. The reforms supported under the operation, and, more broadly, under the state’s reform program, are expected to make contributions to further reducing poverty in several ways. Some o f the main mechanisms through which the program would impact poverty are as follows:

41

0 Fiscal reforms will enable a greater share o f resources to be focused o n poverty-related expenditures or social infrastructure. The M T F P seeks to reorient public spending towards high- priority developmental spending (social sector spending, non-wage O&M, capital spending) that will provide primary education, health, basic social and infrastructural service to the people, including support for improved agricultural performance-and promote inclusive development.

0 Structural reforms towards private sector development seek to improve the investment climate by easing the regulatory burden o n the private sector. This will enhance economic growth and employment opportunities.

0 The governance program would reduce corruption and harassment, which tends to hurt the poor disproportionately. Whi le the operation supports measures to reduce the wage bill, i t does not support direct retrenchment o f workers. Outsourcing will create more jobs in the private sector than otherwise would have been created in the government sector.

135. The impact o f improving the business environment on j o b creation can be particularly positive. There are constraints in both high-shll and low-ski l l segments o f the HP labor market, which are manifested in high reliance o n agr icuhre and in high, double-digit unemployment rates among educated youth. In addition, the s lu l l s assessment study being undertaken by GoHP-with Bank assistance-will help in the preparation o f a j o b creation strategy.

136. GoHP i s aware that there may be consequences to tourism development, and addressing this i s part o f medium term plans. In particular, the risk o f the spread o f H IV /A IDS has been recognized. Even though HIV prevalence i s only 0.13 percent and there are just over 300 A I D S cases in the state, GoHP has in place an effective A I D S awareness campaign, and awareness i s higher than in other states.

B. Implementation, Monitoring, and Evaluation

137. Arrangements within GoHP. T h e Department o f Finance and Planning will be the nodal coordinating agency for other departments f rom the GoHP side for overall implementation and monitoring o f reforms proposed under HPDPL1. A multi-departmental group o f officials has been working with the Bank team towards preparation o f the proposed operation, and will oversee the implementation and monitoring for relevant sectoral components. Indicators for monitoring are indicated in Annex A. Overall outcomes will be monitored through data published by the Department o f Economics and Statistics, administrative data maintained by various departments, surveys as undertaken, and budget figures made available by the Department o f Finance and Planning. GoHP has held workshops on reforms, and important strategy papers and Plan documents are made available on the website. Further public consultations will be held during the operation.

138. Role o f the World Bank team. Monitoring f rom the Bank side wil l be undertaken through implementation support missions-in close consultation with GoHP. The Program Policy Matr ix (Annex A) provides a results framework that describes expected outcomes. During supervision missions, the benchmarks indicated in the matrix will be evaluated, and interim steps taken by GoHP wil l be monitored.

C. Fiduciary Aspects

139. Improving Public Financial Management i s a central part o f the reform program in HP. Based on the findings and recommendations o f the State Financial Accountability Assessment, which will be undertaken during the operation, key reforms can form the basis for future operations or tranches. Specific measures are being supported under the operation, as presented in Section V.

42

140. The Bank has reasonable assurance that the control environment for foreign exchange in the Reserve Bank o f India (RBI, which i s the Central Bank o f India) i s satisfactory for the purposes o f this operation, based on the RBI audit report and the satisfactory outcomes o f other operations, which have been disbursed and managed through the RBI. The International Monetary Fund (IMF) does not carry out a Safeguard Assessment o f the RBI. As part o f the preparation for this operation, the RBI audit report and published annual financial statements for the year ended June 30, 2006, were reviewed by the Bank. The audit report has a clean, unqualified opinion, and was conducted by a group o f six private f i r m s o f chartered accountants appointed by GoI. The financial statements are prepared in accordance with the RBI Act, 1934, the notifications issued there under and in the form prescribed by the RBI General Regulations 1949, and the audit has been conducted following auditing standards generally accepted in India.

141. Additionally, GoHP has a well-defined program to make further progress o n improving public procurement that includes the passage o f a modem procurement law designed to enhance transparency in procurement operations. Specific steps to improve procurement have been complemented by the enhanced financial management practices discussed above.

D. Disbursement

142. Upon effectiveness o f the loan and credit, the borrower, i.e., the Government o f India (GoI) will submit to the Bank a withdrawal application for the f irst tranche. The withdrawal application for the second tranche will be submitted after the Bank and Go1 have assessed HP’s compliance with tranche release conditions. In each case, the Bank will disburse the U S dollar proceeds to the credit o f GoI’s account with the RBI. This account i s controlled by the Office o f the Controller o f Aid, Accounts, and Audit (CAAA) o f the Department o f Economic Affairs, Go1 and i s part o f the GoI’s general foreign exchange reserves. Upon receipt o f each tranche o f the loadcredit proceeds, Go1 will transfer the equivalent rupee amount to GoHP as per the revised guidelines for the transfer o f external assistance to “special category” states on a 90 percent grant and 10 percent loan basis. GoHP will conf i rm to the Bank within 30 days, the receipt o f each tranche and i t s credit into the Consolidated Fund o f the State.

143. The loan and credit proceeds for this operation do not finance specifically agreed activities. The proceeds may be used for any purpose, in support o f the Program, other than to finance excluded expenditures (as defined in the loan agreement and financing agreement for the operation). Pursuant to the legal agreements for this operation, India (in i t s capacity as the borrower o f the IBRD loan and IDA credit recipient) and Himachal Pradesh will undertake not to use the proceeds to finance any excluded expenditures. If any amount o f the loan or credit proceeds are used to finance excluded expenditures, the legal agreements will authorize the Bank to require India or Himachal Pradesh (through India) to refund the amount.

E. Environmental Aspects

144. Specific country policies supported by the operation are not l ikely to cause significant adverse effects on the country’s environment, forests, and other natural resources. In fact, environmentally beneficial outcomes are expected f rom this operation, since enhancing the environmental sustainability o f growth i s an overarching objective. I t recognizes that environmental resources are a key engine o f growth in the state and environmental stewardship i s an integral part o f prudent economic management.

145. HP’s environmental institutions and regulations build upon a comprehensive national level policy framework for environmental and forest management, which set out elaborate regulations and procedures that cover a l l aspects o f environmental and natural resource management. Implementation o f these i s l e f t to state level institutions. However, the environmental regulatory capacity in HP i s in i t s nascent stage and needs substantial strengthening. The principal gaps include a ubiquitous shortage o f expertise, a lack o f

43

clear definition o f roles arising f rom fragmented environmental management roles, inadequate coordination among departments, and weak compliance incentives.

146. It i s in this context that this operation seeks to strengthen the capacity o f the environmental agencies. It: (i) supports the establishment o f a Department o f Environment and Pollution Control; (ii) calls for a review o f capacity and gaps and a time bound commitment to implement the recommendations o f the assessment; (iii) establishes systems and procedures to mainstream and strengthen environmental management within key sectors (especially the large footprint sectors such as roads and hydropower); (iv) supports mechanisms to enhance public participation and promote accountability; and (v) most importantly, supports the preparation o f an Environmental Master Plan, accompanied by a time bound action plan for the execution and implementation o f the Plan.

147. The Environmental Master Plan i s envisaged as a strategic management tool to strengthen the sustainability o f growth in the state and encourage stakeholder participation. It would facilitate comprehensive and holistic environmental management by providing a platform for integrating cross- cutting issues, engaging non-environmental agencies, establishing environmental baselines, identifying fragile areas and assisting in monitoring performance over time. This would provide a crucial information base that would allow environmental stewardship to be integrated into mainstream pol icy and decision malung. The Bank team i s assisting GoHP in the preparation o f this Plan and it i s envisaged that there will be an ongoing engagement to assist in implementation, compliance, and execution.

148. GoHP has identified hydropower as one o f the state’s growth pillars. This operation recognizes that to optimize the potential o f this sector there i s a need to assure sustainability and equity through strengthened environmental management. There are weaknesses in the implementation o f C A T plans that will be addressed through this loadcredit. Given the dramatic expansion in hydropower development envisaged by GoHP, this operation encourages a move away f rom fragmented, piece-meal, and project specific assessments o f environmental activities towards more comprehensive and holistic approaches that take account o f cumulative impacts. I t should be recognized that the operation i s not supporting hydropower expansion per se-but, rather, supporting sustainability o f GoHP’s own expansion plans, through improved catchment management, afforestation, reduced soil erosion and landslides, etc.

149. Other reforms supported by this operation are expected to have n o direct environmental impacts. These include promoting better revenue and expenditure management to create fiscal space for development priorities and improvements in governance and public administration.

F. Risks and Mitigation

150. The main r isks include fiscal, reputational, political, and l imi ted technical capacity. The nature o f these r isks and the corresponding mitigation strategy i s as follows:

Fiscal Risk. Non-adherence to the targets set in the MTFP could derail the state’s adjustment path, and affect future tranche release. Enactment o f the Himachal Pradesh Fiscal Responsibility and Budget Management Act, 2005, reduces the risk o f deviating f rom the fiscal correction path. Linlung o f Bank assistance, as wel l as central government debt rel ief t o the achievement o f annual fiscal adjustment, further strengthens the incentives for the GoHP to adhere to the MTFP. The award o f the Sixth Pay Commission o f GoI, which i s yet to be announced, will increase the salary expenditures o f state governments, as a l l state governments tend to fo l low the central pay award for their c i v i l servants. The underlying fiscal model used for the operation provides for a reasonable increase in salary resulting from the yet unknown award. However, a higher than assumed increase will necessitate other fiscal correction measures to maintain adjustment. The operation i s being designed with tranches to mitigate against risk o f unacceptable fiscal slippage.

44

GoI’s framework for DPLs provides for tranching, and evaluation o f progress on tranche conditions before release o f the subsequent tranche.

0 Reputational Risk. GoHP has plans to realize the benefits o f the state’s large hydropower potential for the benefit o f the people o f Himachal Pradesh. T h i s hydropower expansion i s going to proceed irrespective o f the Bank’s involvement. The aim o f the Bank‘s support i s to make the state’s own hydropower development plans more environmentally sustainable. Under the current DPL, the main focus for hydropower i s o n preparation and timely implementation o f C A T plans. The DPL program will encourage the GoHP to move coherently and comprehensively to study, plan and implement integrated actions for sustainable hydropower development. As a further mitigatory measure, the operation focuses on: (i) building institutions for environmental management in the state; and (ii) improved environmental stewardship and planning. Thus the DPL i s going to support the enhancement o f the institutional capacity o f GoHP to support and regulate the sustainable development o f hydropower rather than the indiscriminate development o f hydropower resources. Accordingly, n o reputational risk i s perceived f rom this operation. The Bank will continue to hold regular consultations with stakeholders to address any concerns, and will emphasize that the D P L wil l help GoHP embark on an environmentally sound path to hydropower expansion.

0 Limited Technical Capacity. Implementation may be slower than anticipated in case o f limited technical capacity. W h i l e capacity in HP i s arguably as good as that in other DPL states, the state may face technical constraints in implementing i t s f i rs t multi-sectoral DPL. In order to help alleviate these constraints, the Bank i s trying to ensure that significant technical assistance i s available to fo l low through on the reform measures supported by the proposed operation. Close attention i s also being paid to sequencing the reforms in such a way as to avoid an overloaded agenda which would strain implementation capacity.

0 Political Economy Risk. HP faces state assembly elections in early 2008. In order to ensure continuity in reform, broad ownership o f key objectives has been built among key stakeholders, through extensive consultations-in order to align the operation to the government’s Five Year Plan. The reform program also addresses HP’s development priorities over which there i s broad consensus. Caref i l consideration has been given to polit ical economy factors in the design of the reforms and their sequencing, and tranching.

45

DO N0.1/2/2005-FB.IV (Val. Ill Annex A

Page 1 o f 19 f&3*

r n T T 4 R r n *m

3$M r n T T ? - @ n

FINANCE SECRETARY DEPARTMENT OF ECONOMIC AFFAIRS

~ I ~ ~ S T R Y OF FINANCE GOVERNMENT OF INDIA

New Dclhi Tel .23092611, 23092555 Fax .23094075

August 28,2007

Mr. Robert Zoellkk President The World Bank 1818 H Street, NW Washington DC 20433 USA

Dear Mr. Zoellick:

1. I am attaching a letter of Development Policy dated August, 2007, from Chief Secretary to the Government of Himachal Pradesh. The letter outlines the agenda through which the Government of Himachal Pradesh proposes to strengthen and consolidate its reforms process, and for which it has sought assistance from the World Bank of US $200 million.

2. Government of India supports this continued initiative and commends the proposal for the consideration of the World Bank.

n

Yours sincerely,

(0. SUBBARAO)

End: As above

d i e Govern in lait o f H. P.

\ t)evcl.opmciit Poiicy L,oan o f lJS Ii; 200 million with the Wor!d Bank. l a thc abovc

contest. sevei*al rotiiids of ~ ~ S C L I S S ~ O R ~ have been held \kith Llic Bank team. and a list o f

prior ac~ioi is Ibr the loan were inutualI> finalii.ed. ' 1 ' 1 ~ State Government has

sriccessfully completed the outstanding actions points which had been identified by the

World Bank as 'condition precedent' for the first lranche disbursement. Alter detailed

dialogue by the World 13aiik leain aiid the conccrned Adminisirat ive Secretaries of the

State C;o\eriiiiienl. a miittially agreed policy matrix (a i r r te~x i ) has also been t+ovl\ed

out. which shall form the government's road map for this Development Policy I ,orzii

(DPI,) .

2. As p i would he aware. Himaclial Practesh had becn given the status o f a Special

Category State by the Governinent of' India (Gol), babed upon the recognition of the ~

physical and topoyriiphical coiidit ions. relativcly low density o f populatioii atid fm

flung villages/hamlets. tlic cost o f provision o f necessary social infrastructure i s very

high. Bcsides thc capital costs, the mairitcnarice costs are also very high duc to the

Annex A Page 3 of 19

gcographical and climatic conditions o f this €[ill Statc. For al l these rcasons, good

govemaice requires much higher cxpciiditure as compared to the plains.

3 . The niiilti proupcd appr(wch o f t ' i c Y ~ R ~ C ' S reform prrtgran, incluclcs:

Creating fiscal space to fiind the devctopiiient vision as outlined in the

state's Eleventh Five Year Plan (2007- 12) Approach Papcr for acliicving

a growth rate of 8.5% per aniiiim.

* Developing the economtc potential in sub-sectors tike hjdropower and

tourism in an environtnentally and ecoiioiiiiealty sustainable inanner.

Safeguarding the state's environmental cvealtli by developing a

comprehensive environinent protection strategy and improving the

overall institutional approach to environrncnt managernetit.

Strengthening governance and public administration to improve service

delivery and adininislrative efficiency, and promoting private sector

development For faster gri'% t l i and productive eniploymenl.

Creating Fiscal Space

4. For various reasons, including the fact that Hiinaclial Pradesh was denied i ts due

share in 1he hydropower projects ol' iinilivided Punjab that affected i ts revenues, the

Statc i s iccl i i ig under a high debt st . with outstandiiig total debt of niorc tliari Rs.

20,000 crorc or 69% o f GSDP, and aiiiitial interest liability o f about Rs. 1800 crorc or

6% of GSDP. To meet i t s high iiitcrest burden liab cs, as aIw to maintain thc

required pace o f i ts devclopmental goals, I1P Cioveriiments have bccn forccd in thc past

to resort to net borrowings o f morc than Rs. 2000 crorc per ycar. Thesc borrowings

included off-budgct borrowings which had been necessitated in the past to avoid

pcrennial ovcrdratis with the Resen-e Bank o f India.

5. Kzepirig in v ic i i the scveritj o f thc fiscal crisis, thc (iowrrimcnt has ciiiharlced

on a fiscal correction progrsm that has startcd yielding bcncfits. Thc fiscal correction

p r o g m i s bcirig inldei-takan since 2002-03, addressing cxpcnditure adjustmcnt and

cnlzanceincnt o f revenue. As a result total xpcnditurc as a share o f GSDP has dccliiicd

from 32% in 2002-03 to about 29% oCGSINJ in 2006-07. 17i is i s particularly evident

in salaries, whose share has declined from 1.4% o f GSDP in 2002-03 to 9.4% in 2006-

07. ;It the same time, successful effOl7S to increase the states revenue-~-incIudiiip the

introduction of state VA?' and. more recently, encotiraging inflow o f royalty revenue

Annex A Page 4 of 19

from compketcd hydropower. projects --have increased stdte's own revciiuc froiii 5.6%

o f GSDP in 2002-03 to 8.3% of CBDP in 2006-07. Tlic decline in cxpciiditurc and

increase in rcvcnuc has contributed h i encouraging iiiiprovcinent in the fiscal balancc,

which lias improved from 12.4% o f CISDP in 2002-03 to 4.3% of GSDP i n 200647. A

gct~crctus Tuclfirli Finance Comrni oii (TW) dc\olutioii pnckasc ill 2005-06 has a l so

helped the process o f fiscal consolidalion.

6. The Government is now engaged in consolidating the fiscal tiirnarouiid with a

sustainable long term fiscal poiicy that targets reduction in the level of' debt stock while

creating fiscal space for finaricing the development vision o f the state. As a racilitation

measure, the Gowmi ie i i 1 enacted the Himachal Pradesh Fiscal Responsibility and t3udget

Management Act (HI-'I:KBMA) in 2005. One of the Ley requirements of the kW'R13hlA

i s that a niiilti year rolling Medium 'Ieri i i Fiscal Policy (M'I'1:P) shuuld be placed annually

before the statc's 1,agislature. ' I h e inlention i s to set nut clearly the course of fiscal

correction to he followed. The latest S4'I'I.P was placed before the Ixgislature on Apri l 05.

2007. which i s appended to this letier. 'l'lie Budget for the )ear 2007-08 is the first

milcstonc of' r11c MTFf". To stippcrn tlw M1'FP. thc Cioi cni iucnt h a c p r t in p lacr a t iscal

corrcctioti program undcr l iwd by ii scries o f measures to cnl~ance state revenuc,

restructure expenditure. arid improve expenditure efficiency. These are outlined in the

appended Program Policy Matrix.

7 . By the enactment of tlic IIPFRBMA, thc state received access to c h ~ dcbt relief

scheme structured by the TFC. Uiiticr t h e sclzemc, Rs. 834 crorc of Go1 loans w a s

rcstructurcd. GOHP will. as a co~isc'yucncc. bciicfit from a rcduction iii intcrcst

exporidittire to the cxtent o f Rs. 135 Crorc over thc pcriod 2005-06 to 7009-10 on i ts

outstaridiiig GOI loans. These mcasiires are being supplemented by additional iiicastircs in

thc MTFP to 1-estrain the arinital borrowing rcyuirernciit and rcstriicture high cost debt.

'This M'I'IY and the program policy inalrix stands approved by tile State Cabinet.

8. I'he State Covernnient i s now secking this DPI. LO support the ruf'onn program or the goveriiinent to mitigate the: intensity o f its debt stress, as also to maintain the

moinentuiii o f its developmental path. The opening o f t h i s window o f the [>PI. shall

also help the State Government in i t s resolve to not resort to any fittiire off-budget

borrowings. Tlie Chief Minister o f HI3, in his Budget Spcech for 2007-08, hiis already

given an assurance to the 1.egislative Assembly of Ih is resolve of the Government.

GOHP has been merging o f f budget debt with i t s on budget debt in a staggered nianner.

Annex A Page 5 o f 19

and has taken a conscious decision to prepay off-budget dcbt. in the past tlircc years the

state repaid Rs. 1832.1 1 crnr~s o f off-budget borrowing rclating to the lli i i iachal

Pradesh State Electricity Board, Ilimachal Piddesll Forest Corporation, IIimachal

Praticsh Infrastructure Development Board, 1 linxichal Pradcsh Road and Industrial

Dcvclopment Corporatioil aiid I limachal Pradcsh TIealth Systems Corporation.

9. As a part of i ts Giiuncial ant1 cconoinic rcforni prograni. tltc Statc (iovcmmcnt

proposes to utili& this DPI. to undertake a Medium I'er~ii i:iscal Policy Correction

program, with the main objective o f reducing fiscal deficit below 3% o f GSDP by

2008-09, as also attain a reventie siirplus o f mort: tliaii I% o f CiSI>P hy 2009-10. The

M'I'FP also seeks to increase Stale's o'vvi i tax revenue froin 5.2% o f GSDP in 2006-07

to at leas1 6.3% of GSDP in 2009-10. I he MTFP lias charted a path to decrease salary

share in total expendittire from 36% in 2004-05 to 30% by 701 1-12, 'I'hro~lgh a

systematic process of increasing S t m ' s own revenues and compressing overall

expenditures, the interesl payment bui dens are also sought to be brought down from

20% o f total expenditure in 2007-08 to 15% by 201 1-12. Besides the above M targets, GOfP also iiitcnds to makc judicious use o f DPL tmnches to increase capital

outlay froin 12% o f to ta l cqxitdit i rrc in 2007-08 to 30% in 70 1 I .12. In addition. the

no11 wage maintciiaiice outlay is proposed to be iiicrcascd from 13% in 2007-08 to 18%

o f totaf expenditure by 20 1 1 -I 2. To cncouragc selective issuance of government

guarantee, tlic ceiling on risk wcightcd guarantees undcr thc flPFRBMA has been

dccrcascd from 80% to 40% of. total rcvcii i ie receipts o f thc preceding year.

10. The MTFP \vi11 be suppoimi by a series o f measurcs to improvc cxpcnditurc

cfficiciicy. Apart from begin i ihg a proccss for dcvcloping Dcpartniciital Medi~im Term

Expciiditure Frameworks, tlic fiscal program swks to streogtlicn the starc's Public

Financial Maiiagenicnt and Accountability system. Key measiircs that the state wil l be

undertaking include updating the state's fiiiaiicial rules, strengthening internal controls,

completion o f treasury computerifation. modernize the existing procurement

procedures and rules kniiieworl, including \soi-kiiig t o \ \ i i r d ~ it procwcnieiit lm and

preparing for rol lout o f e-procurement. 'I lie state shall also be strengtheniiig accounting

and audit systems in urban local bodies arid strengthen i ts response to audit issues.

Annex A Page 6 o f 19

Development of Sectors with Economic Potential

I I. Critical to thc state‘s long term plan of crcatiiip cmplol iiiciit in the private sector

and to build the revenuc. base o f tlic Ftatc by higlicr investment activity (both private

and public invcstmerxt) i s to strengthen t l ie crucial infrastntcturc area of t lydropowcr in an criviroimcntal friendly and sustsiiiablc manner. This sliali esctitually help To

contribute 20.000 MW (if I Iiniaclial i’radcsh hydropou cr to alleviate the northern grid

power shortage and pro\ ide sufficicnr ciiergy to power industrial gmrth in the skate.

Given the need for meeting power needs of the country from ’clean’ energy. it i s our

hope that this DPL w i l l also pave the way for f l i t h e r active engagement towards

financing o f hydra power pro-iects. wliicli shall also earn ‘Carbon Credits‘ iii term o f

the Kyoto protocol. Simultaneousl~. i t is the State Government estimate that full

realization o f the 20,000 M W power potential 01’ the State. will help ihe State

Governmetit generate an annual rewnue stream o f a1 least Ks. 8000 crore. his, in ract,

can eventually help Wiinaclial Pradesli to migrate out o f the ‘special category slate‘

status and become a vibrant and self‘ reliant economic unit o f tl ie Indian Union of

States.

12. In order to proniotc cm’irtliinioiitally sustainable dcvcloprncnt o f hydropower,

Gol4P u ill scck to insritutionalizc .clcvcfopmcnt ctf I IP‘s hydropow c f potcntial to

address cnvironmeiital impact and assure grcatcr suszainability. Thc policy matrix that

has been approved by the Statc’s Council of Ministers. shall substantially address

eiivironiiicntal issucs o f Catctiineiit Arca ‘Treatment Plans for river basins in t h i s fragile

Ilirnaleyan region of Himachaf Pradesh. GoIlP u ill start with steps to improve

catchnicnt inanaycinent activitics. and M ill gradually move to a system of intcgratcti

rivcr basin Catcliincrrt Area ‘Trcatmcnt Plans-rathcr tlian a picccmcal project-Icvcl

approach tliar i s currently €0 lIowcd--stlartiiig with the Satluj Bash, for which a s tuc l~ i 5

already ongoing. In addition, GOHI) i s undertaking a strategy study For the optimal

model for hydropower developmerit in the state, recommendations from which will guide future hydropower planning arid managelnetit capacity. HPSI’R also ptnns to

implement recommeiidatioi~s uiider [lit. I 1 icity Act. 1003. and c11h:ince eIricicncy of

i t s operations.

13. ‘i‘he state is aware of i t s huge utidarutilized natural assets and ecoiioriiic potential

in the tourism sector. ’1’0 begin with. the Slate Government i s coininitted to updating

the state‘s tourism policy to ar-hitate a clear vision for the development o f the sector

Annex A Page 7 o f 19

in an cnvironincntally friendly way. prepare a framework o f responsibilities for tlic

scctor's dcvefopnient and to coordinate the rolc or various agcncies cngagcd in i t s

devclopmcne. The I-Timaclial Pladcsh Tourism Developniciit Board i s bciiig activated as

a forum for il morc strategic and inter-departmental approach to tourism Jcvclopinciit

in HP and pilot tourism projects are being bid out for private sector participation.

Upgradation o f airports and better connectivity form part o f GoHP's medium term

Q k l l I S .

14. 'l'he Government wxi ld like 10 diversif> sources of em~~loynient in HP away

fro111 the Public Sector by strengtlienhg tlie capacity o f the private sector to generate

quality employment in an environmentally sustainable manner. With this in view the

Government is undertaking a skills mapping study co\:eritig all districts in HI' to

iden1if)i skills gap and identify skills deinsrtded by emerging sectors. The results o f the

study \+ill be used tc? deliver a time-bound action plan with clear accountability

mechanisms including the development of' a framework Ibr public privale partnership

in tl ie provision of vocational and technical education in the state. To coordinate. plan

and regulatc infrastructure devciopmcnt in iiewly industrializing arcas arid priority

areas the state is enacting an Iiidustr-ial Area Development Act.

Promoting Institutions for Environmentally Sustainable Development

15. C i d 1P recognizcs that environmental nianagcment is an interdisciplinary field,

aid requires cross-scctoral decisions and coordiiiatioii. In order to strcngthen the

ovcrall institutional frarncwork for cnvironmei1tally sustainablc developmcnt, a

sepaate Department o f Etiviromiciit has bccn created SO that environmcntally sciisitive

issues can be gi\ en more focused attention. This departmelit wil l help promote intcr-

departnieiital coordination to ensurc comCcrgciice of eiiviroiiinurital objectives arid

n k i i n i z e intcr-sectoral conflicts, and help to capitalize on the statc's comparative

advantages and use envirormental resources as growth drivers. With a long term

perspective. GoHf' has decided to prepxe an hivironment Master Plan for the state to

fosler inter-departmental coordination and include environmental considerations as key

planning tools-and siipport developrnenr goals, providing a holisiic view of' the

Bro"ili-geiieratiiig potential of natural resources, as wcll as their l imi ts and carrying

capacity. T h e components o f [lie t-,nvironment Master Plan wil l include detailed

resource inventory covering a l l environment parameters; trend analysis o f environment

degradation; \. ulnerabil ity assessnienl to establish /ones; and appropriate development

Annex A Page 8 of 19

critcria to guidc dcvclopiiicrtt aiid oj>t ini ix resource utiii7ation. Once prepared, i t s

implementation would bc pilotcd bepiiiniiig wi th fragilc arcas, and gt-itdtirrily scaliiig up

to st'atc Ievcl. This i s the first time in India that such aii exercise i s bciiig attcmptcd,

and this can h a w dcmonstratioii cff 'ccts for other economics depcndcrit on a fragile

iiatural rcsourcc base.

16. Otlier important actroiis to strengthcii eiiviroiiment riidiiageiiiciit includc efforts to

better manage muck arid debris disposal in the state. Muck disposal sites will be

identified and nolified, and implementation o f muck disposal and protection ~ o r k s at

identified sites \vi11 begin over the nwi iu in tern.

Strengthening Governance and Yubiic Administration

I 7. The policy matrix also includes good governance measures. iriiprovitig private

sector participation in the de-vvelopmental process, iinproveinent in efficiency of the

c i v i l services and enhancing transparency aiid accountability in the Government

through e-goieriiance initiatives and better implementation o f Right lo Inforrnaiion

Act. 'I'he state has already notified the Go1 proposal 011 assured inininxiin tenure for

IAS officers and intends capping tranrrers at 6% o f cadre strength for other oflkers.

While poslings data for EAS officei's are already available on the GoHP website

t2zrough tiic civi l l ist the sttttitc i s going to he disseminating tetiiirc information in a inore

citizcii fiicrtdly manner oii thc -E\cbsite. fn a inove to cut do1111 pcndcticjr of files tho

(ioHP i s strcngthcning the usage o f e-governance to track official f i l e s atid hopes lo

have all goscrnmcnt departments implement REFKIC by Octobcr 2007. To improvc

speed of decision making, thc Govcrntntmt o f f-iimachat Pradcsli is scckiiig to scak up

a single f i l e system with its introduction in f ivc add itioiial dircctoratcs. The

(iovcriimcnt i s also initiating functional rcvicws in fivc key dcpartiliciits 1% itb a view to

improving tlicir opcrdtioaal efficiency. HP has a transparent adininistration and

(ioverninent department wfcbsitcs cotltairl offieiiil hiforinatioti. Bowcver, to furthcr

strengthen the itnplenieritation o f the Right to Infornia~ioiz Act, the Government of

Hiinachai IJradesh will begin stio-inoLu information disclosure in five major

departments with large public interface.

18. 'I'he Stare Goveminenr also i

provisions for outsoiircirig o f sewice delivery mechanism. 'I'hree major departments 01'

the GoHP are aiready engaged in susbstanlial outsourcing. While the Irrigation and

Annex A Page 9 o f 19

Public I k a i t h Dcpartment has alrcady transferred 12 Flow i r r i g d o i i schemes and I7 irrigation tuhcwells to Krishak Vikas Sanghs (Farmcr Associations). a further 20

gravity flow irrigation schemcs a d rubcwell based scheiiies have been approved for

traiisfcr to Krishak Vikas Sanpiis. l i t the area o f rural drinking watcr supply sys tem

I O i 1 scticnics I iavc bccn idcntificd for trimsfor to Panchayati Raj Iiistitutions of which

77 I schemes have already been transferred. in the Education Department Hiring o f

teachers are being tindertaken by school Parent ‘i’eacher Associations and so far about

4000 school teachers have been hired through this mechanism. And lastly tinder the

l l rban Departtilent, Lirhan l,ocal I3udies have started oiitsotircing the collection and

transportation o f solid waste beg inn in^ with the Shiinin h4iinicipal Corporation.

19. Giveit the above context, we request thal the Ministry of 1:iiiance gives us Full

support to pursue our 1)evelopment flolicy I,oan tranches with the World Bank. I

would. therefore, request yoit to fotwnrd this proposal to the World Bank for apprcwd

o f the First Himaclial Pradesh 1)evelopment Policy LoaiKredi t .

Chief Secretary to the Government ofH.1’.

I 9

-

1 I

I I

C c j .-

i

.-

Annex B Page 1 o f 4

Annex B: Fiscal Summary for HP

Recent Trends in Key Fiscal Variables: Absolute Values

Rs Crore 1990-91 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 (R.E) Revenue 806.5 2992.6 3045.6 3715.8 3658.8 3980.9 4634.5 6558.6 6946.0 State's Own Revenues

Tax Non- Tax

Central Taxes and Grants Shared Taxes Grants

Non- Interest Expenditures Salaries (incl GIA for education) Pensions & Retirement Benefits Non- Wage 0 & M Other Revenue Expenditures Subsidies and Transfers Capital Outlay Net Lending

HP Primary Surplus (+)/Deficit (-) Interest Payments

Go HP Revenue Surplus (+)/Deficit(-)

Go HP Fiscal Surplus (+)/Deficit(-)

Consolidated Surplus(+)/Deficit(-)

Debt Stock Guarantees

209.8 160.9 48.9

596.7 188.0 408.7

974.8 470.7

50.8 164.2

8.9 96.3

149.2 34.6

-168.3 109.2

-93.8

-277.5

1294.0 403.3

904.6 863.2 1089.0 1052.0 1259.3 1851.9 2186.6 2398.0 620.3 728.4 915.6 887.5 984.3 1251.9 1497.0 1516.6 284.4 134.8 173.5 164.5 275.0 600.0 689.7 881.4

2088.0 2182.3 2626.8 2606.7 2721.6 2782.6 4372.0 4548.0 552.0 330.3 325.1 347.6 449.6 537.3 493.3 592.9

1536.0 1852.0 2301.7 2259.1 2272.1 2245.3 3878.7 3955.1

3639.4 3911.2 1644.2 1758.6 474.4 421.6 604.8 623.5

34.0 99.3 327.3 446.6 553.9 548.7

0.8 12.9

4030.2 1956.7 440.3 516.0 109.4 357.0 649.8

1.1

4541.2 2147.3 488.6 455.9

93.1 497.2 859.7

-0.6

4810.0 2251.3

532.6 613.0 254.5 382.1 784.8

-8.4

4803.8 2301.6

590.7 613.2 197.5 448.8 654.0

-2.0

5715.6 2583.5

714.8 780.8 310.8 512.8 820.8

-7.8

6519.5 2728.1

800.0 1057.8 263.9 615.3

1065.9 -11.4

-646.8 -865.6 -314.4 -882.4 -829.0 -169.3 843.0 426.5 736.8 979.2 1196.9 1459.2 1554.6 1641.1 1563.5 1665.3

-828.9 -1283.2 -860.5 -1482.4 -1607.2 -1158.4 92.5 -184.3

-1383.6 -1844.8 -1511.3 -2341.6 -2383.6 -1810.4 -720.5 -1238.8

-2471.5 -1322.0 -3232.9

7330.4 8728.8 10359.3 12149.7 14293.0 15571.4 18850.7 19942.8 1874.7 3061.0 4285.0 4428.3 4809.8 4315.5 3553.3 2129.51'

GSDP 2815.2 14112.5 15661.2 17148.2 18904.7 20721.0 23024.0 25435.0 28995.9 Memo Items Power Sector Revenue (Excl. Power Subsidy) (1) 1264.2 1628.8 1861.0 Cash Operating Expenditure (excl. Depreciation) (2) 1150.2 1574.8 1881.7 Earning before Int, Depm, Tax & Appropm (EBIDTA) (3)=(1)-(2) 114.0 54.0 -20.7 Interest (4) 125.5 121.8 110.3

Net Lossprofit (excl. Depm) before Subsidy (-I+) (6) -11.5 -67.8 -131.0 Capital Outlay (7) 409.8 487.0 1930.2 Overall Financing Requirement before Subsidy (+A)@) 421.2 554.8 2061.3 *Guarantees pertaining to the Himachal Housing Board,HP Forest Corporation,HPRIDC and HPIDB have been retired by merging their off budget borrowing with on- budget debt

Taxation (5) 0.0 0.0 0.0

Annex B Page 2 o f 4

Recent Trends in Key Fiscal Variables: Share of GSDP

% GSDP 1990-91 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 (R.E) Rev en u e 28.6 21.2 19.4 21.7 19.4 19.2 20.1 25.8 24.0 State's Own Revenues

Tax Non- Tax

Shared Taxes Grants

Central Taxes and Grants

Non- Interest Expenditures Salaries (incl GIA for education) Pensions & Retirement Benefits Non- Wage 0 & M Other Revenue Expenditures Subsidies and Transfers Capital Outlay Net Lending

HP Primary Surplus (+)/deficit (-) Interest Payments

Go HP Revenue Surplus (+)/Deficit(-)

Go HP Fiscal Surplus (+)/Deficit(-)

Consolidated Surplus(+)/Deficit(-)

Debt Stock

7.5 5.7 1.7

21.2 6.7

14.5

34.6 16.7

1.8 5.8 0.3 3.4 5.3 1.2

-6.0 3.9

-3.3

-9.9

46.0

6.4 4.4 2.0

14.8 3.9

10.9

25.8 11.7 3.4 4.3 0.2 2.3 3.9 0.0

-4.6 5.2

-5.9

-9.8

51.9

5.5 4.7 0.9

13.9 2.1

11.8

25.0 11.2 2.7 4.0 0.6 2.9 3.5 0.1

-5.5 6.3

-8.2

-11.8

55.7

6.4 5.3 1 .o

15.3 1.9

13.4

23.5 11.4 2.6 3.0 0.6 2.1 3.8 0.0

-1.8 7.0

-5.0

-8.8

60.4

5.6 4.7 0.9

13.8 1.8

11.9

24.0 11.4 2.6 2.4 0.5 2.6 4.5 0.0

-4.7 7.7

-7.8

-12.4

64.3

6.1 4.8 1.3

13.1 2.2

11.0

23.2 10.9 2.6 3.0 1.2 1.8 3.8 0.0

-4.0 7.5

-7.8

-11.5

69.0

8.0 5.4 2.6

12.1 2.3 9.8

20.9 10.0 2.6 2.7 0.9 1.9 2.8 0.0

-0.7 7.1

-5.0

-7.9

-10.7

67.6

8.6 5.9 2.7

17.2 1.9

15.2

22.5 10.2 2.8 3.1 1.2 2.0 3.2 0.0

3.3 6.1

0.4

-2.8

-5.2

74.1

8.3 5.2 3.0

15.7 2.0

13.6

22.5 9.4 2.8 3.6 0.9 2.1 3.7 0.0

1.5 5.7

-0.6

-4.3

-11.1

68.8 Guarantees 14.3 13.3 19.5 25.0 23.4 23.2 18.7 14.0 7.3 Memo Items Power Sector Revenue (Excl. Power Subsidy) (1) 5.5 6.4 6.4 Cash Operating Expenditure (excl. Depreciation) (2) 5.0 6.2 6.5 Earning before Int, Deprn, Tax & Approprn (EBIDTA) (3)=(1)-(2) 0.5 0.2 -0.1 Interest (4) 0.5 0.5 0.4

Net LossiProfit (excl. Deprn) before Subsidy (- / t ) (6) 0.0 -0.3 -0.5 Capital Outlay (7) 1.8 1.9 6.7 Overall Financing Requirement before Subsidy (t/-)(8) 1.8 2.2 7.1

Taxation (5) 0.0 0.0 0.0

Annex B Page 3 o f 4

Key Fiscal Variables under MTFP: Absolute Values

2007-08 2008-09 2009-10 2010-1 1 201 1-12 Rs Crore (Proj) (Proj) (Proj) (Proj) (Proj) Revenue 7760.0 8861.7 10156.9 11658.6 13379.7 State's Own Revenues

Tax Non- Tax

Central Taxes and Grants Shared Taxes Grants

Non- Interest Expenditures Salaries (incl GIA for education) Pensions & Retirement Benefits Non- Wage 0 & M Other Revenue Expenditures Subsidies and Transfers Capital Outlay Net Lending

Interest Payments-with DPL

2900.0 3340.0 3831.2 4375.8 5063.4 2000.0 2330.0 2691.2 3121.8 3621.3

900.0 1010.0 1140.0 1254.0 1442.1 4860.0 5521.7 6325.7 7282.8 8316.4

785.0 957.7 1168.4 1425.4 1739.0 4075.0 4564.0 5157.3 5857.3 6577.3

7149.4 3014.4

915.0 1111.5 244.0 777.7

1093.2 -6.3

1737.0

8213.6 3414.4

974.1 1385.8 261.1 778.3

1409.9 -10.0

1829.1

9499.7 3777.9 1087.6 1717.2 295.4 778.5

1854.6 -11.4

1948.0

10861.4 4023.2 1229.0 2161.7 323.4 782.7

2354.4

2074.7 -12.9

12409.3 4385.4 1388.7 2587.4 356.7 782.1

2923.6

2209.5 -14.6

HP Primary Surplus (+)/ Deficit (-) 610.6 648.1 657.2 797.1 970.4

Go HP Revenue Surplus (+)/Deficit(-) -39.6 218.9 552.4 1064.0 1669.9

Go HP Fiscal Surplus (+)/Deficit(-) -1126.4 -1181.0 -1290.8 -1277.5 -1239.1

Consolidated Surplus(+)/Deficit(-) -1915.23 -2017.18 -2194.40 -1428.45 -1179.20

Debt Stock 21069.3 22250.3 23541.1 24818.6 26057.7

GSDP 33055.3 37683.1 42958.7 48972.9 55829.1 Memo Items Power Sector Revenue (Excl. Power Subsidy) (1) 1789.5 2434.5 3223.6 3993.4 4517.7 Cash Operating Expenditure (excl. Depreciation) (2) 1715.5 2391.2 3080.2 3610.6 3949.9 Earning before Int, Depm, Tax & Appropm (EBIDTA) (3)=(1)-(2) 74.0 43.3 143.4 382.8 567.8 Interest (4) 140.3 162.7 161.9 168.1 172.9 Taxation (5) 0.0 0.0 0.0 0.0 0.0 Net LossProfit (excl. Depm) before Subsidy (-/+) (6) -66.3 -119.4 -18.5 214.7 394.8 Capital Outlay (7) 948.6 962.9 1141.1 631.7 611.0 Overall Financing Requirement before Subsidy (+/-)(a) 1014.9 1082.3 1159.7 417.0 216.2

Annex B Page 4 o f 4

Key Fiscal Variables under M T F P : Share of GSDP

2007-08 2008-09 2009-10 2010-1 1 201 1-12 % GSDP (Proj) (Proj) (Proj) (Proj) (Proj) Revenue 23.5 23.5 23.6 23.8 24.0 State's Own Revenues

Tax Non- Tax

Central Taxes and Grants Shared Taxes Grants

Non- Interest Expenditures Salaries (incl GIA for education) Pensions & Retirement Benefits Non- Wage 0 & M Other Revenue Expenditures Subsidies and Transfers Capital Outlay Net Lending

Interest Payments-with DPL

HP Primary Surplus (+)/ Deficit (-)

Go HP Revenue Surplus (+)/Deficit(-)

Go HP Fiscal Surplus (+)/Deficit(-)

Consolidated Surplus(+)/Deficit(-)

8.8 6.1 2.7

14.7 2.4

12.3

21.6 9.1 2.8 3.4 0.7 2.4 3.3 0.0 5.3

1.8

-0.1

-3.4

-5.8

8.9 6.2 2.1

14.7 2.5

12.1

21.8 9.1 2.6 3.7 0.7 2.1 3.7 0.0 4.9

1.7

0.6

-3.1

-5.4

8.9 6.3 2.7

14.7 2.7

12.0

22.1 8.8 2.5 4.0 0.7 1.8 4.3 0.0 4.5

1.5

1.3

-3.0

-5.1

8.9 6.4 2.6

14.9 2.9

12.0

22.2 8.2 2.5 4.4 0.7 1.6 4.8 0.0 4.2

1.6

2.2

-2.6

-2.9

9.1 6.5 2.6

14.9 3.1

11.8

22.2 7.9 2.5 4.6 0.6 1.4 5.2 0.0 4.0

1.7

3.0

-2.2

-2.1

Debt Stock 63.7 59.0 54.8 50.7 46.7 Memo Items Power Sector Revenue (Excl. Power Subsidy) (1) 5.4 6.5 7.5 8.2 8.1 Cash Operating Expenditure (excl. Depreciation) (2) 5.2 6.3 7.2 7.4 7.1

Interest (4) 0.4 0.4 0.4 0.3 0.3

Net LossiProfit (excl. Deprn) before Subsidy (-I+) (6) -0.2 -0.3 0.0 0.4 0.7

Overall Financing Requirement before Subsidy (+/-)(8) 3.1 2.9 2.7 0.9 0.4

Earning before Int, Deprn, Tax & Approprn (EBIDTA) (3)=( 1)-(2) 0.2 0.1 0.3 0.8 1 .o

Taxation (5) 0.0 0.0 0.0 0.0 0.0

Capital Outlay (7) 2.9 2.6 2.1 1.3 1.1

Note: Non-tax revenue from royalty power and equity power have been projected on a realistic basis, considering commissioning possibilities o f ongoing hydropower projects, prices at which power may be sold, and actual generation. There can be an upside to the revenue projection if more aggressive assumptions are used or the three fundamental assumptions listed above turn out to be more favorable than assumed. For demonstration purposes, we have attempted to quantify the revenue upside as 0.3 percent to 0.5 present o f GSDP in each of the years 2009-10 to 201 1-12. As a consequence, HP's projected own revenue could reach 9.4 percent o f GSDP in 201 1-12. Correspondingly, the gross fiscal deficit could decline to 1.9 percent o f GSDP in 201 1-12, and the revenue surplus would increase to 3.3 percent o f GSDP in 201 1-12.

Annex C Page 1 o f 3

Annex C: Action Plan for Completion of Catchment Management Activities For Sustainable Development of Hydropower in Himachal Pradesh

1. GoHP has a vision o f accelerating sustainable development o f hydropower projects in the state. Several actions have been initiated by GoHP to facilitate rapid implementation o f the activities related to the above activities:

A committee headed by Chief Conservator o f Forests (P&D) has been constituted to develop strategy for effective implementation o f a l l CAT Plan works and to design formats for collecting/consolidating base line data, which can later o n be converted into GIS platform. The committee will also develop performance audit system; All the monies payable on account o f cost o f Compensatory Afforestation (CA), cost o f C A T Plan, N e t Present Value etc. are recovered f rom the user agency at the time or after the approval by the Ministry o f Environment & Forests (GoI), under Forest (Conservation) Ac t 1980. The funds so recovered are now being remitted to account CA-1595 allotted to State Himachal Pradesh at Corporation Bank Lodhi Road, N e w Delh i by Compensatory Afforestation Fund Management and Planning Authority (CAMPA); T o ensure speedy transfer o f money to C A M P A a account to be operated jo in t ly by Conservator o f Forests (Finance) and Registrar (Budget) has been opened in the Corporation Bank Kasumpti Branch at Shimla. All the Divisional Forest Officers (DFOs) have been directed to deposit the amount recovered from user agencies to this jo in t account; Directions to prepare beat level status o f forest have been issued to al l the Conservators; Public Works Department has been requested to issue directions to ensure safe disposal o f muck generated in the road construction process; The CAMPA has envisaged setting up o f State Level Steering Committee headed by the Chief Secretary o f the respective State and the State Management Committee headed by the respective Principal Chief Conservator o f Forests (PCCF) o f each State. These committees have been notified; Department has reviewed the existing reporting mechanism for various departmental activities. Wherever necessary the formats have been revised; Three Watershed Development Societies for Ravi, Beas and Satluj catchment have been registered; For spending through Watershed Development Society, a separate account in the Nationalized Bank i s opened for each society after release o f funds from CAMPNState Government; Eco-Task Force have been raised by employing ex-army personnel to increase the pace o f C A T Plan work; and Reporting/monitoring mechanism for progress under C A T Plan has been put in place.

2. The following action plan describes activities planned by the state government for immediate and medium term implementation o f catchment management activities (CAT+CA), works o n which shall be simultaneously taken up. T h e long terms plan also would include use o f NPV+ lease rent amount. These actions will support increase in retention o f soil moisture, soil conservation and reduction o f s i l t inflows to the rivers, besides increasing overall green cover.

(a) Plan for Short term Actions:

3. State undertakes to implement priority actions for items included in the C A T Plans o f 4 projects - Nathpa-Jhakri, Baspa, Rampur and K o l D a m projects, and a part o f the C A works as per schedule given below:

Annex C Page 2 o f 3

Action Forest Department to provide an estimate o f funds required to implement priority action (CAT and CA related) to Finance Department GoHP to release funds already available, for C A and C A T plan, etc. to Forest Department on quarterly basis, based on the above estimates. The f i rs t installment to be released by June 15,2007

Implementation o f CA works to begin by July 15, 2007 Identify priority actions and fix implementation responsibilities at local level (related to major items, such as landslide control, soil conservation, nursery development, etc) in coordination with project developers, territorial DFOs, and other stakeholders- by June 30,2007 Nominate a senior level officer for implementation and monitoring o f C A T plan and related works - by June 30,2007. Prepare designs, estimates, targets and monitoring parameters for a l l identified priority activities (by individual responsible . _ entities) -by August 15,-2007. Finalize the designs and estimates (by PCCF/Secretary, or the - . _ designated committee), including employing the services o f a state neolocist- bv August 3 1. 2007. Ensure availability o f funds to individual implementing entities (DFO, Societies) - by September 0 1, 2007.

Quarterly monitoring reports to be provided with 10 days o f next quarter (beginning September 10,2007). The base line information with site photographs to be generated for each project, within 15 days f rom finalization o f the design. State shall take other measures to facilitate implementation, e.g. review o f expenditure norms for catchment management activities, enhanced delegation o f financial powers (including for outsourcing works) to executing officers - by July 3 1,2007.

Timeline/ Present Status Done

Quarterly requirement prepared by Forest Department and shared with Government. First installment o f Rs. 100 mi l l ion has been released to Forest Department. Further, GoHP has agreed to release an additional amount o f Rs. 200 mi l l ion by March 2008, as per an agreed schedule. GoHP will also facilitate implementation o f the remaining outstanding C A and C A T works within the next 3 years - at yearly completion targets o f 30%, 30% and 40% o f the remaining outstanding works.

Works commenced. Works/ Priority activities identified.

Chief Conservator o f Forest (P&D) has been nominated Act ion initiated.

Act ion being taken.

Out o f the f i rs t installment o f Rs. 100 mi l l ion released to Forest Department, Rs. 70.7 mi l l ion has been allotted to the concerned entities and balance amount i s being allotted. N o t due

Photo monitoring technique i s being circulated. Draf t proposal for enhanced delegation o f financial powers will be prepared and sent to Government for approval by July 3 1,2007.

Annex C Page 3 o f 3

Action Terms o f reference (TOR) for the preparation o f the baseline database and preparation o f the C A T plan for the Satluj basin prepared and finalized Procurement activities for getting consultants initiated

Preparation o f GIs-based baseline data on forest cover and quality, erosion intensity and s i l t load Finalization o f prioritized implementation plan for al l catchment activities o f the basin

(b) Plan for Long term Actions:

Timeline Draft TOR prepared by August 15, 2007 and finalized in consultation with Bank by September 15,2007. Activities initiated by September 3 1, 2007 and completed by December 3 1, 2007. By March, 2008.

Within 90 days after the finalization o f r iver basin catchment management ulan.

4. Subsequently, these plans shall be prepared for al l r iver basins.

State shall prepare river basin level C A T plans for a l l major river basin, starting with the Satluj basin.

5. Once the basin level C A T plans are prepared and ready for implementation, a l l the remaining project- specific plans shall be integrated into that (until then, the individual CAT plans continue to be implemented). All basin level C A T plans shall be based on high quality disaggregated GIs-based baseline data on forest cover and quality, erosion intensity and s i l t load. The state shall develop this baseline within a specified time period (by March, 2008) through utilization o f the services o f the forest department and consultants. The key activities would include:

Annex D Page 1 o f 7

Annex D: Terms of Reference for Environment Master Plan July 2007

1. Background

Located in North India, Himachal Pradesh (HP) i s a small mountainous state bordering Punjab, Haryana, Uttarakhand, and Jammu and Kashmir. With a geographical area o f 55,673 sq. k m s and population o f 6.6 mill ion, HP accounts for 1.6 percent o f the national geographical area and about 0.6 percent o f India’s population. It i s one o f India’s leading states in terms o f human development, and, in recent years, HP has achieved higher growth rates than the rest o f the country - powered by rapid expansion o f the secondary and tertiary sectors. HP i s a unique state because o f the success it has achieved over the past three decades, despite severe structural disadvantages o f relative remoteness, environmental fragility, and a diff icult hill terrain which raises the costs o f service delivery - al l characteristic o f Himalayan states in India. At the same time, the state i s r i ch in natural resources with abundant water, minerals, forests, biodiversity, and fertile soils, and judicious and sustainable exploitation o f these resources could present opportunities for further development.

The Wor ld Bank has been approached by the Government o f Himachal Pradesh (GoHP) to become a partner in i t s development effort, and support a developing program o f policy and institutional reforms. In light o f i t s articulated development objectives, GoHP has signaled willingness to adopt and continue reforms in key areas to create fiscal space to finance critical investments, promote private sector development, encourage sectors where the state can compete effectively by playing to i t s natural strengths, strengthen governance and public service delivery, conserve and protect i t s environmental heritage, and further improve social outcomes. To help underpin HP’s reforms, the Bank has been requested by both GoHP and the Government o f India (GoI) to provide support in the form o f a Development Policy Loan (DPL).

HP has some distinctive characteristics that set it apart f rom other Indian states. Firstly, it i s a relatively young state in the Indian union. The state, currently comprising 12 districts, was granted full statehood in 1971. Secondly, HP i s a small state both in terms o f area and population. O f the population o f about 6.6 mill ion, 90 percent s t i l l reside in rural areas. In terms o f area, it ranks seventeenth among India’s states and union territories - and i s one-sixth the size o f Rajasthan, India’s largest state. Thirdly, it i s geographically different f rom most Indian states located in the plains. HP i s largely mountainous, but exhibits extraordinary biological diversity. Except for a few pockets bordering Punjab and Haryana, altitudes span from 400 meters to almost 7000 meters above sea level. O f the aggregate geographical area, almost two-third i s officially classified as forests, although actual forest cover i s lower. The hilly terrain and forest cover contribute to l o w availability o f land for traditional agriculture, and net sown area i s only about 15 percent o f the total. The population density in the state (at around 110 per sq. km.) i s lower than the national figure o f 320 per sq. km., largely due to relatively l o w and scattered population in the hill and forest areas.

HP’s r i ch and varied natural heritage provides both opportunities and risks to i t s development strategy. Natural resources are a critical, if underutilized, engine for accelerating growth and poverty reduction. Sustainability o f economic growth in HP i s contingent upon sustainability o f i t s environmental heritage. HP’s key growth and revenue drivers in the medium t e r m are critically dependent on the state’s natural resource base. At the same time, resource dependence renders the economy highly vulnerable to the consequences o f environmental degradation. Whi le some environmental degradation inevitably accompanies growth, inaction or failure to balance the environmental costs o f development with the benefits will have particularly serious consequences for the state - whose opportunities l ie in sectors l ike horticulture, tourism, and hydropower which depend on the environment. Given HP’s unique geographic

Annex D Page 2 o f I

situation and small resource base, protecting r ich natural resources assume greater importance than in other states. The state, therefore, recognizes the need to sustain i t s environmental resources.

2. Objectives

With a long term perspective o f achieving environmentally sustainable development, GoHP has indicated i t s intention to prepare an Environment Muster PZun (EMP) for the state, to be completed within the f i rs t year o f the DPL. The EMP would be a guiding tool providing strategic direction with respect to al l encompassing environmental issues; a unique means for engagement between implementing agencies, development departments and the local government to take action on environment pr ior i ty issues o f local concern; developed with community interests integrating feedback from residents and interested stakeholders; and a tool to monitor environment performance and progress. This would be the f i r s t attempt in India to develop an Environment Master Plan o f this nature.

The key objectives o f the EMP would be to enable the GoHP to: Simultaneously address issues o f ecological and environment restoration and bring convergence along with the development activities taking place in the state; Engage and ensure close coordination with al l the concerned development departments, both at the state and GO1 level Decide future financing o f investments for development in a sustainable manner, and Develop suitable institutional arrangements in order to implement the GoHP’s policies and strategies.

3. Scope o f Work

The scope o f work to achieve the above stated objectives would involve the following: (these have been further detailed as tasks in Section 4)

1. identification o f different eco-zones with specific environment attributes ; 2. preparation o f a detailed resource inventories covering al l environment parameters; 3. inventorization o f needs o f different sections o f the population; 4. trend analysis o f cumulative environment degradation; 5. vulnerability assessment in the context o f air, water and land, to establish differential

development zones; 6. documentation o f potential threats and new development policies; 7. formulation o f appropriate development criteria for optimization o f resource use; 8. establishing interlinkages between different sectors and points o f integration between them; 9. preparation o f sectoral guidelines to mainstream environment parameters in development

activities; 10. forecasting for externalities and planning for corrective measures such as those arising f rom

climatic changes 1 1. finalisation o f a comprehensive integrated EMP.

The major sectors and activities which would be covered (but not be l imi ted to), by the EMP have been broadly categorized under infrastructure, natural resources management (NRM), Services and Regulatory and l isted in the following table:

Annex D Page 3 o f 7

Infrastructure

The E M P will also provide an operational mechanism for issue identification, preparation and implementation o f management plans, accountability mechanisms, monitoring, and enforcement procedures, and roles for other department, to be coordinated by the Environment Department. Once prepared, i t s implementation would be piloted during the DPL process, beginning with the identification and implementation starting with the fragile areas and gradually scaling up to cover a l l the sectors mentioned above, to the State level.

4. Methodology and Tasks

Task 1: Establish Baseline conditions: The objective o f this task i s to establish the “as is’kcenario, identify critical thrust areas, issues and corrective measures for a l l the sectors / activities listed above in section 3.

o Common parameters for scoping baseline for the above listed sectors are as follows: Resource inventory o f existing assets o f the sector Patterns o f planning and development in the sector Technology adopted in the sector along with any changes in technology Stakeholder involvement in environment preservation and restoration Critical environment issues / hotspots associated with the sector Environment initiatives taken by the sector to address critical environment issues Environment related studies carried out in the sector Environment monitoring (key parameters such as air and water pollution) carried out for activities related to the sector Institutional mechanisms within the sector to address identified environment issues Data / documentation pertaining to addressing demographic issues in the context o f the sectors, such as population changes; requirements o f populations and changing lifestyles; migratory populations

Annex D Page 4 o f 7

including tourists; transhumants; transit labour popluation; pressures fe l t by communities due to degraded environment conditions.

Information on human resource management issues (which may have relevance to environment management) in the sector such as: manpower, vocational training, awareness levels etc. Regulatory analysis to identify any regulations that have environment implications (negative or positive), and compliance with the same. In addition to the above (section 4,l.a) listed common parameters, those specific to NRM sectors, covering flora, fauna and aquatic species are as follows:

o

o

o

. . Inventory o f endangered species . Inventory o f exotic species .

. Information on biodiversity losses

Inventory o f habitats and existing species

Inventory o f migratory species and scope for introducing new species based o n climatic /(ago-climatic) stability

o In addition to the above (section 4,l.a) listed common parameters, those specific to service sectors, are as follows:

Information / data o n environment health and quality o f l i fe related issues such as water and air borne diseases, changes in vectors etc.

. Methodology for carrying out baseline data collection would involve the following:

o Overall coordination would be provided by the Department o f Environment o Deployment and utility o f a combination o f primary and secondary data. o Combination o f in-house and outsourced inputs derived from consultants

(appropriately identified), expertise drawn f rom the department o f environment and other sectoral agencies. Secondary data and information can be derived from sectoral and development agencies.

o Appropriate questionnaires for data collection would be developed by the consultants o Primary data collection would focus on NRM and service sectors. T h i s would be

outsourced from educational/ vocational training institutes, universities, research / training institutes belonging to sectors, during vacations and closure.

Task 2: Conduct a spatial Vulnerability Assessment and formulate planning principles : the objective o f this task i s to correlate baseline data and information and identify critical and vulnerable areas / issues related to the above listed sectors.

o Establish criteria o f vulnerability based on baseline collected. . A key criteria would be related to environmental health and i t s associated impact on quality o f l i fe.

o Set priorities for optimal decision making. o Identify vulnerable areas i.e, physical areas or hotspots; and policies which exacerbate

environment deterioration in these areas. o M a p hot spots and identify trade offs o Categorize areas based on impacts and associated environmental r i sks and establish

criteria for the same. o Formulate planning approach, as an optimal combination o f “bottom up” (inclusive o f

community inputs) and “top down”. o Develop criteria for carrying out an Environment Impact Assessment and guidelines for

the 3 broad categories o f sectors stated in Section above. Additionally identify sectors / activities where EIA would be mandatory based o n their vulnerability. (This i s to help raise the bar in activities to be carried out in vulnerable areas)

Annex D Page 5 o f 7

Task 3: Develop Public Consultation and Communication Strategy for the Department of Environment: The objective o f this task i s to enable and strengthen:

The institutional mechanism for the redressal o f environment issues engaging public attention. T h i s would be further aided by placing the EMP in the public domain People’s awareness and sensitization for effective inputs An increase in the implementation and accountability o f developers and implementing agencies.

o

o o

Task 4: Develop sectoral guidelines (for the three broad categories o f sectors identified in section 3): These would a im to ensure that sectoral development has minimal adverse environment impacts, and would typically include the following:

o typical environment issues for each sector and an impact matrix. o guidance on carrying out EAs. o TORS for carrying out EAs. o Good practice examples to illustrate innovative solutions for identified issues while

balancing economic, social and ecological considerations.

Task 5: Develop an institutional mechanism for implementation of the EMP o

o

o

Develop an operational mechanism for the overall coordination by the Department o f Environment. Def ine roles and responsibilities o f departments related to the sectors listed in Section in the context o f environment management. Develop a mechanism for each department to enable issue identification, preparation and implementation o f management plans, accountability mechanisms, monitoring, and en for c ement procedures . Develop a mechanism to ensure that each sector (if need be with the intervention o f the Finance Dept.) has in-built monetary mechanisms to address environment issues in their development plans.

o Establish mechanism to integrate regional and local level plans at the area level to enable a decentralized planning process.

o

Task 6: Establish need for training and capacity enhancement o

o

Assess s lu l l s and identify gaps in environment management s lu l l s within the department o f environment and sectors listed in Section 3 above. Prepare training plan indicating target audience, s l u l l level and broad indications o f type and extent o f environment management training required.

Task 7: Develop Monitoring and Evaluation Protocols o Identify monitorable parameters which would indicate increased environment

responsibility within development sectors and within the community. o Identify monitorable indicator for improved environment management in identified hot

spot areas. Citizen oversight committees can be formed and monitoring protocols developed for them to assist in improved environment management in these areas.

o Develop a system and a protocol for monitoring environment performance which i s GIS, GPS based and IT enabled.

o Develop a system for monitoring cumulative impacts. Ecological footprint analysis can also be carried out on pi lot basis to test i t out as a monitoring tool.

Annex D Page 6 o f 7

5. Deliverables and reporting schedule

o The following time schedule shall be endeavored to be followed for completion o f the proposed Environment Master Plan: . .

. . . . .

Submission o f request for proposal to Wor ld Bank - 3 1st July, 2007. Publication o f advertisement for Inviting Tenders for the proposed work - 10th August, 2007. Receipt o f tenders - 3 1 st August, 2007. Processing and scrutiny o f tender document - 10th September, 2007. Short listing o f consultants - 10th October, 2007. Award o f work - 15th November, 2007. Start o f work by consultants - 30th November, 2007.

o The terms o f reference comprises seven major tasks, the time frame for the completion o f these tasks shall be as under:-

Task 1:

Task 2:

Task 3:

Task 4:

Task 5:

Task 6:

Task-7:

Task-8:

Establish Baseline conditions - April lst, 2008 I t i s envisaged that some o f the inventory activities initiated during the period will continue beyond 4 months also. Conduct a Spatial Vulnerability Assessment and Formulate Planning Principles - July lst, 2008 (after the completion o f task-1) Develop Public Consultation and Communication Strategy for the Department of Environment - (The activity to start one month after the start o f task-1 and to continue till completion o f tasks 1&2. If required, to continue beyond completion o f task -2 t i l l completion o f task -5.) Develop Sectoral Guidelines - T w o months (After completion o f task- 2): September lst, 2008 Develop an institutional mechanism for implementation of the EMP- T w o months (After completion o f task-4): November lst, 2008 Establish need for training and capacity enhancement - One month (After completion o f task-5): December lst, 2008. Develop monitoring and Evaluation Protocols- One month (After completion o f task-6), January lst, 2008 Submission of Final Report - Environment Master Plan- Two months (After completion o f t a ~ k - 7 ) ~ March lst, 2008

The final Environment Master Plan shall be delivered by the first quarter o f 2008. The consultants shall have the flexibil i ty to start task-2 simultaneously with task-1 but will have to complete the task-2 within the time framed specified after competition o f task -1. Deliverable out puts at the completion o f each o f above mentioned tasks.

Task-1:

Task-2:

Report on Base line parameters o f each sector as specified under the TORS under this Task. A Report giving the detailed analysis o f vulnerability and identifying the critical parameters that would define the planning principles. The report shall also identify the sectors for which the EL4 shall be mandatory. The report shall identify vulnerability criteria and develop a vulnerable matrix (including mapping o f vulnerable zones) for the sectors. The out puts shall be documented as part o f task- 1&2 reports. A Report specifying the out puts mentioned in the TORS for this task.

Task-3: Tas k-4 :

Annex D Page 7 o f I

A Report giving an institutional frame works focusing on inter-agency coordination for various sectors for the implementation o f Environment Master Plan. A status paper on the training and capacity needs identified under various sectors with reference to implementation o f EMP. A report defining monitoring evaluation and responsibility protocols.

Task 5:

Task-6:

Task-7: Task-8: Submission o f Final Report.

6. Team Composition:

The consultant’s team shall comprise o f a multi disciplinary team o f experts in sectors identified for the preparation o f Environment Master Plan. The consultants shall be required to seek assistance o f an international repute/ advisor for various activities.

Annex E Page 1 o f 4

Annex E: Public Information Notice (IMF)

IMF Executive Board Concludes 2006 Article I V Consultation with India Public Information Notice (PIN) No . 07/9 January 25,2007

Public In$xniution Nuiices (PINS) f o im part o f the TMF’9 efforts to promote transparency o f the IMF’s vie\bs and analysis o f ecoiiornic developments and policies. With the consent o f the country (or countries) concerned, 1’1Ns are issued after Executive Board discussions o f Article 1V consultations with member countries, o f i t s surveillance o f developments at the regional level, o f post-program monitoring, and o f ex post assessments o f member countries with longer-term program engagements. PIKs are also issiicd after Excct1tii.c Board discussions o f gcncral policy imattcrs, unless oiherwisc decided by the Exccutivc Board in a particular casc.

On December 20,2006, the Executive Board o f the International Monetary Fund (IMF) concluded the Article IV consultation with India.’ An update was requested from IMF, as attached below.’

India-Assessment Letter for World Bank August 10,2007

As requested, this note provides the IMF staf fs assessment o f India’s macroeconomic conditions, prospects, and related policies for the First Himachal Pradesh Development Policy LoardCredit being considered by the Executive Board o f the Wor ld Bank. The thrust o f our assessment remains the same as in the 2006 staff report.

The economy continues to grow strongly, supported by domestic demand. GDP growth has been stronger than expected, but i s expected to moderate to 8% percent in 2007/08, f rom a high o f 9% percent last fiscal year. Headline inflation (WPI), at 4% percent, i s below the R B I ’ s target although core inflation i s higher. W h i l e the rupee has appreciated by 8 percent in real effective terms this year, export growth remains strong at 18 percent y/y. With imports also robust, the external current account deficit i s expected to widen to 1% percent o f GDP in 2007/08 (about % percent below the projection in the 2006 staff report). The deficit i s financed by portfolio inflows and commercial borrowings, which could make India more susceptible to a reversal in global investor sentiment. However, reserves stand at a record $222 bi l l ion (about 8% months o f imports, and over 10 times short-term external debt), and external debt remains l o w (about 17 percent o f GDP, as o f end 2006/07).

The immediate challenge i s managing the near-term risk o f potential inflationary pressures. Short- term interest rates remain l o w in real terms, liquidity remains ample, and credit growth remains robust, nntwithctnndino inrrencec in nnlirv mtec 2nd wcerve remiirementc over the nnct venr 2nd ctenc hv the

Annex E Page 2 o f 4

The key medium-term priority i s to address India’s supply constraints on an aggressive footing. This involves f i rs t reducing general government debt (about 79 percent o f GDP, as o f end 2006/07) and creating room for social and infrastructure spending. The general government deficit i s expected to decline further to 5% percent o f GDP in 2007/08 (compared with a projection o f 6% percent in the staff report), o n the back o f strong growth and improved statelevel finances. Provided consolidation continues, staff projects that the debt-to-GDP ratio should fall to about 70 percent o f GDP by 2008/09, given the backdrop o f relatively l o w interest rates and strong growth. However, achieving this and the central government’s target o f current balance by 2008/09 wil l require revenue and expenditure reform, including the streamlining o f tax exemptions and subsidies.

Relieving supply constraints also requires greater progress in structural reforms to improve infrastructure, create jobs, and reduce poverty. While special economic zones hold promise to stimulate investment and employment, the associated tax holidays could be costly, and better targeted tax incentives would likely be more cost effective. Trade tariffs could be further reduced, building on recent progress. In addition, steps to develop key financial markets (e.g., money, corporate bonds, and derivatives) would facilitate investment (including infrastructure) and enable better risk management as the capital account opens further.

Overall, prospects for India’s growth and macroeconomic stability remain good, and a higher growth path could be achieved by accelerating key reforms. The staff report on the 2006 Article IV consultation with India was published on February 15,2007.

Annex E Page 3 o f 4

India: Selected Econontic Iiidicators ''

2002103 2003104 2004105 2005i06 2006107

Proj.

"

(In percent)

Domestic economy

Change in real GDP at factor cost

Change in industrial production

Change in wholesale prices (1xriod averagc)

Change in consumer prices (period average)

hxternal economy

Merchandise exports

Merchandise imports

Current account balance

(In percent o f GDP)

Direct investment, net ' Portfolio investment, net

Capital account balance

Gross official reserves j'

(In months o f imports) ' External debt (in percent o f GDP) 1

3.8 8.5 7.5 8.4 8.9

5.8 7.0 8.4 8.2 1..

3.6 5.4 6.5 4.4 5.2

4.0 3.9 3.8 4.4 6.6

(ln billions of U.S. dollars)

53.8 66.3

64.5 80.0

6.3 14.1

1.3 2.3

3.2 2.4

0.9 11.4

10.8 16.7

76.1 113.0

9.4 9.2

20.7 18.6

85.2

118.9

-2.5

-0.4

3.7

9.3

28.0

141.5

8.7

17.7

104.8

156.3

-10.6

-1.3

5.7

12.5

24.7

151.6

7.5

15.7

127.6

196.8

-17.9

-2.0

9.3

14.7

48.6

175.4

7.9 ', 16.7

Annex E Page 4 o f 4

T: inan cia1 variables

Central go-cieiiinient balance (in -6.0 -5.1 -4.1 -4.2 -3.6 percent o f WP) (’

percent o f GDI’) ’ Change in broad money (in 14.7 16.7 12.3 21.2 19.3 percent)

Tnterest rate (9 1 -day Treasury bill S.9 4.2 5.3 6. I 7.1 rate)

General goveu-nnient balance ( in -9.7 -9.1 -7.3 -7.4 -6.2

Sources: Rescrve Bank o f India; Ministry o f Finance: ( ‘ E K Data Company Ltd; IMF, Intcn?utioizd Firiaucial Statistics: and TMF staff estimates.

otherwise indicated. ’ Net foreign direct investnicnt in India less i ic t foreign invcstincnt abroad. ’ End of period.

Data are for April-March fiscal years as available at the t ime o f the Executive Board meeting. unless 1

Impot-ts o f goods and services projected over the foll0~7lng twelve months. Residual maturity basis, except contracted maturity basis for mediuni- and long-teim nonresident

Excluding divcstment receipts from rcvenucs and onlcnding o f small saving collcctious f rom

4

5

Indian accounts.

expcnditures and nct lending. ’ As o f December 8.2006.

6

TMF calculations as ofNovember 30, 2006. As ofNovember 24,2006. As o f December 22,2006.

9

10

P

m 2

m P 2 m

E

Annex G Page 1 o f 2

Annex G: Country at a Glance

POVERTY and SOCIAL

2005 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1999-05

Population (%) Labor force (%)

Most recent estimate (latest year available, 1999-05)

Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition I% of children under5) Access to an improved water source (% of population) Literacy I% ofpopulation age f5+) Gross primary enrollment I% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1985

GDP (US$ billions) Gross capital formation/GDP Exports of goods and serviceslGDP Gross domestic savingslGDP Gross national savingslGDP

Current account balancelGDP Interest payments/GDP Total debVGDP Total debt servicelexports Present value of debffGDP Present value of debffexports

227.2 23.7 5.4

19.5 19.9

-2.3 0.9

18.0 23.0

1985-95 1995-05 (average annual growth) GDP 5.5 6.0 GDP per capita 3.4 4.3 Exports of goods and services 10.9 13.5

India

1,094.6 730

804.2

1.5 1.9

29 29 63 62 47 86 61

116 120 112

1995

355.2 26.5 11.0 25.1 28.4

-1.8 1.4

26.6 27.8

2004

8.3 6.8

28.1

South Asia

1,470 684

1,005

1.7 2.1

29 63 66 45 84 60

110 116 105

2004

695.9 31.0 18.2 31.1 33.3

-0.7 0.5

17.9 12.7 15.8 72.7

2005

9.2 7.7

22.0

LOW- Income

2,353 580

1,364

I .9 2.3

31 59 80 39 75 62

104 I10 99

2005

005.7 33.4 20.3 32.4 34.7

-1.3 0.8

15.3 12.6 13.7 57.3

2005-09

8.3 7.0

13.6

Development diamond'

Life expectancy

T

I GNI Gross per + primary capita enrollment

I I

Access to improved water source

India Low-income group

Economic ratios'

Trade

Capital J

Domestic ~

savings formation

Indebtedness

India Low-income group

STRUCTURE of the ECONOMY

(% of GDP) Agriculture industry

Services

Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services

Manufacturing

1985 1995 2004 2005

33.7 28.2 18.0 18.3 26.4 28.1 27.5 27.3 16.4 18.1 15.9 15.7 39.9 43.6 53.7 54.4

67.4 63.8 59.9 58.3 11.4 10.8 11.0 11.3 7.8 12.2 20.0 23.3

1985-95 199505 2004 2005

3.5 2.1 0.0 6.0 6.5 5.8 9.6 9.4 6.7 5.4 8.7 9.1 6.7 8.2 9.6 9.9

5.7 5.2 3.8 5.7 4.2 5.5 5.4 9.8 5.4 6.3 16.7 18.8 9.9 10.0 22.3 27.1

Growth of capital and GDP (YO)

30 T 20

10

0

-10

I GCF -o-c,np I

Growth of exports and imports (%) I

Note: 2005 data are preliminary estimates. Group data are to 2004. 2005 Indicates 2005-06 (Apr 1 to Mar 31).

The diamonds show four key indicators in the country (in bold) compared with its income-group average. if data are missing, the diamond will be incomolete.

Annex G Page 2 o f 2

India

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surpius/deficit

1985 1995 2004 2005

TRADE

(US$ millions) Total exports (fob)

Tea Iron Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000=100) import price index (2000=100) Terms of trade (2000=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, locai/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

Composition of net resource flows

4.9 10.0 7.2 9.0

19.2 17.9 -1.7 -3.1 -8.8 -6.7

1985 1995

9,461 32,311 334 1,011 544 1,175

5,580 23,747 17,294 43,670 1,310 970 4,261 7,526 3,338 10,330

100 106 135 102 74 103

1985 1995

12,777 39,657 19,418 51,213 -6,641 -1 1,556

-776 -3,205 2,207 8,506

-5,210 -6,255

4,639 3,319 571 2,936

6,520 21,687 12.2 33.4

19a5 1995

40,951 94,464 2,396 9,849 9,750 17,499

3,531 13,566 313 1,713 124 357

450 565 1,421 -1,048 2,273 1,254

106 2,144 0 1,591

2,882 1,427 1,375 1,318

157 1,170 1,218 149

280 901 938 -752

3.9 4.2 4.4 4.4

19.1 19.7 -3.7 -3.5 -7.2 -7.4

2004 2005

82,150 104,780 1,440 1,436 5,079 6,189

60,731 71,816 118,779 156,334

3,105 2,681 29,844 43,963 25,135 31,677

115 124 ill 126 103 98

2004 2005

128,181 165,390 150,611 194,679 -22,430 -29,289

-2,669 -5,027 20,253 24,095

-4,846 -10,221

31,618 24,874 -26,772 -14,653

140,076 150,866 44.9 44.3

2004 2005

124,376 123,123 4,865 5,557

23,662 23,363

19,250 24,335 300 417 773 809

872 1,060 996 1,421

4,693 379 5,474 6,598 8,835 11,968

2,111 1,592 1,843 2,130

784 843 1,059 1,288

289 384 770 904

Inflation (Oh) 1 5 , 4 3 2 1

0 00 01 02 03 04 05

I GDPdeflator ' 0 - C P I I

Export and import levels (US$ mill.) j / r l a I 150,000

100 000

50,000

0

I O5 I 99 00 01 02 03 04

0 Exports H Imports

Current account balance to GDP (%) I

1 Composition of 2005 debt (US$ mill.)

A - IBRD B - IDA D -Other multilateral F -Private C - IMF

E - Bilateral

G . Short-term

Development Economics 4/23/07

SIRMAURSIRMAUR

SHIMLASHIMLA

SOLANSOLAN

MANDIMANDIUNAUNA

BILASPURBILASPUR

HAMIRPURHAMIRPUR

KANGRAKANGRA

CHAMBACHAMBA

KULLUKULLU

LAHUL & SPITILAHUL & SPITI

KINNAURKINNAUR

SHIMLA

Nahan

Solan

Reckong Peo

Kullu

KeylongChamba

Dharmshala

Mandi

Bilaspur

Hamirpur

Una

Kaza

Khoksar

Manali

Udaipur

Kilar

Tisa

Chauri Khas

Sihunta

DramanKotla

Bhawarna

Jogindernagar

Banjar

Rampur

RohruSandhasu

Nerua

Chaupal

Deorha

Theog

Seoni

Ghumarwin Karsog

Kumharsain

Chachyot

Lambagraon

Sarahan

Kumarhatti

Kasauli

Arki

Kalkhar

SarkhagatNadaun

Amb

Bangana

Barsar

Mehatpur

Nalagarh

ShalaiDadahu

Kothkhai

NieharSangla

Morang

Puh

Nako

Nurpur

Indora

RanitalJaisinghpur

Brahmaur

Lintig

CHINA

SIRMAUR

SHIMLA

SOLAN

MANDIUNA

BILASPUR

HAMIRPUR

KANGRA

CHAMBA

KULLU

LAHUL & SPITI

KINNAURSutlej River

Sutlej Rive

r

Beas River

Ravi River

Beas

Riv

er

Spiti River

Chenab River

Chandra River

31°

32°

33°

31°

32°

33°

76°

76° 77° 78°

77° 78°

IBRD 35401

APRIL 2007

ELEVATION (in meters)

Glacier

6.000

4.500

3.000

1.900

1.350

900

600

300

RIVERS

SELECTED CITIES AND TOWNS

DISTRICT CAPITALS

STATE CAPITAL

DISTRICT BOUNDARIES

STATE BOUNDARIES

INTERNATIONAL BOUNDARIES

I N D I A

HIMACHAL PRADESH

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, anyjudgment on the legal status of any territory, or any endorsement oracceptance of such boundaries.

0 150 Kilometers75