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Document o f The World Bank
FOR OFFICIAL USE ONLY
Report No: 26534-IN
INTERNATIONAL DEVELOPMENT ASSOCIATION
AND
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT FOR
A PROPOSED CREDIT IN THE AMOUNT OF SDR 76.4 MILLION
(US$ 110 MILLION EQUIVALENT)
AND
A PROPOSED LOAN IN THE AMOUNT OF US$ 110 MILLION
TO INDIA
FOR
THE SECOND ANDHFfA PRADESH ECONOMIC REFORM LOAN/CREDIT
January 9,2004
Poverty Reduction and Economic Management South Asia Region
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization
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ADB ACB
AFF AIDS
AP APDRP
APERC
APERL APPCB CAGR CAS CFAA CGG CRISIL csc DFID
EBIDTA
FRSP GAD Go1 GoAP GSDP H I V HODS HRM
CURRENCY EQUIVALENTS
Currency unit: Rupees (Rs.) US$1= Rs. 45.50
1 b i l l ion = 100 crore
GOVERNMENT’S FISCAL YEAR
April 1 - March 3 1
ABBREVIATIONS AND ACRONYMS
Asian Development Bank Ant icompt ion Bureau
Annual Fiscal Framework Acquired Immune Deficiency Syndrome
Andhra Pradesh Accelerated Power Development and Reform Program Andhra Pradesh Electricity Regulatory Commission Andhra Pradesh Economic Reform Loan Andhra Pradesh Pollution Control Board Compound Annual Growth Rate Country Assistance Strategy Country Financial Accountability Assessment Center for Good Governance Credit Rating Information Services o f India Ltd. Cabinet Sub-committee United Kingdom Department for International Development Earnings Before Interest, Taxes, Depreciation and Amortization Fiscal Reform Strategy Paper General Administration Department Government o f India Government o f Andhra Pradesh Gross State Domestic Product Human Immunodeficiency Virus Head o f Departments Human Resource Management
HRD IBRD
IDA ICRA
I T M B M
MDGs
MTEF MTFF NGO OLTP O&M OUP PD PE PIP
PSAL
SAL SFAA SPEM SPIUS SSA T&D V R S VAT
Human Resources Department International Bank for Reconstruction and Development International Development Association Investment Information and Credit Rating Agency Information Technology Multi-buyer model
Mi l lennium Development Goals
Medium Term Economic Framework Medium Term Fiscal Framework Non-governmental Organization On Line Transaction Processing Operations and Maintenance Oxford Policy Management Program Document Public Enterprise Participatory Identification of the Poor
Programmatic Structural Adjustment Lending Structural Adjustment Lending State Financial Accountability Assessment State Poverty Eradication Mission Strategy and Performance Innovation Units Sarva Shiksha Abhiyan Transmission and Distribution Voluntary Retirement Scheme Value Added Tax
Vice President: Praful Pate1
Sector Director: Sadiq Ahmed Sector Manager: Kap i l Kapoor Task Managers:
Country Director: Michael F. Carter
Vinaya Swaroop, Lead Economist Rajni Khanna, Economist
FOR OFFICIAL USE ONLY
INDIA: SECOND ANDHRA PRADESH ECONOMIC REFORM LOANKREDIT
A .
B .
C .
D .
E .
F .
G . H .
TABLE OF CONTENTS
INTRODUCTION ............................................................................................................................ 1
THE POLITICAL AND ECONOMIC SITUATION IN INDIA ..................................................... 1
ANDHRA PRADESH’S DEVELOPMENT: PROGRESS AND CHALLENGES ......................... 3 (i) Poverty has been reduced and social indicators have improved. but the pace o f change
remains slow ........................................................................................................................ 4
Improvement in service delivery ....................................................................................... 10 (ii) Economic growth has increased. though it remains below potential .................................. 7 (iii)
ANDHRA PRADESH’S MEDIUM-TERM REFORM PROGRAM ............................................ 11 (i) Pro-poor policy formulation and implementation. and monitoring o f key poverty
indicators ........................................................................................................................... 11 (ii) Structural measures to facilitate economic growth ........................................................... 12 (iii) Public Enterprise (PE) reform: Restructuring and privatization ....................................... 13 (iv) Improving fiscal discipline and spending composition; and public expenditure
management and financial accountability ......................................................................... 14 (v) Improving govemance ....................................................................................................... 21 (vi) Sectoral reforms: Education. Health and Power ............................................................... 23
BANK’S ASSISTANCE TO ANDHRA PRADESH .................................................................... 28
THE PROPOSED LOANKREDIT ............................................................................................... 29 (i) Loadcredit administration ............................................................................................... 30 (ii) Performance monitoring .................................................................................................... 30 (iii) Status o f Main Indicative Actions for APERL2 ................................................................ 31 (iv) Fiduciary issues ................................................................................................................. 34 (v) Environmental management .............................................................................................. 35
................................................................................................. . FUTURE APERL OPERATIONS 35
. LESSONS LEARNED. BENEFITS AND RISKS ........................................................................ 37 (i) Lessons leamed ................................................................................................................. 37
(iii) Risks .................................................................................................................................. 39 (ii) Benefits ............................................................................................................................. 38
ANNEXES
Annex A: Annex B: Annex C: Annex D: Statistical Annex
Letter o f Development Policy. Policy Program Matrix Power Sector Reforms in Andhra Pradesh Public Information Notice (IMF)
M A P
This document has a restricted distribution and may be used by recipients only in the performance of their official duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .
Syed Ahmed Ivor Beazley Ananya Basu Robert P. Beschel Vikram Chand Bhavna Bhatia Raihan Elahi Christian Eigen-Zucchi Peter Heywood Subhramaniaum V. Iyer Vidya Kaniath Rajni Khanna Stuti Khemani Sunita Kiker i Sunil Khosla Deepak Mishra Jeeva Perumalpillai-Essex Shunalini Sarkar Nicola Smithers Venkatesh Sundararaman Vinaya Swaroop Upasana Varma Dina Umali-Deininger
Shantayanan Devarajan Shahrokh Fardoust
T a s k T e a m
Senior Counsel, LEGMS Senior Financial Management Specialist, SARFM Economist, SASPR Lead Public Sector Management Specialist, SASPR Senior Public Sector Management Specialist, SASPR Senior Energy Economist, SASEI Financial Analyst, SASEI Economist, SASPR Lead Health Specialist, SASHD Senior Financial Analyst, SASEI Program Assistant, SASPR Economist, SASPR Economist, DECRG Adviser, CICDR Senior Energy Specialist, SASEI Senior Economist, SASPR Senior Economist, SASRD Program Assistant, SASPR Adviser, PRMPS Economist, SASHD Lead Economist, SASPR Research Analyst, SASPR Lead Agriculture Economist, SASRD
P e e r Rev iewers
Chief Economist, HDNVP Senior Adviser, DECVP
FOR OFFICIAL USE ONLY
INDIA
SECOND ANDHRA PRADESH ECONOMIC REFORM CREDITLOAN
Credit and Loan Summary
Borrower : Government o f India
Implementing Agency Beneficiaries : State o f Andhra Pradesh
Amount
: Government o f Andhra Pradesh
: Credit: SDR 76.4 mi l l ion ( U S $ l l O mi l l ion equivalent)
: Credit: Standard IDA terms; 35 years maturity with 10 years o f grace.
Loan USSl10 mi l l ion
Loan: Payable in 20 years, including 5 years o f grace, at the standard interest rate for LIBOR-based variable-spread U S Dol lar single currency loans.
Terms
Onlending Terms
Description
Benefits
Risks
Disbursement
Project ID Number
: Standard terms o f central resource transfers for state development budgets.
: The proposed second Andhra Pradesh Economic Reform Loadc red i t (APERL 2) i s in support o f an ongoing reform program, which includes six components: (i) improving poverty monitoring and pro-poor pol icy formulation and implementation, (ii) implementing structural measures to foster economic growth, (iii) restructuring and privatizing public enterprises, (iv) improving fiscal discipline, the composition o f spending, public expenditure management, and financial accountability, (v) strengthening governance, and (vi) facilitating sectoral reforms in education, health and power.
: In providing further support for the very meaningful reform program o f the Government o f Andhra Pradesh, this operation recognizes progress to date and will facilitate the state’s next steps towards achieving better socioeconomic outcomes and reducing poverty. More specifically, the benefits expected from APERL 2 include: (a) improvement in the state’s investment climate through increased competition in agriculture and greater labor market flexibility, (b) fiscal savings f rom further public enterprise reform, (c) improved delivery o f public services as a result o f public expenditure, financial management and governance reforms, and (d) freed up resources for other development priorities f rom the continued curtailment o f power sector losses.
: The major r isks stem from: (a) a tightening o f fiscal targets in the next few years, leaving very l itt le room for slackness, (b) the di f f icul t issues o f agriculture metering and l o w tariffs for power, posing financial risks, (c) vulnerability t o external shocks, such as poor monsoons, impinging o n overall growth, and (d) inherent r i s k o f changes in pol icy priorities as a result o f elections due in 2004.
: The loadcredit would be disbursed in one tranche in an amount equivalent to US$220 mi l l ion upon effectiveness.
: IN-PO75191
PROGRAM DOCUMENT FOR A PROPOSED SECOND ANDHRA PRADESH ECONOMIC RESTRUCTURING LOANKREDIT
A. INTRODUCTION
1. During the last two country assistance strategy cycles, an important component o f the Bank’s approach in India has been to focus o n states that have demonstrated a commitment to broad based reforms, particularly in the areas o f fiscal management, power sector administration, and governance.’ Together with other external agencies, the Bank has adopted the logic o f selectivity and has focused on a small number o f states, promoting their reform programs through a mix o f lending instruments, such as adjustment and investment loans, and non-lending support in the form o f analytic work and technical assistance.
2. One o f India’s leading reforming states, Andhra Pradesh (AP) has had a long and productive relationship with the Bank. As part of i t s support to the Government o f Andhra Pradesh’s medium-term reform program, the Bank approved i t s f i rst adjustment operation-the Andhra Pradesh Economic Reform Loan (APERL)--in March 2002 for US$250 mill ion. The United Kingdom Department for International Development (DFID), co-financed the operation with an additional E65 mi l l ion (roughly US$lOO million). Envisaged as the f i rs t in a series o f Structural Adjustment Loans ( S A L S ) , APERL 1 called for 14 up front actions that were completed in early 2002, and outlined a set o f key indicative actions for a follow-up second operation.
3. These actions have been completed: and this Program Document (PD) lays out the APERL 2 program. Section B. br ief ly describes the polit ical and economic situation in India and provides the context for this operation. Section C. summarizes the overall development progress and challenges in AP. Section D. reports on A P ’ s medium-term reform program supported by APERLs. Section E. outlines the Bank’s assistance strategy in AP and Section F. discusses the proposed APERL 2 operation. Looking ahead to possible future adjustment operations, Section G. details a set o f key actions for APERL 3. Subject to agreement among a l l concerned parties (Government o f India [GoI], Government o f Andhra Pradesh [GoAP], the Wor ld Bank and DFID), APERL 3 i s expected to be processed in late 2004 or early 2005. Finally, Section H. details the lessons learned, and the benefits and r isks o f both the AP program and the Bank operation.
B. THE POLITICAL AND ECONOMIC SITUATION IN INDIA
4. Thepolitical situation. The present central government i s a 24-party coalition and has been in office since September 1999. Although the reform pace has been slow, the need for reform i s broadly accepted across the political spectrum. Different ruling parties in a number o f states are also pursuing reform programs. Reforms in some states outpace those o f the central government, and several state governments have shown considerable determination in backing reforms in the face o f opposition and strikes. India i s entering into a period o f elections at both the state and national level. Elections were held in four states in December 2003, and national and several state elections (including in AP) are due in 2004.
5. The economic situation. India has made significant progress in improving the living standards o f its citizens since launching wide-ranging economic reforms in 1991. Real GDP growth averaged 5.8 percent during the 1990s, and poverty fe l l significantly, though the degree o f decline i s debated. India i s expected to register growth o f around 6.8 percent in 2003-04. After slow and uneven growth (4.3 percent) last year,
~
The most recent India Country Assistance Strategy (CAS) was discussed by the Board on April 5, 2001. The CAS Progress Report, which endorses this strategy, was discussed by the Board on December 5,2002. Preparation for a new CAS for a four year period-2004-05 to 2007-08-has been started and i s expected to be completed by February 2004.
In some cases the actions were modified to reflect a change in circumstances. Details on these actions are given in Secton F.
due in part to a bad drought resulting in negative agncultural growth, growth i s expected to p ick up this year with a better monsoon and continued industrial recovery. The service sector has remained the main source of growth while growth in the industrial sector has slowed down since the late 1990s. Medium-term growth prospects in India depend critically on the pace o f structural reform and fiscal consolidation. Recent Bank and IMF reports (the Bank’s 2003 Development Policy Review and the IMF’s 2003 Article IV report) argue that the current rate o f reforms and growth put at risk the achievement o f the 10th Five Year Plan (2002-07) target o f 8 percent average GDP growth and poverty reduction f rom 26 percent in 2000 to 21 percent by 2007 and to 11 percent by 2012. Accelerating India’s economic growth will require considerable improvements in infrastructure and the investment climate, along with improvements in health, education and other services to set India on a higher growth trajectory.
6. Fiscal consolidation remains elusive, and India’s debt to GDP ratio continues to increase. The recent passage o f the Fiscal Responsibility and Budget Management Bill, which mandates the elimination o f the fiscal current account deficit o f the central government by March 3 1,2008, i s an encouraging development. Nevertheless, further efforts wil l be needed to address fiscal imbalances both at the center and in the states. In spite o f the high fiscal deficit, India’s vulnerability to an external crisis i s presently l imi ted by i t s large reserves, equivalent to 15 months of imports, and i t s l o w level o f external public debt. Bo th the capital and the current account are in surplus on the back o f strong remittances and exports in services. Interest rates are currently low, but there i s a r i s k that an increase in interest rates, both internationally and in India, could significantly raise the Government’s debt service burden. The high fiscal deficit in India i s also accompanied by a poor composition o f expenditure, with payments for wages, pensions, interest, and subsidies crowding out capital and maintenance spending. Reorienting central government spending towards public investment and maintenance will be necessary for developing infrastructure and accelerating growth.
7. Fiscal strengthening at the state level will also be crucial t o fostering growth and infrastructure development. Roughly 40 percent o f the combined center-state fiscal deficit stems f rom the deficits o f the state governments. In the last few years, several state governments-AP, Karnataka, Maharashtra, among o t h e r s h a v e come forward with well-defined medium-term fiscal reform agendas primarily aimed at reducing fiscal deficits to a sustainable level. A number o f states have also developed elaborate plans to reform their power sectors, which have been draining their treasuries due to a variety o f problems including high transmission and distribution losses, and l o w metering and tariffs in the agricultural sector. The reforming state governments have signed memoranda o f understanding with the central government and are receiving funds in support o f their reform programs. GoI’s efforts to provide additional incentives for broad reaching reform programs have generally worked well. In this vein, the new “Structural Adjustment Assistance Facility” was created, under which state governments can approach the central government and request funding from multilateral institutions in support o f fiscal and other structural pol icy reforms. T o ensure transparency, and equal access for a l l states, Go1 has recently issued a set o f guidelines o n SALS.^ Finalized in December 2002, these guidelines emphasize that any state seelung S A L assistance should have a multi-year reform program for sustainable poverty reduction that:
Aims at generating primary and revenue surpluses and l imi ts the consolidated fiscal deficit to less than 3 percent over a medium-term (3-5 years); Includes a sustainable program for subsidy elimination or containment, especially in the power sector; Reforms c iv i l services including reducing the administrative costs o f governance; and Reforms public sector enterprises.
The Guidelines also state that “An overall focus on poverty reduction and sector specific parameters (infrastructure, education, etc.), which are ingredients o f MDGs, should also be reflected in- the action
“Structural Adjustment Assistance Facilities Guidelines,” Department o f Economic Affairs, Min is t ry o f Finance, Government o f India, December 2002.
2
program o f the SAL.” The present adjustment operation, APERL 2, i s consistent with these guidelines and i s being processed as part o f this initiative.
c. ANDHRA PRADESH’S DEVELOPMENT: PROGRESS AND CHALLENGES
9. AP i s the fifth largest state in India with a population o f 76 mill ion. Predominantly rural and one o f the poorer states, A P ’ s per capita income was about US$382 in 1999, which i s about 86 percent o f the national average (US$446 in 1999). In 1999-00,21.6 percent o f the population in AP-against the national average o f 22.2 percent-lived below the poverty line.
10. In the early 1990s, AP was seen as an economically and socially backward state in India, particularly in comparison with other states in South India. More than ha l f o f the state’s population was illiterate and the state ranked 26th out o f 32 StatesLJnion Territories in literacy. Levels o f education across the population were also the lowest among Indian states. On key health indicators-infant mortality, for instance-AP lagged behind the national average. Economic growth was positive but lower than the national average. Poverty had declined, but the decline was less impressive when compared to other states. N o t only was AP lagging behind in development, i t had n o vision or strategy to catch-up with other more progressive states.
11. The situation changed in the mid-1990s. The Indian economy, with a strong push from the central government, had already embarked o n a market-oriented reform program. In 1999 GoAP articulated a far- reaching vision for economic and social development through the Vision 2020 d o c ~ m e n t . ~ During this process, AP became the f i r s t Indian state to put together a strategy for comprehensive development and a complementary reform agenda. The Vision 2020 document i s a statement o f intent t o pursue economic growth, develop human capital, and reduce poverty. I t also specifies targets, similar to the Mi l lennium Development Goals (MDGs), including growth o f real GSDP over the period 1995-2020 at an ambitious average annual rate o f 10.3 percent, total literacy by 2010 (later advanced to 2005), universal enrollment in primary school with an increase in the completion rate f rom 60 to 90 percent by 2005, a reduction in infant mortality to 10 per 1,000 (live births), and the provision o f primary and secondary healthcare to all, especially to the poor and vulnerable. Poverty eradication and improvements in social welfare are listed as the main development themes, and better governance i s recognized as being a critical factor in development and for achieving these goals.
12. This vision has been la id out in a series o f sixteen sector strategy papers that were prepared between 1999 and 2001.5 A P ’ s overall medium-term development strategy has two main objectives: (i) eradicating poverty and focusing o n human development; and (ii) accelerating economic growth. The goals o f eradicating poverty and accelerating human development are to be achieved through direct interventions (for example, the pro-poor Velugu program), building the capabilities o f the poor and disadvantaged groups (by improving literacy and health), empowering wamen (addressing gender inequalities in education and increasing gender-sensitivity in health programs), and by accelerating pro-poor growth. The State Government wants to transform i ts role in the economy f rom being primarily a controller o f the economy to becoming a facilitator and catalyst o f growth. T o this end, GoAP wants to reform public enterprises and focus its attention o n those sectors o f the economy for which there i s a clear role for the state, leaving others largely to market forces. Progress towards these twin objectives requires that the state be in a sound fiscal position. According to A P ’ s fiscal reform strategy, restoration o f the state’s fiscal health i s to be achieved by (i) reforming and restructuring the power sector to reduce the drain o n public resources, (ii) containing the growth o f the public wage bill and improving the targeting o f subsidies and transfers, and (iii) reforming the revenue system by introducing a Value Added Tax. Finally, AP wants to strengthen governance by m a h n g government S M A R T (Simple, Moral, Accountable, Responsive, Transparent).
“Vision 2020: Swama Andhra Pradesh,” Govemment o f Andhra Pradesh, January 1999.
The strategy papers are posted on A P ’ s govemment’s Web site: www.aponline.gov.in
3
13. To implement these strategies, GoAP has initiated reforms o n several fronts: fiscal consolidation, better governance, power sector restructuring, emphasis o n primary education and health, privatization o f public enterprises, reduction in the administrative and regulatory burden for f i rms, creation o f new infrastructure, and social mobilization through the formation o f self-help groups. Sectoral targets and actual performance are monitored quarterly and the implementation o f these strategies i s continuously updated . 14. With i t s reform agenda gaining momentum, the image o f AP as a backward state began to change. Many o f these reforms have started to produce encouraging results and the state has begun to bridge the wide development gap that existed between AP and more developed Indian states. In a 2003 ranking o f the best and the worst states in which to l ive and work-the f irst o f i t s lund-the India Today magazine rated AP as the “Fastest Mover” in the 1990s. The positive impact o f good policies o n outcomes, especially in the second ha l f o f the 1990s, is wel l documented on both social and economic fronts. The following paragraphs describe A P ’ s progress and future challenges in major social and economic areas:
(i) Poverty has been reduced and social indicators have improved, but the pace of change remains slow
15. Most recent estimates suggest that poverty has declined in the 1990s (Table 1).6
Table 1: Poverty Reduction in Andhra Pradesh (Head-count estimates; using National Sample Survey [NSS] data)
1993-94 (NSS 50th Round) 1999.00 (NSS 55’h Round) Urban Rural Overall Urban Rural Overall
Andhra Pradesh 17.8 29.2 26.2 10.8 26.2 21.6 All-India 17.8 33.0 29.1 12.0 26.3 22.2
Source: Deaton and Dreze, Economic and Political Weekly, September 7, 2002
16. Between the early and late 1990s, AP experienced a 39 percent increase in literacy, a 32 percent increase in the proportion o f births attended by a health professional, and a 24 percent increase in the proportion o f the population with access to safe drinhng water. The state has also been particularly successful in increasing the number o f children enrolled in school. During the 1990s, the school enrollment o f 6-10 year-olds grew by 12 percentage points-from 73 to 85 percent. According to the GoAP’s education department, the level o f enrollment reached 96 percent in 2002 following a strong public campaign. GoAP has also recognized chi ld labor as a significant factor constraining progress towards i t s development goals, and i s addressing it through a number o f actions.
17. As a result o f these improvements, A P ’ s human development index, which i s a weighted average o f poverty and human development outcomes, has progressed. Whi le the state’s performance remains below the national average and the rate o f i t s progress s t i l l needs to be accelerated, AP has done well, registering a 40 percent increase in the development index over a 20-year period (Table 2).
There i s controversy about poverty numbers in India. Official head-count numbers, released by the Planning Commission of India for the country as well as for states, show a steeper decline in overall poverty. T h e numbers reported in Table 1 are the “adjusted” head-count estimates prepared by Deaton and Dreze. For more information on the numbers, see the Andhra Pradesh Poverty Note, World Bank (2003).
4
Table 2: Human Development Index for Major Indian States, 1981 to 2001
State 1981 1981 1991 1991 2001 2001 Value Rank Value Rank Value Rank
Kerala 0.500 1 0,591 1 0.638 1 Punjab Tamil Nadu Maharashtra Haryana Gujarat Karnataka West Bengal Rajasthan Andhra Pradesh Orissa Madhya Pradesh Uttar Pradesh Assam Bihar
0.41 1 0.343 0.363 0.360 0.360 0.346 0,305 0.256 0.298 0.267 0.245 0.255 0.272 0.237
2 7 3 5 4 6 8 12 9 11 14 13 10 15
0.475 0,466 0.452 0.443 0.431 0.412 0.404 0.347 0.377 0.345 0.328 0.314 0.348 0.308
2 3 4 5 6 7 8 11 9 12 13 14 10 15
0,537 0.531 0.523 0.509 0.479 0.478 0.472 0.424 0.416 0.404 0.394 0.388 0.386 0.367
2 3 4 5 6 7
9 10 11 12 13 14 15
a
All India 0.302 0.381 0.472 Source: India National Human Development Report, 2001 (Planning Commission, OUP).
18. Future challenges. A P ’ s development challenges can be seen from the progress that i t has made in achieving the MDGs.’ Data on A P ’ s progress, where available, are listed in Table 3.
19. AP i s l ikely to achieve some of the MDG targets. Halv ing the proportion o f people suffering fi-om extreme poverty and hunger i s possible by 2015 if AP i s able to sustain the achievements o f the 1990s. Although poverty has declined in AP (Table l), the reduction i s smaller than in other Indian states, particularly when compared with the other Southern states o f Kerala and Tami l Nadu, and the pace o f poverty reduction has been relatively slower in rural areas. In order to meet i t s poverty reduction goals, the challenge for AP i s to improve the access o f the poor to credit and social services (particularly, health and education), especially in rural areas. GoAP’s strategy for rural poverty reduction focuses on direct measures and targeted programs, and the main program i s Velugu (means Eternal Light). I t seeks to raise rural income by widening access to non-farm employment opportunities and improving access to financial ixsources.* The success o f this program wil l be key to reducing rural poverty.
Since their launch at the Mi l lennium Summit held in N e w York in September 2000, the MDGs have become a widely accepted benchmark for measuring development progress. The MDGs set selected quantitative targets for poverty reduction and improvement in various aspects o f welfare from their 1990 levels that should be achieved by 2015. There are eight broad goals and a selected l i s t of indicators to monitor progress towards each o f them. The gth goal deals wi th developing global partnerships for development, and is not reported here because it i s more applicable at the country rather than the state level.
* The Bank has supported the Velugu program through two lending operations. The first was a $111 mi l l ion district poverty initiatives project that was approved in 2000. The second operation is a $150 mi l l ion rural poverty reduction project that was approved in 2003.
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Table 3: Millennium Development Goals: AP's Progress and Future Challenges (In percent, unless mentioned otherwise)
Indicator to measure progress Millennium Development Goal
Value of indicator Value of indicator Year 2015 in 1990 in 2000 target
Head Count Index (Deaton and Dreze, 2002) 30.4 21.6 15.2 1. Eradicate Extreme Poverty and Hunger Underweight children under 5 years of age 56.0 36.1 28.0
Children 5-9 attending school 58.8 89.1 100
2. Achieve Primary Education Pupils starting Grade 1 who reach grade 7 52.6 100
Literacy Rate of 15 to 24-year olds 51.5 67.7 100
** 11.5 26.3
0.59 0.72 1
Women in Wage Employment in the non-agricultural
Ratio of Literate females to males among 15- to 24- year olds
3. Promote Gender sector Equality and Empower Women
Under-five mortality rate (per 1,000 live births) 94.2 84.6 31.4
Infant Mortality Rate (per 1,000 live births) 72.8 65.1 24.3 4. Reduce Child Mortality
Maternal Mortality Ratio (per 100,000 live births) 300 130 75
Births attended by skilled health personnel 42.9 68.3 90 5. Improve Maternal Health
** 6. Combat HIVIAIDS, Contraceptive prevalence rate 41.7 62.0
** 337.5 630.1 malaria and Other diseases Prevalence rates associated with Tuberculosis per
100,000
7. Ensure Population with access to safe water 57.0 81.3 78.5 Environmental Sustainability Population with access to latrineltoilet facility 22.9 27.8 **
Notes: ** indicates that the state has not set any quantitative targets. When data are not available for 1990 or 2000, they are extrapolated- assuming a constant rate of growth--from information available for the closest year.
20. The goal o f universal primary enrollment by 2015 i s l ikely to be met, but achieving the targeted completion and retention rates will be a challenge. There has been progress towards gender equality in the labor market and in education-but targeted interventions are clearly necessary in order to eliminate the gender gap in education. Despite i t s recent efforts in improving school enrollments, the state continues to lag behind other states in literacy and education outcomes. According to the Census o f 2001, with a literacy rate o f 61 percent, AP was ranked 28* in a group o f 35 states and Union Territories. Moreover, there are significant disparities across location, gender, income group and social category. The state i s makmg efforts to address these problems. In 1999, AP developed an education pol icy that will be updated annually to reflect achievements and problems. GoAP i s adopting several strategies to increase enrollment, retention and completion rates, such as increasing physical access to school faculties, expanding non- formal and bridging programs, providing residential schools for children living in remote areas, increasing access to teaching and learning materials, inspecting and evaluating school and service provider performance, and monitoring student attendance.
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Figure 1 : Reaching the Millennium Development Goals Progress in Reducing Income Poverty and in Human Development
Poverty headcount rate
T 35
Infant mortality rate per 100,000 live births
T 8o
1987 1994 2001 2008 2015 L O 3 0 1987 1994 2001 2008 2015
Percent of 6-10 year-olds in school Ratio of female to male literacy
L O 1 0 1987 1994 2001 2008 2015 1987 1994 2001 2008 2015
21. In the health sector, the challenges are even bigger. The state i s on track to achieve i t s target o f reducing maternal mortality t o three-quarters o f its 1990 level by 2015, and the goal o f halving the proportion o f people without access to safe drinlung water i s also l ikely to met. Despite the very clear emphasis o n health outcomes in Vision 2020 , however, the sector lacks a clear focus o n outcomes and would benefit from a more focused strategy. The major health status indicators are worse in AP than in comparator southern states, and in some cases improvement seems to have stalled. Meeting the goal o f reducing chi ld mortality rates to two-thirds o f the 1990 level by 201 5 i s unlikely given the rate o f progress to date. Though numerical targets are unclear, progress towards combating H IV /A IDS and other diseases l ike tuberculosis has also been slow in the 1990s. Given that the private sector in AP n o w accounts for more than two-thirds o f a l l institutional deliveries, two-thirds o f antenatal care, and one-third o f immunizations, achieving the MDGs will require a strong cooperative effort involv ing both the public and private sectors.
(ii) Economic growth has increased, though it remains below potential 22. After trailing the national economy during the f i rst h a l f o f the 1990s, A P ’ s economy picked up momentum in the last 5 years. In the second ha l f o f the 1990s (1996-97 to 2000-Ol), A P ’ s GSDP growth rate exceeded the average growth rate o f the national economy (Figure 2). The strong performance o f the services sector has been the main driver of A P ’ s better growth performance. The success in the services sector i s largely attributable to the sustained double-digit growth rate in information technology,
7
telecommunication, business process outsourcing, and other business-related services. Whi le AP has consistently performed better than the national economy in the agriculture sector during the 1990s, the difference between the two has become more pronounced in the last f ive years. The performance o f the industrial sector, however, has been a major concem. Despite the fact that AP i s perceived to have the third best investment climate among major Indian states, the growth rate o f the industrial sector has remained l o w at 5 percent, comparable to the rate achieved by the rest o f the country.
Figure 2: After sub-par performance during the first half of the 199Os, AP economy has begun to pick up
A P Past vs. Current Growth Rate AP vs. India (1996.97 - 2002-01) I 199OB1-1996197 . 1996B7-2000/01 India . Andhra Pradesh 7Ph
GSDP Agriculture & Industry Services allied
Source: Central Stafisfical Organization
GSDP Agriculiure 8 Industry Services allied
23. The agricultural and allied services sector (including livestock, forestry and fishery activities) employs more than 60 percent o f the state’s labor force and i s the main source o f l ivelihood for most o f the rural poor. The sector grew at an average rate o f 4.8 percent per year during the 1996-97-2000-01 period, substantially higher than the national growth rate for the agncultural and allied services sector o f 2.1 percent, which was adversely impacted by droughts in several states. This improvement in AP has been achieved in large part due to the increased diversification into livestock, fisheries and high value horticulture, which i s consistent with the goals o f Vision 2020. The strengthened growth performance has also been facilitated by the govemment’s policies to spend more public resources o n productivity-enhancing investments, mostly irrigation and rural in f ra~t ructure.~ Moreover, in the late 1990s, GoAP l i f ted some key trading restrictions o n agricultural commodities (i.e. inter-state transport and storage controls). In order to improve the management o f water resources, GoAP boosted the participation o f farmershsers in systems management by enacting the “Andhra Pradesh Farmer Management Irrigation Systems Act.”
24. Large volatility of agriculture growth however remains a concern. While AP economy has emerged as a dominant agricultural force in the country in recent years, i t s growth rate remains highly volatile. In three o f the last five years-1999-00, 2001-02, and 2002-03-AP received significantly less rains, which adversely affected the state’s agnculture growth (not including allied services o f fisheries, livestock etc., where the state has done much better) and had a bearing on i ts overall growth rate. The agriculture sector shrunk by 6.9 and 9.0 percent in 2001-02 and 2002-03, respectively (Figure 3). With nearly two-third o f i t s population s t i l l dependent o n agnculture, the large fluctuations in agricultural growth rate are l ikely to have a bearing on the level o f transient poverty rate in the state and perhaps explain the slow pace o f poverty reduction in the state in recent years.
Impressive performance of the agriculture sector.
Public investments in the agricultural and allied sectors, after a decline in the early 1990s increased in real terms from Rs. 5.2 bil l ion in 1996-97 to Rs. 8.6 bi l l ion in 2000-01 (in constant 1993-94 rupees). During the period, private investments in the sector also increased in real terms from Rs. 6.0 to Rs. 8.1 billion. More generally, private sector investment i s significantly larger than the public sector investments in most Indian states.
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Figure 3: Due to recurrent droughts, AP’s agriculture growth rate remains highly volatile
40 i 36.4
-10
-20
-30
A
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 (A
ource: Department of Economics and Statistics, GoAP
14
12
10
8
6
4
2
0
-2
d
25. Improvement in the investment climate is likely to boost future growth rate. AP has vastly improved i t s investment climate by undertaking a slew o f deregulation initiatives. A survey done by the Wor ld Bank and the Confederation o f Indian Industries in 2000 found that AP had the third best investment climate among major Indian states (behind Gujarat and Maharashtra). A 2003 survey by the same organizations has reconfirmed A P ’ s favorable investment climate. A 2002 survey by the National Association o f Software and Service Companies (NASSCOM) rated the capital c i ty o f Hyderabad as the top destination for IT enabled service businesses among eight major Indian cities. N o t surprisingly, last year, Hyderabad recorded the highest exports o f IT enabled services among a l l major Indian cities. The improved investment climate has l ed to greater commitment o f investment f rom private investors, with the expected future investment being significantly higher than the current level. For example, investment in projects that were completed between 1997-2001 made up 20 percent o f A P ’ s GSDP. On the other hand, investments in projects under implementation account for nearly 47 percent o f state’s GSDP, the second highest ratio among major Indian states. Once these projects are completed, the state’s growth rate i s expected to get a significant boost.
26. Achieving the Vision 2020 growth target remains a major challenge. To achieve the Vision 2020 annual average growth target o f 10.2 percent between 1995-2020 period, GoAP will not only have to sustain the ongoing reform program but will also have to undertake new initiatives. A recent Wor ld Bank study has found that, l o w productivity growth and considerable inter-state disparity in the distribution o f opportunities are the two important causes why A P ’ s economy has not grown at i t s potential”. To raise productivity and improve distribution o f opportunities, especially in the industrial sector, the state needs to eliminate a number o f barriers, prime among them are: (i) over-staffed and fragmented industrial firms, and rigid labor laws, (ii) lack o f competitive market for agricultural produce at the wholesale level, (iii) l o w level of intra-state and international trade, (iv) weak implementation o f various deregulation measures, and (v) lack o f adequate opportunities for a l l citizens in al l regions to seize the reforms to their advantage.
27. The government is making strong efforts to eliminate these growth barriers. Vision 2020 and the related strategy papers focus on 18 high potential sectors as growth engines, and work has been initiated to remove structural impediments to growth. Fo r example, in the area o f reducing administrative and regulatory barriers for setting up private business, the government has moved aggressively. I t enacted “Industrial Single Window Clearance Ac t No. 17 o f 2002” to expedite the processing and issuance o f various approvals, clearances and permissions required for setting up industrial undertakings in the state. In August 2003, 94 percent o f large and medium industries and 82 percent o f small-scale industries received approvals within the prescribed time limit. Proposals for the simplification o f inspection
lo “Unlocking Andhra Pradesh’s Growth Opportunities: An Agenda Towards Achieving the Vision 2020 Growth Targets”, The World Bank, May 2003.
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procedures have been prepared by the Confederation o f Indian Industry and Pricewaterhouse-Coopers, and e n s h n e d in a Govemment Order in August 2002. GoAP i s also planning to deal with the currently inflexible industrial labor market by granting permission related to lay-offs and closures o f industrial undertahngs, and seeks to become a pioneer in building institutions, which help to promptly resolve labor disputes in the state. Given that agnculture is, and will continue to be for some time, the l ifeline o f i t s economy, GoAP has devised plans to be a powerhouse o f Indian agriculture. Elements o f the reform program include (a) encouraging crop diversification to enhance agricultural growth and employment; (b) giving farmers freedom o f choice in marketing their produce and (c) allowing private sector participation in the operations o f wholesale markets.
(iii) Improvement in service delivery 28. In pursuit o f Vision 2020, GoAP has placed great emphasis upon improving the quality o f front-line service delivery. All govemment departments have been placed in eight groups (such as economic or human development, infrastructure or governance) depending upon their core functions. A number o f performance indicators have been established for departments, which are monitored monthly, quarterly and annually by the Chief Minister, ministers and secretaries. Performance achievements are reported online by every department every month. About 90 departments and offices with a large public interface have prepared Citizens Charters, and the state i s currently setting up a network o f call centers to systematically monitor charter implementation and record the timely disposal o f citizen complaints. Some o f the successes are noted below:
Population Stabilization. Through a variety o f initiatives, such as media campaigns targeted at increasing the age o f marriage o f girls and efficient sterilization and reproductive health programs, AP recorded the third lowest population growth rate among Indian states f rom 1991 to 2001. During the 1980s, A P ’ s population grew by 24 percent; in the 1990s, the decadal growth rate came down to less than 14 percent. T h i s performance i s remarkable when compared with the national rate, which was s t i l l over 20 percent in the 1990s.
Improving Literacy. GoAP has pursued a twin strategy o f achieving universal elementary education and adult literacy. The number o f children out o f school was reduced by nearly 50 percent-from 7.6 to 4.2 percent in 2002. With the assistance o f non-govemmental organizations (NGOs), around 6.5 mi l l ion adults were given basic literacy training between 2000 and 2002.
Improving Water Conservation. Ap has launched a watershed movement to treat 100,000 hectares o f waste dry lands, and currently 56,400 hectares are under treatment. The results are clearly visible on ground water levels and crop productivity. Out o f 5,298 watersheds evaluated in 20 districts, the average increase in water level was 1.96 meters, and the number o f dry bore wells has been reduced from 19,952 in 2000 to 4,111 in 2002.
Expanding Forest Cover. Through the state’s emphasis o n forest conservation and Joint Forest Management program, AP experienced the highest growth in forest cover in the country between 1997 and 2001. Dense forest cover increased by an average o f 19 percent; open forest grew by 26 percent; natural regeneration increased by 60 percent; and forest fires and grazing were reduced by 72 and 57 percent, respectively.
IT enabled initiatives. The state’s efforts in applying information technology to improve service delivery have been among the most innovative in the developing world. There are several IT enabled initiatives in AP that have improved service delivery to citizens. One that particularly stands out i s the e-Seva program. Started in August 2001, i t i s a one-stop-shop for 42 citizen services, ranging f rom paying utility bills and taxes, t o obtaining birth certificates, to purchasing train tickets, at 33 service centers throughout Hyderabad and surrounding municipalities. Currently, wel l over h a l f a mi l l ion transactions take place each month, with an average service time o f 2 minutes in off-peak and 15 minutes at peak time. Plans are currently underway to extend the service to 229 more sites in al l 117 municipalities by the end o f 2003. A parallel initiative that seeks to provide instant access to over 60
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services in rural areas, called the On Line Transaction Processing program, i s currently being piloted in two districts.
0 Infrastructure services. There are also signs that infrastructure services in AP are improving. GoAP has made it a priority to improve rural infrastructure and road connectivity. Between 1991 and 2001, the state witnessed a 27 percent increase in the number o f villages connected with “pucca” roads, as compared to 23 percent for Maharashtra, 17 percent for Kamataka and 8 percent for Tamil Nadu. In the power sector, availability and quality o f power supply has improved, and power theft has been significantly curbed. In 2002, AP was ranked f irst in a performance rating-done by two independent credit agencies, CFUSIL and ICRA, on behalf o f the Government o f I n d i a - o f the state power sectors across 26 states.
29. AP has come a long way from where it started in the mid-nineties. I t s progress i s real and i s wel l documented. However, the state has a huge unfinished development agenda and needs to do far more to meet i t s development goals outlined in Vision 2020. In this context, three things are important: first, the reform process has to be sustained; second, the pace o f progress has to increase; and third, the benefits o f growth and public services need to be more pro-poor. A start has been made; now the reform process has to be deepened and sustained. The state needs support f rom a l l i t s stakeholders to continue moving forward on i t s development path.
D. ANDHRA PRADESH’S MEDIUM-TERM REFORM PROGRAM
30. A P ’ s ongoing reform program, supported by APERLs, has six main components:
A. Pro-poor pol icy formulation and implementation, and monitoring o f key poverty indicators;
B. Structural measures to facilitate economic growth;
C. Public enterprise reform: restructuring and privatization;
D. Improving (a) aggregate fiscal discipline; (b) public expenditure management; and (c) financial accountability;
E. Improving governance; and
F. Sectoral (education, health and power) reforms
31. The associated pol icy program matrix, which outlines specific actions and benchmarks for these components, i s appended to the GoAP’s Letter o f Development Policy.
(i) Pro-poor policy formulation and implementation, and monitoring of key poverty indicators 32. In Vision 2020, poverty eradication and improvement in social welfare are listed as the most important parameters o f development progress. Initially, GoAP’s poverty eradication strategy focused o n direct measures and targeted programs-for example, launching additional public employment schemes, enhancing the Public Distribution System to ensure the food security o f the poor and socially disadvantaged, and launching pension schemes to protect the aged, disabled, and widows. In 2000, the government constituted the State Poverty Eradication Mission (SPEM)-a committee o f govemment ministers and officials, and representatives f rom research institutions and c iv i l society-whose role i s to coordinate and provide guidance on poverty reduction efforts in the state. A poverty reduction strategy was drafted in 2001 that highlights a broader set o f measures to reduce poverty in the state. This included: (a) generating faster growth, particularly in agriculture; (b) strengthening primary health and education services; (c) enhancing social capital through self-help groups; (d) promoting sustainable livelihoods o f the poor; (e) focusing greater attention o n backward regions and poorer segments o f society; and (f) improving the administrative machinery in order to improve the delivery o f services for the poor and promote greater convergence o f social development.
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33. In terms o f actual implementation o f i t s poverty eradication strategy, two particular state initiatives stand out: first, a holistic approach that addresses rural poverty by coordinating the activities o f a number o f l ine departments through the Velugu Program, and second, an exercise to identify the poor through participatory methods to provide better targeted programs. The Velugu Program, the local name given to the Bank supported District Poverty Initiatives Project (DPIP), helps rural poor families achieve improved and sustainable livelihoods. Focusing o n the poorest o f the rural poor, the program provides credit to individuals through community investment funds, promotes people’s organizations, and enhances social capital o f the poor. In the past, problems relating to identifying the poor had adversely affected proper targeting o f poverty programs. The ongoing Participatory Identification o f the Poor (PIP) in 700 mandals covering over 12,000 habitations will provide valuable information for effective implementation o f anti- poverty programs.
34. GoAP’s work on poverty monitoring has been much slower than expected. After a delay o f almost a year-for a variety o f r e a s o n s t h e Poverty and Social Analysis Monitoring Unit (PSAMU) has been established and i s now operational. In conjunction with several l ine departments, P S A M U has prepared a draft consolidated action plan for implementing the government’s strategy for poverty eradication. An important aspect o f this work i s to monitor and analyze poverty, which in turn will strengthen pro-poor policies across l ine departments. The draft p lan includes a preliminary l i s t o f poverty indicators that will be regularly monitored and disseminated. In turn, this information will provide better information o n the efficiency and effectiveness o f service delivery to the poor. These actions are l ikely to lead to better mainstreaming o f poverty across GoAP policies.
(ii) Structural measures to facilitate economic growth 35. Whi le A P ’ s economic growth has picked up in the last f ive years and the state i s performing above the national average (Figure 2), i ts growth rate remains considerably below the ambitious Vision 2020 target. Improving productivity in agriculture and industry holds the key to higher economic growth. Among the many reform programs under consideration by GoAP, the following two deserve special mention:
36. Facilitating greater competition in agriculture. In AP, l i ke many other states, agricultural markets are highly regulated, dominated by public sector organizations, and are monopolistic in nature. The Andhra Pradesh (Agricultural Produce and Livestock) Marketing Ac t o f 1966 prescribes that “288 notif ied apcu l tu ra l produce” (processed and un-processed) including cereals, pulses, oilseeds, cash crops, fruits, vegetables, flowers, fish, livestock, and poultry can be sold wholesale only by farmers through designated government-regulated “mandis” or wholesale markets. Direct bulk sales to prospective buyers by farmers i s prohibited. In order for the agricultural marketing system to function efficiently, farmers must be given freedom o f choice to sell their produce wholesale either through mandis or other marketing channels and the operation o f wholesale markets be opened to the private sector. An Expert Committee set-up by Go1 has recommended that state governments should replace current regime by an omnibus provisions that al low institutions other than the government to set-up an agricultural market, provided minimum standards, specifications, formalities, and procedures la id down by the government are complied with. GoAP i s in the process o f amending i t s agricultural marketing A c t and draft proposals to this effect are currently being reviewed.
37. Labor market reform. A constrained and inflexible industrial labor market has been identified as one of the main factors contributing to l o w labor productivity in AP, which i s one o f the lowest in the country. AP accounts for 13 percent o f the industrial labor force in India but produces only 6 percent o f the industrial output. The state’s labor rules are not necessarily more restrictive than those in other parts o f India, but substantial overstaffing means that industries in A P are disproportionately more affected by such inflexibilities than industries in other states, l ike Gujarat and Maharashtra. GoAP recognizes that a dynamic and flexible labor market, with necessary safeguards, i s the key to a prosperous and vibrant industrial sector. I t has therefore undertaken a number o f initiatives in recent years to streamline inspection procedures to reduce the regulatory burden faced by f i rms . Annual inspections of industries and
.
12
eliminating unauthorized random inspections (August 2002) and self-certification facilities for a l l industries (April 2001 and June 2002) are two such important policy changes that have been recently undertaken by the state.
38. Notwithstanding the current reforms, there i s an unfinished agenda in the labor market. Given that ‘labor’ i s in the “concurrent l is t ” o f India’s Constitution, AP cannot project a totally new agenda in labor reform without the cooperation o f the central government. However, even within the limits o f the current constitutional arrangement, there are a few channels through which the state can introduce flexibil i ty in the labor market. In this context, AP recently became the f i rs t Indian State to amend i t s Contract Labor (Regulation and Abolition) Act, 1970, to facilitate hiring o f temporary/contract labor for non-core service oriented activities by the f i r m s and commercial establishments. GoAP plans to undertake further labor reform in the coming months, including the introduction o f the Special Enclave Service Condition and Dispute Resolution Act, 2003. This Ac t will lead to creation o f labor arbitrators in notif ied areas and is expected to result in faster resolution o f industrial disputes and removal o f certain rigidities in the functioning o f the labor market in the state.
(ii) Public enterprise (PE) reform: Restructuring and privatization 39. Ap has made significant progress in i t s PE reform program. As o f September 2003, 9 enterprises have been privatized, 8 disinvested, 22 closed and 11 have been restructured. Gross proceeds from the sale of assets amounted to about US$30 million, with about US$26 mi l l ion received so far (the bulk o f w h c h wil l be used to cover the existing liabilities o f the enterprises). Proceeds from disinvestments o f 8 enterprises were close to U S $ 4 0 mill ion. Phase I o f the PE program, which started in 1999, i s drawing to a close. Of the 19 un i ts included in Phase I, actions for sixteen were completed, f ive units were closed, and eight were privatized, including Nizam Sugar Limited (counted as one enterprise but with eight separate units) and seven sugar and spinning cooperatives.” In a l l but one o f the cases, sale and purchase agreements have been executed and private purchasers have taken control o f associated assets. Three o f the PES have been restructured and downsized, including AP Irrigation Development Corporation, AP Meat and Poultry Corporation, and AP Agro-Industries Corporation. The three remaining enterprises in Phase 1 include two spinning mills (one o f which i s at an advanced stage o f privatization whi le the other is held up in a Mumbai court), and AP Handicrafts Corporation where a Cabinet decision has been taken to continue the corporation for another year.
40. Phase I1 o f the reform program covers 68 enterprises and will be implemented over a four year period-from 2002-03 to 2006-07-with a target o f an average 15 uni ts to be completed each year. These targets have been set based o n the timing and implementation experiences under Phase I. Phase I1 enterprises include: (i) 16 corporations ranging in size and covering a variety o f sectors, including finance, industry, agro-industry, and services; (ii) 43 cooperatives, in sugar, spinning, dairy, o i l seeds, and rural electricity; and (iii) 9 enterprises, where the government holds minority shareholdings.
41. The target of completing 15 units for 2002-03 has been achieved. Option studies for nearly 40 enterprises have been completed. Ten units have been closed, including five cooperatives and five corporations o f varying sizes. Compensation as part o f the Voluntary Retirement Scheme (VRS) has been paid to the employees, and the Implementation Secretariat i s in the process o f appointing liquidators for the sale o f assets and the settlement o f liabilities. T w o units (sugar factories) have been privatized, and another three units have been restructured through downsizing and the payment o f VRS. Another 10 are slated to be privatizedclosedrestructured in 2003-04 and the process for al l 68 enterprises in Phase I1 i s l ikely to be completed by 2006-07. Recently a major sale was completed (Godavari Fertiliser Company), which raised Rs..102 crore for the government; this was the f i rst transaction which resulted in a net resource transfer to GoAP’s treasury.
The five units o f Nizam Sugar Limited that were privatized, have crushed 23 percent more cane and increased capacity utilization by 30 percent in one year.
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42. A P ’ s PE reform program provides valuable leaming experience and has become a model program in India. A number o f delegations f rom other states have visited AP to learn about i t s experiences. Several factors contributed to these achievements, including polit ical support f rom the top, the creation o f Implementation Secretariat and i t s commitment to the program, and the Technical Assistance program to build institutional capacity and provide technical advice. Part o f i t s success comes from putting in place the VRS and social safety net program to compensate employees for the loss o f jobs and assist them in finding alternative employment. As o f September 2003, 21,467 employees in Phase I and I1 had taken VRS. The DFID financed social safety net program provided counseling andor training services to over 6,000 workers. The Implementation Secretariat has also developed a communications program that has helped build acceptance o f PE reforms and lessened opposition. Phase I was essentially a leaming exercise and a reorientation o f the government away f rom direct involvement in commercial activities. I ts fiscal impact has been relatively small so far. The state has yet to tackle the two major enterprises-A.P. State Transport Corporation and Singareni Collieries-which together account for 88 percent o f the total PE employee strength o f 250,000. Nonetheless, the reform process has been sequenced appropriately and i s slowly gaining acceptance among a l l stakeholders. Such acceptance should help set the stage for fbture actions on the larger and more complex enterprises beyond Phase 11.
(iv) Improving fiscal discipline and spending composition; and public expenditure management & financial accountability
Fiscal discipline and spending composition
43. As part o f the Vision 2020 work, GoAP had prepared a Fiscal Reforms Strategy Paper in January 2002. Operationalized around a medium-term framework, the strategy projects broad fiscal aggregates over a six-year period, and sets annual targets for deficit and debt. T h i s strategy i s expected to achieve fiscal stability and make additional funds available for priority development expenditures which are identified as: (i) capital expenditure for new infrastructure creation, (ii) non-salary operations and maintenance (O&M), and (iii) social sector investments in primary health and education.
44. A review o f GoAP’s fiscal reform program indicates that there has been a commitment in the last couple o f years to achieving aggregated fiscal discipline. An important measure of this commitment i s the adoption o f and adherence to the Medium Term Fiscal Framework (MTFF) indicating that the Finance Department i s serious about tailoring expenditures to incoming revenues.” In both 2001-02 and 2002-03-the f irst two years o f the MTFF-targets for a l l deficit measures were met (Table 4). This i s commendable as in both these years there was a shortfall in fiscal devolution f rom GoI. The debt stock also moved at the anticipated pace.
45. Looking forward, based o n the f i rs t six months o f data, the fiscal numbers for 2003-04 also appear to be on target. However, one reason for possible slippage in the consolidated fiscal deficit i s if the Fuel Surcharge Adjustment (FSA) designed to cover higher production cost in the power sector i s not t imely passed on to the consumers (for more information, see paragraph 82). GoAP i s however, committed to implement the F S A upon approval by the Regulator.
Achievements.
l2 The MTFF i s laid out in the GoAP’s Fiscal Reforms Strategy Paper, 2002, which along with other government strategy papers i s available, on GoAP’s Web site. The MTFF has been revised in September 2003 and the revised version wil l be put up on the Web site in January 2004.
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Table 4: AP's Fiscal Numbers: An Evolution (in Rs. crore and as a % of GSDP)
1999-00' 2000-01 2001 -02 2002-03 2003-04 Actual Actual MTFF Actual M TFF P.A." MTFF L.E."
(i) Revenue 15739 18305 20760 19801 23660 21 590 26290 24796
Total Revenue (12.6) (13.2) (13.9) (13.2) (14.3) (13.1) (14.2) (13.6) 101 79 12124 13310 13242 15130 14734 17050 16536
State's Own Revenue (8.1) (8.7) (8.9) (8.8) (9.1) (8.9) (9.2) (9.1) (ii) Deficit measures
-1 875 -2952 -2380 -2383 -1611 -1 494 -321 -1 000 Primary (-1 5 ) (-2.1) (-1.6) (-1.6) ( - t o } (-0.9) (-0.2) (-0.5)
-1233 -3595 -3863 -3699 -3411 -3054 -2408 -2866 Revenue (-1 .O) (-2.6) (-2.6) (-2.5) (-2.1) (-1.9) (-1.3) (-1.6)
-4976 -7306 -7901 -7541 -8116 -7625 -7721 -7892 Fiscal (-4.0) (-5.3) (-5.3) (-5.0) (-4.9) (-4.6) (-4.2) (-4.3)
(-6.4) (-5.9) (-5.9) (-5.4) (-4.9) (-4.3) (-4.3) -8847 -8886 -8906 -8876 -8078 -7822 -7830
Consolidated (iii) Debt measures
28598 35651 42940 42493 50461 50084 58045 58301 Debt stock (22.8) (25.6) (28.6) (28.3) (30.6) (30.4) (31.8) (32.0) Debt stock with off-budget 33841 41686 49969 49465 57490 57967 64824 65293 borrowings (27.0) (30.0) (33.3) (33.0) (34.9) (35.2) (35.5) (35.8)
Notes: (i) 'Extraordinary accrued liabilities (over 1 percent of GSDP) this year were shifted to the next year: (ii) ** Pre Actuals; and (iii) ... Latest estimates. (iv) The projected numbers are from the MTFF of February 8, 2002 (after removing the SAL grants from revenue.
Definitions: (i) Primary Surplus (+)/Deficit (-) = Total Revenue - Non-interest Expenditure: (ii) Revenue Surplus (+)/Deficit (-) = Total Revenue - Revenue Expenditure; (iii) Fiscal Surplus (+)/Deficit (-) = Total Revenue - Revenue Expenditure - Capital Outlay - Net Lending; (iv) Consolidated Surplus (+)/Deficit (-) = Fiscal Surplus (+)/Deficit (-) +Gross Budgetary Support to Power Sector - Power Sector Financing Requirement.
46. The bulk o f the fiscal adjustment has come f rom those areas explicitly identified in GoAP's fiscal strategy-the public wage bill through restrictions on new hiring, the power sector with a reduction in associated financial losses and the focus o n rice subsidy program-which strengthens the credibility o f the overall reform p r ~ g r a m . ' ~ The largest fiscal gains have come through a substantial containment o f the wage and pension bill (Table 5). Since this i s the single largest component o f state expenditures, continued progress i s a good signal for steady fiscal reforms. Expenditures on non-salary operations and maintenance and capital investments have been increasing, but have fallen slightly for primary social services in 2002- 03. This i s a concem given the historical underinvestment in these areas. However, the impact o f this underinvestment i s lessened as GoAP has made substantial improvement in other reform areas, such as governance and public expenditure management, which are expected to improve the effectiveness o f public spending o n service delivery to the poor. Also, in line with this medium-term strategy, spending in this area i s budgeted to grow substantially to 2.4 percent o f GSDP in 2003-04 and to 3 percent o f GSDP by 2006-07.
I3The financial performance o f the power sector was not good in 2001-02, but has much improved since then (more on this below).
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Table 5: Public Spending Composition (in Rs. crore and as a % of GSDP)
1998-99 1999-00 2000-01 2001 -02 2002-03 2003-04 (P.A.) (B.E.)
2203 2495 2668 2957 2985 4299 Primary health +primary education (1.92) (1.99) (1.92) (1.97) (1.81) (2.36)
1385 1992 2724 3091 3796 4793 Capital outlays (1.21) (1 59) (1.96) (2.06) (2.31) (2.63)
2064 1908 2528 2779 3041 3693 Non-wage O&M (1.80) (1.52) (1.82) (1.85) (1.85) (2.02)
6735 8343 10009 10133 10472 11278 Salaries & Pensions (5.86) (6.66) (7.19) (6.75) (6.36) (6.18)
47. In the area o f tax reform, GoAP has taken several actions to strengthen i t s revenue performance. AP has been a leader in making preparations for adopting the Value Added Tax (VAT). The state’s VAT legislation has been approved by the Legislature and has been sent to Go1 for obtaining the President o f India’s assent. GoAP has acted upon several recommendations o f the Revenue Reform Committee, which has prepared reports o n commercial taxes and stamps & registration. Reports o n excise, motor vehicle taxes are currently under preparation. The government has incorporated many recommendations o f the RRC report, particularly in the case o f VAT design. Other actions taken o n the basis o f RRC reports include abolition o f internal check posts, establishment o f Large Taxpayers Units and Dealer Service Centers in each division, holding o f regular bi-monthly meetings with Trade associations to address grievances.
48. As part o f i t s annual exercise, GoAP has revised i t s MTFF and the fiscal adjustment process i s now to be guided by the Second MTFF prepared in September, 2003. The revised MTFF i s to be put on GoAP’s Web site in January 2004. Fiscal targets f rom the First and Second MTFFs are given in Table 6 and Table 7, respectively.
Table 6: Andhra’s First Medium Term Fiscal Program: 2001-02 to 2005-06 (in Rs. crore and as a % of GSDP)
2005-06 2004-05 2000-01 2001 -02 2002-03 2003-04 Actual Latest Estimates Projected Projected Projected Projected
- 2938 -2380 -1611 -321 1328 2990
-3595 -3863 -341 1 -2408 -753 1207
(i) Deficit measures
Primary (-2.1) (-1.6) (-1 .O) (-0.2) (0.7) (1.3)
Revenue (-2.6) (-2.6) (-2.1) (-1.3) (-0.4) (0.5) -7306 -7901 -8116 -7721 -6820 -5801
Fiscal (-5.3) (-5.3) (-4.9) (-4.2) (-3.4) (-2.6) -8826 -8886 -8876 -7822 -6809 -5884
Consolidated (-6.3) (-5.9) (-5.4) (-4.3) (-3.4) (-2.6) (ii) Debt measure Debt stock with off- 41399 49969 57490 64824 71 369 77207
(iii) Miscellaneous Total spending 25750 28240 31150 33600 361 00 39180 State’s own revenue 12190 1331 0 151 30 17050 19310 22090 SpendinglRevenue 2.1 1 2.12 2.06 1.97 1.87 1.80 Source: Department of Finance, Government of Andhra Pradesh, February, 2002. Definitions: See Table 4.
budget borrowings (29.8) (33.3) (34.9) (35.5) (35.3) (34.3)
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49. The revised targets (Table 7) indicate that there i s some slippage in deficit measures in the outer years, as compared to the First MTFF targets that were prepared in February, 2002. This slippage i s mainly due to (i) a revised (lower) projection o f fiscal devolution f rom the center; (ii) delayed turn-around in the financial performance o f the power sector (as compared to the aggressive forecasts that were made in the f irst business plan o f the power sector) and continued subsidy in 2005-06 and 2006-07; and (c) slightly slower than expected growth in A P ' s o w n revenue, due to sluggish economy.
Table 7: Andhra's Second Medium Term Fiscal Program: 2002-03 to 2006-07 (in Rs. crore and as a % of GSDP)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Actual Actual Pre-Actual Projected Projected Projected Projected
(i) Deficit measures - 2953 -2383 -1 494 -1 000
-3595 -3699 -3054 -2866 Revenue (-2.6) (-2.5) (-1.9) (-1.6)
-7306 -7541 -7625 -7892
Primary (-2.1) (-1.6) (-0.9) (-0.5)
Fiscal (-5.3) (-5.0) (-4.6) (-4.3)
Consolidated (-6.4) (-5.9) (-4.9) (-4.3) -8847 -8906 -8073 -7830
(ii) Debt measures 35651 42493 50084 58301
Debt stock (25.6) (28.3) (30.4) (32.0) Debt stock with off-budget 41686 49465 57967 65293 borrowings (30.0) (33.0) (35.2) (35.8) (iii) Miscellaneous Total spending 2561 1 27342 29215 32688 State's own revenue 12124 13242 14734 16536 SpendinglRevenue 2.1 1 2.06 1.98 1.98 Source: Department of Finance, Government of Andhra Pradesh, September, 2003.
-776 174 (-0.4) (0.1 1 -2276 -473 (-1 . I ) (-0.2) -8374 -8030 (-4.1) (-3.6) -81 35 -7765 (-4.0) (-3.5)
67395 75009
73666 80859 (33.3) (33.3)
(36.4) (35.9)
35742 38980 18636 21 035 1.92 1.85
2294 (0.9) 1090 (0.4) -6790 (-2.7) -6381 (-2.5)
86729 (34.6) 86770 (34.6)
41 928 24045 1.74
Note: The revised MTFF assumes SAL amounts of US$320 million in 2003-04, US$350 million in 2005-06, and US$380 million in 2006-07 as one of the sources of deficit financing.
Definitions: See Table 4.
50. One positive point that stands out in the revised MTFF exercise i s that when looking at the total state government spending as a ratio o f i t s own taxes, the two projected series-from the First MTFF and the Second MTFF-are pretty close. This indicates that the state government's o w n fiscal efforts in meeting the deficit targets have been good.
5 1. In order to control government guarantees, GoAP has passed Government Orders (GOs 445 and 446) imposing a ceiling on the guarantees of the state government and laying down guidelines for their credit risk analysis, disclosure and reporting. The maximum total outstanding government guarantees are fixed at 90 per cent o f the revenue receipts o f the second preceding year. The accompanying guidelines describe pre-sanction procedures (which loans are eligible for state government guarantees, responsibilities o f the Administrative departments o f the Secretariameads o f Departments aslung for the guarantee, amount o f guarantee commission, evaluating r i s k o f the guarantee), directions for the drafting o f the guarantee deed and the required accompanying documentation and post-sanction procedures (performance monitoring o f the guaranteed entity). The Departments o f the Secretariat and the Heads o f Departments are required to submit o n a quarterly basis entity-wise position o f the outstanding loans guaranteed by the government. The Finance Department, on i t s part, i s required to maintain a database regarding a l l guarantees issued by the government, monitor them and publish them in the State Budget. GoAP has also made a provision for a guarantee redemption fund in the budget amounting to 1 percent o f the guarantees outstanding.
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52. Future challenges. At the same time, GoAP faces a few challenges. Whi le there i s l i tt le the state govemment could do when there i s a decline in fiscal devolution f rom the center, GoAP needs to continue strengthening i t s revenue reform program. A major challenge in the upcoming fiscal year will be the adoption and implementation o f the Value Added Tax (VAT).14 The VAT has the potential to substantially improve revenue performance and reduce distortions, but requires carefd implementation.
53. GoAP has also initiated steps to reform their pension system. A pension forecasting p lan with a robust forecasting methodology has been prepared. The software package developed in the report serves wel l as a policy tool: i t can quantify the fiscal impact o f changes in any parametric or fundamental variables (link contributions to pension benefits for existing employees). A blue print for pension reform and ways to rationalize the pension system have also been suggested. The report has been put up to a Cabinet Sub Committee for discussion. Implementation o f the report’s recommendations will be planned after i t s clearance.
54. With the objective o f deepening the fiscal reform process, GoAP plans to undertake one further action: T o institutionalize the MTFF process through formal legislation, with the primary purpose o f mandating the presentation o f a medium-term fiscal analysis and implications for annual deficit and debt stabilization targets along with the annual budget.
55. In the area o f spending, a challenge for the govemment i s t o improve the effectiveness o f public expenditure and development outcomes. Given the enormous and pressing needs o f A P ’ s developing economy, i t i s critical to have a process o f resource allocation across competing needs based o n a systematic evaluation o f priorities and the actual impact o f spending. The fiscal allocation process should therefore be increasingly informed by evidence o n actual performance, and driven by deliberation over pol icy alternatives. Some reforms in this direction are being pursued through improvements in budget processes and public expenditure management. Overall, reforms in governance and financial management are improving accountability for public expenditures.
Public expenditure management andfinancial accountability
Achievements. 56. GoAP’s Fiscal Reform Strategy Paper lays out a comprehensive budgetary and financial management reform program. These reforms are critical in strengthening the link between public spending, service delivery and development outcomes. T o date, the state has established: (i) effective fiscal control mechanisms and a credible budget, (ii) increased polit ical engagement, l ine department flexibility, performance orientation and participation in the budget process (iii) greater transparency in budgets and out-tums, (iv) predictable within-year funds f l ow to l ine departments and (v) increased compliance with the basic accounting requirements in spending departments and in local and other bodies. These measures are described below:
(a) Measures to strengthen budget preuaration and execution process
0 Budget transparency and consultation. The MTFF guides the preparation o f the Annual Fiscal Framework (AFF), within which the detailed annual budget i s then developed. The AFF for 2002-03 and 2003-04 were posted on the GoAP’s Web site and comments were sought f rom al l stakeholders. Feedbacks were received through seminars, media debate, and e-mail/mail.
Hard budget ceilings, and greaterflexibility to line departments. The AFF allows hard budget ceilings to be set for the line departments, at the beginning o f the budget p r o c e ~ s . ’ ~ Within these ceilings the
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l4 The revised date o f VAT introduction-April 1, 2003-has passed and VAT has not been implemented in any o f the Indian states. While AP, along with a few other states, had done al l the necessary preparation for introducing the VAT, Go1 decided to postpone the launch. Since state govemments are to receive 100 percent reimbursement from Go1 in case o f a revenue shortfall in adopting the VAT, it i s not possible for a state to go on its own. Al l concemed parties are looking into the issue and a new date for VAT implementation i s yet to be announced.
Is This does not, however, mean that there are no revisions to allocations during the financial year. Revisions w i l l be necessary if revenues fall short o f estimates or if some new schemes are introduced during the year. The allocation o f cuts, decided upon by the
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l ine departments are given greater responsibility and flexibil i ty to prioritize their expenditures, and to re-appropriate budgets within prescribed norms.16
Improved budget release mechanisms. The. fiscal frameworks and the hard budget constraints enabled the Finance Department to make 6-month budget releases at the beginning o f the 2002-03 fiscal year, and a credible commitment to quarterly releases in the second ha l f o f the year. This was further improved in 2003-04 when the release at the beginning o f the year was for the f i rs t 9 months. This i s a critical development in increasing the predictability o f funds f lowing to l ine departments.
Improved cash management. The improved budget release system described above combined with the newly structured payment schedule system (within each month) have facilitated better cash management by the Finance Department, including better matching o f revenue and expenditure cash flows.
Incentives to provide better services and collect user charges. The modified initiative to provide incentives (in the form o f supplementary budgets) to l ine departments for providing enhanced quality of services and collecting additional user charges i s steadily taking-off, particularly in departments such as transport, police, education, health, horticulture and agnculture.” For 2002-03, the amount collected i s reported to have been Rs. 103 crore by January 2003.
Performance budget. GoAP has enhanced the 2003-04 budget preparation process through (i) requiring each department to identify objectives, work plan, and performance targets (drawing f rom the GoAP’s comprehensive performance measurement system)18 and linkmg these to funds requested, (ii) the Cabinet Sub-committee (CSC) playing a central role in considering the competing demands o n the total funds available at a cross-government workshop, rather than this being essentially done through individual negotiations between the Finance Department and line departments, (iii) workshops at state and district levels to discuss the l ine department performance budgets with officials and the public. The performance budget process has not yet changed the format o f the budget presented to the Legislature, and it i s unlikely that i t has impacted the quality or content o f the budget this f i rs t time round, but it provides a basis for strengthening the process and quality o f the budget in future years.
(b) Measures to strengthen financial accountability, internal control and legislative scrutiny
57. focused on:
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The short-term (1-3 year) approach to improving financial accountability and intemal controls has
“Getting the basics right” While GoAP has the foundations for a satisfactory financial management and accountability system, several basic weaknesses remain. Accordingly, measures being implemented in 2002-03 and 2003-04 include:
(i) Strengthening internal controls through significantly enhanced monitoring and enforcement the timely and regular application o f financial procedures and controls. An internal audit system in the State Government i s being introduced;
Cabinet Sub-committee, i s closely linked to the budget release process, and the rate o f expenditure b y different departments and schemes. l6 Currently there is limited room for prioritization and flexibility given the high proportion o f ‘non-discretionary’ expenditures (e.g., salaries, regular operating costs, already committed expenditure). The ‘discretionary’ portion i s estimated to be about 10-12 percent o f the total budget.
The earlier announced initiative o f authorizing line departments to retain the amounts the incremental user charges collected in Deposit Accounts and to use these, was modified. As a result o f views expressed by the Auditor General, l ine departments are now required to deposit such amounts into the State’s Consolidated Fund, and are then provided supplementary budgets to use these amounts for authorized purposes. The incentives created by the initiative to generate revenue and improve service delivery may therefore be less than originally anticipated.
The system o f performance monitoring was reviewed by top officials in June 2003, with a view to streamlining the system, and ensuring balance between what individuals are held accountable for and their authority.
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(ii) Continued modernization o f the financial accountability system through computerization (e.g., o f treasuries and payment o f salaries, and networking), and by updating financial codes, rules and regulations; and
Fostering a culture o f transparency through better disclosure o f financial information. (iii) Diagnostic work to prepare for the medium-term In April 2003, a State Financial Accountability Assessment (SFAA) was completed by GoAP, to prepare a medium-term road map for deeper improvements in the financial accountability and management system. The Wor ld Bank’s assessment i s that the analysis and reporting in the SFAA i s high quality and thorough, and that i t s findings are well-supported by strong analytical evidence which has provided a strong basis for an effective program of financial accountability reform. The main findings o f the SFAA are:
(i) The operation o f the centralized Treasury system provides effective discipline over spending by l ine departments. The internal controls exercised by the l ine departments themselves are, however, generally weak.
A number o f weaknesses regarding control were noted in respect o f expenditures managed outside the centralized Treasury system, including f h d s provided to local and other bodies in the form o f grants-in-aid, advances and loans, and the funds managed in the Public Account.
Timeliness o f financial reporting has been improved and the previous backlog o f overdue accounts and audit reports o f local and other public bodies has been reduced significantly.
Improvements in the presentation o f budget documents and accounts have made them simpler t o understand and enabled greater public scrutiny and participation.
58. Future Challenges. The critical challenge for the next few years i s to sustain and institutionalize the improvements in public expenditure management and financial accountability that have been achieved so far, This i s a major feature o f the GoAP program in 2003-04 and subsequent years. Institutionalizing these improvements i s facilitated by the introduction o f greater transparency and the expansion o f the role played by the Cabinet Sub-committee and line departments in allocating resources.
59. Effective institutionalization will also depend on translating the platform created by the Finance Department into improved prioritization and service delivery performance in line departments. GoAP i s introducing a medium term expenditure planning process, init ially in three departments, drawing o n the experience thus far in the primary health sector. In addition, performance budgeting will be further developed and refined. GoAP plans to incorporate departmental objectives and targets in the Demands-for- Grants requests i t submits to the Legislative Assembly.
60. Strengthening financial accountability remains a challenge for the reform program. As part o f the S F A A process, the state government i s preparing an action plan that emphasizes several steps to be taken in the short to medium term. The key features o f the plan involve:
e Further improving basic financial controls and accountability within l ine departments, and for funds outside the direct control o f the Treasury such as grants-in-aid, loans and advances including modernization o f financial codes and functionary manuals to underpin recent improvements, and creation o f an effective internal audit function.
Establishing better management, control and accounting arrangements for funds held in the Public Account, including a thorough review o f the AP Government L i f e Insurance and AP Government Employees Group Insurance Scheme.
Extending the financial accountability assessment process to cover local government and public sector undertakings.
6 1. An SFAA Implementation Committee was formed in September 2003 through a Government Order (GO 417) to take forward and
0
(ii)
(iii)
(iv)
0
0
Implementation o f SFAA recommendations i s proceeding rapidly.
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monitor the implementation o f the SFAA action plan. This i s supported by a team o f senior officials and external experts f rom the Centre for Good Governance. Significant steps have already been taken to strengthen accountability in furtherance o f the action plan. These include issue o f a Government Order (GO 45 1) which defines the accountability o f senior level Controlling Officers and links release o f funds to the proper discharge o f their fiduciary responsibilities. Related instructions have been issued to Treasuries requiring them to ensure that financial norms have been met before releasing fund and guidance to controlling and disbursing officers in the fo rm o f handbooks on financial accountability. A workmg group has been established on internal audit, chaired by the Principal Finance Secretary, and a review o f existing internal audit functions carried out by the Institute o f Chartered Accountants. Decisions have been made on the structure and functioning o f internal audit, taking account of, including introduction o f systems audit and some outsourcing to private sector professional audit f i rms.
(v) Improving Governance
62. GoAP i s pursuing a broad agenda o f governance reforms, encompassing machinery o f government and pay and employment issues, human resource management and development, enhancing transparency and citizen orientation, anticorruption, and improving the management o f the GoAP’s legal agenda. Advances in strengthening governance continue to be impressive in areas where GoAP has historically placed i t s greatest emphasis, such as e-governance and human resource development. Progress i s also being made in areas such as administrative deregulation to promote private sector growth, anticorruption and the management of GoAP’s legal agenda. The key challenge in coming years will be to ensure the effective implementation o f the existing reform agenda while moving forward in a few selected areas such as administrative rationalization.
63. The highlights o f the reform program are briefly discussed below:
Strategy for governance reform. A White Paper on Governance Reform was prepared by the government and i s posted on the Internet. T o carry the reform agenda forward, GoAP established an Administrative Reform Unit within the General Administration Department (GAD). With support from DFID, GoAP set up the Centre o f Good Governance (CGG) to provide support to the reform program with analysis and assistance for departments to draw on. The CGG has played a particularly valuable role in analyzing the effectiveness o f reforms and makmg recommendations to improve imp1ementati0n.l~ Other sources, such as the GoAP’s Performance Management Committee, have made recommendations for improving the quality o f the states performance indicators. GoAP also recently created an Advisory Commission o n People’s Empowerment (COPE), which i s charged with improving service delivery, combating corruption, increasing productivity and reducing administrative costs.
Civil service reform. The c i v i l service reform agenda covers topics ranging from pay and employment to reforming the machinery o f government to improving performance orientation. Whi le the number o f c iv i l servants per capita in A P has historically been high for Indian states, over the past several years the government has made substantial progress in reducing the size o f the c iv i l service and controlling the growth o f the wage bill. GoAP has also made notable progress in the conduct o f a c iv i l service census and in i t s efforts to establish a computerized human resource database.” GoAP has developed a comprehensive organizational chart o f reporting relationships for ministers, departments and HODS (Head o f Departments) and has grouped these departments under eight general categories which are considered collectively in budgeting and performance review exercises. GoAP also met the formal
0
A CGG study has identified scope for a number of improvements in the CARD program to reduce corruption and improve service delivery. Another study looked carehlly at enhancing the effectiveness of citizens charters, which have spread widely throughout state departments and agencies. Yet another looked at ways in which the operation of the Administrative Tribunal could be improved.
Whi le the initial target o f June 2002 has proven overly optimistic, the SmartGov project has a major HRM component, and the system i s now being developed on a pilot basis and will be ready for launch in four major departments encompassing over 50 percent o f the civil service by December 2004.
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goal for developing and publicizing citizens’ charters in at least 25 departments, although more work remains to ensure effective implementation. W o r k o n HRD issues, including establishing training centers in al l 23 districts and identifying and training o f 10,000 “change agents,” i s proceeding in a highly satisfactory fashion. There are a few areas where implementation has not advanced rapidly. The f i rs t i s the review and simplification o f human resource procedures, which should be one o f the functions performed by the new wing in GAD tasked with responsibility for Administrative Reform. A second i s the development of pol icy analysis capacity within the GoAP Secretariat, which i s a long-term objective that could be addressed through a combination o f training and capacity building and lateral recruitment. Third, while GoAP has taken essential steps in reorganizing the Government along functional lines and has identified potential candidates for rationalization among Departments and HODS, it has yet to begin rationalizing departments, eliminating administrative overlap and duplication between them, and closing units whose services are n o longer necessary.
Electronic governance. Progress o n expanding electronic governance has been impressive. A blueprint for electronic governance has been drawn up for 35 major departments. Slums (renamed SmartGov) was launched in November 2002 (with 483 modules), and Twins/e-Seva has been expanded. Over 5 mi l l ion transactions have taken place since the system was launched in August 200 1, and the number o f transactions has now surpassed 50,000 per day. Plans are being developed to computerize the administration o f social benefits and to r o l l i t out to over 100 locations throughout the state by June 2004. Plans are also underway to make at least 25 services available on-line through the AP Portal by December 2003 and over 105 services available by FY 2005-06, as we l l as to bring the benefits o f electronic governance to rural areas through the use o f luosks.
Access to information. GoAP will implement the Government o f India’s Freedom o f Information legislation, which was enacted in January 2003 but has yet to be formally ratified. The law establishes a baseline set o f standards for federal and concurrent subjects, whereas states will establish guidelines for those areas within their designated mandate. In preparation for the notification o f this legislation, GoAP has prepared a draft set o f rules which incorporate important provisions such as suo-mot0 disclosure, penalties for non-compliance and appeals procedures. GoAP has also established a high level committee to oversee implementation o f the FOI legislation, designated a set information officers in the departments and districts, and prepared legislation o n upgrading the quality o f records management.
Anticorruption. During 2001 and early 2002, GoAP took some promising steps in developing an innovative anticorruption strategy focusing on prevention, prosecution and public relations. Talented officers were placed in charge o f the Anticorruption Bureau (ACB) and Vigilance Enforcement Department WED). A number o f Government Orders were passed making suspension mandatory for officers caught in entrapment cases, prohibiting officers f rom being routinely released on bai l until the completion o f the investigation, and attaching disproportionate assets acquired through il legal means to the court, among others. As a result, the performance o f these un i ts has significantly improved. Between 2001 and 2003, the number o f trap cases went up by 71 percent; the number o f disproportionate assets cases went up by 83 percent; and the number o f disproportionate assets seized in these raids increased by a 154 percent. The number o f convictions increased by 115 percent; the number o f dismissals f rom service increased by 25 percent; and the number o f gazetted and non- gazetted officers booked increased by 25 and 68 percent, respectively. The performance o f the VED also shows significant positive improvements in many areas. There was an increase in revenue leakage detected by 18 1 percent over 200 1-02, and an increase in revenue realized by 3 1 percent.
Future plans call for significantly strengthening this effort. The budgets for the ACB and VED will be increased by 50 percent for the next fiscal year and 20 percent each year after that, leading to a doubling o f resources over the next three years and al lowing them to expand their presence into the district level. A Cabinet Sub-committee has been formed to consider three items o f legislation that will directly or indirectly affect corruption issues, including the Performance Accountability Bill, the
0
0
0
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Corrupt Public Servant’s Forfiuture o f Property Bill and the A P Transparency in Public Procurement Bill.
(vi) Sectoral reforms: Education, Health and Power
Education
64. As la id out in Vision 2020, the education sector i s central to A P ’ s vision for economic and social development, and has been placed on the front burner o f state issues. Specific education markers have been outlined under this plan, which include achieving full functional literacy (by 2005) and ensuring that educational achievement in the state will be second to n o other state in India.
65. The specific objectives under Vision 2020 are (i) ensuring full literacy, (ii) promoting education among women, (iii) focusing vocational and higher education on marketable slulls, (iv) encouraging private sector initiatives in education especially in higher education and (v) creating effective frameworks for managing and funding education. These objectives are being met through the adoption o f key strategies, such as hiring more teachers, investing in physical infrastructure, revising curricula, focusing o n the disadvantaged groups, expanding non-formal coverage, focusing more attention on adult literacy programs, and enhancing community involvement in planning, management, administration and monitoring. GoAP’ s pol icy document entitled Education for Al l , together with Vision 2020, expands the scope for investment in education in the state and further illustrates GoAP’s commitment to achieving the goals set in these pol icy documents . 66. Achievements. A P ’ s education sector i s transforming rapidly and much o f this change has taken place within a l itt le less than a decade. As a priority, the government i s making a tremendous effort to achieve universal enrollment at the primary and upper primary levels, and to ensure retention and completion at these levels. Using household census information, state education officers have periodically conducted social audits in which the responsibility for bringing absent children to school i s placed on the sarpanch (the head of the panchayat), members o f the Vil lage Education Committees, members o f School Education Committees, members o f the Parents-Teachers Associations and education officers f rom various administrative levels. Primary school infrastructure has grown considerably across the state, and under a new Centrally Sponsored Scheme known as the Sarva Shiksha Abhiyan (SSA), a considerable amount o f investment in upper primary schooling has been included in the Tenth Plan, which i s l ike ly to be continued in the Eleventh Plan period.
67. Teacher management has improved considerably in the state with the completion o f the teacher’s database and the introduction o f a counseling system to deal with teacher transfers issues. A complete teachers database i s now available for scrutiny o n the AP Government Web site. A counseling system has been in place to deal with the issue o f teacher transfers and has often been cited as a best practice model for teacher management and rationalization issues.
68. GoAP has engaged a number of parateachers or Vidya Volunteers on a contractual basis to fill teacher vacancies in the short to medium term. The use o f Vidya Volunteers i s also expected to help during the transition f rom the District Primary Education Project (another Go1 centrally sponsored scheme) to SSA, which will shift the emphasis f rom primary to upper primary schooling.
69. Statewide student assessments have been carried out for children in Grades I-V in Mathematics and Telugu under a newly initiated Quality Improvement Program. Under the program, teachers participate in an intensive 45-day training course that helps them make assessments o n whether children in the same cohort have acquired the minimum competency level in language and quantitative s lu l l s for that group. The assessments are used to identify weaker groups o f students within classrooms and these children are then given increased attention to ensure that the set o f core competencies identified for that specific cohort are attained. Since assessments and specialized training of this kmd may be new to many o f the teachers, and even mandal and district level officers, state level project officers who have already been trained in these assessments facilitate courses at lower administrative levels.
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70. Whi le the state government s t i l l does not actively encourage the private provision o f primary and elementary schooling, several initiatives that have been undertaken that would help lead to greater private involvement in both actual operations and the management o f existing school programs. T w o recent examples include the participation o f a private, non-profit organization, the Naandi Foundation, in the management and running o f the school feeding program in the twin cities o f Hyderabad and Secunderabad. A similar arrangement has been established in Warangal as well. Secondly, GoAP has engaged forty corporate houses to manage about a third o f the schools in the Hyderabad- Secunderabad area under a l imited arrangement through the same non-profit foundation.
71. Future challenges. AP has made substantial progress in the education sector, but much needs to be accomplished before the goals o f Vision 2020 can be reached. Whi le enrolment rates across a l l groups have increased steadily over the years, attendance i s irregular, and retention and completion rates are s t i l l low. This i s particularly true for disadvantaged, vulnerable groups and girls. Quality o f education services i s s t i l l poor and attention i s being paid to improving quality o f education through increased non-wage operations and maintenance spending, improving the pupil-teacher ratio, provision o f textbooks and uniforms, increased funds for innovation, teaching learning equipment and materials funded through the SSA. Teacher quality i s also being improved by pre-service and in-service training. For this purpose GoAP has developed a training calendar, which ensures that teachers are not taken away from their primary responsibilities too often by training programs.
72. The key education sector issues that GoAP plans to address include: (i) improving the overall capacity to plan for the sector, monitor and evaluate changes in outcomes, and move towards performance based management o f the sector, (ii) ensuring that al l children are enrolled, attending and staying in school through the basic cycle (Grades 1-7), are obtaining an education o f reasonable quality and are showing demonstrable gains through assessment o f learning achievements conducted on a sample basis; (iii) how to improve resource flows to the sector and to improve the efficiency and effectiveness o f public spending, and (iv) to ensure that public spending i s equitable in nature, and that the l imited or scarce access resources that are available are spent judiciously across the various education levels, and across diverse gender, social and economic groups.
73. Furthermore, increased efficiency and equity in the use o f public resources o n education will also be achieved by adopting a school cluster based performance improvement program, improvements in attendance o f both teachers and pupils, by undertaking a public expenditure tracking survey and by developing and implementing a strategy o n the basis o f the findings through a public expenditure trackmg survey.
74. Increasing enrollments at the primary and upper primary level i s expected to place a considerable amount o f pressure o n the need for secondary school resources. GoAP i s cognizant o f this requirement and plans are being considered to expand the provision o f secondary schools in the state system. This will require increased in-flows o f resources into the state tied for education services at a l l levels, particularly at the secondary level.
Health 75. The National Sample Survey (NSS) and Bank studies for the AP health sector indicate that the private sector i s a major player in health care provision and financing, accounting for almost 90 percent o f a l l ambulatory care and more than 70 percent o f hospitalizations. The private sector accounts for two thirds of antenatal care, more than two-thirds o f a l l institutional deliveries, and one-third o f immunizations. A high and increasing proportion o f health care consumers, including the poor, are turning to the private sector, despite considerable donor input into the public sector over the last decade.
76. A large amount o f public money i s spent o n the provision o f private goods (ambulatory care and hospital care) and i s mostly captured by the upper income group. Although the state i s responsible for the delivery o f health services, a major portion o f the funding derives f rom GoI’s centrally sponsored schemes which, in effect, limits the freedom o f the state to take new directions and approaches, and allocate funds accordingly.
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77. In short, the health system in AP i s heavily reliant on the private sector and efforts to improve priority health outcomes will fa i l if they do not take this into account.
78. AP has the good fortune o f a strong polit ical commitment to improving health outcomes. These goals, including infant and chi ld mortality, maternal mortality, and communicable disease control, are clearly articulated in Vision 2020. Achieving these targets will require dealing with the whole health sector, both public and private. This emphasis o n health outcomes and the need to deal with both the public and private sector means that the Department of Health will need to be reorganized to meet new challenges and will need to try new approaches to reaching some o f the targets, including demand side interventions. Accordingly, the state plans to undertake the following actions:
0 Develop a strategy to ensure that the private sector contributes optimally to achieving the health goals of Vision 2020. The strategy will emphasize the oversight and enabling roles to be played by the public sector in ensuing the involvement o f the private sector in meeting the health goals.
GoAP will develop a plan, based on the recent functional review, for reorganizing the Department o f Health and the Commissionerate o f Family Welfare.
GoAP will emphasize demand side interventions to promote equity and improve quality (and provide alternatives to the failed supply side interventions) with init ial emphasis o n maternal and chi ld mortality. T o this end, detailed plans for a pi lot scheme will be developed, which will use vouchers to enable poor women to obtain antenatal care, and delivery and postnatal care through public or private nursing homes.
Power
0
0
79. The power sector in AP, l ike in most Indian states, exerts a significant impact on the overall fiscal performance o f the state. GoAP has implemented major reforms during the last four years that have yielded many positive outcomes. These compare very wel l with progress in the rest o f India, although results are mixed in some areas. An assessment o f the reforms reveals:
0 Significant progress in structural, regulatory and governance reforms. These include (i) unbundling in 1999-2000 o f the Andhra Pradesh State Electricity Board into six corporatized companies with independent management and functioning on commercial principles, (ii) effective regulation by the independent Andhra Pradesh Electricity Regulatory Commission (APERC) since i ts establishment in 1999, (iii) enactment and rigorous enforcement o f anti-theft legislation and introduction o f a citizen’s charter for the services provided by power utilities, (iv) significant reduction in transmission and distribution (T&D) losses from 37 percent in 1999-2000 to 26 percent in 2002-03 and improvements in collection efficiency-to over 98 percent-including collection o f receivables f rom public sector consumers.
Improvements in access, availability and quality of power. About 3000 megawatts (MWs) o f new generation capacity has been added in A P ’ s power system resulting in improved availability o f power supply. Special efforts have been made to improve the availability and quality o f power supply to industries, and to increase access to electricity in both urban and rural areas.
Continuing concern over the power sector’s Jinancial viability. The financial performance o f the power sector during 2000-01and 2001-02 did not meet the expectations o f GoAP’s own Business Plan, incurring losses o f about Rs.3000 crore in both years (see Table S), and placing an enormous strain o n the state’s finances. A severe country-wide drought during this period resulted in substantially lower hydro-power generation and increased electricity demand for imgat ion purposes. This delivered a double shock to the sector’s financial situation. The state recovered wel l f rom these diff icult circumstances and reduced power sector losses by about 40 percent f rom Rs.2928 crore in 2001-02 to Rs.1911 crore in 2002-03. This Performance i s laudable given that the drought worsened in 2002-03. Significant efforts were made to contain financial losses by curtailing theft, controlling agricultural supply within the limits o f the government’s policy, improving efficiency, and rationalizing tariffs for
0
0
25
industrial consumers.21 Cost recovery for the distribution companies has accordingly increased from 72 percent in 2000-200 1 to 79 percent in 2002-2003. AP has qualified to receive a cash support as an incentive for reducing the gap between average cost o f supply and revenue under the GoI’s Accelerated Power Development and Reform Program (APDRP). Notwithstanding these efforts, the state has not been able to tackle the diff icult twin issues o f metering and l o w tari f fs in the agnculture sector, which imposes high r isks and makes improvements in the sector’s financial performance vulnerable. However, GoAP fully acknowledges the importance o f progress in this area, and has initiated some work to lay the foundations for action (see below).
Table 8: Power Sector Finances (in Rs. crore and as a % of GSDP)
1998-99 1999-00 2000-01 2001-02 2002.03 (P.A.)
-2422 -3191 -3082 -2928 -1911 Net profit(+)lloss(-) (-2.1 1) (-2.55) (-2.22) (-1.95) (-1.16) Business PlanlMTFF targets -2438 -1 792 under APERL 1 (-1.62) (-1.09)
There has been sustained progress in reducing cross subsidies. APERC has made good efforts to rationalize tariffs and reduce the cross subsidization. Tariffs for subsidizing categories (HT-industries, commercial consumers and railway traction) have declined in real terms. Fo r HT-industrial consumers tariffs have been reduced f rom a maximum o f Rs. 3.95kWh in 2002-03 t o Rs. 3.60kWh in 2003-04. Progress in raising tariffs for subsidized consumers has been limited, however, especially for agricultural and residential users, who pay about 10 and 81 percent o f the average cost o f supply, respectively.
80. Tariffs for agnculture are the lowest among a l l Indian states and have not been revised for the last three years. Progress o n metering 2.2 mil l ion agriculture consumers i s lagging. So far, only new agriculture consumers and horticulture consumers are metered. Distribution companies (discoms) have submitted a metering plan to the APERC, which proposes full metering o f a l l consumers by 2006-07. After several years o f un- metered and subsidized power supply, farmers’ interests in maintaining these concessions are firmly entrenched. Whi le there i s greater acceptance o f the need for metering in order to comply with the provisions o f National Electricity A c t 2003 and continued pressure f rom the Regulator, progress on metering in the medium term i s l ikely to remain difficult.
8 1. Future challenges. Power sector reforms are critical for growth and the success o f fiscal reforms. Despite continuing concern about the financial sustainability o f A P ’ s power sector, GoAP i s malung progress o n a second generation o f reforms. A number o f structural reforms and commercialization initiatives are planned to provide stability and sustainability to the state’s fiscal position, increasing cost recovery, reducingkontaining subsidy support and lochng- in reform gains by preparing for the privatization o f distribution business. The government i s also planning significant investments to eliminate power shortages, further increase access and improve the quality o f power supply. The main components of GoAP’s power sector reform strategy include:
82. Continued efsorts towards eficiency improvement, theft control, and tariff rationalization in order to strengthen the sector’s overall financial performance. In 2002-03, the power sector (the whole o f generation, transmission and distribution businesses) recovered i t s operating costs through i t s own revenue (earnings before interest, tax and depreciation) for the f i rs t time since the init iation o f reforms in 1999-00,
L i k e other states in India agriculture metering and tariffs remain diff icult in AP.
2’ By enforcing supply regulations more strictly and communicating with farmers on the power supply situation, distribution companies were able to contain the level of supply to agriculture in 2002-03 to 2001-02 levels. Reduction in HT-industrial tariffs and incentive scheme resulted in 27 percent increase in HT-sales v is -h is previous year, reversing the trend o f declining sales during the period 1998-2002.
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and realized an overall 79 percent cost recovery through tariffs. The goal i s t o progressively reach 100 percent cost-recovery, which GoAP aims to achieve through sustained efforts to improve operational efficiency, reduce the cost of power purchases, and rationalize tariffs. With the l ikely introduction o f open access and competition (consistent with the provisions o f the Electricity Ac t 2003), pressure o n the utilities to further reduce cross subsidies will increase. Greater overall cost recovery will, therefore, require measures to rationalize tariffs f rom subsidized consumer categories. T o mitigate the financial and fiscal risk o f the failure o f hydro power generation, GoAP i s committed to a timely and regular implementation o f a Fuel Surcharge Adjustment (FSA), in accordance with the APERC’s directive.” As per the provisional information available for the f i rs t six months in 2003-04, the loss for transmission and distribution companies i s estimated to be about 117 crore, as against the target o f Rs. 25 crore profit for the f irst six months.23 The projected loss for the year as a whole (2003-04) i s Rs.600 crore tahng into account the committed subsidy for Rs.1513 crore. Of this gap, Rs.276 crore i s estimated o n account o f power purchase mix which i s proposed to be recovered through FSA. Roughly 102 crore i s on account o f inadequacy o f depreciation to meet debt service obligation. The latter i s proposed to be covered through tar i f f adjustments. In order to recover for the losses o n account o f the increased cost due to adverse power purchase mix, APTRANSCO has applied to the Regulator o n October 18, 2003 for a fuel surcharge adjustment. Whi le the Regulator’s order i s awaited, GoAP i s committed to implementing the F S A upon receiving the approval.
Table 9: Power sector finances: Present and future cost recovery
2002-03 2003-04 2004-05 2005-06 2006.07
Recovery of operating cost from revenue (in percent) 79 85 88 93 96
Subsidy for Distribution Companies (in Rs. Crore) 1082 1513 141 1 830 501
Source: Draft Power Sector Business Plan, September 6,2003.
83. Implementation of alternative mechanisms for the delivery of subsidies directly to agriculture consumers, enabling the power utilities to operate commercially. At present, subsidies to agriculture power consumers are provided through tariffs and are thus routed through the utility. The large share o f power that i s supplied to the agriculture consumers either without metering or at l o w tar i f f rates i s perceived as a big business r i s k by potential private investors. Through a Task Force o n power supply to agriculture, GoAP i s exploring alternative ways o f delivering subsidies to agriculture without affecting the commercial operation o f the utilities. The Task Force submitted i t s report t o GoAP, and based o n the government’s approval, the Task Force will p i lot test alternative subsidy delivery mechanisms during the next 12-15 months. Based on the lessons learned from the pilots, the government wil l finalize i t s strategy o n this important issue, t o be implemented from April 2005. The Task Force i s also initiating an incidence study to promote a better understanding o f the subsidy being provided to residential and agriculture consumers. Taken together, these initiatives will eventually enable the government to formulate a more effective mechanism for targeting and delivering subsidies to apcul ture, while allowing the utilities to operate on commercial principles, as wel l as reducing the overall fiscal impact.
22 In 2001-02 and 2002-03, on account of drought and the failure o f hydro power generation, GoAP had to provide additional cost support o f Rs.473 crore and Rs.262 crore, respectively. To address this issue, the APERFC in April 2003 issued an order for a Fuel Surcharge Adjustment in retail tariffs. The FSA facilitates on a quarterly basis an automatic pass through o f increased power purchase costs on account o f uncontrollable elements including failure o f hydro generation. 23 This has been mainly due to high production cost resulting from an adverse hydrohhermal mix. Hydro generation in the f irst six months has been 755 MUS against the target of 261 1 MUS. If this pattern continues for the year, the resultant higher production cost for the year could be in the range o f Rs. 300 to 400 crore.
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84. Separation of transmission and trading functions and moving to a multi-buyer model. In accordance with the Electricity Ac t 2003, AP plans to separate the transmission and trading functions and introduce open access in consultation with the APERC. An init ial feasibility study o n the establishment o f a multi- buyer model (MBM) and direct contracting between generators and distributors has been completed. The government and the utilities are currently discussing the strategy for shifting to a multi-buyer model, and depending o n the availability o f necessary infrastructure and commercial arrangements, the move i s to be implemented by April 2005. Mov ing to MBM would promote further commercialization and facilitate competition.
85. Privatization of distribution. GoAP seeks to lock in the efficiency gains achieved in the f irst phase of the power sector reforms by privatizing the distribution business. T w o o f the important pre-requisites identified by the privatization advisors have already been addressed: (a) in April 2003, APERC has enunciated long term tar i f f principles to mitigate regulatory uncertainty, and (b) the new Electricity A c t 2003 provides for the establishment o f alternative dispute resolution mechanism^.'^ GoAP has prepared a draft privatization strategy, which will be finalized by March 2005 based o n consideration o f the structural issues la id out in the new Electricity A c t 2003, and in consultation with the Regulator regarding introduction o f open access and competition in the power sector. The government has prepared a draft action plan to address these pre-requisites, important even in the context o f hr ther commercialization o f the sector, and intends to implement the actions over the next 15 months. The implementation o f the agreed plan will be important for GoAP readiness to launch the privatization o f distribution in 2005. The key to the success o f this effort lies in flexibil i ty for the government to be able to customize i t s privatization strategy to the market appetite and private sector’s capacity to undertake investments in distribution.
86. Expansion of access to electricity in rural areas. GoAP i s committed to providing electricity access in al l homes in the state by 2005-06. Currently, 67 percent o f the population has access to electricity. Developing viable business models for supply to rural areas and improving access will be critical. Uti l i t ies and GoAP are discussing service delivery models and financing arrangements for improving access.
E. BANK’S ASSISTANCE TO ANDHRA PRADESH
87. The Bank’s current assistance strategy in AP i s guided by the India Country Assistance Strategy (CAS), which was discussed by the Board in April 2001. Highlighting three strategic principles o f selectivity, adoption o f a programmatic approach, and reliance on partnerships, i t emphasizes assisting those states which have: (i) chosen to embark o n a comprehensive program o f reforms, including fiscal, governance and power sector reforms; (ii) expressed interest in entering into a partnership with the Bank; and (iii) have a relatively high incidence o f poverty. All three strategic principles are applicable to the proposed operation. AP has a comprehensive medium-term reform program that includes fiscal, governance and power sector components. Together with other donors such as DFID, the Bank has a strong partnership with AP, and as described in Table 1 above, more than one in five people l ive in poverty.
88. The 2001 CAS outlines both a base case and a l o w case for lending. A s explained in the 2002 C A S Progress Report (paragraph 6), India’s performance currently places it towards the l o w end o f the base case, with an otherwise strong macroeconomic performance undermined by high fiscal deficits, positive but slow and uneven progress in structural reforms, and reasonable portfolio performance (though disbursements rates have fallen, i t i s marginally above the 17 percent threshold set out in the CAS). The recent India Development Policy Review examined India’s fiscal position in depth, and confirmed that i t was a drag o n growth rather than a threat to stability. As outlined in both the CAS and the CAS Progress Report, the Bank i s proceeding in this context with sub-national adjustment lending with the key a im o f reducing state-level deficits (now ha l f o f the national deficit). Experience shows that there has been some
24 Other issues identified as conditions precedent by the privatization advisor are: mitigation o f measurement and subsidy risk for power supply to agriculture, financial restructuring and re-capitalization o f distribution companies, announcement of policy on introduction o f competition, and evolution o f the sector structure to a multi-buyer model.
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progress in reducing fiscal deficits in AP, Kamataka and Orissa. Encouraged by this progress, Go1 has asked that the S A L facility be available more broadly to other states based o n wel l defined criteria, including progress in reducing fiscal deficits as a major trigger. Thus, the volume and timing o f such lending i s governed by “self-regulating triggers” in that they depend o n the speed o f reforms, including in the area o f fiscal policy, at the state level. Last fiscal year, n o adjustment loans were processed; this year about four are l ikely to be processed.
89. The Bank has had a long development partnership with AP. It was one o f the earliest reforming states to receive Bank Group support. With a current lending portfolio (active projects) o f roughly US$2 billion, it has the largest assistance program among Indian states. Through multi-state projects, channeled via centrally-sponsored schemes, the Bank has supported AP in improving the delivery o f public health services and primary education. Since 1995, the Bank has financed a variety o f state specific investment projects-including rural poverty, health, chi ld nutrition, forestry, irrigation, rural roads and state highways, and power projects. A Structural Adjustment Loan, APERL 1, focusing o n fiscal and governance issues, was approved in March 2002.
90. The Bank’s assistance strategy in AP also has a major non-lending component. Various pieces o f analytical work have been done over the years both to help the client and to underpin the Bank’s own lending program. Formal and informal work done in the last five years includes a growth study, a fiscal report, a state financial accountability assessment (done by the client), and sectoral studies o n education, health, water resource management, and environment. Most o f the recent analytical work has been undertaken, at the request o f GoAP, in support o f Vision 2020. In addition, as part o f APERL 1 supervision and preparation for APERL 2, several due diligence pol icy notes have been prepared over the last 12 months o n a variety o f topics, including poverty, fiscal, governance, public expenditure and financial management, public enterprises, agriculture and rural development, education, health and power.
91. Among external agencies, DFID’s active assistance program has complemented the Bank’s work the most. Besides being a partner in adjustment operations, DFID i s providing technical assistance o n the state’s reform agenda, including the key issues o f governance, public enterprise reform, power sector reform and poverty monitoring and analysis. Other programs in DFID’s portfolio include efforts to improve rural livelihoods, primary education, and services to poor people in 32 towns across the state. DFID also finances a number o f national projects in AP, particularly in the health sector o n HIV/AIDS. T o complement this work, DFID has provided strategic technical assistance o n the health sector to GoAP.
F. THE PROPOSED LOANKREDIT
92. The proposed APERL 2 i s the second operation in a series o f planned SALS to AP. I t i s based o n the strength o f A P ’ s overall reform program and o n progress o n the fourteen key indicative actions that were documented in APERZ, 1. The loan supports the state’s medium-term reform program through another single tranche loadcredit to the Government o f India o f US$ 220 mi l l ion (50 percent IBRD, 50 percent IDA) to be on-lent to GoAP. L i k e the first, this operation will also be co-financed by DFID with a l ikely grant amount o f about U S $ 100 mill ion. The overall size o f financial support has been set o n the basis o f (a) the principle set out in GoI’s S A L guidelines; (b) the methodology o f determining S A L amount in Indian states as set out in the note prepared by the Bank in August 2003; and (c) an assessment o f A P ’ s overall reform efforts.
93. At the time o f the APERL 1 discussions in early 2002, it was anticipated that subject to a satisfactory performance, a comparable level o f support would be provided in 2002-03. A s mentioned earlier, n o adjustment operation was processed in any o f the states in India while the Go1 reconsidered their policy o n such assistance.
94. AP has completed the APERL 2 actions. However, implementation o f the reform program to underpin APERL 2 has fallen short o f the steps envisaged at the time o f APERL 1 (see below). Moreover, as noted in Table 9, the financial performance o f the power sector was weak in 2001-02; losses were
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Rs.490 crore above the business plan target. Actions could have been taken to address the structural issues in the power sector, particularly those related to agncultural metering and cost recovery (both o f which are important for commercialization and privatization o f distribution). Given the good progress with reform implementation otherwise, particularly in meeting the fiscal targets in 2001-02 and 2002-03, the proposal here i s to proceed with APERL 2, but with a reduced amount-US$220 mi l l ion plus US$lOO mi l l ion fi-om DFID-compared to the f i rs t tranche o f assistance which was US$250 mi l l ion f rom the Bank and US$lOO mi l l ion f rom DFID.
95. Table 10 shows A P ’ s borrowing requirement for 2003-04.
Table I O : Andhra Pradesh: Borrowing Requirement and Financing (in Rs. crore and as a % of GSDP)
2000-01 2001 -02 2002-03 2 0 0 3 - 0 4 Pre Actuals Latest Estimates
Fiscal Deficit 7306 7541 7625 7892 (5.25) (5.02) (4.63) (4.33)
Deficit Financing 7306 7541 7625 7893
Loans from the Center 2882 2812 2917 4377
Small savings loans 843 974 1611 1593 WMA from the Center -0.40 -0.80 -0.80 0
Loans from Market/ Institutions 3230 2852 4262 1820
WMA from RBI 88 405 0 0 Provident Fund 425 320 41 2 427 Non-Debt Borrowing 769 -118 34 -1 89 Other financing 0 1675 0 1457
Adjustment Loans 0 857 0 701 Adiustment Grant 0 81 8 0 756
Of which
Of which
Note: WMA - Ways & Means Advances
(i) Loadcredit Administration
96. Loadc red i t funds arrangement wi l l be similar to that o f the previous loan. Through GoI, GoAP will submit to the Bank a withdrawal application upon loan effectiveness. The U S dollar proceeds o f the Loadcredi t will be transferred from the Bank to GoI’s account held at the Reserve Bank o f India, into which a l l Bank disbursements are deposited. The account i s controlled by the Office o f Controller o f Aid, Accounts and Audit, o f the Department o f Economic Affairs, Ministry o f Finance, GoI, and i s part o f GoI’s general foreign exchange reserves. The Rupee equivalent funds will be transferred by Go1 to the Consolidated Fund of GoAP in one tranche o n standard terms for central resource transfers to state development budgets (30 percent as grant and 70 percent as loan, with Go1 bearing the foreign exchange risk). GoAP will confirm to the Bank the receipt o f these funds within 30 days.
97. Disbursement o f the funds will not be l inked to specific purchases. However, Go1 will not use the Loadcredi t proceeds to pay for certain expenditures included in the Bank’s standard negative l ist which includes expenditures o n mi l i tary hardware, luxury goods as defined in the Standard International Trade Classification, and environmentally hazardous goods.
(ii) Performance Monitoring
98. indicators:
As a part o f its lending supervision program, the Bank team will monitor several measures and
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0 Poverty and social indicators that are to be published on a regular basis by the Poverty and Social Monitoring Unit o f GoAP;
Results f rom survey-based monitoring that i s ongoing in several sectors, such as health, and wil l be started in others l ike education;
Half-yearly fiscal data that are prepared and put on the internet by GoAP;
Power sector finances that will be made available for a l l six power companies o n a quarterly basis;
Progress o n PE reform that will be observable f rom half-yearly reviews o f the program; and
Governance improvements that are anticipated with the implementation o f the Freedom o f Information Act.
99. GoAP has been promoting greater transparency and accountability in its programs. In the last couple of years, it has established over 980 performance indicators for both departments and districts, which are monitored monthly, quarterly and annually by the Chief Minister, Ministers and Secretaries. Performance indicators were also included in the “Performance Budgets” prepared by the l ine departments during the 2003-04 budget process. T o monitor public service delivery, about 90 departments and offices with a large public interface have prepared Citizen’s Charters, and the state i s currently setting up a network o f call centers to systematically monitor charter implementation and record the timely disposal o f citizen complaints. These initiatives and measures will also facilitate performance monitoring as a part o f the supervision o f the APERL 2 loan.
(iii) Status of Main Indicative Actions for APE= 2 100. There were 14 main indicative actions for processing AP S A L 2 la id out in the AP S A L 1 document (pages 25 and 26). These actions, listed under three categories, and information o n their status, are described below. In some cases the actions have been revised to reflect a change in circumstances.
0
0
0
0
0
Fiscal reform
Action I . Fiscal targets: (i) confirmation o f 2001-02 fiscal performance (budgetary and consolidated) through the available fiscal data; 2002103 performance o n track to achieve consolidated fiscal targets for the year; (ii) expenditure composition reforms o n track through shifting o f resources towards primary social services, non-salary O&M, and capital spending; and (iii) GoAP to prepare a public report on mid-year fiscal performance.
Status. Completed. Fiscal targets for 2001-02 and 2002-03 have been met (and based o n the first six months o f data, the fiscal numbers for 2003-04 also appear to be consistent with the revised MTFF targets); (ii) expenditure composition i s broadly o n track though spending o n primary social services has been less than the amount budgeted (all efforts are being made to ensure that the 2003-04 target i s met); and (iii) a report on mid-year fiscal performance was prepared and was put on GoAP’s Web site.
Action 2. Development and implementation o f pension forecasting capacity, including selection o f a forecast methodology and staff training in this system, as a f i rs t step towards pension reform.
Status. Completed. A report o n state pension reform has been prepared. The report has a detailed pension forecasting plan with a robust estimation methodology. An init ial training session was conducted o n the forecasting methodology.
Action 3. Strengthening o f revenue mobilization through preparation measures toward implementation of the sub-national VAT; preparation o f the Revenue Reform Committee (RRC) report o n tax revenue mobilization strategy, introduction o f statutory requirements for periodic revision o f specific duty rates.
Status. Completed. APVAT Bill, 2003 has been passed by the Legislature and sent to Go1 for the assent of the President o f India. VAT implementation i s a national issue and will be decided by GoI. All concerned parties (several states and GoI) are in the process o f deciding on a new date for VAT
31
implementation. The Revenue Reform Committee has prepared reports o n commercial taxes, stamps and registrations. Reports on excise and motor vehicle taxes are under preparation. GoAP has incorporated many o f the recommendations, particularly on organizational changes to bring more autonomy and improving tax services in the Commercial Tax Department. Whi le the government has not introduced any statutory requirement, i t continues to periodically revise the specific duty rates.
Public expenditure management reform
Action 4. Development o f departmental medium-term expenditure plans, focused in 2002-03 on primary health and education expenditure linkages to the consolidated MTFF to ensure appropriate resource allocation consistent with sectoral policy objectives (universal literacy, primary health coverage targets, etc).
Revised Action 4. Development o f departmental medium-term expenditure plans, focused in 2002-03 o n primary health expenditure linkages to the consolidated MTFF to ensure appropriate resource allocation consistent with sectoral policy objectives, such as primary health coverage targets. Development and agreement o f Terms o f Reference (TORs) for multi-year expenditure plans in education, health and roads & buildings.
Status. Completed. A report on a medium-term strategy and expenditure framework for health has been prepared and the sectoral budget links with the overall fiscal program are l ikely to be strengthened. Preparation o f the education sector MTEF was not approved by GoI, and therefore, the MTEF for education was not established. To move forward o n the expenditure planning agenda, it was decided by a l l concerned parties (GoAP, the Bank and DFID) to prepare TORs for multi-year expenditure plans for three key departments (education, health and roads & buildings) and agree o n actions.
Action 5. Completion o f the State Financial Accountability Assessment and related action program covering the State Government; satisfactory progress towards implementation o f agreed financial accountability actions (reducing backlog o f accounts and audit o f 1999-00--2000-0 1 ; responses to audit report o f State Government; measures to improve some identified internal control issues).
Status. Completed. GoAP completed a State Financial Accountability Assessment in M a y 2003. An SFAA Implementation Committee was formed in September 2003 through a Government Order (GO 417) to take forward and monitor the implementation o f the SFAA action plan. Significant steps have already been taken to strengthen accountability in furtherance o f the action plan. These include the issuance o f a Government Order (GO 45 1) which defines the accountability o f senior level Controlling Officers and links release o f funds to the proper discharge o f their fiduciary responsibilities. Related instructions have been issued to Treasuries requiring them to ensure that financial norms have been met before releasing funds and give guidance to controlling and disbursing officers in the form o f handbooks o n financial accountability. A w o r h n g group was established o n internal audit, chaired by the Principal Finance Secretary, and a review o f existing internal audit functions was carried out by the Institute o f Chartered Accountants. Decisions have been made o n the structure and functioning o f the internal audit, including the introduction o f systems audits and some outsourcing to private sector professional auditing f i rms. There has been a significant reduction in the backlog o f local government accounts and audits. Within 5 months o f the release o f the 2000-01 report, the relevant departments responded to 16 o f the 63 (25 percent) audit paragraphsh-eviews. This i s an improvement over the response to the 1999-2000 report, when only 20 o f the total 69 ( 28 percent) paragraphsheviews were responded to in the whole year.
Action 6. Formulation and implementation o f comprehensive pol icy o n government guarantees, including, inter alia, setting an aggregate cap o n guarantees, methodology for assessing merit and r i s k o f individual guarantees, norms for budgetary provisioning for government guarantees, and establishment o f guarantee fees.
0
0
0
32
Status. Completed. A comprehensive policy on government guarantees has been prepared and i s operational. A Guarantee Redemption Fund has been established.
Action 7. Implementation o f an elective government payroll computerization system.
Status. Completed. This measure provides state employees the option o f either receiving their salary payments in cash or having them transferred to their commercial bank account. In urban centers, around 90 percent o f GoAP employees now receive their salaries through Banks.
Governance and public management reform
Action 8. Establishment o f the Poverty and Social Analysis Monitoring Unit, and identification by the State Poverty Eradication Mission (SPEM) o f key poverty monitoring indicators, establishment o f a baseline, and implementation o f mechanisms for the regular updating and monitoring o f poverty indicators.
Revised Action 8. Establishment o f the Poverty and Social Analysis Monitoring Unit (PSAMU), identification o f a preliminary l i s t o f key poverty monitoring indicators, and preparation o f a Draf t “Consolidation o f the Poverty Eradication Act ion Plan.”
Status. Completed. The Poverty and Social Analysis Monitoring Unit has been established and i s operational. A draft consolidated poverty eradication action plan has been prepared, which includes a draft l i s t o f poverty indicators that will be regularly monitored and disseminated. The final l ist o f indicators and the baseline will be developed following further consultations. Mechanisms for updating, monitoring and disseminating the poverty indicators are being developed as part o f the Act ion Plan.
Action 9. Formulation and implementation o f measures to advance deregulation to relax constraints to business environment and growth, including legislation on enhancing the effectiveness o f the single window investment clearance system, and implementation o f measures to reform the business inspection regime.
Status. Completed. Legislation has been passed and i s being implemented with good results. In August 2003, 94 percent o f large and medium industries and 82 percent o f small scale industries received approvals within the prescribed time limit. Proposals for the simplification o f inspection procedures have been prepared by the Confederation of Indian Industry and Pricewaterhouse-Coopers, and e n s h n e d in a Government Order in August 2002.
Action I O . Init iation of the Phase I1 program for public enterprise restructuring/privatization and significant progress towards meeting f i rs t year targets.
Status. Completed. Phase I1 program i s moving forward steadily.
Action 11. Completion of a procurement review and action plan, and initiation o f recommended measures, including inter alia: strengthening o f transparency in the bidding process, publishing o f large tenders o n the internet, improving the system for handling complaints, and increasing GoAP’s value for money in state procurement.
Revised Action 12. Init iation with a firm timetable o f the second (revised) procurement review and action plan. Initiation o f recommended measures, including inter alia: strengthening o f transparency in the bidding process, publishing o f large tenders o n the internet, improving the system for handling complaints, and increasing GoAP’s value for money in state procurement.
Status. Completed. Fol lowing a request f rom GoAP, an init ial procurement review was prepared by DFID consultants, but i t s quality was deemed unacceptable. Af ter several iterations between GoAP, procurement experts in the Bank and in DFID, TORS were approved for a second (revised) procurement review. Global Procurement Consultants L imi ted have been recruited to do the second (revised) review, which i s underway and i s expected to be completed by December 2003. An e-
0
0
0
0
0
33
procurement pi lot project was initiated in four major departments in October 2002, which account for Rs. 2,000 crore (approximately $435 million) annually in procurement transactions.
Action 12. Implementation o f the anti-corruption strategy to reform andor rationalize existing agencies to strengthen the independence, professionalism and effectiveness o f the anti-comption function.
Status. Completed. (i) An initial anticorruption action plan has been prepared. (ii) G. 0. Ms. No. 280 has been issued to fix a minimum tenure o f three years for deputation o f personnel to the Anticorruption Bureau, and to allow their premature transfer only with the approval o f the Vigilance Commissioner. (iii) GoAP has agreed to proposed budget increases for the ACB and VED o f 50 percent this year and 20 percent in each o f the following two years, along with a plan for strengthening staffing in these departments.
Action 13. Establishment o f a computerized human resource management database.
Revised Action 13. Design a comprehensive human resource management module as a sub component o f the SmartGovt. E-governance initiative.
Status. Completed. GoAP continues to make solid progress in this area. A comprehensive HRh4 module has been designed as a major sub-component o f the SmartGovt. e-governance initiative. I t should be expanded to cover four major departments comprising over ha l f the c iv i l service by March 2004, with complete roll-out scheduled for December 2004.
Action 14. Submission o f the Right to Information Bill to the State Legislative Assembly.
Revised Action 14. Initiate preparation to implement the Freedom o f Information Legislation (Act. No. 5 o f 2003, Go1 Freedom o f Information Act). Draf t rules that provide for an independent appeals process, penalties for non-compliance, and aggressive, department-specific suo-mot0 disclosure requirements.
Status. Completed. A bill was drafted and was submitted to the Cabinet where some discussion ensued, resulting in the bill being referred to a Cabinet sub-committee for further consideration. AP n o w plans to use GoI’s Right to Information Act, which was passed by Parliament in early 2003. GoAP translated the Go1 act into Urdu and Telegu, drafted i t s own rules to strengthen the central act, and prepared a training module o n Freedom o f Information.
(iv) Fiduciary Issues
10 1. Financial management. As discussed above (paragraph 57), the recently completed State Financial Accountability Assessment provides an in depth analysis o f the strengths and weaknesses o f the financial control environment in the State Government. The report’s findings are strongly supported by evidence and provide a satisfactory basis o n which to make a fiduciary assessment o f the operations of the State Govemment itself.
102. The Wor ld Bank/DFID team found the fiduciary risk to be significant to moderate, but that i t i s declining as a direct result o f the measures already taken by government. This assessment rests o n the following broad conclusions:
0 Effective budgetary control over core expenditures i s achieved through the provision o f funds to line departments on a timely and predictable basis, in line with the budget, and through the operation o f the centralized Treasury system.
Weaknesses exist regarding funds managed outside the central Treasury system.
The GoAP’s action plan addresses the key issues raised in the SFAA, and the analysis i s t o be extended to cover local government and public sector undertakings.
103. As discussed earlier (paragraph 59), GoAP has started implementing the SFAA action program. Tracking the implementation will be one o f the key means by which the Bank obtains fiduciary assurance.
0
0
34
The other main plank will be continued monitoring to ensure that progress achieved during APERL 1 i s sustained and institutionalized.
104. Procurement. GoAP has identified procurement as a key area in achieving S M A R T government and i s seeking to upgrade i ts practices to improve transparency and accountability and achieve better value for money. Options for pursuing this include introducing new procurement legislation and issuing a general govemment order, as wel l as the use o f e-Procurement. GoAP has requested technical assistance from DFID o n improving and upgrading i t s procurement practices and policies, and a consultancy towards this end should complete i t s work by December 2003, when it will provide a report t o the GoAP’s Committee on Procurement chaired by the Principal Secretary, Information Technology. The assessment will be fairly comprehensive in scope, ranging f rom the current bidding process and system o f tender evaluation and review/approval committees, to post-award issues o f contract management, quality control and/or inventory management, including legislation. T o ensure the consistency o f this work with Bank procurement assessments in other Indian states, such as Karnataka, Maharashtra, Tamil Nadu and Uttar Pradesh, Bank procurement staff have been involved in the preparation and conduct o f this study. GoAP i s making significant progress in the area o f e-Procurement, which was launched o n a pi lot basis in four departments in January 2002, with an annual procurement o f Rs. 1,441 crore (approximately $306 million). Current plans call for ro l l ing it out across govemment in the next two years.
(v) Environmental Management
105. GoAP pays serious attention to the environmental sustainability o f i ts growth agenda. Several environmental goals have been outlined in Vision 2020. AP has one o f the best performing Pollution Control Boards in India. The Bank has been actively involved with GoAP on environmental management issues over the past several years, f rom assisting in strengthening the AP Pollution Control Board (APPCB) to assessing the impact o f environmental r i sk factors on health. As part o f i t s efforts to achieve the Vision 2020 environmental goals, GoAP has agreed with the Bank o n a three-year program o f non-lending technical assistance to improve environmental management capacity in several departments. The main thrust o f this program i s to assist GoAP in undertalung upstream strategic environmental assessments in selected key growth areas and in piloting the resulting institutional and pol icy initiatives to better integrate environmental and sectoral objectives.
106. An environmental due diligence process has been introduced for the public enterprise reform program. In this context, with the help o f DFID-financed consultants, the Implementation Secretariat o f GoAP carries out environmental audits on enterprises that are targeted for privatization. These audits identify existing as wel l as anticipated future environmental liabilities in the enterprise. The audit report i s available to the registered bidders for their study and due diligence on the enterprise. The enterprise i s asked to furnish the Pollution Control Board’s consents and duly comply with the conditions if any before the enterprise i s transferred to the purchaser. Bidders are given one year to complete environmental clean- up. Environmental issues wil l be more important in Phase I1 as the larger and more complex enterprises are dealt with. A detailed manual o n environmental auditing was prepared in M a y 2002, which sets out the specific steps involved. The practice o f using technical experts to carry out the audits will continue.
G. FUTURE APERL OPERATIONS
107. Future APERL operations will depend upon the pace and depth o f A P ’ s ongoing reform program. Assuming continued successful in GoAP’s reform efforts, two more adjustment operations are envisaged after APERL 2 over the next two to three years (Table 1 l), bringing the total amount o f APERL adjustment lending over the five-year period f rom 2001-02 to 2006-07 to US$ 1.4 bil l ion. The support amount i s projected to increase in the outer years, when the reform process i s expected to be more diff icult and require more effort. This principle o f back-end loading i s also aimed at incentivizing reforms. The indicated amounts in Table 11 will be adjusted and/or the timing o f assistance changed, depending upon progress on the agreed actions. The amounts indicated in Table 11 are also subject t o resource availability on the part o f the funding agencies.
35
Table 11 : Planned Future Adjustment Operations and Possible Amounts (in million of US dollars)
APERL 1 APERL 2 APERL 3 APERL 4 2001-02 2 0 0 3 - 0 4 2005-06 2006.07
(PROCESSED)
Bank lending 250 220 250 280
DFlD grant 100 100 100 100
Note: The timings of future APERLs are indicative. APERL 3 would be processed upon meeting of the key actions.
108. Several actions in eight key areas are indicative for a future APE= 3, and would need to be largely met before the operation can go forward (expected to be processed in late 2004 or early 2005). The areas and actions are as follows:
Poverty reduction. In consultation with the main l ine departments, the Consolidated Act ion Plan for Poverty Reduction i s finalized and i s operational.
Agricultural and industrial growth. The state’s investment climate i s improved by introducing legislation that (a) amends the “Andhra Pradesh (Agricultural Produce and Livestock) Market Act,” which will bring about greater liberalization o f agncultural wholesale markets, and (b) implements the “Special Enclave Service Condition and Dispute Resolution Ac t o f 2003,” which will expedite the resolution o f industrial disputes.
Fiscal consolidation. Primary and consolidated fiscal deficit targets and expenditure composition target are attained annually in accordance with the Medium-Term Fiscal Framework, and legislation i s introduced for the annual presentation o f the MTFF along with the budget.
Public expenditure and financial management. The reforms in public expenditure and financial management as identified in the State Financial Accountability Assessment are continued including (i) al l pending audit paragraphs for 2001-02 and 2002-03 replied to the Accountant General; (ii) maintenance o f timely resource releases; and (iii) intemal audit unit established and functioning.
Privatization and disinvestment. Phase I1 o f the Public Enterprise Reform program i s implemented and program targets for 2003-04 and 2004-05 are achieved.
Governance. An anticonuption action plan i s implemented with good progress (on the basis o f agreed milestones) in expanding the independence, capacity and effectiveness o f the anticorruption agencies. Legislation i s introduced in the Assembly to strengthen public procurement, and the e- procurement program i s implemented consistent with existing milestones.
Power sector. As key steps towards commercialization o f the power sector and readying distribution companies for privatization, the sector’s financial vulnerability and r isks are mitigated by (i) reducing the revenue subsidy support paid by GoAP (not to exceed Rs. 15.13 b i l l ion in 2003-04, and Rs. 14.11 b i l l ion in 2004-05) as per the sector’s Business Plan, (ii) moving towards full cost recovery through tariffs in the distribution business (reaching at least 85 percent by 2003-04 and 88 percent by 2004-05), to be achieved through efficiency improvement, tar i f f rationalization and reduced subsidies, (iii) implementing the universal metering plan as approved by the APERC and (iv) finalizing an alternative mechanism to deliver subsidies to agricultural consumers to be fully implemented in at least one district serviced by each o f the four distribution companies f rom April 2005.
Education sector. (1) Class-to-class transition rates are increased at the elementary level leading to improved achievement in mathematics and languages at Grades 3 and 5, and (ii) student and teacher attendance i s raised over a mutually agreed upon baseline. Assessment o f transition rates,
36
achievement levels in mathematics and language, student and teacher attendance i s done on a sample basis by an independent agency.
109. Achievement o f these key milestones will indicate that GoAP i s sharpening the focus o f i t s policies and programs to ensure that they make a greater contribution to poverty reduction and help move the state closer to i t s development goals. Regular monitoring o f poverty and related key programs wil l ensure that the latter are better targeted in addressing the needs o f the poor. I t will mean that the government as a whole-as opposed to say, the rural development department-is fully involved and responsible for achieving the goal o f eradicating poverty in AI’. The two pieces o f legislation will help improve the state’s investment climate by removing structural impediments to growth. Achievement o f the fiscal, public expenditure and financial management actions will indicate that GoAP i s continuing i t s good work in fiscal consolidation and that resources are made available on time for l ine departments to deliver effective and efficient public services. Continued success in Phase I1 o f the PE reform program will ensure that the government continues to move away from areas where the rationale for government involvement and control i s weakest. Achievements in the area o f governance will move the state closer to i t s objective o f having a S M A R T Government. The stated reforms in the power sector wi l l put the sector’s finances o n a structurally sound footing that will be less affected by external shocks. Moreover, the sector will be ready for distribution privatization, which wi l l further improve i t s efficiency when completed. Finally, the envisaged reforms in the education sector will help the state move closer to i t s Vision 2020 targets.
H. LESSONS LEARNED, BENEFITS AND R I S K S
(i) Lessons Learned 110. The current operation benefits f rom several important lessons drawn f rom AP’s f i rs t pol icy based lending program, two previous adjustment programs in Karnataka and Uttar Pradesh, and the Bank’s wider experience with adjustment lending.
Research and experience suggest that reform programs are much more l ike ly to succeed when there i s strong country ownership. External agencies such as the Bank can then help facilitate that process by providing technical and financial support. The AP experience clearly confirms this conclusion. The state has a well-defined medium-term reform program to achieve the targets listed in Vision 2020. The government regularly monitors progress against these targets and makes appropriate adjustments. The Bank and other external agencies are assisting the state-financially and technically-in pursuing this agenda.
Bank-wide experience shows that our lending program must be supported by sound analytical work. On each component o f the reform program supported by APERL 2, there has been some analytical work done in the last 12 months. More specifically, due diligence notes have been prepared on a variety o f topics including poverty, fiscal, governance, public expenditure and financial management, public enterprises, agriculture and rural development, education, health and power. Other formal reports completed include a growth study, a fiscal report, a state financial accountability assessment (done by the client), and sectoral studies on school education, health, environment and water resource management.
A series of single-tranche adjustment operations are better suited for supporting a multi-year reform process. While this entails higher administrative costs for the Bank, the process contributes to good incentives. I t also helps provide an exit strategy for the Bank if the reform program falters. In the case o f AP, the proposed follow-up adjustment operation i s based on a continuation o f the government’s reform program, which meets the pre-specified lending criteria specified in the previous operation. If the state continues to move forward o n i t s reform agenda, future adjustment support, subject to the approval of a l l concerned parties, i s l ikely to continue.
37
I t i s important to institutionalize reforms as early aspossible. In the last couple o f years, A P ’ s budget management re form program has advanced impressively, with the introduction o f a medium term fiscal framework, a new budget release mechanism, and a draft budget for state-wide consultations prior to the annual budget process. These reforms have yet to be fully institutionalized, however, and the momentum for moving this agenda forward could start weakening with the transfer o f the main architect o f these reforms. For example, the task o f revising the MTFF has been delayed. This experience highlights the importance o f institutionalizing reforms, and the proposed operation emphasizes institutionalizing the MTFF process through formal legislation, which would mandate the presentation o f a medium-term fiscal analysis and the implications for annual fiscal outcomes and debt stabilization targets along with the annual budget.
Although the pace o f progress o f different components o f a govemment owned reform program varies, i t i s important t o identify the critical elements of the program, where progress has to be sustained in order for the overall program to remain credible. For example, i t i s clear that unless the financial performance o f A P ’ s power sector i s continually improved, overall fiscal reforms will remain tentative. The first loan did not have any specific actions for the follow-up operation that were directly related to the financial performance o f the power sector. In contrast, APERL 2 contains key actions for a possible future APERL 3, including actions that have a direct link with the financial performance o f the power sector, such as targets for cost recovery f rom tariffs.
Adjustment programs need to show sensitivity to local political conditions. Power sector reforms in India are complex and polit ically difficult. The sequencing o f reforms, the pace o f progress and the achievement o f outcomes i s significantly affected by polit ical considerations. For example, agriculture metering and tariffs are major issues in AP (as in several other Indian states as well). Whi le recognizing the need for improved power sector financial performance, APERL 2 i s sensitive to the politics o f agriculture metering and tariffs, and focuses the key power sector action for a future APERL 3 on overall cost recovery targets, which i s consistent with GoAP’s o w n revised power sector business plan.
(ii) Benefits
111. A P ’ s development progress over the years i s we l l documented. More importantly, GoAP i s committed to malung further progress towards achieving i t s development targets as outlined in Vision 2020. The proposed follow-up adjustment operation recognizes A P ’ s efforts in improving the lives o f i t s citizens. It provides an important signal to the development community that the state’s reform efforts are being noticed and supported.
112. The components o f A P ’ s reform program that are being supported by APERLs will help the state in achieving better socioeconomic outcomes and reduce poverty. More specifically:
Coordinating an action program with different l ine departments will help GoAP reduce poverty. Strengthening poverty analysis and monitoring will facilitate more informed decisions and help reorient policies and programs for a greater impact o n poverty.
Supporting efforts to improve the state’s highly inflexible labor market i s l ikely to help AP move closer to i t s high growth targets.
Malung further progress in privatizing and restructuring public enterprises will start generating fiscal savings.
Consolidating the fiscal accounts further and reducing borrowing to finance revenue expenditures will continue to generate savings o n interest and will create space for allocating more resources towards enhancing growth and reducing poverty, such as raising capital spending, non-wage O&M and social sector spending.
Supporting public expenditure, financial management as wel l as the governance reform agendas will ensure that (a) budget releases to l ine departments and other agencies are timely and predictable, and
38
(b) budget appropriations are being spent o n the intended activities, promoting better service delivery to citizens.
Continuing to reduce power sector losses will improve the financial situation o f the sector and it will put the distribution companies in a much better position to provide good service to their clients. Moreover, financial savings in the power sector wil l free up resources for spending on other development priorities.
0
(iii) Risks 113. Major r isks to the government’s medium-term reform program can be characterized as follows:
0 Fiscal risks. Fiscal targets in the outer years o f the MTFF become tighter and there i s very l itt le room for slackness. W h i l e GoAP has shown remarkable commitment in keeping deficits down in the past two years, the real test o f fiscal discipline will be in the coming years, particularly in the election year 2003-04. Will the govemment reduce i t s spending-as it has done in the past two years-if i t s projected revenue (including those f rom the central government) fails to materialize? Can the deficit target be achieved in an election year? Whi le much o f this fiscal risk i s impossible to avoid, improved fiscal monitoring with statements published o n the internet every six months will at least provide early warning if fiscal discipline weakens. The revised Second MTFF has adjusted the fiscal targets taking into account the state o f the economy and i t s impact o n revenue-both in terms o f the anticipated size of fiscal devolution f rom the national govemment as wel l as i t s own revenue.
Power sector risks. The power sector continues to pose substantial financial r isks t o the public budget. These r isks are due to (i) the diff iculty o f reducing power subsidies to agnculture and residential consumers, and o f metering agriculture consumers, (ii) the lower than projected growth in sales to HT- industries and the higher sales to agriculture consumers, (iii) the inabil ity to further improve operational efficiency, and (iv) the failure o f distribution privatization. The evolution o f the market and industrial structure in the next 2-3 years as per the Electricity A c t 2003, may also cause uncertainties in the cost and revenues o f the power companies.
The national Electricity A c t 2003, which mandates metering o f a l l consumers in the next two years, and continued pressures f rom APERC are l ike ly to assist in mitigating the power sector r isks. The pilots initiated by GoAP’s Task Force, through increased communication and consultation with farmers, are working towards improving the acceptance o f metering.25 GoAP i s also planning to test alternative mechanisms to deliver subsidies to farmers, which i s l ikely to assist in mitigating the agnculture subsidy risk impinging commercialization and privatization o f distribution. The r i s k of l o w growth in sales to HT-industries i s to be mitigated through continued rationalization o f industrial tariffs and implementation o f the tar i f f incentive scheme. GoAP needs to strictly adhere to i ts pol icy o f supply regulation to agriculture. The APERC has devised a number o f mechanisms which mitigate these risks. First, monthly monitoring and review i s expected to minimize the r isks o f delays in efficiency improvements that have been assumed in the sector’s business plan. Second, under the 2004 tar i f f order, i t has established a mechanism o f a Fuel Surcharge Adjustment in retail tar i f fs which allows automatic pass through every quarter o f increased power purchase costs stemming f rom uncontrollable elements, such as hydro power generation shortfall. This will enable distribution companies to mitigate the financial r i sk associated with drought, which makes otherwise relatively cheaper hydro power generation less attractive and forces generation f rom more expensive thermal sources. F rom the Bank‘s standpoint, the team plans to continue tracking power sector performance o n a quarterly basis to anticipate any significant variations in these critical factors.
External shocks. Relatively poor monsoons in the last three years have affected the performance o f the agriculture sector, which continues to provide the l ivelihood o f over 60 percent o f the state’s labor force. Another bad monsoon would put a further strain the state’s economy (though early reports
0
0
*’ In a rural co-operative society nearly 50 percent of farmers have opted for metering.
39
suggest a normal monsoon for 2003-04). Increased diversification o f the agriculture sector, crop substitution, and the adoption o f drip irrigation have helped the state soften the impact o f the poor monsoons.
Political risks. With elections in 2004, pol icy priorities may change and may differ f rom those being pursued as part o f the current reform agenda. Reduced commitment to the reform program, particularly if it negatively affects the financially vulnerable power sector, would lead to delays or a loss o f financial support f rom Go1 and the B a n k
114. The single most important risk mitigating factor to GoAP’s reform program i s i t s past success. I t i s worth noting that AP i s one o f the major reforming states in India with full reform ownership. A P ’ s strong track record suggests that the reform program i s becoming self-sustaining, in that improvements in terms o f growth and human development in the recent past are contributing to the further sustainability o f the reform program.
115. The Bank’s adjustment program also seeks to minimize risks. Whi le APERLs generally support the medium-term reform program o f GoAP, each APERL provides financial support o n the basis o f progress made against a set o f monitorable actions that were identified in the previous loan. More specifically, APERL 2 funding i s in recognition o f GoAP’s satisfactory completion o f a set o f actions that were outlined in APERL 1. Loolung ahead, the APERL 2 document outlines a similar set o f measures that will underpin a decision to process a possible future loan.
e
40
Annex A Page 1 of 23
Letter of Development Policy and Program Policy Mat r ix
w X h 4
FINANCE SECRETARY &3TR?T
m m *4-%Fm
* m m GOVERNMENT OF INDIA MINISTRY OF FINANCE
DEPARTMENT OF ECONOMIC AFFAlRS Tf R?8/ NEW DELHl
6.1.2004
Negotiations for the Second Andhra Pradesh Economic Reform Loan were held from 23rd to 26'h Oecember, 2003 a t the World Bank Office a t New Delhi. I enclose a copy of the letter dated 2gih December, 2003 of the Government of Andhra Pradesh to this Ministry along with the Policy Program Matrix outiining the proposed actions by the State Government.
/
2. I am to convey the support of the Government o f India t o the Government o f Andhra Pradesh in implementing this program and would request the World Bank to take further necessary action,
hjki Icy--J ,4'--y---b
Yours sincerely,
L I--* -.-----c-
[ O.C. 6upta)
Mr. James 0. Wolfensohn, The President, World Bank, Washington DC 20433, U.S.A.
Encl : as above.
Annex A Page 2 of 23
- Dr. Mohan Kanda, I.A.S. /PI Hyderabad - 500 022 Off : +9140-23452620
+9140-23455340 Fax. +91-40-23453700 Res +91-40-23415388
Letter of Development Policy, Government ofrlndltru Prurlesh
I. T h i s Lelter of Development Policy explains how the Structural Adjustment program. financed by the World Bank and the Department of International Development (UK). supports the broader reform program of Andhra Pradesh. I t also details how the proposed second SAL meets the criteria for accessing the Structural Adjustment A tance Facility, as prescribed by the Ifepartrnent ot' Economic Affairs, Ministry of Finance. Government o f India.'
2. Sevcral key components of the AP reform program would not be possible without the valuable SAL engagement and financial a
The SALs help finance a portion of the direct costs o f reform, including increasing or maintaining spending levels in priority areas like primary education, primary health, capitti1 and non-wage spending, paying VRS to the employees o f closed public enterprises, and covering operating \q(+$d subsidies 10 the power sector and interest costs for servicing power sector debt raised in suppork of restructuring, reforms and eventual privatization of distribution companies.
The SALs provide positive incentives for the pursuit of reforms that may not have direct quantifiable financial costs.
When the direct costs of rcforin i s less than SAL assistance. funds could hc used to finance the budgetary gap. Relatively cheaper SAL funds atilow for substitution for other more costly borrowing such as bonds raised through SPVs or raising funds from "snxrll savings."
3. Thc: Government of Andhra Pradesh has undertaken an ambitious goal of transforining Andhra Pradesh into one of the foremost states in the country as well as in the region in terms of growth, equity and quality o f l i fe by the year 2020. These goals as well as the other development goals o f the state are detailed in the report tjtlcd "Andhra Prddesh Vision 2020." This vision document commits the Governinen1 o f Andhra Pradesh to secure sustainable social and economic growth for i ts people. bN improving their quality of IiFe, increasing pcoplcs' participation in the development process.
4. Gmivrh rcir<yets andfr,cii.s nreas: Andhra Pradesh Vision 2020 sets stretch targets in tenns of real GUY growjth that the state aspires to achieve in the periods 2000-2010 and 2010-2020. The Vision also identifies 25 ( 19 core and 6 others) growth engines that the state should pursue to drive economic growth. These engines were selected based on several factors, including size, potential growth, potential eniploytnent. intrinsic strengths of the sector in AP (natural resources, lalent, proximity to markets and the
nce. The value addition o f the SAL process i n AP is three-fold:
$1 4
' f 1 4
,/;trcngthcning governance and reducing poverty.
Annex A Page 3 of 23
Itke). Agriculture includes sectors Similarly industry includes se cover IT, BPO and retail activities. I t advocates improvements in the living btandards of a l l sections
5. The role of govemmetit: governmetit as a facilitator and role, the government will play
These engines are further broken in
Providing specialized infrastructure
Conducting focused and e
Creating investment-friendly regulation that focters investment and facilitates business
Enabling talent availability through necessary changes in the education system and
investors. tive promotion to market the o rtunities the State offers to
to improve govem
such as e-seva (the one of Regstration Depa SAUKARYAM (Civic
I. Andhra Pradesh’s Overall Reform Programme
7. The medium-term development strategy of Andhra Prades and emphasizes eradicating poverty, fostering human devel
Vision 2020 document ing hra
reform program. The e overall debt burden, improving resource ty sectors, Achievements in the area of are impressive, and governance reforms
e area. The government’s agenda of public enterprise reform continue to move forward in the e-go has also made significant progress and the program i s now in i ts second phase.
8. Most of the fiscal goals are being pursued by a vigorous reform program that i s supported by Structural Adjustment Programs, which have the following components:
A. Pro-poor policy measures;
B Structural measures to facilitate economic growth;
C. Public enterprise reform: restructuring and privatization;
2
Annex A Page 4 of 23
I>. Improvement o f (a) agg and financial accountabi
E. Strengthening of governance;
F. Sectoral reforms (edu
9. Progress has been made in all of i n better poverty and social indicators. much improved. AP i s among the top second only to Gujarat in terms of i enabled initiatives and programs that particularly successful in raising chi1 and quality of power suppiy has impro 2002, AP was ranked first in a perfor two independent credit agencies CRISIL and ICRA on behaIf of the Government of India. government has also qualified for the cash s Development Reform Program (APDRP). The conti upon these gains.
2. The availability
Our tive under the GoI’s Accelerated Power rm efforts in the power sector seek to build
11. Major Policy Reforms Unde n as Part of Medium Term Reform Programme
A, Pro-mor Policy Measures
10. The state’s poverty reduction strate been evolved through cons processes and i s built around t
y Eradication Miss ater Conservation,
approach span the sectors imp enterprise and market development, sustainable natural resource management, health and education. The Mission approach also integrates strategies for addressing equity issues including gender equity and providing due roles and voices for the very poor and othe planning tn identify key poverty indicators and implement monitoring. These indicators wil l then be published on a re on the efficiency and effectiveness of service delivery to include:
in this context
* Several poverty alleviation programs undertaken in various departments have been aligned with the overall poverty reduction program under the Poverty Eradication Mission.
The Participatory Identification of the Poor (PIP) program was initiated in March 2003 to ensure better targeting o f the poor.
A consolidated draft action plan was prepared for the implementation of the Poverty Reduction Strategy i n coordination with key line dep ents. The draft plan wi l l be further developed, and more detailed plans wi l l be formulated and implemented by the line departments.
11 . These activities wi l l sharpen the focus in reducing poverty and contribute to progress towards meeting the Millennium Development Goals, consistent with the main criterion in the Government o f India’s Structural Adjustment Assistance guidelines.
*
*
Annex A Page 5 of 23
(i) Sit& Window Clearance Systenz: The Clearance Act No. 17 for setting up industri - one at the district-level and the 0th time-bound framework.
and random inspections: fficers in the state are now required
specifically allotted to them and inspection inspections other than the one specified in the 1 be treated as “unauthorized” and the erring offici No. 33, August 27,
(iii) Self-certification facility for all industries: The go various provisions in selected statutes for industries ~~ovemment order Ms, No 28, Ap 2002).
(iv) ~ ~ i ? r ~ ~ u c ~ ~ o n to submit informat simplified Commo 30 minutes to com to 1995. The new
e for action (Government Order Ms.
Aiinual Return: All industrial units in the state are on to the District Industries Centers once a year t
long and takes nearly 30- ith this requirement prior work facing the firms.
13. The Government of Andhra Pradesh i s make the state’s investment climate the best i government intends to undertake two key reform initiatives that merit special attention:
itted to further reforms in this area with a view to ountry. In the forthcoming financial year, the state
i‘i) Labor “ w e t reforms: Faster resolution of labor disputes and creation of a peaceful industrial environment in the state i s a priority for the government. The state government has recently prepared draft legislation, called ”The Special Enclave Service Condition and Dispute Resolution Act, 2003,” which i s expected to speed up resolution of industrial disputes and remove some o f the rigidities in the functioning of the labor market in the state, The government has also taken steps to liberalize the contract labor regulations. These policy changes are expected to attract higher industrial investment and create greater employment opportunities in the state.
( i i j More c ~ ~ ~ ~ p e t i r ~ v e ugricu rul marketing systent: The state government i s considering a model Act on agricultural marketing, which wil l allow farmers to undertake bulk sales o yards and permit institutions other than the government to set-up agricultural market yards, provided minimum standards, specifications. formalities, and procedures laid down by the government are complied with. By eliminating the intermediaries and creating more competition in the agricultural market, this new legislation i s expected to lead to higher income for farmers and better return for agro-processing companies.
Annex A Page 6 of 23
Annex A Page 7 of 23
D. Fiscal and Other Budeehrv Reforms
19. demonstrated substantial committed to a fiscal con size of the state's deficit
over annually. The MTFF a management, The state has the Medium Term Fiscal in 2001-02 and 2002-03 (p adjusted accordingly and the
20. The consolidated fiscal defi as as high as 6.4% o f . was brought down io 5.9% of GSDP in 2001-02 an forecast for the current fiscal year.
2 I. The Ministry o f Finance, Gove nt of India evaluates the fiscal performance o f states through the single monitorable indicator-a consistent 5-percentage point annual reduction in the. consolidated revcnue deficit as a percentage of t consolidated revenue deficit to total rev 03, we have achieved a 76.839 achieving revenue surplus over th
Wi th the adoption o f and adherence to a
4.9% in 2002-03. A
ainst a targeted 15% redu
ovement in our march towards
Table 1: AP's Perf0 01-02 to 2003-04
(in Rs crores and as a % of GSDP)
200 1-02 2002-03 2003-04
(i) Deficit measures - 2380 -2383 -161 1 -1494 -32 1 - 101)O
-3863 -3699 -341 f -3054 -2408 -2866 Revenue (-2.6) (-2.5) (-2.1) (-1.9) {-1.3) {- 1.6)
-7901 -8116 -7625 -772 f -7892
Primdry (-1.6) (-1.6) (- 1 .O) (-0.9) (-0.2) (-0.5)
Fiscal (-5.3) (-4.9) (-4.6) (-4.2) 1-4.3)
Consolidated (-5.9) (-5.9) (-5.4) (-4.91 (-4.3) (-4.3) -8886 -4906 -8876 -8073 -7822 -7830
(ii) Debt Measures 42940 42493 5046 i 50084 58045 58301
Debt stock (28.6) (28.3) (30.6) (30.4) (3 1.8) (32.0) Debt stock with off- 49969 49465 57490 57967 64824 65293 budget borrowings (33.3) (33.0) (34.9) (35.2) (35.51 135 8) - Note: The projected numbers are from the MTFF of February 8,2002 (after removing the SAL grants from revenue). Definition. Consolidated Surplus (+)/Deficit (-1 = Fiscal Surplus (+)lDcficit (-1 + Gross Budgetary Support to Power Sector - Power Sector Financing Rcquirement,
22. The revised fiscal stabilization goals of the government are reflected in the Medium Term Fiscal Framework (MTFF), which i s updated with the pre-actuals for 2002-03 and the revised business plan o f
Annex A Page 8 of23
the power sector, The main goals of the
level of 4.3% of GSDP in 2003-04 from 4.9% in 2002-03, 2006-07. Similarly, debt stocks i n c l ~ d i ~ g the off-budget 35.2% o f GSDP in 2002-03 to 34.6% of GSDP in 2006-
preceding year as ac
23. With the objec ocess, we plan to under e further action:
Table 2: AP’s Revised N ts: 2000-01 to 2006-07 (as a % of CSDP)
Revcnuc Surplus (+) /Deficit (-1 Fiscal Surplus (+)/Deficit (-1 -5.3 -5.0 -4.6 -4.3 -4. I -3.6 -2.7 Consolidated deficit -6.4 -5.9 -4.9 -4.3 -4.0 -3.5 -2.5
-2.6
Debt Stock 25.6 28.3 30.4 32.0 33.3 33.3 34.6 Debt Stock with Off-Budget 30.0 33.0 35.2 35.8 36.4 35.9 34.6 Borrowings
24. The power sector forecasts are based on a d multi-year business plan rhat has been fully integrated with the MTW reflecting the financing requirements from Government. Details o f the power sector financing requirements are given in Table 3.
Annex A Page 9 of 23
25. Another major fiscal goal i s to restructure priority items towards priority development expen areas are indicated in Table 4 below:
y from non-developmental nned expenditure increases
Table 4: Trends and Targets of GoAP in Priori (in Rs crores and as a 8 o f GSDP)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 (3E)
Non-wage O&M 2528 2779 3 3693 4130 481 6 5540 (1.8) U,9) ( 2 4 (2.0) (2'0) (2.1 ( 2 4
Capital outlay 2724 3091 3709 4693 471 7 5491 6267 (2.0) (2.1 1 (2.3) (2.61 (2.4) (2.4) (2.5)
Primary education 2670 2960 2998 4299 5060 6076 7395 and primary (1.9) (1.97) (1.82) (2.36) 12.5) (2.7) (3.0) health
26. Andhra Pradesh's d financial mana the overall reform progr mostly process related and aim to the budget preparation controls, accounting and direct result o f improved to the budget ceilings, greater flexibility with decentralized re-appropriation and financial assured budget releases at compliance to the accountabili of expenditure and undue with
27. I n order to improve public expenditure and financial management, a state financial accountability assessment was commissioned by the State Govemment and entrusted to Centre for Good Governance. The Government has stressed improving financial accountability within line departments as being the critical focus of Public Expenditure Management / ancial Management efforts in the coming years. The SFAA report was recently completed (May 2 and an Action Plan i s under way to improve financial accountability within line departments. So f the key initiatives that are being taken towards improving the public expenditure management in the state are listed below:
ngthening public exp l ink between public
ning of the year, has s. This has resulted in a noticeable avoidance of the traditional rush of money from the treasury at the end of the year.
* In accordance with Resenile Bank regulations, a comprehensive policy on government guarantees has been prepared and i s operational.
An Annual Fiscal Framework i s to be prepa ed and published for state-wide consultation^ prior to the annual budget presentation to the Legislature. Performance budgets were introduced in 2053-4 budget process.
A new budgetary cash manag~ment system has been established, under which the first release covers the first 9 months o f expenditure.
Good progress has been made in clearing the backlog o f overdue audits and responses to points raised by the Comptroller and Audit01 General,
*
Annex A Page 10 of 23
t have ~radit~onally been an area of strength for Andhra Pradesh.
e has been drawn up for 35 major departments, and the as renamed SmartGov and was zen Services) has been expanded
locations by the end of current fi
31. The under the
4 The state has adopted the G egislacion on Right to Information, GoAP wil l draft rules that provide for an independent penalties for non-compliance, and aggressive. department-specific suo-moto disclosu
Strategy and Performance Innovation Units (SPIUs) have been established to support administrative reforms in eight line departments.
tenure for ACB and VED staff, allowing premature
The functions of the ACB, VED and departmental Vigilance Officers w i l l be strengthened to collectively enable them to pursue the three-pronged ention, enforcement and public awareness building to combat corruption. A e in resources has been agreed which wil l result in a doubling of the budgets nizations over the next three years.
A review of procurement policies i s to be undertaken and an action plan for implementation is being prepared.
The SAL process provides positive incentives for these activities, which substantially reduce the
the key governance related initiatives that have been taken up and are supported
gilance Commissioner.
32. administrative costs of governance in line with Criterion of the Gol’s SAL guidelines.
Annex A Page I I of 23
state a leader in the last couple of years teas o f the sector.
ensure success of the program. Direct s gradually and i s forecast to fall to below were taken during the past two years:
budget was high initialty, but has come down GSDP by 2006-07. Several important measures
Budget support to the powe
Cost recovery from tariffs h
ion of APERC’s
Additioiial measures are to be implemented over the medium term, including:
d regular filing of automatic pass through to retail tariff rates of uncontrollable fuel variations in the mix of power purchases, as per the formula approved by APERC in
ort at Ks 151 3 crores in 200
December 2003.
itation of the revenue subsidy per the business plan in 2004-05. FY03 to 85 percent i
FuIl budgetary provision for support to t
Implement~t~on of performance based order.
Finalization of an alternative mech nted in a phased m
93 percent in FYO6.
g cash support to APGENCO).
rm tariff principle in FY2005 as per APERC’s
sidies to agricultural consumers, to bi:
Annex A Page 12 of 23
APERC.
4 Separation of transmission and tr progress towards a multi-buyer mo
per the National Electricity Act 2003, and
4 Finalization of the distribution privatization strategy,
* In~roduction of open access as per APERC's orders.
35. These initiatives constitute a sust program for power sector s dy containment and elimination, which i s consistent with th n of Gol's SAL facility re ments. The financing of the SAL program has been instru rpinning the substantial progress on power sector reform realized in AP.
f i i ) Education Sector Reforms
political environment i consistent with the goals enshrined in document. This document lays empha the state wil l be second to none in the
vocational and h
er reforms in the soci
among women,
administration and
37. and utilization of funds, targeting public resources to economically and socially disadvantaged groups a individuals, develop a mediu sectors and promote greater monitoring through the dev targeting of resources through data-intensive planning and budgeting, and to move towards a performance based management system.
} Health Sector Reforms
We are in the process of undertaking reforms aimed at improving the efficiency in the allocation
to ensure allocative are underway to stre
ased clusters, greater planning
35. been prepared. Two key elements of this strate ngthening regulatory departi~ental r~organiza~ion. recognize that the ovider of health care services in the state, and this and ~ t r e n ~ ~ h e n ~ n ~ the regulatory framework to improve t services provided by the private and public sectors, Based on a functiona1 review of ents and bodies i fved with responsibility for health, we have identified a series of administrative reforms, and an ac plan has been developed to take these forward. These actions wil l improve the efficiency and effectiveness of government health sector policies and programmes.
As part of the efforts to achieve the Vision 2020 goals o atth, a medium-term he
Annex A Page 13 of23
III me costs
funding o f $100 millio
Spending
Capital Expenditure Public Enterprise Reform go (VRS Spending)
Support to Power
40. The direct and ind comprehensive fiscal ref0 process far outweigh these initial costs, and are amp1 for instance, the consolidate 2000-01 to 5.9% of GSDP in 200 1-02 and further fiscal year.
4 I. around Rs.1610 crores for
ammeters during the lined from a level o f 6.4% GS and i s forecast to fall to 4.
Most of the cost o f reform i s current1 's own resources and SAL financing of the burden o f reform costs on state's
ublic expenditure, Moreover, accounting for all the costs
associated with critical reforms, shows the rigorous structure of the Fiscal Reform Programme of Andhra Pradesh as well as i t s sus~ainab~li~y.
f the fiscal defici
Annex A Page I 4 of23
42. On the strength
ns wil l be processed o
43. Pradesh’s m e d i ~ m - t e ~ reform programme in the form of a policy programme matrix.
Also attached to this Letter of Development Policy i s the specifics of ihe Government of Andhra
YOU~S sincerely,
(MOHAN KANDA)
Shri D.C.Gupta, Secretary to Govt. of India, Department of Economic Affairs, Ministry of Finance, NEW DELHI.
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Annex B Page 1 of 7
Power Sector Reforms in Andhra Pradesh
A. Implementation of reforms: Achievements during 2002-03
1. reforms in AP during the last two years. Some key reform achievements include:
There has been continued good progress in implementation o f structural, regulatory and governance
0
0
0
0
2.
Independent functioning of the distribution companies. Independent Board o f Directors for each o f the discoms have been appointed, transfer o f employees post unbundling completed, and senior managers with appropriate sk i l ls and experience have been appointed through a competitive selection process. Several initiatives to develop the regulatory, finance, commercial and customer service functions have been completed and continued improvements are underway. Performance monitoring and reporting system to monitor employee performance against pre-set performance targets has been established and i s operating successfully.
Sector Regulation. APERC has set an impressive track record o f operating through a transparent regulatory processes, with the involvement o f various stakeholders and public and has demonstrated i t s abil ity to take independent decisions. The Commission has issued regulation o n Long Term Tar i f f Principles, defined customer service standards o f performance; and stipulated merit order dispatch for a l l generating stations to foster efficiency in power procurement. The most recent regulatory order o n Fuel Surcharge Adjustment will allow quarterly adjustments in the tariffs o n account o f change in the fuel prices and in the generation mix due to uncertainties in hydro generation, thereby mitigating the financial r isks o f the hydro failure.
Governance and efficiency improvements. AP has been a leader among the Indian states in improving power sector governance and setting new benchmarks in i t s transparent management. The government and the companies have implemented impressive measures to control electricity theft, eliminate corruption and improve efficiency. I t i s the f i rs t state to enact anti-theft legislation and i t s effective enforcement - 150,000 theft cases were registered during 2001-03 as against 9,200 cases in 11 years from 1989-2000. About 4100 consumers and more than 50 employees have been arrested for theft o f electricity.
Improvements in access, availability and quality of supply and services, About 3000 MWs o f new generation capacity has been added in the state’s power system since 1999 (an increase o f 40 percent), resulting in improved availability o f power. Electricity access rate has increased to 67 percent. Power supply quality indicators have improved - reduction in transformer failures, improvements in voltages, and reduction in supply interruptions. Customer Care Centers for handling commercial complaints, help-lines for lodging technical and commercial complaints, and developing customer databases have also positively influenced utility-customer interface and contributed to improvements in service quality.
B. Financial Performance and Fiscal Implications W h i l e financial performance o f the sector has improved since the initiation o f reforms, it i s short o f
the expectations o f the Business Plans prepared by GoAP and the utilities. During the period 2000-02 the sector incurred an annual loss o f about Rs.30 billion, causing enormous burden o n the state’s finances i.e. nearly 2 percent o f GSDP.’ The financial performance in 2001-02 was particularly poor and losses exceeded the expectations reflected in the government’s medium term fiscal framework (MTFF) by 28 percent (Figure 1). Severe country-wide drought during this year resulting in l o w hydro-power generation and increased demand for irrigation had an adverse impact on the financial losses o f the power utilities.
I Under the Annual Revenue Requirement (Am) and Tar i f f review process, APERC approves the quantum o f GoAP subsidy based on full cost tariffs determined by APERC and retail tariffs approved. This subsidy essentially goes towards providing subsidy to agriculture, residential consumers and rural electricity co-operative societies. During the last three years the losses incurred by the utilities have been much higher than that projected under the A W T a r i f f order mainly on account o f increased cost o f power purchase due to decline in hydro generation, govemment’s decision to increase power supply to agriculture consumers and under-realization of efficiency improvement targets by the utilities. Under such situation the actual support provided by GOAP at the end o f the fiscal year has been much higher than the subsidy approved by the regulator at the beginning of the fiscal year.
Annex B Page 2 of 7
3. Financial performance has improved in 2002-03. The power sector deficit was reduced to Rs. 19.1 b i l l ion despite a diff icult drought.*. The revenue subsidy support o f Rs. 18.8 b i l l ion f rom the government during this year was 27 percent lower compared to the previous year and only 5 percent higher than Rs.17.9 b i l l ion projected under the MTFF. This has been achieved through effective implementation o f the APERC’s directives on power supply, continued efficiency improvements in metering, billing and collection, reduction in T&D losses and increase in sales to HT-industrial consumers. Through effective supply regulation and extensive communication with the farmers o n the power supply situation, crop choice etc, utilities were able to contain the level of supply to agnculture during 2002-03 to 2001-02 level. Total revenue has shown a marked increase o f Rs.15 billion, and average cost recovery through tariffs has improved from 70 percent in 200 1-02 to 79 percent in 2002-03. AP has qualified to receive cash support as incentive for reducing the gap between average cost o f supply and revenue, under the GoI’s Accelerated Power Reforms and Development Program (APDRP) for 2002-03.
Figure 1: Financial Performance Revenue Deficit
Figure 2: Cost Recovery through tariffs
85%
Box
75%
70%
65%
63%
55% FY mQ0 FY moi FY mQ2 FY mo3
* aggregate for Generation, T & D
Some o f the areas where AP’s power sector has performed wel l with a positive impact on i t s finances 4. include:
A turnaround in HT sales - After a f ive year period o f declining sales to HT industrial consumers there has been a remarkable 26 percent growth in the sales during 2002-03 fol lowing the tar i f f incentive scheme introduced by APERC. In 2003-04 HT-industrial tariffs have been further reduced3 and incentive scheme continued till 2004-05. There has been continued year o n year progress o n reduction in cross subsidies. As a pol icy decision APERC set a cap o f 15 percent tar i f f increase for subsidizing categories in i t s f i rs t tar i f f order. In subsequent tar i f f orders this cap has decreased and now stands at zero for some categories and negative for HT-industries. Tariffs have declined in real terms. For HT- industries tariffs have been reduced f rom a maximum o f Rs.3.95kWh in 2001-02 to Rs.3.60kWh in 2003 -04.
Increased investments - especially in the T&D network, and better consumer metering resulting in significant reduction in both technical and non-technical T&D losses (from 37 percent in 1999-2000 to 26 percent in 2002-03).
Growth in collection efficiency - which rose f rom 92 percent in 1999-00 to 98 percent in 2002-03
T h e aggregate de f i c i t for the transmission and dis t r ibut ion business was Rs. 18.7 billion in FY2003.
Tar i f f for HT industries (category I) has been reduced from Rs.3.71kWh in 2002-03 to Rs.3.60kWh in 2003-04. APERC has estimated Rs.2.36 / kWh as cost-to-serve for this consumer category.
Annex B Page 3 of 7
e
5.
Debt restructuring - utilities have restructured their expensive debt. Outstanding dues o f about Rs.25.3 b i l l ion to central generating stations have been securitized as l o w interest bonds o f GoAP, reducing GoAP’s debt service burden by about Rs.12.8 b i l l ion during 2002-03 to 2006-07.
Power supply to agriculture - measurement and subsidy issues: L ike other states in India, Andhra has adopted a pol icy o f providing subsidy for agricultural production through l o w electricity tariff. Tariffs for agriculture are lowest among a l l the states in the country and have not been revised in the last three years. Average per unit realization f rom agriculture in 2002-03 i s estimated at only Rs.0.3lkWh (covering only 11 percent o f the average cost o f supply) in comparison to Rs.l . l lkWh in Rajasthan, Rs.0.55 in Karnataka and Rs. 1.32kWh in Uttar Pradesh. Metering o f agriculture consumers i s another area where progress i s lachng, inspite o f directives for full metering provided by the APERC. After several years o f following this practice o f un-metered and subsidized power supply, farmer interests in maintaining these concessions are firmly entrenched, and the issues have become highly politicized. Subsidies delivered under the present flat-rate tar i f f system are regressive and benefit large farmers much more than the small and marginal farmers. Externalities l ike overuse o f water and uneconomic crop choices are some o f the negative outcomes o f the tar i f f subsidy policy. Improving the service provided to farmers, containing costs and enhancing cost recovery and viable means o f regulating and measuring supply to agriculture, constitute key challenges for GoAP in commercializing the power sector.
6. Subsidies for domestic consumers: In 2002-03 the average revenue fkom residential consumers covered about 81 percent o f the average cost o f upp ply.^ Tariffs for the large residential consumers are today perhaps highest in however tar i f f for the lowest consumption block (upto 50 k W m o n t h ) even after an increase o f 70 percent in July 2000 and 7 percent in March 200 1, are l o w compared to several other states.6 In future any increase in the power purchase costs o n account o f uncontrollable factors i s proposed to be passed on to residential consumers through fuel adjustment surcharge. With the government’s plans o f increasing the electricity access to al l the habitations by 2007, adequate tariff adjustments will be required to keep the operating subsidies at a sustainable level.
C. Phase II Reforms and Sectoral Business Plan (2003-04 to 2005-06) 7. In the next phase o f reforms GoAP aims to pursue achieving financial viabil ity for the power sector through further commercialization, efficiency improvements and reforms. The objective i s to progressively achieve full cost recovery through tariffs and limit power sector operating subsidies at a minimal and fiscally affordable level. The government’s business plan highlights the following structural and pol icy measures in the medium term time frame.
e Tariff rationalization and cost recovery. Discoms plan to progressively improve cost recovery through tariffs in the medium term - f rom 79 percent in 2002-03 to 88 percent by 2004-05 and further to 96 percent by 2006-07. This i s proposed to be achieved through tar i f f rationalization, cost reduction and efficiency improvements. Measures for reduction in cross subsidy will be continued and attempts will be made to move tariffs close to cost o f service to the consumers.
Agriculture power supply and metering. Maintaining supply to agriculture consumers as per the government’s regulation pol icy and in accordance with the regulatory directives. All new agriculture consumer and horticulture consumers are being metered. Util i t ies have submitted their metering p lan
e
APERC follows consumer category-wise cost o f service approach in tari f f determination (perhaps the only regulatory commission in the country). As per this approach the cost o f service to residential consumers in 2003-04 i s estimated Rs. 4.64.kWh. The cost recovery as per cost of service approach is about 53 percent.
Residential tariffs were increased substantially in July 2000 (69-300 percent across various consumption blocks), which lead to serious agitation in the state, in which three people lost their life. In Apr i l 2001, APERC reduced the tariffs to mitigate the impact o f tari f f shock in its first tari f f order (tariff for the lowest consumption block was not reduced). Tariffs were revised upward again in Apr i l 2002.
Tariffs for residential consumers consuming 50 kWh per month are (as on March 2002) : AP - Rs. 1.35/kWh; Kamataka - Rs. 2.05kWh; Madhya Pradesh - Rs. 1.10 k W h (plus 0.65 kWh FSA); Maharashtra - Rs. 1.45kWh; Orissa - Rs. 1 .05kWh; and Rajasthan - Rs. 1.53kWh
Annex B Page 4 of 7
0
0
0
0
8.
to the APERC and propose to complete 100 percent metering, based on the directions provided by the regulator.
Alternate subsidy delivery mechanism. Task Force on power supply to agriculture has submitted i t s report to GOAP on alternate mechanisms to provide subsidy to agriculture consumers. Based o n the government’s approval, the altemative(s) will be pi lot tested during next 15-18 months, and the strategy finalized to be implemented from April 2005.’ Task Force’s report o n subsidy delivery mechanism has evaluated and considered, among others, the option o f direct payment to farmers. It i s expected that with the implementation o f alternate subsidy delivery mechanism, subsidy would be provided by the government directly t o agnculture consumers and not channeled through power utility.
Distribution Privatization. GoAP intends to lock in efficiency gains achieved in the f irst stage o f reforms through privatization o f distribution business. Draf t privatization strategy prepared with the assistance o f international investment bankers i s under review and some measures initiated to achieve key conditions precedents for privatization. One o f the main r isks highlighted by the advisors pertains to power supply to agnculture- metering, cost recovery and subsidy payment. M a n y o f these actions are in-fact critical to the commercialization o f the sector even under government ownership. GoAP will finalize the privatization strategy and take actions by March 2005, to meet the conditions precedents required for launching the transaction.
Multi-buyer model and open access : In accordance with the provisions o f the National Electricity A c t 2003 to separate the transmission and trading function and introduction o f open access, AP i s planning to move f rom the present sector structure to a multi-buyer model with direct contracting between the generators and distributors. This i s expected to enhance commercialization o f the sector and reduce costs through efficiency in power procurement. An init ial feasibility study on implementation o f multi- buyer model has been carried out with the assistance o f international consultants. I t i s planned to move to multi-buyer model by March 2005. Open access for the retail consumers will be implemented according to the APERC’s directives to be issued, as per the provisions o f Electricity A c t 2003.
Improving electricity access in rural areas - GoAP i s committed to provide electricity access in al l the habitations in the state by FY2005-06. The utilities and GoAP are discussing service delivery models and financing arrangements for improving access. Structural shift f rom the present operating subsidy regime to a framework o f capital subsidy for access within fiscally affordable limits will be required.
According to power sector business plan approved by the GoAP, sector’s losses are projected to reduce from Rs.19.1 bi l l ion in 2002-03 to Rs.12.5 b i l l ion in 2004-05 and to Rs.0.5 b i l l ion in 2006-07 (Figure 3). Power sector’s EBIDTA (aggregate for generation, transmission and distribution companies) turned around to become positive in 2002-03 (based on provision financial information). The EBITDA for a l l the discoms i s expected to become positive f rom 2005-06. The projected improvement in financial performance i s based o n : (i) an average 8.3 percent annual growth in electricity sales during 2002-03 to 2006-07, comprising 14.5 percent CAGR for HT-industries, 14.3 percent CAGR for residential consumers resulting f rom load growth and 24 hours power supply in rural areas from 2004-05 and (-) 3.3 percent CAGR for agriculture consumers to be realized through a combination o f measures including tariff rationalization, feeder separation, effective supply regulation, metering and D S M measures. (ii) reduction in transmission losses from 7.5 percent t o 5 percent, and distribution losses f rom 19.7 percent to 14.5 percent, f rom 2002-03 to 2006-07 respectively; (iii) increase in revenue realization resulting f rom increase in load, tariff rationalization and improvements in metering, billing and collection efficiency; (iv) reduction in power procurement costs through Genco’s operational efficiency improvement, and strict adherence to
’ Implementation i s to be rolled out in a phased manner; GoAP plans to roll out the new subsidy delivery mechanism in four districts and then expand i t to other parts o f the state.
Annex B Page 5 of 7
merit order dispatch and ABT regime; and (iv) timely and regular implementation o f F S A approved by APERC to mitigate the financial r i sk o f failure o f hydro power generation.
I Figure 3: Financial Performance Projections
2500 1500
? 500 9 " -500 ui
LT -1 500
-2500
-3500
I-SAL 2: EBIDTA -SAL 2: PAT I
"As per draft Business Plan dated September 06,2003. Aggregate for Generation, T & D
D. Financial Risks 9. Although the financial health o f the sector has improved in 2002-03 and i s forecast to continue to improve, significant downside financial r i sks to the sector arise from: (i) difficulty in reducing subsidies for agriculture and residential consumers, and metering o f apcu l tu re consumers; (ii) variations in the load forecast and sales mix, specifically lower than projected sales growth for industry and higher growth in sales to agriculture (iii) inabil ity to further increase and sustain operational efficiency improvement gains, particularly collection efficiency and (iv) failure o f distribution privatization efforts. In the absence o f meaningful solution for power supply to agriculture and mitigation o f the subsidy payment risk, privatization o f discoms under the current structural configuration will remain a big challenge. Enactment o f the National Electricity A c t 2003 will have significant impact o n the industry and market structure of the power sector in the coming years. There are therefore l ikely to be uncertainties in costs and revenues imposed by evolution o f the market structure in the next 2-3 years.
10. Agriculture metering and cost recovery i s a diff icult issue, as in other states. I t i s expected that the new Electricity Act, through i t s provision o f metering o f a l l consumers in next two years, and continued pressures f rom APERC wil l help to mitigate this risk. The pilots initiated by GoAP's Task Force, through increased communication and consultation with the farmers attempting to increase the acceptance o f metering by the farmers.' GoAP i s also planning to pi lot test alternate mechanisms to deliver subsidy to farmers, which will assist in mitigating agriculture subsidy risk for commercialization and privatization of the distribution business. For successful privatization o f distribution business, the conditions precedent identified by the advisors (investment bankers) should be adequately addressed before the launch o f the transaction. Progress on minimizing subsidy risk will be critical. Risk o f regulatory un-certainty will be mitigated through implementation o f long term tar i f f principals as per the APERC's order. Government will need to flexibly adapt i t s privatization strategy in the context o f new market and industry structure envisaged under the new Electricity Act, and in view o f the investor interest prevailing at the time o f launch o f the transaction.
11. The table below presents the extent o f l ikely impact o n power sector finances based o n sensitivity analysis o f some o f the above mentioned r isks : (i) A S I refers to an alternate scenario which assumes lower
Three models being pi lot tested include service delivery by farmer's association, by a private franchisee and community mobilization I t has been informed that in these pilots some farmers are now coming fonvard to accept metering. In a rural co-operative society nearly 50 percent o f the farmers have opted for metering.
Annex B Page 6 of 7
sales growth specifically for HT-industries, higher sales to agnculture and postponement o f generation capacity addition by one year and (ii) AS I1 refers to an alternate scenario which assumes efficiency improvements to be 2 percent lower. Under the alternate scenario I the subsidy requirement i s estimated to be higher by about Rs.3 b i l l ion and Rs. 2.6 b i l l ion respectively in 2003-04 and 2004-05; the estimates for the alternate scenario I1 are about Rs. 1.79 bi l l ion for 2003-04 and Rs. 1.8 1 b i l l ion for 2004-05. The r isks o f lower than projected sales to industry wil l be mitigated through continued rationalization o f industrial tariffs and implementation o f incentive scheme. T h e risk o f sales to agnculture sector will be mitigated through strict adherence to supply regulation policy, and segregation o f feeders for agnculture load for effective monitoring o f supply to agriculture. Monthly monitoring and review by APERC, i s expected to minimize r isks o f delays in efficiency improvements. Further the financial and fiscal r isks o f failure o f hydro power generation i s expected to be mitigated through regular implementation o f the fuel surcharge adjustment in tariffs.
12. The deterioration in the power sector finances could overturn the fiscal gains that may be achieved in the medium term. Continued priority and support to the power sector reforms through restructuring program, technical assistance and PSAL will be required to mitigate power sector risk. The Bank will continue to undertake quarterly monitoring o f the financial performance o f the power sector to detect early s i g n o f emerging financial problems, and to facilitate contingency planning to minimize adverse fiscal impacts.
Table 1: Forecasts of power sector financing requirements (Rs. billion) 2003-04 2004-05 2005-06 2006-07
Subsidy support from GoAP Base case (MTFF) 15.13 14.11 8.30 5.01 AS I 18.14 16.76 9.07 3.76 AS II 16.94 15.90 10.36 7.30
Net cash support from GoAP Base case (MTFF) 10.23 11.26 4.1 1 -1.06 AS I 13.25 13.99 4.95 -2.21 AS It 12.05 13.05 6.17 1.24
Base case (MTFF) 28.59 36.99 28.83 27.97 AS I 31.91 40.31 30.29 27.48 AS II 30.58 39.15 31.35 30.83
Net cash impact on GoAP*
Nofes: (1) *includes support for debt service obligation for the power sector taken over by GoAP. (ii) All the above numbers are based on the draft Business Plan dated September 06,2003
Annex B Page 7 of 7
Annex C Page 1 of6
EXTERNAL RELATIONS DEPARTMENT
PUBLIC INFORMATION NOTICE
Public Information Notice (PIN) No. 031104 August 21,2003
International Monetary Fund 700 19th Street, NW Washington, D.C. 2043 1 USA
IMF Concludes 2003 Article I V Consultation with India
Public Information Notices (PINS) are issued, (i) at the request o f a member country, fo l lowing the conclusion o f the Article IV consultation for countries seelung to make known the views o f the IMF to the public. This action i s intended to strengthen IMF surveillance over the economic policies o f member countries by increasing the transparency o f the IMF’s assessment o f these policies; and (ii) following policy discussions in the Executive Board at the decision o f the Board.
On July 18, 2003, the Executive Board o f the International Monetary Fund (IMF) concluded the Article IV consultation with India.’
Background
Economic activity in 2002103 was uneven across key sectors. Growth i s estimated to have slowed to 4% percent in 2002103 f rom 5% percent in 2001102, with the sharp drought-induced decline in agriculture (by 3% percent) offsetting the recovery in industry and the strong growth in services. Within industry, infrastructure-related sectors seem to have led the way, on the back o f the publicly sponsored national highways development project.
Inflation has picked up in recent months, mostly owing to supply side factors. WPI inflation rose from under 2 percent in April 2002 to about 6% percent at end-April 2003 before subsiding again to around 5 percent in early June. The pickup was mostly due to the higher global o i l prices and a drought, which affected edible o i l prices.
Balance o f payments developments have been favorable and foreign exchange reserves are being accumulated at an unprecedented rate. Goods and services export growth was strong-benefiting f rom improved competitiveness and the global trend towards outsourcing dnven by the need to cut costs. Notwithstanding the relatively strong growth in non-oil imports (13% percent in 2002/03), India registered a current account surplus estimated at 3/4 percent o f GDP in 2002/03. Capital account developments appear to have been driven by dollar weakness and expectation o f a rupee appreciation, a highly favorable interest rate differential, and changes in international banlung practices. The result o f these developments has been an unprecedented accumulation o f reserves-reserves reached $83 b i l l ion in mid-July-and an appreciation of the rupee vis-&vis the dollar by around 4 percent in the year to mid-July 2003.
Financial markets were characterized by general weakness in equity prices, coupled with a sustained ra l ly in bond markets. Stock market developments in India have generally been weak, but have improved measurably since April 2003 along with global and regional equity markets. In contrast, bond markets have witnessed a sustained rally. Easy liquidity conditions, coupled with weak investment demand and structural reforms that have deepened government securities markets, resulted in a sharp decline in interest rates to historical lows, notwithstanding the large government borrowing needs. These conditions also allowed a
Under Articled IV o f the IMF’s Articles o f Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with of ic ia ls the country’s economic developments and policies. On retum to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion o f the discussion, the Managing Director, as Chairman o f the Boards, summarizes the views o f the Executive Directors, and this summary is transmitted to the country’s authorities.
Annex C Page 2 of 6
lengthening o f the maturity o f government debt, and led to a flattening o f the y ie ld curve and a narrowing o f spreads between government and corporate bonds, across the maturity and credit quality spectrum.
Monetary and exchange rate pol icy was aimed at maintaining easy liquidity conditions while also attempting to limit volatility in the rupee and stem i t s appreciation. Since April 2002, the bank rate-the key pol icy signaling rate-has been reduced by 50 bps to 6 percent, the rep0 rate by 100 bps to 5 percent, and the cash reserve ratio (CRR) by 1 percentage point t o 4% percent. At the same time, the RBI continued i t s pol icy to contain volatility in the exchange rate, with the effect o f limiting the appreciation o f the rupee. T h i s intervention in foreign exchange markets was accompanied by sterilization operations. The authorities also used the opportunity provided by the strong reserve position to further open up the capital account, prepay some external debt, and offer debt rel ief to HIPC nations.
General government fiscal imbalances in 2002/03 are l ikely to be worse than expected in the budget. The provisional estimate i s for a central government deficit (including privatization receipts in revenues) o f 5.9 percent o f GDP, compared with the budget target o f 5.3 percent o f GDP. The outcome for the subnational governments in 2002/03 i s also l ikely to be worse than expected-the staff estimates a deficit o f over 4% percent o f GDP, compared with a budget target o f 4 percent o f GDP. Revenue shortfalls were the main factors underlying the weaker-than-planned outcome, notwithstanding some expenditure compression. Consequently, the general government deficit in 2002/03 i s estimated to be about 10 percent o f GDP and general government debt about 85 percent o f GDP. Contingent liabilities in the form o f central and state government guarantees stand at around 12 percent o f GDP.
The budget for 2003/04, announced in February 2003, makes litt le headway in checking fiscal imbalances. The deficit i s to be reduced by only about !A percent o f GDP to 5.6 percent o f GDP in 2003/04.* On the revenue side, the budget includes some measures to improve tax administration, but does l itt le to reduce exemptions. The budget also expects to collect some Rs. 132 b i l l ion (% percent o f GDP) in privatization revenues, compared with about Rs. 30 b i l l ion actually realized in 2002/03. There were only a few measures aimed at containing expenditure. A central plank o f the budget i s the promotion o f infrastructure projects worth Rs. 600 b i l l ion (2% percent o f GDP) over the medium term. These projects are to be undertaken through public-private partnerships, with the government expecting to contribute Rs. 20 b i l l ion annually.
The budget also contains several proposals aimed at t ahng advantage o f the l o w interest rate environment to restructure the debt obligations o f both the central and state governments. The central and state governments have agreed that, over a three year period ending in 2004/05, a l l states' debt owed to the central government carrying interest rates in excess o f 13 percent will be swapped for additional proceeds from small savings and market loans, both o f which currently have lower interest rates. In addition, the government also offered a scheme to buy back banks' holdings o f central government securities which were contracted under high interest rates o f the early 1990s. These securities are to be bought back on a voluntary basis f rom banks that are in need o f liquidity or want to encash the premium on their bond holdings for making provisions o n their nonperforming assets (NPAs). T o provide the incentive for banks to do the latter, the authorities have allowed a tax deduction o n the premium income if banks use it to increase provisions.
The staff projects that the economy will grow at 5% percent in 2003/04, broadly in l ine with consensus forecasts, but there i s some upside potential to this projection. Early indications are for good monsoon rainfall. The projection for 2003/04 incorporates a recovery in agriculture, but there i s potential for an even stronger rebound in this sector. Inflation i s expected to moderate to around 4% percent by end-2003/04. The external current account i s projected to remain in surplus.
' On the staffs definition-excluding privatization receipts from revenues-the deficits would be broadly unchanged in 2003/04 relative to 2002/03.
Annex C Page 3 of6
Executive Board Assessment
Executive Directors viewed the recent resilience o f the Indian economy as testimony to the benefits o f the reforms undertaken since the early 1990s. They noted that, despite a weak global environment and a severe drought during 2002-03, the economy grew at a rate that compares favorably with that o f most other countries. Directors welcomed the significant strengthening o f India's extemal position-manifest in the high level o f reserves and l o w extemal vulnerability. At the same time, Directors noted that the slowdown in growth since the mid-1990s i s o f concern because o f i t s implications for poverty reduction. They reiterated the view that higher, sustained output and employment growth rests o n pushing ahead with fiscal consolidation and critical structural reforms. Some Directors asked for further study on isolating the cyclical and structural factors affecting growth.
Directors stressed that India's large fiscal deficits and public debt are exacting an economic cost in terms o f foregone growth. Despite the apparent ease with which the fiscal deficit has been financed, they noted the detrimental effects o n growth through crowding out o f critically needed spending o n physical and social capital and through the preemption o f resources for private investment. Directors pointed out that the large fiscal imbalances leave litt le room for maneuver in the face o f shocks and have tended to result in ad hoc policy changes, which increase investment uncertainty. They believed that the authorities should use the favorable extemal and interest rate environment to build the necessary polit ical consensus for accelerating needed fiscal and structural adjustments. Directors noted that the strategy o f postponing consolidation while attempting to stimulate growth i s r isky, and that few countries have had success in growing out o f severe fiscal problems without implementing a comprehensive reform program.
Directors looked forward to passage o f the Fiscal Responsibility and Budget Management (FRBM) bill, and welcomed steps to advance implementation o f provisions o f the FRBM. They noted that the FRBM would bring important discipline and transparency to the central government budget process and enable the authorities to draw up a clear and time-bound plan for restoring fiscal sustainability. They urged early introduction o f medium-term fiscal plans and targets, anchored by clearly specified fiscal rules that can be enforced. Directors noted that fiscal adjustment needs to focus o n revenue mobilization through widening the tax net and simplifying the tax system. In particular, the range o f exemptions should be narrowed and the scope for discretion reduced. Directors also encouraged the authorities to use the recommendations in the various reports on tax and expenditure reform that have been prepared in recent years to draw up a roadmap for fiscal reforms with explicit timetables.
Directors recognized that some important initiatives have been undertaken to strengthen state finances in recent years, including the use of performance-based transfers f rom the center, limits o n government guaranteed loans, and the introduction of fiscal responsibility legislation by some states. Nevertheless, Directors pointed out that state finances have improved only moderately, suggesting that much more needs to be done, including in the areas of reforming the tax system, divesting public enterprises, and reducing subsidies and losses in the power sector. In this context, Directors regretted the delay in the introduction of the value added tax (VAT). They urged that top priority be given to developing the necessary consensus to implement the VAT within the current fiscal year, with the central government launching a concerted campaign jo int ly with the states about the VAT's benefits.
With inflationary pressures under control, Directors viewed the maintenance o f easy monetary conditions as appropriate. They welcomed recent cuts in administered savings rates and pol icy rates, noting these should allow banks to lower lending and deposit rates and narrow the rupee/dollar interest rate differential. However, Directors noted that administered interest rates and directed lending reduce the effectiveness o f monetary policy and hinder financial development. M a n y Directors encouraged a clearly specified automatic link between administered rates and market rates to prevent a prolonged misalignment o f interest rates.
Directors noted that, going forward, the scope for continued sterilized intervention could narrow and make the task of managing the monetary impact of balance o f payments inf lows increasingly difficult. Several Directors cautioned that the current strategy could inadvertently expose the system to more risk-through
Annex C Page 4 of 6
further increases in interest-sensitive inflows and unhedged foreign currency exposure in the corporate sector. They welcomed recent measures to facilitate and encourage hedging, but noted that such measures would be most effective if market players perceive the need to undertake such hedging activities. Whi le a few Directors noted the potential implication o f exchange rate appreciation, most Directors encouraged the authorities to gradually allow greater f lexibil i ty in the exchange rate.
Directors saw the continued strength in the extemal accounts as a good opportunity to further liberalize extemal transactions. They welcomed measures to liberalize capital account transactions, but going forward, encouraged deeper trade reforms. Directors singled out the need to simplify the trade regime by lowering tariffs, introducing a more uni form duty structure, significantly reducing exemptions and eliminating administrative barriers. They welcomed India's decision to grant debt rel ief under the enhanced HPC Initiative.
Directors commended the steady progress made in moving ahead with financial sector reforms. They welcomed the introduction o f risk-based supervision and implementation o f a prompt corrective action framework for commercial banks. They encouraged the introduction o f time limits o n remedial actions in the latter, so as to increase the framework's effectiveness. Directors also saw a need to broaden the scope o f the market for interest rate derivatives and to tighten the regulatory treatment o f state-govemment guaranteed loans.
Directors welcomed the recent reforms aimed at providing a comprehensive framework to clean up banks' impaired assets and strengthen their underlying finances. In particular, Directors saw the passage o f the Securitization Act, the issuance o f the accompanying guidelines by the Reserve Bank o f India, and the amendments to the Companies A c t creating the National Company L a w Tribunal as important steps. T o give full effect to these reforms, they encouraged early repeal o f the Sick Industrial Companies A c t and steps to ensure that borrowers are not able to obtain unduly long protection against collateral enforcement under the new tribunal.
Directors encouraged the authorities to advance the timetable for bringing India's classification and provisioning standards in line with international best practice. They viewed the government's new debt buyback scheme with banks, as wel l as banks' improved profitabil ity and the new securitization framework, as a good opportunity to shorten the timeframe for classifying loans as doubtful and for building provisions needed under the new norms. Directors commended the recent passage o f the anti-money-laundering law, and urged the authorities to complete the questionnaire o n money laundering and terrorism financing.
Directors also encouraged further steps to strengthen the performance and efficiency o f the banlung system, including reducing government ownership and improving the commercial orientation o f public sector banks. Some Directors noted that raising the foreign direct investment limit in private banks and lifting the restrictions on voting rights would be complementary steps to strengthen competition in the banking system. Directors also saw the need for a clearer strategy o n the future role o f development finance institutions, given their weak overall financial condition. Owing to the current fiscal situation and need to contain systemic risk, they encouraged the authorities to move away f rom government-orchestrated rescue packages o f these institutions, with litt le conditionality.
Directors viewed sustained progress o n other reforms also as critical to improving growth prospects and generating j o b opportunities. They welcomed recent steps to further decontrol fertilizer distribution and the planned introduction o f a pricing system to discourage inefficient fertilizer production. However, Directors called for early action o n lifting restrictions on agricultural marketing and trade and reforming the public distribution system, minimum support prices, and fertilizer subsidies. As for industry, they welcomed the removal o f key goods f rom the l i s t reserved for small-scale industries, the enactment o f a more modem competition bill, and the passage o f a new Electricity Bill allowing the power sector to be opened up to greater competition. Directors encouraged further progress with small-scale dereservation, and o n reforming labor laws to allow more flexibility, reflecting market conditions.
Directors noted the promising start to the process of privatization in the f i rs t ha l f o f 2002l03, and encouraged publicizing the benefits o f previous divestment to build popular support for this reform. They
Annex C Page 5 of 6
also supported the authorities' proposal to create a fund for divestment receipts, t o be used for debt reduction and identified development programs, rather than for recurrent spending.
Directors welcomed the smooth operation o f periodic price adjustments for diesel and petrol. Going forward, they encouraged the authorities to formulate an explicit strategy to deal with episodes when o i l prices temporarily move out o f a normal range.
Directors commended India for completing assessments under most o f the Fund's standards and codes. They welcomed India's subscription to the SDDS, but urged that priority be given to addressing shortcomings in the timeliness and coverage o f fiscal data to support the objective o f fiscal consolidation. They also encouraged the authorities to facilitate early completion o f the Statistics ROSC report.
Annex C Page 6 of 6
India: Selected Economic Indicators 1'
1998199 I999100 2000101 2001102 2002103 (In percent)
Domestic economy Change in real GDP at factor cost Change in industrial production Change in wholesale prices Change in consumer prices
External economy Merchandise exports 21 Merchandise imports Current account balance (In percent of GDP) Direct investment, net 31
Portfolio investment, net Capital account balance Gross official reserves 4
(In months of imports) 51
External debt (in percent of GDP) 41
Short-term debt (in percent of GDP) 4/71
Debt service ratio (in percent of current account receipts) Change in real effective exchange rate (in percent) 41
Financial variables Central government balance (in percent of GDP) 81
General government balance (in percent of GDP) Change in bank credit to commercial sector Change in broad money Interest rate 41 91
6.5 4.1 6.0
13.1
34.3 47.5 -4.0 -1 .o 2.4
-0.1 8.4
32.5 5.8
23.4 2.7
19.1
-4.6
-5.5
-8.8
14.5
19.4 8.7
6.1 4.4 6.6 5.0 3.4 7.1 3.4 3.8
(In billions of US, dollars)
37.5 44.9 55.4 59.3 -4.7 -3.6 -1 ,I -0.8 2.1 3.3 3.0 2.6
10.4 10.0 38.0 42.3 6.0 6.9
22.0 21.9 2.8 2.3
17.8 15.3
1 .I 6.2
(In percent)
-5.5 -5.7
-9.9 -9.9
18.3 15.8
14.6 16.8 9.2 8.7
5.6 2.7 3.4 4.3
44.9 57.6
0.8 0.2 4.7 2.0
10.6 54.1 7.7
20.5 3.0 9.5
1.7
-6.3
-10.5
11.3
14.2 6.1
4.3 5.8 3.6 4.0
53.0 65.5 3.7 0.7 3.6 0.9
12.6 75.4
9.2 20.1 61 3.0 61
14.1 61
-5.6 61
-6.0 61
-1 0.0 61
19.6
15.0 5.9
Sources: Reserve Bank of India; Ministry of Finance; CEIC; International Financial Statistics; and IMF staff estimates. I/ Data are for April-March fiscal years, as available at the time of the Board Meeting for the 2003 Article IV consultation (July 18, 2003). 21 Balance of payments basis. 31 Net foreign direct investment in India less net foreign investment abroad. 41 End of period. 51 Imports of goods and services projected over the following twelve months, 61 Staff estimates for 2002103, 71 Residual maturity basis, except contracted maturity basis for medium- and long-term nonresident Indian accounts. 81 Excluding divestment receipts from revenue and onlending of small saving collections from expenditure and net lending, 91 91day Treasury Bill rate.
~~~
Public Information Notices (PINS) are issued, (i) at the request o f a member country, following the conclusion o f the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action i s intended to strengthen IMF surveillance over the economic policies o f member countries by increasing the transparency o f the IMF's assessment o f these policies; and (ii) following pol icy discussions in the Executive Board at the decision o f the Board.
Annex D Page I of 6
Statistical Annex
India at a dance 1211 9/03
POVERTY and SOCIAL
2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)
Averaae annual growth, 199642
Population (%I Labor force (%)
Most recent estimate (latest year available, 199642) Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,OOOlive births) Child malnutrltion (% of children under 5) Access to an improved water source (% ofpopulation) Illiteracy (% ofpopulation age 15+) Gross primary enrollment (% of school-age population)
Male Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982
GDP (US$ billlofls) 194.8 Gross domestic investmerWGDP 21.7 Exports of goods and services/GDP 6.1 Gross domestic savingdGDP 18.3 Gross national savings/GDP 19.2
Current account balance/GDP -2.0 Interest payments/GDP 0.4 Total debtlGDP 14.1 Total debt service/exports 13.6 Present value of debtlGDP Present value of debtlexports
1982-92 199242 (average annual growth) GDP 5.6 6.0 GDP per capita 3.4 4.2 Exports of goods and services 6.9 12.9
lndia
1,048.3 470
495.4
1.7 2.2
29 28 63 67
84 41
102 111 92
1992
244.2 23.8 9.0
21.8 21.8
-1.6 1.4
37.0 28.0
2001
5.5 3.8 6.0
South Asia
1,401 460 640
1.8 2.3
28 63 71
84 44 97
108 89
2001
481.4 22.4 13.3 24.0 25.9
0.1 0.8
20.3 11.7 14.1 84.7
2002
4.3 2.7 9.9
Low- income
2,495 430
1,072
1.9 2.3
30 59 81
76 37 95
103 87
2002
509.3 21.4 15.3 21.4 23.2
0.6 0.7
20.7 13.9
200206
6.2 4.7 7.9
Development diamond'
Life expectancy
T
GN I
capita per
1
Access to improved water source
- lndia Low-income group
Economic ratlos'
Trade
.L
Indebtedness
1 -lndia -- Low-income group
STRUCTURE of the ECONOMY
(% of GDP) Agriculture Industry
Services
Private consumption General government consumption Imports of goods and services
Manufacturing
(average annual growth) Agriculture Industry
Services
Private consumption General government consumption Gross domestic investment Imports of goods and services
Manufacturing
1982
35.9 25.8 16.2 38.3
69.9 10.7 8.4
1982-92
3.1 6.7 6.5 6.8
5.3 6.1 5.7 5.7
1992 2001
30.9 25.0 26.7 25.9 16.2 15.3 42.3 49.2
65.8 65.4 11.2 12.8 9.8 13.9
199242 2001
2.5 5.7 6.2 3.3 6.6 3.4 8.2 6.8
5.3 5.4 7.4 7.2 7.0 3.0
12.4 3.5
2002
23.0 26.4 15.5 50.6
67.1 12.7 16.5
2002
-3.2 6.0 6.1 7.1
7.3 1.6 2.8
17.9
1 Growth of Investment and GDP (%) 1
97 98 99 w 01
GDi -GDP
1 Growth of exports and imports ( O h ) 1 25 20 15 10 5 0 5
Note: 2002 data are preliminary estimates. * 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 D Page 2 of6
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 surplusldeficit
TRADE
(US$ millions) Total exports (fob)
Marine Products Ores and Minerals Manufactures
Total imports (cif) Food Fuel and energy Capital goods
Export price index (1995=100) Import price index (1995=100) Terms of trade (1995=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, locaVUS$)
EXTERNAL DEBT and RESOURCE FLOWS
(US$ miNions) Total debt outstanding and disbursed
IBRD IDA
Total debt service IBRD IDA
Composition of net resource flows Ofkial grants Official creditors Private creditors Foreign direct investment Portfolio equity
World Bank program Commitments Disbursements Principal repayments Net flows interest payments Net transfers
1982 1992 2001 2002 Inflation (X) 1 6.7 12.6 7.7 8.8
.. 18.7
.. -3.2
.. -7.2
1982 1992
9,490 18,869 377 602 445 738
5,109 14,039 16,468 24,316 1,071 507 5,957 6,100 2,662 4,532
94 95 125 96 75 99
1982 1992
12,377 23,599 18,352 27,917 -5,975 -4,318
-335 -3,423 2,510 3,852
-3,800 -3,889
3,101 4.692 699 -803
4.896 9,832 9.7 30.6
1982 1992
27,546 90,264 1,395 9,326 6,983 15,438
2,054 7,697 172 1,395 72 267
394 363 1,352 2,543 1,180 1,563
0 313 0 244
1,889 2.678 1,397 1,954
98 834 1,300 1,119
146 828 1,153 292
3.1 4.3 3.5 3.0
17.4 19.1 -8.1 -7.4
-10.4 -10.9
2001 2002
44,915 53,000 1,237 1,381 1,262 1,900
33,370 38,353 57,618 65,474 2,043 2,368
14,000 17,640 9.882 12,746
90 101 93 100 97 101
2001 2002
65,580 77,986 73,706 84,254 -8,126 -6,268
-3,601 -4,882 12,125 14,448
398 3,298
11,359 13,682 -1 1,757 -1 6,980
54,106 75,428 47.7 48.4
2001 2002
97,516 105,210 7,015 5,141
20,402 21,642
9,327 13,042 1,372 3,029
569 637
384 410 365 -3,657
-1,569 -1,861 4,741 3,611 1,951 944
2,190 1,523 2,089 1,465 1,467 3,196
622 -1,730 474 470 148 -2,200
57 58 95 w 01 1 ---GDPdeflator -CPI
Export and Import levels (US$ mill.) 1 l7o.wo T
60,000 s0,wo 40,wo 30,WO 20,wo 10.000
0
I O2 I 96 97 98 99 00 01
53 Exports Imports
Current account balance to GDP (%)
' T
Composition of 2002 debt (US$ mlll.)
G 4,0835,141
F 51,061
A - IBRD B - IDA D - Other multilateral F - Private C- IMF G - Short-term
E - Bilateral
Annex D Page 3 of 6
India Social Indicators
POPULATION Total population, mid-year (millions)
Urban population (% of population) Total fertility rate (births per woman)
POVERTY (% of population) National headcount index
Urban headcount index Rural headcount index
Growth rate (% annual average for period)
INCOME GNi per capita (US$) Consumer price index (1995=100) Food price index (1995=100)
INCOMElCONSUMPTlON DISTRIBUTION Gini index Lowest quintile (% of income or consumption) Highest quintile (% of income or consumption) SOCIAL INDICATORS Public expenditure
Health (%of GDP) Education (% of GDP) Social security and welfare (% of GDP)
Net primary school enrollment rate (% of age group)
Male Female
Access to an improved water source (% of population)
Urban Rural
Total
Total
Immunization rate (% under 12 months)
Measles DPT
Child malnutrition (% under 5 years) Life expectancy at birth (years)
Total Male Female
Mortality Infant (per 1,000 live births) Under 5 (per 1,000 live births)
Male (per 1,000 population) Female (per 1,000 population)
Births attended by skilled health staff (%)
Adult (15-59)
Maternal (modeled, per 100,000 live births)
Latest single year
1970-75
613.5 2.3
21.3 5.4
190 21
2.5
60 72 48
52 52 51
120 188
324 353
1980-85
765.1 2.1
24.3 4.4
290 41 36
3.3
1 18
57 57 57
97 148
261 279
30
1995-2001
1,032.4 1.7
27.9 3.0
28.6 24.7 30.2
460 149 135
37.8 8.1
46.1
0.9 4.1
a4 95 79
56 64
63 62 64
67 93
250 191 440
42
Same regionlincome group
South Asia
1,377.8
27.8 3.2
I .a
450
1 .o 2.5
84 94 a0
58 65
63 62 63
71 99
252 202
42
Low- income
2,505.9 1.9
3.5 30.8
430
1 .I 2.8
76 90 70
60 61
59 58 60
a0 121
312 256
Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97; ratios exceeding 100 indicate discrepancies between the estimates of school-age population and reported enrollment data.
2003 World Development Indicators CD-ROM, World Bank
Annex D Page 4 of 6
India - Key Economic Indicators
Actual Estimate Projected Indicator 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
National accounts (as YO of GDP) Gross domestic product"
Agriculture Industry Services
Total Consumption Gross domestic fixed investment
Government investment Private investment
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 26.2 24.9 25.0 23.0 22.7 22.0 21.3 20.7 25.9 26.6 25.9 26.4 25.7 25.7 25.8 25.9 47.9 48.5 49.2 50.6 51.6 52.3 52.9 53.5
78.3 18.2 18.3 79.1 18.2 78.4 78.7 78.7 21.8 21.8 21.7 20.5 23.0 23.0 22.9 22.9
6.2 6.1 5.9 5.9 5.9 6.0 6.3 6.3 15.6 15.8 15.7 14.6 17.1 16.9 16.6 16.6
E X P O ~ ~ S (GNFS~ 11.8 13.8 13.3 Imports (GNFS) 13.7 14.5 13.9
Gross domestic savings 21.7 21.8 21.7 Gross national savings' 23.6 23.7 23.7
Memorandum items Gross domestic product 446989 460616 481440 (US$ mil l ion at current prices) GNI per capita (US$, Atlas method) 440 450 470
Real annual growth rates (%, calculated from 1993 prices) Gross domestic product at market prices 7.1 3.9 5.5 Gross Domestic Income 5.5 3.0 5.1
Real annual per capita growth rates (%, calculated from 1993 prices) Gross domestic product at market prices 5.3 2.2 3.8 Total consumption 3.1 -2.4 4.0 Private consumption 1.7 -2.7 3.8
EXPO& (GNFS)~ 53251 63764 65580 Merchandise FOB 31542 44894 44915
Imports (GNFS)~ 67028 75656 73706 Merchandise FOB 55383 59264 57618
Net current transfers 12256 12798 12125
Balance of Payments (US$ millions)
Resource balance -13777 -11892 -8126
Current account balance -5080 -3926 398
Net private foreign direct investment 2165 3272 4741 Long-term loans (net) 1214 4141 -459
Official 1068 -237 365 Private 146 4384 -824
Other capital (net, incl. errors & ommissions) 7237 2363 7077 Change in reservesd -5536 -5856 -11757
Memorandum items
Real annual growth rates ( YR93 prices) Resource balance (% o f GDP) -3.1 -2.6 -1.7
Merchandise exports (FOB) 14.2 22.0 5.5 Manufactures 9.5 59.9 7.4
Merchandise imports (CIF) 9.4 -0.9 4.9
15.3 16.5
20.3 22.1
14.9 16.9
21.8 23.6
15.0 17.3
21.6 23.2
15.1 17.5
21.3 22.9
15.2 17.6
21.3 22.1
509343 592216 644366 701 108
630
762847
680 410 520 580
4.3 4.9
6.8 1.0
6.0 6.5
6.0 6.2
6.0 6.0
2.7 4.7 5.6
5.3 2.8 2.3
4.5 5.1 6.3
4.6 5.3 5.8
4.7 4.8 5.0
77986 53000 84254 65474
14448 3298
3611
-6268
-4158 -3657
-501 14229
-16980
87989 59520
100172 18620
14960 -12183
-1566
3500 -187 223 1
-3018 1650
-2798
96692 65484 ,11332 87439
- 14640 15259 -4135
105698 71590
122918 96494
-17220 15565 -6232
3500 -1118 1586
-2704 1900 1950
115681 78365
134501 105736
15876 -18820
-1848
3500 3984 1280 2704 1900
-1536
I
3500 4648 1908 2740 1600
-5613
-1.2 -2.1 -2.3 -2.5 -2.5
4.6 14.9 5.2
6.4 5.1
15.8
8.4 8.6
14.0
8.0 8.4
10.9
8.1 8.5 8.6
/Continued)
Annex D Page 5 of 6
India - Key Economic Indicators (Continued)
Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006
Public finance (as % of GDP at market prices)' Current revenues 11.1 Current expenditures 23.5 Current account surplus (f) or deficit (-) -6.4 Capital expenditure 3.3 Foreign financing 0.1
Monetary indicators M2lGDP 58.0 Growth o f M 2 (%) 14.6 Private sector credit growth I 62.3 total credit growth (%)
Price indices( YR93 =loo) Merchandise export price index 92.2
Merchandise terms o f trade index 83.0 Merchandise import price index 111.1
Consumer price index (% change) 3.3 GDP deflator (% change) 3.8
11.4 24.0 -6.6 3.0 0.1
62.3 16.1 55.0
90.4 119.9 15.4
3.9 4.5
17.4 19.1 24.4 25.9
3.5 4.2 0.5 1.3
-6.9 -6.1
65.3 70.0 14.4 15.0 52.9 62.1
85.1 96.1 111.1 120.0 71.1 80.6
3.1 4.3 3.5 3.0
19.3 25.4 -6.1 4.9 1.1
10.9 13.1 3.4
102.0 124.4 82.0
4.2 4.5
19.6 . 19.9 20.2 25.2 25.1 25.1
5.2 5.6 5.1 1.2 1.0 0.7
-5.6 -5.2 -4.9
12.2 13.0 74.1 13.0 12.3 12.6
134.7 13.8 13.7
103.6 104.8 106.2 121.4 120.8 121.9 85.3 86.7 87.1
3.9 4.3 4.6 4.1 4.7 4.7
a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use o f I M F resources. e. Consolidated central government. f. "LCU" denotes "local currency units." A n increase in US$/LCU denotes appreciation.
Annex D Page 6 of 6
India - Key Exposure Indicators
Actual Estimate Projected Indicator 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Total debt outstanding and disbursed (TDO) (US$m)a
Net disbursements (US$m)a
Total debt service (TDS) (US$m)a
Debt and debt service indicators
(“3) TDO~XGS~ TDOiGDP TDSiXGS ConcessionaliTDO
IBRD exposure indicators (“3) IBRD DSipublic DS Preferred creditor DSipublic DS (“3)‘ IBRD DSiXGS IBRD TDO (US$mld
IDA TDO (US$mld Share o f TBRD portfolio (%)
IFC (US$m) Loans
983 13
-443
9845
148.4 22.0 14.9 45.4
19.6 30.0
2.5 7509
6.2 18918
686.0 436
99098 97516
3867 -1204
10842 9327
127.0 121.9 21.5 20.3 13.9 11.7 37.9 37.8
11.5 16.0 26.6 25.5
1.4 1.7 6915 7015
5.8 5.7 18813 20402
677.7 804.0 412 512
105210
-55 18
13043
111.8 20.7 13.9 38.2
24.8 49.2
3.2 5141
4.4 21642
782.0 498
115277 121456 128446 137671
11048 6179 6989 9225
14469 11337 17510 16091
111.1 107.6 104.1 103.0 19.5 18.8 18.3 18.0 13.9 10.0 14.2 12.0
17.2 6.8 3.7 7.9 15.5 23.9 14.2 25.6
2.0 0.5 0.4 0.5 4126 4924 6029 7203
3.7 4.5 5.5 6.7 22351 22818 23321 23844
782.0 .. 503 1-n Equity and quasi-equitye 250 266 292 284 L I Y
MIGA MIGA guarantees (US$m)
a. Includes public and publicly guaranteed debt, private nonguaranteed, use o f IMF credits and net short-
b. “XGS” denotes exports o f goods and services, including workers‘ remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the
Bank for International Settlements. d. Includes present value o f guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments.
term capital.