” A States Focus Makes Sense”

The multilaterals have begun dealing directly with the state capitals and New Delhi does not seem to mind.

A new trend is afoot as the World Bank and the Asian Development Bank seek to give their lending in India a stronger "states" focus. The ADB made a USD 250 million loan to Gujarat last year (with the horrendous title of the "Gujarat Public Sector Resource Management Programme") and is eyeing Madhya Pradesh and one of either Tamil Nadu or Kerala as additional candidates. The World Bank is developing a "restructuring" loan for Andhra Pradesh, and is also working on Rajasthan, Haryana, Orissa and Karnataka. Fiscal reform at the state level is at the heart of the exercise, because without it all lending will be unfruitful. It seems a little late in the day to come to this realisation, but better late than never. As an official at the World Bank asked, "If we make a big educational loan to the states, how do we know they will continue to have the money to pay the teachers after we leave. We´ve poured a lot of money into the power sector, but is it sustainable?"

The central government in New Delhi sees the multilateral banks as allies in its effort to broaden and deepen fiscal reform countrywide. With attention focused exclusively on the central government´s fiscal deficit (slated to go down to 4.5 percent of GDP this year) the fact that all the states put together add another 4 percent to the overall public sector deficit is completely lost sight of. "There hasn´t been much action on the part of the states yet on fiscal reform," the World Bank staffer said.

The carrot of additional resources the multilaterals can offer the states is a powerful device New Delhi has at its disposal to get the states to undertake tax and public enterprise reforms and cut back on current expenditure. Only then will they be in a position to deliver the social services and provide the infrastructure that is constitutionally their responsibility. Health, education, power and irrigation are all "state subjects" under the Indian constitution. As Finance Minister P. Chidambaran said at the recent Fund-Bank meeting, "A states focus makes sense."

WB on Andhra
In its first full-fledged report on a state economy, the World Bank analyses how Andhra Pradesh is one of India´s larger resource-rich states, but has a growth rate lower than the country´s average, and considerably below that of India´s six fastest-growing states. One of the reasons has been the plethora of poorly targeted welfare schemes (more than a hundred directed at the scheduled castes alone) spread too thin to make meaningful monitoring and control possible.

The largest such scheme is the one on rice subsidy which covers 85 percent of Andhra´s population with a ration of good-quality rice that makes "self-targeting" impossible. The report points out that a much more sustainable anti-poverty strategy would be to rely on rapid labour-intensive growth, effective provision of basic services, and smaller, and self-targeted programmes for the very poor. Thus, if the rice were replaced with cheaper foodgrains, it would be easier to restrict ration cards to about 30 percent of the households, the population below the poverty line.

The Bank report contains a comprehensive agenda for reform for the tax system, public enterprises, the power sector, canal irrigation, roads, ports, primary schooling and public health, all of which are state subjects. Will Hyderabad bite? Well, it has already started nibbling. It has raised the price of rationed rice from INR 2 to 3.50 per kg and reduced the allocation from 5 to 4 kg per person per month, with an upper limit of INR 20 kg per family. (However it is still loathe to restrict eligibility to the poor.) It has reversed full prohibition, raised power tariffs (but only a bit) and awarded the first contract to a private party to develop a port on a BOT (build-operate-transfer) basis.

Chandrababu Naidu, regarded as one of the more development- minded and technology savvy chief ministers (he is into computers in a big way), made a big pitch to World Bank President James Wolfensohn during a recent visit. World Bank staffers are understandably coy to discuss conditionalities, and claim they are only responding to requests from the states to help them out of the fiscal mess they find themselves in. As one of them said, "Well, we have had three or four states coming in and asking us to come and take a look." They are obviously pleased with the new Rajasthan scheme to give an immediate power connection to any farmer willing to pay INR 1.20 per unit (for which there is quite a rush).

That conditionalities can have some bite is shown by the ADB´s Gujarat loan, under which the state must reduce its deficit to 2.7 percent of the state´s GDP by the next (1998/99) financial year. However, the state will have to reduce its current level of power subsidy of about INR 15 billion by as much as two thirds if it is to get anywhere near this target, and avail of the final tranche of the loan.

The ADB Way
The World Bank is planning to lend for both social and infrastructure sectors in the restructuring packages under the state-focused loans. It is in a position to do so because it can include soft loans under IDA in the package (which are necessary for the social sector). The ADB, on the other hand, does not make soft loans to India and China, concerned that this would leave little for any of the other Asian countries. So there is likely to be less of a queue at the doors of the ADB.

The ADB does make available its list of criteria for selecting states under the new approach, which it hopes will account for about half its lending to India soon. The criteria include commitment to policy reforms, infrastructure needs, a satisfactory record of project implementation in the past, and ability to borrow on non-soft loan terms. While it says it hopes to include a blend of high- and low-income states, it is hard to see some poor states meeting the last of these criteria in particular. On the other hand, who knows, if the fiscal crisis gets bad enough in states like Bihar and Uttar Pradesh, they might just be moved to begin to put their houses in order.

Initially however, it looks like states-focused lending is going to stay mostly to the west of the emerging development divide running down the middle of the country.