India - Cataract Blindness Control Project

4C4 -7--n / / /A/ t)oum@nt of The World Bank FOR OMCAL USE ONLY Repot No. P-6141-IN NEMORANDUM AND RECOMMNDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 85.3 MILLION TO INDIA FOR A CATARACT BLINDNESS CONTROL PROJECT APRIL 21, 1994 MICROGRAPHICS Report No: P- 6141 IN Type: MOP Ths document s a rstricted distribution and may be used by reipiens ODIy iD the POrfmace of Thisr ofcl dutiesn t ontets may not otherwise be disclosed witbout World Bank authorization. !hi _fis d,is it-otm a o  CURRENCY EOUIVALENTS (As of May 1, 1993) Currency Undt = Rupee Rupee 32.60 US$ 1.00 Rupee 1.0 - US$0.0307 METRIC EOUIVALENTS I Meter (m) = 3.28 Feet (ft) I Kilometer = 0.62 Miles FISCAL YEAR April I - March 31 ABEV_IATIONS AND ACRONYMS AsDB - Asian Development Bank CRR - Cash Resve Requirement DANIDA - Danish Intemational Development Agency DBCS - District Blindness Control Societies DEA - Deparmnt of Economic Affairs DGHS - Director Genera7 of Health Services EAP - Environmental Action Plan EIA - Environmental Impact Assessment ECCE - Extracapsular Cataract Extraction ECO - Expanded Cofinancing Operation EFF - Expanded Fund Facility EIA - Environmental Impact Asssmet ESAF - Enhanced Strcural Adjustment Facility ESW - Economic and Sector Work FIAS - Foreign Investment Advisory Service GEF - Global Environmental Facility (01 - Government of ndia ICCE - Intracapsular Cataract Extraction ICDS - Integrated Child Development Services IOL - Intraocular Lens LICB - Limited International Competitive Bidding MOF - Ministry of Finance MOHFW - Ministry of Health and Family Welfare NBCB - National Blindness Control Board NEAP - National Environmental Action Plan NGO - Non-Government Organization NPCB - National Program for Control of Blindness NRF - National Renewal Fund NRI - Non-Resident Indian NTPC - National Thennal Power Corporation PCC - Program Coordination committee PMU - Project Management Unit PPF - Project Preparation Facility PTl - Poverty Targeted Intervention PVO - Private Voluntary Organization RBI - Reserve Bank of India SEC - State Empowered Committee SOC - State Ophthalmic Cell SSN - z.ncial Safety Net WDR - World Development Report  FOR OFFICIAL USE ONLY INDIA CATARACT BLINDNESS CONTROL PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President Beneficiaries: States of Maharashtra, Rajasthan, Uttar Pradesh, Madhya Pradesh, Andhra Pradesh, Orissa and Tamil Nadu Amount: SDR 85.3 million (US$117.8 million equivalent) Terms: Standard, with 35 years maturity. On-Lending Terms: Government of India to the States of Uttar Pradesh, Madhya Pradesh, Andhra Pradesh, Rajasthan, Maharashtra, Tanil Nadu and Orissa in accordance with standard arrangements for development assistance to States and Union Territories. Financing Plan: Local Forei Total ~~ US$ Million Government 17.9 - 17.9 IDA 87.6 30.2 117.8 TOTAL PROJECT COSTS M..5 30.2 135.7 Esfmated Disbursements: IDA FY FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 Annual 7.7 13.2 18.3 18.0 18.7 17.8 18.1 6.0 Cumulative 7.7 20.9 39.2 57.2 75.9 93.7 111.8 117.8 Economic Rate of Retr: Not Applicable Poverty Categorv: Program of Targeted hItervention. One of the project's main objectives is to expand service delivery to poor and undeserved areas and to improve access to cataract surgery for tribal populations and women. The project contains specific strategies for delivering services to these two groups. Staff Apprisal Report: Report No. 12246-IN This docunent has a restricted distnbution and may be used by recipients only in the peformance af their official duties. Its contents may not otherwise be disclosed without Wotld Bank authorition.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR A CATARACT BLINDNESS CONTROL PROJECT 1. The following memorandum and recommendation on a proposed credit to India is submitted for approval. The credit, for SDR 85.3 million (US$117.8 million equivalent), would be on standard IDA terms with 35 years maturity. The Credit would help finance a Cataract Blindness Control Project. The proceeds of the credit would be passed on by the Govermment of India (GOI) to the selected States in accordance with India's standard arrangements for development assistance to States. Part I. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. Recent Economic and Social Performance 2. Backround: Since Independence, India's govermnents have faced the daunting task of forging a large, extremely poor populace, sharply divided along ethnic, linguistic, and religious lines, into a modern, federated nation state. Despite the difficult and often fractious political environment borne of this diversity, India has established democratic systems and processes which have ensured a remarkable degree of political freedom and stability. Until very recently, however, driven by the need to build consensus in a highly diverse society with extreme poverty, economic policies were dominated by goals of interpersonal and interregional equity and national self reliance. The strategy for achieving these goals assigned a major role to the state. The large influence of the state on the economy notwithstanding, the private sector remained important--about 80 percent of GDP originated in the private sector. This strategy produced mixed results. It was successful in transforming a secularly stagnant economy into one growing at persistently positive rates (on average, per capita GDP grew at 1.4 percent per year through the 1970s), eradicating famines, substantially reducing the incidence of poverty, and developing a diversified industrial base and a relatively large and sophisticated financial sector. In addition, with conservative macroeconomic management, inflation remained low and fiscal and balance of payments imbalances seldom persisted. As a result, India has never defaulted on its external debt. 3. During the 1980s, consensus began to build that the development policies of the 1950s, 1960s and 1970s were no longer adequate. India's growth rates were much lower than could have been expected in a country saving and investing over one-fifth of its GDP. At over two percent annually, population growth remained high and health and education indicators, while showing some progress, remained among the world's lowest-particularly for women. Faster growth would be needed, it was concluded, both to acceler-e the rate at which the poor are pulled out of poverty and to increase resources for expanded investment in human resources. In consequence, important policy changes were made througheut the 1980s to initiate the liberalization of trade, industrial and financial policies, while subsidies, tax concessions and exchange rate depreciation improved export incentives. Although these measures helped GDP growth to accelerate to over 5 percent per year during the 1980s and reduced the prevalence of poverty, deepseated structural problems were addressed only very partially, and the country's fiscal and balance of payments situations deteriorated steadily. In the late 1980s, mounting macroeconomic instability was compounded by political uncertainty. There were two general elections and four changes of government between end-1989 and July 1991, which slowed the pace of reform and prevented the Government from addressing serious macroeconomic imbalances. 4. Faced with a severe balance-of-payments crisis in mid-1991, the newly elected minority Government embarked upon a program of stabilization and reform that marked a decisive departure from the development strategy that India pursued during much of its post-independence period. The program of strucural reforms  focussed on the investment regime, trade policies, the financial sector, taxation, and public enterprise. The new strategy aims at reducing fiscal and balance of payments deficits, promoting rapid and sustainable growth in incomes and employment through a broad-based liberalization of the economy, and more effective and efficient public interventions to reduice poverty and to deepen India's human capital. 5. Considerable progress has been made on this agenda.' The balance of payments deficit has been sharply reduced and some progress has been made in fiscal adjustment. The role of market forces in resource allocation has been significantly increazed and the economy opened to greater private investnent, both domestic and foreign, and external trade, capital and technology. Significant steps have also been taken to liberalize and strengthen the financial sector. A comprehensive reform of the tax system started with measures taken in the 1994/95 Budget piesented to Parliament in February 1994. Progress in addressing the problems of public en.erprises has been more modest, however. 6. The challenges that remain, however, are formidable by any standard. According to recent estimates thirty-nine (39) percent of India's population remains below the poverty line.2 WAh a population of roughly 917 million persous, and adding 17 million new people each year, India will be the most populous country in the world by the middle of the next century. Most of this growth will take place in urban areas, fundamentally changinlg the demographic landscape of the country. Achieving sustainable growth in per capita income and improvement in the standard of living in tf.is extremely poor, socially and politically complex society represents a development task of major proportions. 7. Recent Economic Performance: The 1990/91 balarnce of payments crisis which pro-vided the initial impetus for reform is over. The current account deficit has Geclined from US$10 billion in 199G/91 (3.4 percent of GDP) to an average of US$4 billion in 1991-93 (1.7 percent of GDP), and an estimated US$ 0.8 billion in 1993/94 (0.3 percent of GDP).3 Foreign exchange reserves have increased to about US$ 15 billion (equivalent to over 7 months of imports), compared to barely US$1 billion in June 1991. The increase in gross reserves in 1993/94 alone was an estimated US$ 8.6 billion. This is due in large measure to a recent surge in exports (up 21 percent, over 1993/94 levels) and in foreign investment (US$ 4.9 billion in 1993/94, almost 9 tines larger than its level in 1992/93). Of the US$4.9 billion of foreign investment in 1993/94, US$4.3 billion consisted of portfolio investment, and the remaining US$0.6 billion of foreign direct investment. The authorities have taken advantage of the rapidly improving external position to retire a significant proportion of the country's short-term debt and have repaid the IMF, in April, all the obligations falling due in 1994/95. 8. On the domestic front, inflation is currently running at an annual rate of about 10 percent, down from a peak of 16 percent in August-September 1991. Real GDP growth has risen from barely 1 percent in 1991/92 to about 4 percent in 1992/93 and in 1993/94. However, the pick-up in economic activity is largely the result of improved agricultural performance due to good rains. Manufacturing production and investment have been slow to recover from the deflationary effects of the initial stabilization measures and from the reorientation of investment plans triggered by the changes in the incentive system. India's recent progress in adjustment, and the principal challenges ahead are described in the 1993 Economic Memorandum, India: Progress and Challenees in Economic Transition, IBRD Report No. 11761-IN, May 24, 1993. The 1994 Economic Memorandum is in preparation and will be distributed to the Board by end May 1994. 2 This estimate, released recently by a Governinenr -appointed expert group, is substantially higher than the previous official estimate of 30 percent. The difference between these estimates is primarily accounted for by the use of regional (as opposed to national) cost-of- living indices. The methodology and extensive sample survey data system on which Indian poverty estimates are based are described in the Department's first poverty assessment, which was published in the 1989 Country Eco%nomic Metnorandum: India - Poverty. Emoloyment and Social Services (Report No. 7617-IN). A new poverty assessment has been initated. 3 The Indian fiscal year nrns from April through March.  9. After a promising start, fiscal perfornance weakened ixg 1993/94. The Central Government's fiscal deficit was reduced from 8.4 percent of GDP in 1990/91 to 5.7 percent in 1992/93 but increased again to 7.3 percent of GDP in 1993/94 against a target of 4.7 percent of GDP. Tax revenue shortfalls (due to weak growthl of manufacturing and imports) account for 40 percent of the fiscal slippage and expenditure overruns for the remaining 60 percent-mostly on subsidies and grants and loans to the states in anticipation of several state elections. In addition, because of the effect of the exchange rate reunification in March 1993 and consequent higher cost of imported military equipment, defense expenditures exceedd the budget target by 0.3 percent of GDP, reaching 2.7 percent of GDP. However, this increase foliows two years of decline in defense expenditures relative to GDP (from 2.9 percent of GDP in 1990/91 to 2.7 percent of GDP in 1991/92, and 2.5 percent of GDP in 1992/93). The 1994/95 Budget programs defense expenditures at 2.6 percent of GDP in 1994/95. With respect to the overall fiscal stance, the Government is fully aware that the fiscal imbalances are unsustainable and need to be corrected (paras. 21-22). 10. While human resource development remains a major challenge and merits the high priority given it, significant progress has been made. Both mortality and feitility have declined sharply during the past decade. The infant mortality rate fell by a quarter from 105 in 1982 to 79 in 1992, and life expectancy now stands at roughly 60 years fcr both men and women. The total fertility rate fell by 20 percent between 1981 and 1991 to a level of 3.6 children per woman. Literacy now stands at more than 52 percent overall (64 percent for males, 39 percent for females), up from 36 percent in 1981 (47 percent for males, 25 percent for females). Significant disparities across regions remain, however, in all of these dimensions. B. Externa Enviroament 11. Enort Markets. External prospects for maintaining strong current account performance are favorable. Although the weighted GDP growth of India's trading partners is projected to be slightly weaker than the 3.5 percent achieved during the 1980's (3.4 percent for the remainder of the decade), the recent shift in direction of India's trade towards the fast growing countries in East Asia, which now account for 12 percent of India's exports, should support strong export growth. In addition, India's import penetration ratios in the slower- growing major industrial country markets are extremnely small (roughly 0.1 percent). 12. It should be noted, however, that Indian exports tend to be concentrated in products that are subject to extensive non-tariff barriers (NTB). NTBs cover over 90 percent of India's clothing exports to the United States and the European Conmunity. These NTBs range from administrative monitoring of imports (with the implicit threat to take action if import levels become disturbingly high) to specific quantitative restrictions under the Multi-Fibre Arrangement. Exports of fabrics, yarns, and other textile products (e.g., carpets, towels and bed lFrens) are subject to similar controls. Overall, NTB restrictions against Indian exports in its major developea country markets are more or less comparable to those also affecting exports from China and Korea. Tariff barriers are relatively low in India's major markets. 13. Reduction in the overall level of restrictions on merchandise trade resulting from the Uruguay Round is expected to have a mixed impact on India. In general, reduction in restrictions imposed by other countries should benefit Indian exports. However, since India currently benefits from preferential access to some industrial country markets, particularly the EC market, a general reduction of restrictions will also erode the competitive edge which has been provided by such preferences. 14. Interest Rates. International real interest rates (US $ LIBOR rate) are projected by the Bank to be about 300 basis points lower than they were during the 1980s. As of September 1993, 45 percent of India's US$ 93 billion external debt was at variable interest rates. Each 100 basis point change in interest rates thus changes India's interest payments by about US$ 400 million.  -4 - 15. Capital AccoM. The prospects for continued strong performance on the capital account are also favorable. The pipeline of foreign direct investment continues to build up rapidly. Commitments are running at about US$ 2 billion per year, and accelerating. India is at present underrepreserted in the portfolios of institutional investors. With a market capitalization of US$ 87 billion (24 percent of which could, under current regulations, be held by Foreign Institutional Investors) and corporate securities amounting to well over US$ 100 billion (to which no restrictions apply), the scope for further inflows, given continuing favorable p,. ceptions of sovereign risks, is large. Volatility is difficult to predict, but it is clearly greater than that associated with foreign direct investment. In the face of these inflows the authorities are concerned about maintaining real exchange rate competitiveness in order to sustain the strong export performance. 16. External Shocks. India is well-positioned to deal with external shocks. Its gross and net reserve positions are strong. Net reserves have increased from zero in March 1991 to US$ 3.3 billion by March 94. In addition the US$ value of gold stocks amount to another US$ 5 billion. Over the last two years, the authorities have also taken steps to reduce short-term external debt from US$ 8.6 billion at the peak of the foreign exchange crisis in 1990/91 (of which US$ 3.7 billion were foreign currency accounts from Non- Resident Indians (NRIs) up to one year maturity and the rest consisted of trade related credits) to US$ 5.2 billion in September 1993. Reserves are sufficient to cope with exogenous shocks zrich as irought-related agricultural production shortfall, oil shocks comparable to those experienced in the past, and a decline in portfolio investment volumes. C. Develonment Obectives and Policies 17. The achievements of the last three years and the generally favorable prospective external envi-ronment notwithstanding, much remains to be accomplished "to bring about the rapid and sustained improvement in the quality of life of the people of India. 4 To this end, the Government has mapped out a set of intermediate, medium-term objectives and approaches in its Eighth Five Year Plan, in two recent Discussion Papers issued by the Ministry of Finance, and in the recent Union budgets. 18. Progress to Date. Substantial progress has been made across much of the reform agenda discussed by the Board in the CAS review held in December, 1992 (see Tables I and 11). Regarding the investment regime, sectors previously reserved for public investment such as power, mining, ports, roads, river transport, air transport, and banking are now open to private investors. In areas not previously reserved for public investment (such as manufacturing) the government has also dismanded the previous investment licensing regime. Similar measures have been taken regarding foreign investment which has risen from less than US$200 million a year in the early 1990s to US$600 million in 1992/93, and US$4.9 billion in 1993/94. In trade, licensing restrictions on imports of intermediates and capital goods have been lifted, but imports of consumer goods (including agricultural products) remain subject to license. The maximum tariff rate has been reduced from 400 percent to 65 percent and average rates from 87 percent to 33 percent. Near-full convertibility of the rupee for current account transactions has been established. The government has taken a number of measures which have significantly liberalized the financial sector and strengthened its institution. Financial institutions' discretion over portfolio composition has increased through the reduction in the Statutory Liquidity Ratio (SLR, which forced banks to hold in goverrnent securities a fixed portion of their deposits) from JO..5 percent of increases in deposits to 25 percent, and the Cash Reserve Requirement (CRR, which forced banks to deposit with the RBI a fixed proportion of their deposits) from 25 percent to 14 percent. In April 1992, the RBI issued new prudential guidelines for income recognition, asset classification, and 4 Economic Reforms: Two Years After and the Task Ahead. Govermmentof India, Ministry of Finance, Departnent of Economic Affairs, June 1993.  Table I: Stablizaton and Strutural Reform Objectives and Progress Objectives Status Fiscal LarRets: reduce the Central Govemment's deficit, to 4.7 cO fiscal deficit (percem of GDP): percent of GDP in 1993-94 and 6 percent of GDP in 1994-95. 90t91: 8.4 93/94: 7.3 (Estimate) 91/92: 6.0 92193: 5.7 euce of Payments: mainain tbe current account deficit at about Current account deficit (US$ billion): ton m 293 witn a gradual decline to about US$ 4 90/91: 10.2 92/93: 52 billion in 93/94 and about US$ 3 billion in 94/95. 91/92: 2.6 93/94: 0.8 Trade: eliminate al QRs and reduce tariffs to 25 percent on Al licensing restrictions on imports of intermediates and iverage by 97/98; institute full convertibility of the mupee for capital goo have been removed. Licensing restictions curremnt account transaction in tLe next year or two. remain On consumer goods (including agricultural product). Maximumtawff mate (%): 400(90); 110(91); 85(93); 65('94). Average tariff rate(%): 87(90); 64('91): 47('92); 33('93). Current account convertibiliy of the rupee vitually implemented. nvestment Re ime: Limit investment licensing requirements to a Except for railways, postal services, telecommunications, oil, few strategic sectors; introduce legislation to expedite closure and gas and coal, virtually all sectors of the economy are now provide firms flexibility in employment decisions. further reduce open to private investment-domestic and foreign. The restrictions on foreign investment. govemment is actively seeking to attract private investment in oil, gas, and coal-with limited success thus far. Financial Sector: reduce banks' forced holdings of go-emnment CRR on incremental deposits educed from 25 to 14 percent; debt, tiberaize deposit and lending rates; phase out subsidy to SLR on incremental educed from 38.5 to 25 percent. pdinty sectors; strengthen prdential regulations and recapitalize Prudential regulation and supervision stretened. Caphal banks. adequacy norms meeting itemational stdads establihad. Rs. 1 13 biUion ipproprted for recapitalization of banks. Tax Svm: substal widening of die base of indirect taxes and a Number of excise tax rats substantially reduced, tax slimplflcation of the rate structures; phased introduction of a VAT; administration simplified and most taxes levied on ad valorem reduction of corporate tax rates and dimination of incentives. basis; corporate tax rate reduced to a standard rate of 46%. Public ente rises: (i) eiminate PEs' privileges such as entry This sategy has been largely implemented but has not been rotection from external competition, and prefetial successfil. While PEs have been given the mandate to access to bdget and financial sector resources; (ii) resuuctu become profit-oriented commerial concems, they have not ptentally viable PEs, liquidate the others, and establish a safety been given the authority to inroduce the required net program to mitigate social costs; (il) provide PEs more estructuring measure such as large scale retrenchment, autonomy and dhe mandate to become profit-oriented concerns. corporate reorganization, closure or selling of units, joint ventures with private investor-which have had to be apprved at the highet polic level in a tim-consming and ofen inconclusive process. provisioning requirements to be reached by all Indian banks by March 1996. The new, more exacting prudentdal standards have forced the banks to start increasing their provisions in 1992-93 and, for the first time in recent history, show losses. Controls on interest rates have been relaxed and controls over firms' access to capital markets removed. While a minimum lending rate remains, interest rates in areas such as certificates of deposits, debentures, commercial papers, and most government securities are now market determined. Since September 1992, foreign institutional investors have been allowed to invest in all non-government securities traded in India's primary and secondary markets, including debentures and shares of private and public enterprises-up to 24 percent of issued share capital in any one company. The tax rate on capital gains is 30 percent on gains realized before one year, and 10 percent thereafter. The authorities have also developed a comprehensive program to strengthen the public banks and increase competition. Tax htes have been reduced and structures simplified and made more economically efficient. The corporate tax rate has been reduced to 46 percent and unified. The number of excise tax rates has been significantly reduced, th, number of exempdons cut, and tax rates are now ad valom to make the Modified Value Added Tax more clearly resemble a value added tax.  - 6- Table II: Sectoral Refonn Objectives and Progress Objectives Status Social Sector: accelerate the development of India's human A national program has been established for promoting the resources, reduce gender, income, and regional inequalities, development of basic education. Disease control prgrams strengthen anti-poverty programs, particularly those providing a have been reviewed and enhanced programs have been set safey net for the poor affected by the adjustment program. up in blindness control and leprosy : an enhanced TB Universal primary education is an important goal of the Eighth program is being established. The central budgets for key Plan. areas of social investments and ongoing national employment schemes have been increased, with increases itt central supponto the states as well. The NRF has been initiated and an employment assurance scheme targeted on the most backward districts is also being established. Axriculture: Achieve more rapid and equitable growth through (i) Trade: No significant change in restrictions on intemal (i) improving incentives by liberalizing intenal and external trade. Expott restrions reduced but stiUl significant. trade; (ii) restructuring of public expenditures with a view to (iu) Subsidtes: Price decontrol of P & K ferilizer, raise gpowth-enhancing expenditures on rural infrastructure, increased expenditures on N; some improvement in effective public support services (e.g., research, extension) by targeting of food subsidy expenditures accompanied by an phasing-out subsidies: (iii) itproving the efficiency of public overal ncrease in outlays: expenditure and administration thraugh institutional (iii) Efficiency of public expenditure: process initiated strengthening, decentralization, greater beneficiary participation (72nd Constitutional Amendment) to decentralize (e.g., irrgation, i infrastructure, forestty): and (iv) expenditure responsibility. improving the maiagernent of natu.al resources. (iv) Natural resource management: state level watr sector reforms introduced in 3 stetes and state level forestry sector reforms introduced in 4 states; Eneag: (i) Increase private sector participation in production, (i) Private sector has been invited to paticipate in oil and refinig and marketing in oil and gas sector. Set prices reflecting gas exploration and development. GI0 is moving towards market conditions; (iu) increase the role of the pnvate sector in m sket based pricing for oil and oil products, except for power generation and distribudon; bring tariffs to reflect coits gas. and increase collection rates; commercialize central and state (ii) About 80 private power genetation projects are under utlities and strengthen their management; and reduce consideration, out of which ? are in advanced stages of inefficiencies in power generation and distribution; (iii) open the negodation. ;;OI is monitoreig bill collection and coal sector to domestic and f1reign competition and private promoting commercializadon of central utilities. Tariff and investment; introduce market pricing of coal and liberalize coal other structural reforms at the state level are under study distribution; commercialize the industry through (phased) closure in 7 states. of loss-making mines. (iii) 001 has reduced the import tariff from 85% to 35% for power grade coal and to 5% for coking coal. Private sector has been allowed to invest in captive coal mines. A program to deregulate coal prices is under consideration with GOI. CUL is gradually closing loss making mines, 12 mines have been closed in the past 12 months. Infstructure: Eliminae bottlenecks and improve efficiency in (i) greater use of consultants for project preparaton and i usystms through (i) improvements in planning and supervision and improved contract managemet 74th implementation capacity of agencies m the sector, (ii) better cost Amendment passed to alow reorganizaton of urban recovery; and (iii) deregulate and increase private sector ifasture erviCeS, establishnent of National Highway participation. Authority under consideration; (ii) some progress on increased fuel taxes, increased rail passenger fares and water; and (iii) progress made in deregulation and private sector participation in civil aviation, bus transport, shipping and on a limited basis in ports. Model rent control passed by center, revision of urban land ceiling act under consideration. 19. Progress has also been made in redirecting central Government expenditures toward high priority public sector programs and improving the efficiency of expenditure. In the program supported by the December 1992 IDA Social Safety Net (SSN) Adjustment operation, cuts made in budgetary funding for important social programs in 1991 were restored in 1992/93, and the 1993/94 budget included substantial increases in funding for primary education, endemic disease control, and maternal and child health programs. Spending on the environment, which was largely unaffected by the 1991 cuts, has increased by 11 percent annually in nominal terms. A number of policy measures to deal with the low efficiency and effectiveness of many of India's existing social programs have also been introduced. Finally, also supported by the IDA SSN operation, GOI has initiated the establishment of a new social safety net (the National Renewal Fund  - 7 - (NRF)) to provide compensation and transitional support to workers who are displaced during the restructuring process. These and other measures being taken by GOI should, if fully implemented, enhance substantially the prospects for managing the transitional costs of adjustment and accelerating the development of India's human resources over the medium term. 20. The Unfinished Agenda. The medium-term _ development agenda outlined above needs to be "As we aProach the end of 1993-94, it is clear that fte Ceatrs tIsca deficit isignifcantly larger tha pursued with renewed vigor in three crucial respects: budget and inflationir Ipoteni is bulding. Thus far the (i) the stabilization and structural adjustment program fscl luuseioi apdcityein baindusofpaymtosl has not, as yet, been completed; (ii) key reforms in teco "cry) an the contracdonaty mfluences of long overdue financial sector reforn. But these offsetdng forces can be sectoral policies have yet to be implemented; and (iii) expected to weaken over time and it is vital to reassert control state governments - key players on the Indian over the fial situation to c,rb inflation, reduce interest rates. state govemments key layers on the Indian releas resources for productive investment adsustaint development scene -- have yet to take up the reform confidence in the economy.' challenge. Economic Surve 1993-94 21. India's continuing high fiscal deficit poses the most serious single current threat to attainment of its medium term development objectives. As recognized by the GOI, it threatens the fi-a-e stability of the economy, reduces fiscal flexibility, and undermines the Lredibility of the overall structural rform program. The deficit is still too large in relation to GDP to be consistent with low and stable inflation, robust investment, and a healthy balance of payments. 22. The Government's recent decision to moderate the pace of fiscal adjustment in the 1994/95 budget in an effort to reactivate the economy and consolidate public support for the reform program represents a calcuilated risk. The authorities recognize that substantially deeper fiscal adjustment, wbich must simultaneously reduce the overall size of the public sector deficit in relation to GDP and reduce the drag exerted by inefficient public sector resource mobilization and expenditure, is essential. Action will be needed on several fronts. Completion of the tax reform along the lines outlined by the Chelliah Committee needs to be complemented by much-improved cost recovery. Greater emphasis needs to be placed on expenditure efficiency, particularly with regard to outlays for subsidies, poverty alleviation and the social sectors. Deepseated fiscal disequilibria in the states, which account for about half of the consolidated central and state governments expenditure, will require major state-level reforms coupled with a thorough overhaul of their systems of taxation and expenditures. Politically difficult adjustments ir. India's current system of intergovernmental transfers may also be requiret 23. Progress in restructuring and commercializing public sector enterprises (PSEs) has been far slower than anticipated. Many PSEs are still piling up substantial losses; most are not generating adequate cash flow to meet their investment needs or are yielding returns on equity below opportunity cos.. Even for the better performing enterprises, the situation is worsening as competition in the economy continues to intensify as a result of the liberalization program. Action is urgently needed to speed up the process of liquidating failing firms, restructure salvageable ones, and accelerate disinvestment in viable firms. Failure to act decisively along these lines could result in significant pressures on the budget and complicate the task of reducing the fiscal deficit. 24. In parallel with further fiscal adjustment, the substantial progress made in reforming the financial sector needs to be sustained over the course of the next 2-3 years, with an emphasis on improving the health and competitiveness of the banking system on a sustainable basis. This will require further actions to strengthen banking supervision, rebuild the capital base of public sector banks, reduce the pre-emptive claims by GOI and other government entities on banks' resources and increase flexibility in interest rate and credit policies. Additional measures to promote private sector participation in the financial system are also needed.  Without such reforms, the weaknesses of the ftnancial system would tend to frustrate efforts to improve the efficiency of the economy, place unacceptable claims on budgetary resources, and weaken macroeconotric stability, particularly in light of the heavy external capital inflows. 25. Progress on the sectoral policy agenda has, with few exceptions, generally lagged behind that on stabilization and structural adjustment. This is because action in many areas is not solely or primarily in the domain of the Union Government. It requires building consensus among ministries at the central level, and across levels of govermnent -- centel, state, and local. Accelerated reform at the sectoral and state !evels is essential if India is to move to a new, sustainable, poverty-reducing high growth path. In virtually all sectors, three general areas need careful attention. First, sectoral policies are still distorting relative prices and, in many cases are resulting in substantW losses in the provision of public services. Distortions in energy prices, for example, are affecting fuel choices, and the implicit taxation of oil and gas production is. discouraging exploration and development. Below cost prices for power, irrigation services, and municipal water supply and sanitation encourage wasteful usage of these resources, contribute to major fiscal imblxances, and sap enterprises' ability to oper - and maintain their assets and invest in service expansion and improvement. Second, the institutional frameworks in which the sectors uperate need to be reformed. Foremost, where the public sector provides economic services (e.g., power, telecommunications, rail), there needs to be a clear organizational and operational separation of commercial functions that could also be performed by the private sector from regulatory and promotional functions that can be performed best by government. The scope of regulation needs to be narrowed and focused on interventions strictly necessary to protect the public welfare. In general, this entails eliminating controls currently imposed by sectoral policies over technology adoption, location, movement of goods and services, private sector entry and exit. It also requires the creation of new legal frameworks and institutions for regulating natural monopolies and serious externalities. Finally, the eauitv and efficiency and/or cost effectiveness with which public services (e.g., social services, public infrastructure servces, agricultural research and extension and public irrigation) are provided need to be increased. 26. The Indian authorities are cognizant of the problems they face and, in most instances, of the available solutions. In generl, however, the required policy changes are likely to prove technically and politically more difficult than those introduced during the last two-to-three years. In particular, it has to be kept in mind that the challenges associated with the design and implementation of complex reforms in a federal democracy such as India's are detennining the scope, pace and sustainability of the economic reform program. 27. Macroeconomic Prospects and Risks. In view of the continuing need for stabilization and the uneven progress in addressing key stmctural/sectoral issues, growth dring the Eighth Plan period (1992-97) is likely to fall short of the over 5 percent per year achieved during the Seventh Plan (1985-90). The reforms, if continued as expected, should begin to bear fruit in the late 1990s, and GDP growth can be expected to attaiD the 6 percent mark during that period. This growth performance is predicated on an expected gradual recovery of rrivate and public investment, a substantial improvement in the efficiency of such investments, and coninued relatively rapid export growth. Inflation is likely to remain in the high single digits in the near term due to anticipated adjustments of key administered prices (e.g., power tariffs, foodgrain prices) and some continuing pressures on the money supply emanating from reserve accumulation and still-high fiscal deficits. 28. The surge of capital inflows during the last several months, which shows no signs of abating, and the Government's recent decision to slow the pace of fiscal adjustment to stimulate the economy complicates the outlook for near-to-mid-term macroeconomic balances. Much will depend upon the near-tern policy adjustments the Government makes. Achievement of the 6 percent fiscal deficit target for 1994/95 is essential not only for re-instituting the medium-term fiscal adjustment program, but also for ensuring credibility of the reform program as a whole. With respect to the capital inflows, widening the current account deficit or accumulating foreign exchange reserves are the two avenues through which an economy absorbs the inflows.  -9- Table m: Key Macroeconomic bdicators 1992193 1993194 1994/95 199S/96 19967 Prasm (mate Projections GDP at factor cost 4.0 3.8 4.5 5.0 5.5 Infladon 9.6 8.5 7.5 7.0 6.0 Domesic Investment/GDP 25.0 24.1 24.0 24.3 24.6 Public 8.9 8.7 8.4 8.2 8.2 Private 16.1 15.4 15.6 16.1 16.4 National Savings/GDP 22.9 23.8 23.1 23.3 23.6 Public 0.4 -1.1 -0.5 0.9 1.9 Private 22.5 24.8 23.5 22.4 21.7 CuffentAccouttalance/GDP 2.1 0.3 1.0 1.0 1.0 Genea Government' Deficit/GDP 7.3 9.0 8.0 7.0 6.0 Generl Govt Primay DeficWGDP 2.0 3.2 1.0 0.5 0.0 Foreign Exchange Res (million US$) 6,749 15,000 15,550 15,750 16,250 In monthsof imports 3.5 7.6 6.8 6.1 5.3 _ener and state govemments consolated. Whether the current account is widened ftrough a reduction in domestic savings or through an increase in investment, however, is of critical importance for the growth of the economy and its future capacity to service the inflows. Accumulation of foreign exchange reserves also involves difficult choices. Unless inflows are sterilized, there is a loss of control over the monetary base and heightened risk of inflation. Sterilized intervention, however, implies rising real domestic interest rates and can be a source of large losses to the central bank. The scenario presented here assumes that, through an appropriate mix of fiscal and monetary policies and a gradual revival of investment and domestic economic activity, the pace of reserve accumulation will moderate perceptibly and the real exchange rate will stabilize and begin to depreciate again gradually. 29. The remarkable improvement in India's external accounts in 1993-94 has eliminated the need for new fast-disbursing assistance for the foreseeable future. However, in view of the potential - 'atility of capital inflows and the delicate policy problem the Government faces in engineering the appropriate combinaton of growth, macroeconomic stability and liberalization of the trade and capital regimes, the Bank should monitor the situation closely and stand ready to resume fast-disbursing assistance if justified. In addition, continued access to long term development assistance will remain critical to India to support reform-related investment programs in agriculture, energy, infrastructure and social sector development. While the private sector has indicated interest in investing in some of these sectors, the public sector will continue to play an important role and official development assistance will remain vital to sustaining investment in these key areas of the economy. D. The Bank Groun's Countrv Assistce Stratev Overal objectives and strateev 30. In continuation of the Country Assistance Strategy outlined to the Board in December 1992 (Report No. 5924-IN), the Bank's assistance to India over the next three years will focus on supporting GOI's efforts  - 10- to provide an enabling environment for broad-based, efficient, private sector-led growth while accelerating poverty alleviation and the development of human resources. To that end, our top priority is to support extending the coverage and deepening of structural/sectoral reforms. Since a large proportion of India's population continues to be subject to malnutrition and ill-health and does not have the educational skills and access to means of production that will enable it to participate fully in and benefit from the growth process, our strategy aims also to enhance the access to and quality of basic social services for the poor and to support well-targeted safety net programs that protect the most vulnerable groups in the society. 31. The overall environment for Bank operations which pursue these objectives remains favorable with significant new openings for structural improvements in the financial, power and coal sectors. However, a large agenda for stabilization and reform remains. Moreover, several priority areas of structural reform will depend on action by State government administrations, and there is evidence that these are still experiencing some difficulty in following up on the reform measures initiated by the Center during the past two years. The bulk of public expenditures in key sectors of the economy (e.g., agriculture) and on social programs is made by the State govermnents. In many States, the policy and institutional frameworks and quality of governance are not consistent with orderly fiscal adjustment, growth and effective and sustainable poverty reduction efforts. Yet these are often States with large numbers of poor. 32. The Bank's assistance strategy comprises: (i) support for GOI's economic and soci-" policies through policy dialogue, economic and sector work (ESW), technical assistance and the continued .ctive management of our portfolio at the Union level and in strategically important States; (ii) direct support for specific reforms through policy-based investment operations at the sectoral, State and economy-wide levels; and (iii) investment lending in the social sectors in direct support of India's safety net and human resource development programs. The priority areas of the Government's development agenda that will be supported by Bank ESW and lending operations during the next three years are highlighted in Attachment 1. To gain wider recognition and support for the Bank's activities in India, particularly in poverty alleviation and human resource development, a special public affairs initiative - to be undertaken jointly with the Government - is planned in the coming year. 33. In view of India's strengthened balance of payments, the Bank and the GOI have agreed that the upcoming meeting of the Aid India Consortium should be restructured so that, in addition to focusing on ODA flows, a more systematic dialogue is also opened with private sources of portfolio and direct foreign investment. To that end, the 1994 meeting will be organized under the name of the "India Development Forum" and will have two distinct parts: Part I will bring together the representatives of the bilateral and multilateral aid agencies for discussion of the Government's plans, programs and assistance priorities; Part II will focus on the information needs of India's market partners. The future fonnat and focus of Form meetings will be further reviewed with the Government in view of the experience gained from the 1994 meeting. Instrments and strategic approaches Economic and sector work 34. The success of the Bank's policy dialogue and lending strategy depends to a large extent on the production and effective dissemination of timely, high-quality ESW. Important examples of work in progress are: a Public Expenditure Review, a trade policy review, and a Private Sector Assessment which is being prepared in collaboration with the IFC. A Poverty Assessment has been initiated and will provide guidance for investment lending in the social sectors and for the deployment of our assistanc_ to the agricultural and urban sectors. Over the next several years, our ESW program will continue to give highest priority to stabilization and economic reform.  - 11 - 35. Future ESW will also focus increasingly on State and sector level issues, on strengthening our ability to adopt a more programmatic approach to these issues, and on cross-cutting development priorities. For instance, the proposed economnic study of Uttar Pradesh (FY95) -- India's most populous state (140 million persons) and one of its poorest (with a per capita income about 30 percent below the national average) -- will provide a comprehensive assessment of reform issues in this key State. Continued support for the further development of the Government's Environmental Action Plan and studies of enviromnental issues in the energy sector represent other planned initiatives in this regard. Finally, as a central element of our ESW strategy, the Department provides informal technical advice as a key element of the policy dialogue. 36. ESW dissemination is being pursued via one or more of a number of channels, depending upon the size and characteristics of the potential target audience and the sensitivity of the material. Meetings, workshops and/or conferences are organized to present and discuss Bank-produced sectoral reports and Bank-wide ESW of broad potential interest. Multiple events targeting different groups including NGOs and PVOs are frequently organized, as was done with the Irrigation Sector Report which was discussed with several state irrigation departments and user groups in several major irrigation commands. Lending strategy 37. Recent improvements in India's balance of payments make it difficult to justify further adjustment lending. However, our economic and sector work will be conducted in a manner so as to maintain a state of readiness for adjustment lending, should balance of payments developments turn unfavorable and provided appropriate programs are put forward for Bank support. In addition, the Governmert has indicated its continued interest in Bank --ipport for its ongoing financial sector reform in the form of financial intermediation lending, including technical assistance. 38. IBRD's FY94 commitments and the lending TableaIV: Th_eYe Lenin Prg - t plan for the next three years are substantially below a S, milleons) those envisaged in the last CAS for two main reasons. First, the recent major increase in India's foreign exchange reserves has eliminated the Sector FY89-91 PY9Q4 PY9SI' balance of payments justification for fast-disbursing ToalW 7,026 5,984 6,690 lending. Secondly, given the fiscal constraints and limited implementation capacity, the authorities Agrlcre 1668 1,57S 1,350 have decided that they wish ;o limit project oil, Gas & Coal 790 12 300 borrowings approximately to the level of annual Transport & Telecom 250 400 52 disbursements so that after the massive Urban & Water 200 92 910 restructuring of the portfolio already accomplished, Indusy & Finance 1406 141 590 restuctrin oftheporfolo areay acomlised, PUN 703 904 970 the committed but undisbursed balances will not Education 567 165 540 begin to grow again. Commensurate with the DissterRelief 210 250 0 reduced planned lending levels, the administrative Adjust0et N 950 0 Socia Safety Net 500 5S0 budget resources for the India Department are Memo tems being curtailed by about 4 percent in the coming IDRD 4,356 2,525 3,220 year. IDA 2,670 3,459 3,470 No. of Operadons 32 34 33 39. Overall, we envisage a three-year IBRD I Lending plan dependenton de availabliy of quality lending program composed of about US$ 2.5 -3.5 program and Projec, billion in policy-based investment/sector operations, mainly in support of infrastructure and energy development. The size and composition of  - 12 - the Bank's lending to India will continue to be closely linked to progress in priority areas of the reform agenda, and as such will be substantially self-regulating. 40. Maintaining or expanding India's access to MA for the forsecable future is critical to the development and reform of key social sector programs. Private capital flows, even if sustained at recent record levels, will not provide the necessary resources for public goods and services such as primary education, family planning, nutrition, endemic disease control and rural works programs targeted on poverty areas. For IDA, a feasible three-year lending plan would involve approximately 20 IDA investment lending operations in pursuit of poverty alleviation, human resources development and environmentally sustainable development for a total of about US$3.5 billion. Poverty Targeted Interventions (PTIs) are expected to constitute 50 percent of the FY95-97 lending program, up from 45 percent over the period FY92-94. 41. The principal macro-economic concerns which, together with the availability o; quality projects and programs, will govem the volume of Bank lending to India are: (i) success in reducing the central govermment fiscal deficit from the estimated outcome of 7.3 percent of GDP in 1993/94 to the budgeted level of 6 percent of GDP in 1994/95, thereby setting the stage for further significant reductions through improvements in tax collections, lowering of budgetary subsidies and restraint in other recurrent expenditures; (ii) control of inflation within single digits and maintenance of a competitive real exchange rate; (iii) maintenance of foreign exchange reserves equivalent to about three months of imports; (iv) progress towards the elimination of quantitative restrictions on external trade and an average tariff rate of 25 percent by 1996/97; and (v) sufficient progress in reducing the government preemption of banking system resources to achieve a statutory liquidity ratio of 25 percent by 1996/97 and the adoption of further measures to increase efficiency and private sector participation in the fiancial sector. These objectives have been discussed with the authorities and are consistent with their own program. Significant shortfalls against these macroeconomic objectives would lead to a progressive reduction in sector and investment lending beginning with those IBRD operations where the prospects for the reforms essential for project viability (Attachment 1) appear least promising-only one or two operations for a total of US$300-400 million. We expect greater year-to-year volatility of IBRD lending than in the past, due both to the heavier sector policy content of the lending program and to our increasing reliance- -as a part of our sti-ategy for strengthening quality and readiness at entry-on borrower preparation efforts (see paras. 70-71). Policy slippage and sustained deterioration in the macro-economic framework would also lead us to re-examine the size and content of the IDA lending program. IDA operations aimed directly at poverty alleviation and human resource development would be the last to be curtailed provided significant improvements and implementation performance are attained. 42. Agriculture will continue to be a major recipient of IDA resources. The sector accounts for about one-third of India's GDP (and close to twG thirds of tradeable GDP), employs the bulk of the labor force and harbors about 80 percent of the country's poor. Overall trend growth in the sector has remained steady at about 2.6 percent since the 1960s and, over the years, India has become self-sufficient in foodgrains and conquered the problem of famines. These achievements notwithstanding, experience in other countries suggests that the growth of the past is modest compared to India's potential. Bringing about an acceleration of agric':ltural growth, together with a more equitable pattern of growth, is one of the principal challenges facing Indian authorities in their efforts to expand exports, output and employment, and to alleviate poverty. 43. There are three key constraints to faster and more equitable agricultural growth: (i) Interventions in pricing and the trade regime depress the sector's profitability and distort price signals, limiting its ability to diversify and further intersiiy its food production. (ii) Since the early 80s, public expenditures in agriculture have been increasing' directed towards recurrent outlays and subsidies (on irrigation, fertilizer, food, credit, inputs and commercial services) at the expense of growth-enhancing expenditures on rural and irrigation infrastructure, effective agricultural technology development and other crucial public support services that  - 13- would further stimulate agricultural productivity. (iii) Inadequate decentralization of decision-making and beneficiary participation in public expenditures undermines their sustainability, efficiency and effectiveness. 44. Given these constraints, the lending strategy adopted in agricultur- will focus on improving (i) the price incentive structure, (ii) the efficiency of public expenditures and administration (including the operation and management of the rural credit system), which together, will raise the profitability of agriculture, and (iii) decentralized decision-making and participation to improve the efficiency and sustainability with which natural resources (water, soil, forestry) are being used by the sector. Because agriculture is a state subject, the lending strategy will support State-level programs, except in selected areas where, for externality and economies of scale considerations, interventions at the central level are more appropriate (e.g., the National Hydrology Project (FY95), Agricultural Human Resources Project (FY96), National Water Management Project and National Agricultural Technology Project (FY97)). 45. To enhance natural resource management, lending operations will comprise state-level forestry projects (Madhya Pradesh (FY95) and Bihar (FY96)) and water consolidation projects (in follow-up to Haryana, recently presented to the Board, Tamil Nadu (FY95) and Orissa (FY97)). These operations will promote appropriate policy changes, institution building, and active beneficiary involvement in the sustainable development, of land, water and human resources. Through increased cost recovery, the water resources operations will also contribute significantly to redressing fiscal imbalances in the states. 46. To improve the price incentive structure and the states' capacity to invest in and deliver crucial public support services, lending operations will comprise state-level agricultural development and diversification operations (Assam (FY95), Uttar Pradesh (FY97) and possibly Karnataka). To implement this strategy, up- front reforms in the purview of the respective states on price and trade policies, the legal and regulatory environment, increased cost recovery and phasing-out of subsidies for less effective agricultural services and inputjs would be expected. These measures would be complemented by investments in rural infrastructure, essential agricultural support services and institutional strengthening that encourage greater efficiency in public administration and its responsiveness to users through a combination of decentalization and beneficiary participation. These state-level operations should also help forge a consensus on the need for reforms in the purview of the Center, particularly those concerning internal and further external trade liberalization and subsidies financed wholly or partly by the Center. In most cases these complementary reforms will be essential for the state level projects to go forward. With respect to rural credit, no operations are currently envisaged pending the formulation of a satisfactory plan for the overhaul of the rural credit system in the context of the ongoing financial sector reform program. 47. Despite progress since Independence, as evidenced by various social indicators (para. 10 and Annex 4) the status of India's human resources remains severely inadequate. A very large proportion of India's children are malnourished, there are high rates of endemic disease, and fertility remains high in much of North India. At present rates of development, these trends will continue, substantial levels of chronic disease will emerge, and there will continue to be an increase for some time in the absolute numbers of illiterates in India. For these reasons, human resources development has been a central focus of IDA assistance in India since 1988. This will continue. 48. The Government has mounted major new programs to address these problems (e.g., national programs for strengthening basic education and endemic diseases) and initiated reforms to strengthen existing programs. Importantly, new and modified programs are being structured/restructured to deal with many of the generic structural problems (e.g., insufficient, misdirected, and poorly targeted expenditures; limited access to services; programs that are of limited quality; serious wastage and inefficiencies; limited cost recovery; and insufficient efforts at tapping the private and private voluntary organization sectors for program planning, implementation and monitoring) that have increased the cost and reduced the effectiveness of previous program  - 14 - structures. This will take time. Overall, underfunding will continue to be a serious problem under present and forseeable fiscal circumstances. 49. In this context, IDA assistance will focus on raising nutritional standards; reducing fertility; reducing morbidity and mortality from key endemic diseases; and raising educational attainments. In all of these areas, special emphasis will be put on improving access, improving efficiency, and raising outcomes. In addition, IDA assistance would help to strengthen links between the public sector and private and PVO organizations. Finally, IDA assistance in these areas will focus almost exclusively on the poor, with special attention to girls, scheduled tribes, and scheduled castes. Based on lessons of experience IDA lending is moving from investment lending to time slice and sectoral approaches. The investment lending will be oriented toward assisting the states in developing more efficient and replicable approaches to dealing with the most important human resource development issues. 50. Specifically, IDA assistance in nutrition would be oriented toward continuing assistance to the Integrated Child Development services for poor women and children and toward the development of a program to strengthen micro-nutrient supplementation, in FY 97 and 98. This will be done in close collaboration with UNICEF. Now that the Indian family welfare program has established a broad based infrastructure, IDA assistance would focus on trying to address some of the fundamental constraints to more rapid fertility reduction, especially in North India, by taking a sectoral approach and focusing on strategic aspects of program management, such as the target setting system, enhanced geographical targeting, improved funding of operating and maintenance costs, and quality assistance (FY96 and 97). IDA assistance in health will continue to address endemic disease issues, with projects to combat Tuberculosis (FY95) and Malaria (FY96). In addition, IDA would assist states in strengthening their overall approach to the supply of health services, following the lead of the project being developed in Andhra Pradesh (FY95) and in another state to be determined (FY97). IDA assistance in education will focus with highest priority on trying to help India achieve universal primary education of acceptable quality, especially for girls, scheduled tribes, and scheduled castes (FY95 and 96). 51. In the energy sector operations will be critically dependent on the Government's ability to press ahead with pricing policy reforms and commercilization of the public sector energy enterprises. The Goverunent's fiscal, balance of payments and growth. targets are all threatened by the growing gap between domestic energy supply and demand, and by the problems in financial and systems management which the continued serious mismanagement of the majority of the state-level power sector creates for the National Thermal Power Corporation, the Powergrid Corporation and Coal India. GOI's new energy strategy is beginning to address these issues by placing much greater emphasis on efficiency issues in the production, use and pricing of energy. In the hydrocarbon subsector, the declining trend in oil production is being reversed through improvements in production of the Bombay High and other oil fields, partially financed under the Gas Flaring Reduction Project (Ln. 3314) and gradual induction of private sector resources into oil and gas exploration and development (including existing fields). However, the incentive systems in all segments of the oil and gas industry still need to be improved through trade liberalization and appropriate reforms of domestic pricing policies, including bringing prices of petroleum products in line with prevailing world prices and progressive phasing out of subsidies. In the power subsector, efficiency, accountability and competition are being encouraged through greater private sector participation. However, clear demarcation of regulatory and operational functions, autonomy within existing public iector entities and the introduction of commercial principles into their operations are still needed. A sustainable solution to the power subsector's efficiency and resource mobilization problems also has to include major tariff reforms, systematic efforts to improve collection, and fundamental restructuring of the State power sectors. All of these steps will be needed to attract private investment to this sector. In the coal subsector, the main challenge is to restructure and enhance the commercial orientation of Coal India Limited, together with measures to liberalize domestic coal pricing and coal imports.  - 15- 52. The Govenmment has initiated action in the commercialization of operations in the coal and power sector. In the case of the power sector the Government has availed of the Project Preparation Facility (PPF) to initiate restructuring of the power sectors in a number of States.(Ref. Board paper SecM94-292, circulated 21 March 1994). Hence we envisage IBRD lending in the next three years to coal (FY95) and the state power sectors of Haryana (FY96); Orissa (FY96) and Uttar Pradesh (FY97) and possibly also of Rajasthan and Bihar, with particular emphasis on improving power systems efficiency, commercializing the sector and ensu-ring environmental sustainability of the investment programs. Timing of the operations will critically depend on the pace of the state sector reform process. An operation for POWERGRID (FY97) is also planned to further improve the transmission planning capabilities and to strengthen and expand the national grid. Due to India's chronic past under-investment in these areas, transmission lines are urgently needed to help improve power system operations and utilization of existing generating capacity. 53. Over the medium term, the growing issues of envirownentally sustainable energy sector development will have to be addressed throiugh improved environmental clearance and monitoring processes, reforms to promote efficient energy demand management, pioneering investments in clean coal technology as well as major sector studies. Future investments in the sector will continue to promote renewable energy sources and environmental improvements in power stations and coal mining operations. A program to this effect is under preparation for GEF and other external funding. 54. Bank support to the infaucture sector is dependent to a large extent on the Government's commitment to reform of the sector. The severe bottlenecks that characterize India's infrastructure subsectors are inhibiting economic growth, international trade and investment. Consequently, GOI's new development strategy attaches heightened importance to the development of efficient infrastructure services. Inadequate and poor quality service, financial pressures, technological change and the need to integrate the Indian economy into the world trade system indicate that the areas most urgently in need of reform initiatives are telecommunications and transport. Since much of the analytical groundwork has been completed in these subsectors, it should be possible to make rapid progress with reform in the near future. There is also a pressing need for reforms at the level of states and municipalities in the urban, water supply and sanitation subsectors due to their critical relationship to progress in areas such as economic productivity, poverty alleviation and environmental protection. Here, the analytical framework is advancing, but further work is needed. In all of these investments it will be a major challenge to design and implement programs which deal effectively with the economic rehabilitation of the people (land owners and squatters) who will be affected by the Government's exercise of the right of way. 55. Unlike most of India's other infrastructure subsectors, the finances of India's telecommunications subsector are reasonably sound. However, service levels are poor and internal resources for the expansion and modernization of services are very inadequate. Opening the telecommunication market to private and foreign investment and operation under government utility regulation is increasingly seen as the route to rapidly expanding coverage and enhanced quality. This is by far the "easiest" of the infrastructure subsectors to reform, and would have a high pay-off in terms of increasing exports, foreign investment and domestic commerce. Given the strong interest of private investors, no Bank lending is envisaged. 56. The key policy issue for India's transport sector is how to introduce commercial management and operational practices where it will promote innovation, efficiency and self-financing of capital requirements. Reform of the road and rail systems revolves around the severely congested high density corridors (HDC), which are a constraint on economic growth. Commercial behavior and incentives in the railroad need to be promoted through a phased reduction in budgetary assistance and institutional reforms to insulate Indian Ralways' from political pressures to offer more subsidized passenger services at the expense of freight services. For roads, new fuel taxes temporarily earmarked for HDC construction and an expressway initiative under a National Highway Authority-relying on modern procurement -- -ntract management processes that  - 16- by-pass the constraints under which the State Public Works Departments are operating--could make an urgently needed contribution towards improving the current situation. The major ports of India have already made substantial investments in container facilities but these are not being used efficiently because of a combination of inadequate port management, strong labor unions, lack of compatible road and rail investments and an inadequate inter-modal system. Reforms to provide more autonomy and accountability to the port authorities and introduce private sector participation are required. The Container Transport Development Project (FY94) will address several of these bottlenecks. 57. The rapid urbanization of the Indian population is both a cause and consequence of economic development. However, in the present institutional and policy regime, it would mean that more people will live in slums while access to basic infrastructure and services and the quality of the urban envirornent are deteriorating. Demographic trends are such that over one-third of India's population will live in urban areas by the turn of the century. Progress will not be made unless effective action is taken at the State level to decentralize responsibilities and allocate corresponding revenue sharing, resource generation and user charging authority to the municipal agencies. Major reforms are needed in the area of land management as well. In partcular, the Land Ceiling and Rent Control Acts (now under revision) have severely depressed the supply of land available for new development and the revenue base of municipal authorities. 58. IBRD lending to the infrastructure sector will be contingent on the reforms referred to above. Hence in the medium term the operations envisaged are in areas where preparation has already been initiated and some progress has been made in capacity expansion and efficiency improvements. These include Bombay Sewage Disposal, Uttar Pradesh Rural Water Supply, Madras Water Supply (FY95), Haryana State Roads (FY96), and Bombay Urban Transport (FY96). Discussions are ongoing with the center, state and local governments to establish apex bodies to finance large scale improvements in municipal infrastructure and services. These entities would be responsible for the identification and appraisal of municipal investments within criteria established to ensure efficient and sustainable development. It is also expected that a National Highway Fund would be established to finance the HDC program of the National Highway Authority, and to provide a focal point for multilateral and bilateral lending to the road sector. 59. Technical assistance. Strengthening India's institutional capacity is a major long-term objective of the Bank's assistance strategy. The Department has increasingly used technical assistance to enhance the management capacity and technical skills of the executing agencies. In view of the availability of technical skills in India, the provision of this technical assistance has relied heavily on domestic consultants. Most of the investment projects in the portfolio now allocate up to 10 percent of the loan/credit amounts for technical assistance. For example, an innovative component of the National AIDS Control Project is helping to establish a national board and a technical advisory committee at the Union Govermment level, empowered committees at the state level, and management teams and monitoring systems at lower levels. The Department has also been active in mobilizig trust fund, Project Preparation Facility (PPF) and Institutional Development Fund (IDF) support for project preparation and capacity building. Institutional Development Fund (IDF) grants have been made to strengthen GOI's capabilities for improving the management of the GOI budget dedicated to externally assisted projects, evaluating alternative decentalization options for strengthening local govermments, and for strengthening capacity to implement a major tax reform. Project preparation, supported with Japan Grants and PPFs is used to finance links between expertise outside of India with suitable Indian institutions, both to assist in project development and to build capacity within India in the longer term. In the power sector, four PPFs have been approved to prepare state power restructuring projects with relevant foreign expertise. In the development of the health portfolio and projects in AIDS, Leprosy, Blindness Control and TB, WHO has provided considerable technical inputs into project development, as have specialists from the US Centers for Disease Control and the US National Institute of Health. Technical assistance is also used to promote enhanced technologies, such as multi-drug therapy in leprosy, short course chemotherapy in  - 17- TB, and the use of intraocular lenses in treating cataracts. Efforts along these lines will continue in all priority sectors. Areas of SNecal Operaffonal Dmphmais 60. Poverty Alleviation. Our basic strategy in this area is to support the Government's efforts to promote accelerated, broad-based economic growth through macroeconomic and sector reforms and increased expenditures in key areas such as rural infrastructure and selected social programs, and to ensure that the poor are protected during the adjustment period and are better equipped to benefit from the growth process. The strategy calls for an intensive dialogue with both Central and State governments, and requires a careful mix of ESW, technical assistance and policy based investment lending centered on the agriculture and human resources sectors. 61. A Poverty Assessment to be completed in FY95 will strengthen the analytical underpinnings for IDA's assistance in long-term poverty alleviation. In view of the key role played by the State governments in the agriculture and human resources sectors, we are also launching a major study of development issues in the important State of Uttar Pradesh, whose performance has major implications for the overall pace of poverty alleviation in India. The substantive results of the Poverty Assessment and Uttar Pradesh state study will be reflected in the 1995 CAS. 62. ParticDati. The IDA operations are targeted directly at poverty alleviation and human resource development (HRD). To improve the sustainability of these operations, a special effort is being made to enlist the participation of beneficiaries and communities in the design and implementation of projects, especially in HRD and agriculture. A departmental task force was established in March 1993 to develop guidelines aimed at encouraging task managers to make a more systematic use of social assessments, participatory approaches, appropriate R&R strategies and procedures in project preparation and implementation. Project preparation includes studies of special groups, beneficiary assessments, rapid rural appraisal, structured groups, and participant observation. This is now very extensively practiced in the India portfolio and good examples can be found in the development of the UP Education Project, the upcoming District Primary Education Project, the Leprosy Control Project, the Blindness Control Project and the Bihar Plateau Project. For example, groups of leprosy patients were canvassed to help assess existing leprosy control efforts and new patients will help to plan the schedule and delivery of their drug treatment. To prepare the Blindness Project, extensive assessments were carried out among previously blind patients who had participated in the ongoing blindness control program to assist in formulating a more user-friendly and higher quality approach to service design and delivery. Village Education Committees are assisting in implementing the UP Basic Education Project and will be instrumental in the District Primary Education Project. 63. NGOs are also now extensively involved in IDA/IBRD assisted programs in the social sectors and 3d resettlement and rehabilitation, agriculture, forestry, and environmental action programs. They are operating a large number of family welfare facilities under the population projects. They are also very involved in the delivery of therapy and rehabilitation under the leprosy project. A very significant part of the surgeries to be performed in the Blindness Control Project will be carried out by NGOs and the project is founded on strengthening the links between the public, private, and PVO organizations. 64. Gender and Poverty. The Bank has supported GOI's programs to draw women into the mainstream of economic activity by improving their access to productive resources and services, such as in agriculture, extension and training. It has also helped improve the welfare and status of women through support to family planning, nutrition, health, technical education and basic education services. Specific examples include the National Sericulture project where the needs of women as workers in silk producing households as regards financial resources, power and decision making were taken into account in the project design. Similarly in  - 18 - the Shrimp and Fish Culture and Rubber projects, income generating activities were directly targeted on the female population, given their role in these lines of production. State Forestry projects have incorporated into their design participation of women in the planning, decision making and benefit sharing of social forestry. The population projects have reduced fertility through better family planning services, and improved the health of women in rural and urban households. The Tamil Nadu Integrated Nutrition Project is an example of the successful establishment of village based Women's Working Group which support the nutrition and health education components of the project. The Bank's Vocational and Technical Education Projects include support for the expansion and upgrading of training for women at various levels including teacher training. In primary education, the UP Basic Education project is aimed at districts selected on the basis of low female literacy and women's NGOs are assisting in project implementation. The rural water supply and sanitation projects in Maharashtra and Kamataka provide a key role for women's user groups and community participation in the maintenancf of hand pumps and the introduction of sanitation. 65. Bank strategy in this area will continue to focus on: (a) deepening the dialegue with the Government on policy, administrative and legal reforms designed to increase the role of women in the development process; (b) strengthening of gender analysis and increasing the WID components/activities in agriculture and forestry projects (FY95 and 96) population a-ld human resources projects (FY96 and 97) and rural water supply projects (FY95); (c) sector work to design effective programs for women. The poverty assessment (FY95) will also include a status report on gender issues relevant to poverty alleviation. 66. Environment. The Bank's commnitment to environmentally sustainable development is also being pursued directly through specific operations designed to support the development of environmental and natural resource management institutions and through financing of investments that will improve the quality of the Indian environment-e.g., the second Industrial Pollution Control project (FY94), State-level forestry deve'opment projects, water resource consolidation projects, renewable energy development and demand-side management programs in the power sector. More generally, we are ensuring that environmental assessments, from preparation to supervision, are carried out in accordance with India's own demanding laws and regulations and in collaboration with beneficiaries, concerned NGOs and project implementing agencies. Where needed, we are seeking adjustments in national standards and processes in order to satisfy Bank requirements. 67. GOI has recently completed preparation of a Country Program to implement the Montreal Protocol and a Natiopal Enviromnental Action Program. The EAP identifies several broad priority areas for action and a corresponding set of programs. Overall, it promises to be a useful vehicle for mobilization and management of resources for India's rapidly expanding environmental protection activities. Importantly, it provides a solid national programmatic foundation for development of activities that could be supported by the next phase of the Global Environment Facility. Building on these efforts, the FY94 CEM is reviewing the status of India's programs to control and rrevent pollution and conserve forests, wildlife and biodiversity. Other ESW will explore in greater depth different aspects of India's environmental situation-e.g., the FY95 study of environmental issues in the energy sector and the FY97 study of industrial pollution. Detailed monitoring of the implementation of the eco-development component in the recently approved Forestry Research Project will provide the basis for further investments (by GEF and IDA) in the preservation of India's biodiversity. Overall, our assistance strategy focuses on implementing environmentally sustainable technologies and on increasing GOI's capacity to implement, monitor and expand its ambitious environmental action program (see Attachment 2). 68. Private Sector Development. In addition to improvements in general policies and institutions, all programs in agriculture, infrastructure, energy and social sectors will continue to enlist private sector participation where appropriate. A fundamental objective of the Bank's strategy during this transition period in India is to promote efficient private sector development by assisting GOI in the elimination of constraints  - 19- to the industrial restructuring which is required in response to the changes in macroecoiiomic and structural policies. The Bank's work in this area is being coordinated closely with the International Finance Corporation. A Private Sector Assessment, has been prepared jointly and is guiding our activities in this area. Increased private sector participation in the financial, energy and infrastructure sectors are central elements of our sector development strategy. Portfolio implementation 69. With more than 100 projects valued at over US$20 billion (net of cancellations, India accounts for 9 percent of the IBRD portfolio and 27.5 percent of the IDA portfolio. Last year's Country Assistance Strategy outlined the main features of this portfolio and how it had developed over the last ten years. It noted that about three-quarters of the projects are being implemented by State governments of varying administrative capacity and that this leads to a marked variation in performance among both sectors and States. The CAS also explained the decline to around 15 percent in the disbursement ratio for investment projects (disbursements as a share of funds committed and undisbursed). Reasons included the ongoing fiscal adjustmene which had reduced budgetary funds particularly at the state level and the real depreciation of the rupee which had reduced the dollar equivalent of rupee disbursements in projects with a high proportion of local expenditure. These factors have exacerbated the long standing problem of project start-up delays associated with slow and cumbersome decision making processes for procurement, together with complex budgetary processes for channeling funds to state-implemented projects. The CAS also noted that efforts to build up the Bank's portfolio in the social sectors and in the poorest States have intensified these problems because those sectors and States are also the ones with the weakest administrative capacities. 70. Last year's CAS outlined the strategy adopted by the Government and the Bank to tackle these problems. This included the need (a) to keep new projects simple and avoid organizational complexity, (b) for key actions on procurement, land acquisition and government clearances to be taken prior to project approval, (c) to use private engineering consultants increasingly for supervision of construction work, (d) to restructure projects where appropriate to achieve project objectives and to cancel components with little scope for improvement, and (e) to improve the mechanisms for channeling central funds to states for externally-aided projects. On the Bank side, we resolved to intensify our reviews of problem projects, to give more emphasis to project-specific implementation plans, and to foster best practice supervision including mid term reviews for all projects. 71. The principles outlined above have continued to guide our approach to portfolio management and "quality at entry" over the last 15 months. The increased use of procurement staff in the New Delhi Office has helped to streamline our own handling of procurement issues. More focussed supervision has led to quicker identification of problems which, along with more systematic follow-up on problem projects (those with an overall status rating of 3 or 4), has reduced their number from 15 percent at the end of FY92 to under 10 percent now. This improvement has been achieved by a combination of cancelling non-performing projects and components and improved performance, as some long standing problems were resolved. 72. Equally important have been the steps agreed jointly with Government to deal with problems arising from procurement procedures and the arrangements for improved flows of funds in the federal system. These changes, which apply to all externally-aided projects, were announced at a special session on aid utilization at the Aid India Consortium in June 1993. On procurement, the Government appointed a high-level task force which has analyzed the reasons for delay in awarding contracts, suggested an optimum procurement cycle compatible with international standards, suggested a workable mechanism to finalize the award of contracts within a given time frame and recommended mandated standard bidding documents for various purchases/works to avoid initial delays and to reduce interpretational problems. The Task Force's report, which in addition to resolving several other issues also provides for the mandatory use of standard bidding  - 20 - documents, has been completed. On the flow of funds, the Government decided that all public sector units of the Center and other autonomous agencies should borrow directly from the multilateral/bilateral agencies without the intermediation of Government on terms mutually agreed between the borrower and the lender. This significantly reduces paper work and delays in the disbursement process. For projects implemented by State Governments, where the additional funds from donors were previously not available from the center until after the expenditures had been made, the Government agreed to a new syste.., of advances. Now, 25 percent of the projected annual expenditure of each project being implemented by a State Government is released by TABLE V: }NDIA-Selected Indicators of Bank Portfolio Performance and Management Indicator FY91 FY92 FY93 FY94 Portfolio Performance Cumulative Undisbursed (US$ billion) 12.8 11.6 10.4 8.9 Number of Projects Under Implementation 109 117 121 107 Averge Implementation Period (years)b 4.7 5.2 5.1 5.5 Average Ratings Development objectives' 1.54 1.53 1.61 1.58 overall staus d 1.90 1.89 1.83 1.83 Percent of projects rated 3 or 4 Development objecdves 4.6 6.8 9.1 7.6 Overall statu 11.9 15.4 10.7 8.6 Cancelled during FY (US$ million) 117.7 1,533.2 1,856.7 526.2 Disbursement atio (%)' 15.4 13.5 14.0 16.0 Disbursement lag ' 26.8 21.8 15.2 34.4 Memorandum item: % completed projects rated unsatisfactory 55.0" Portfolio Maement' Supervision resources (total SWs) 2,158.2 2,295.1 2,523.7 1,637.1 Average supervision (SWs/project) 19.8 19.6 20.8 15.3 Supervision resources by location (in %) Percent headquarters 59.1 61.1 57.8 59.7 Percent resident mission 40.9 38.9 42.2 40.3 Supervision resources by rating category (SWs/project) Projects rated I or 2 19.3 18.6 20.4 14.9 Projects rated 3 or 4 23.7 25.8 24.9 18.7 Memorandum item: date of last CFPR January 1994 FY94 data as of Mach 31, 1994. Average age of projects in the Bank country portfolio. c Extent to which the project will meet its development objectives (see OD 13.05, Annex D2, Preparation of ImWlementation Summary (Fonn 590). 4 Assessment of ovemrl perfomiance of the project based on the ratings given to individual aspects of project implementation (e.g., management, availability of funds, compliance with legal covenants) and to development objectives (see OD 13.05, Annex P2, Preparation of Implementation Summary (Form 590). The overall status is not given a better rating than that given to project development objectives. Ratio of disbursements during the year to the undisbursed balance of the Bank portfolio at the beginning of the year: investment projects only. Full-year esfimate.