India - Country assistance strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 17241-IN MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ONNA COUNTRY ASSISTANCE STRATEGY FOR INDIA DECEMBER 19,1997 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  The last Country Assistance Strategy for India was dated May 19, 1995. CURRENCY EQUIVALENT Currency Unit = Indian Rupee (Rs) US$1.00 = Rs 37.24 (November 1997) GOVERNMENT'S FISCAL YEAR April 1-March 31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank APL Adaptable Program Loans CMIE Centre for Monitoring the Indian Economy CSO Central Statistical Organization DAC Development Assistance Committee EDI Economic Development Institute ERL Economic Restructuring Loan ESW Economic and Sector Work GDP Gross Domestic Product GNFS Goods and Non-factor Services HNP Health, Nutrition and Population IBRD International Bank for Reconstruction and Development IDA International Development Association IDFC Infrastructure Development Finance Corporation IFC International Finance Corporation NGO Non-governmental Organization NRI Non-resident Indian NTPC National Thermal Power Corporation O&M Operations and Maintenance OECF Overseas Economic Cooperation Fund OED Operations Evaluation Department R&R Resettlement and Rehabilitation SEB State Electricity Board WTO World Trade Organization The World Bank Vice President Ms. Mieko Nishimizu Country Director : Mr. Edwin Lim Task Managers . Ms. Joelle Chassard Mr. Colin Bruce The International Finance Corporation Vice President Mr. Jemal-ud-din Kassum Regional Director Mr. Rashad-Rudolf Kaldany Task Manager Ms. Usha Rao-Monari  TABLE OF CONTENTS FOR OFFICIAL USE ONLY Currency Abbreviation and Acronyms Executive Summary A. Introduction ............................................ l B. Country Context .............................................1 Poverty and Human Development ............................................1l Macroeconomic Gains and Weaknesses .............................................2 Development Role of the States .............................................3 C. External Context .............................................4 D. Strategy Formulation .............................................6 Comparative Advantage of the Bank Group ............................................. 6 Consultation .............................................6 Lessons of Past Experience .............................................6 E. The Bank Group's Assistance Strategy .............................................8 Strategic Objectives .............................................; 8 Focusing on Reforming States .............................................9 Support for Policy Reforms .............................................11 Poverty Alleviation ............................................ 13 Social and Environmental Concerns ............................................ 14 Private and Financial Sector Development ............................................ 15 F. Bank Group Operations ............................................ 16 IBRD ............................................ 16 IDA Allocations and Blend ............................................ 18 IFC ............................................ 19 MIGA.19............................................ Bank Group Guarantees ............................................ 19 Non-lending Services ............................................ 19 G. Implementing the Strategy ............................................ 20 H. Risks ............................................ . 21 List of Tables Table 1: Selected Macroeconomic Indicators, 1990-97 ...................................................2 Table 2: India and Its Major States, 1995-96 ...................................................4 Table 3: India: Balance of Payments ...................................................5 Table 4: IBRD/IDA Lending, FY95-FYOO .................................................. 17 Table 5: World Bank Exposure, 1995-2002 .................................................. 17 List of Boxes Box 1: A Vision of India in 2010 ...................................................9 Box 2: Evolution of Bank Operations in the Power Sector .................................................. 12 Box 3: Corruption .................................................. 14 Box 4: Portfolio Management .................................................. 21 Chart 1: IDA and IBRD Commitments and Disbursements, 1991-2000 .................................. 17 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Annexes Annex 1: Country Program Matrix (FY98-00) Annex 2: The 1997 Poverty Assessment and the Country Assistance Strategy Annex 3: India at a Glance Annex 4: Selected Indicators of Bank Portfolio Performance and Management Annex 5: Bank Group Program Summary Annex 6: Summary of Nonlending Services Annex 7: Social Indicators Annex 8: Key Economic Indicators Annex 9: Key Exposure Indicators Annex 10: Status of Bank Group Operations in India  EXECUTIVE SUMMARY i. Vision. With over 300 million persons still poor, India is pursuing "accelerated economic growth with equity." If this strategy is successfully sustained, the nation's per capita income should double to around US$700 (at 1997 prices) by the year 2010. The incidence of poverty would fall from 35 to near 15 percent. Every child would have access to quality primary education and other social indicators would improve substantially. ii. The stabilization and the reform of investment, trade and finance that began in response to the 1990-91 crisis have set India on its way to achieving its vision. But several challenges remain. The public sector deficit must be reduced which will mean cutting the current large subsidies, mostly at the state level (power and irrigation) but also at the Center (food and fertilizers). India also needs to further liberalize its economy, accelerate human development, and invest massively in infrastructure. iii. Strategy Formulation. This Country Assistance Strategy (CAS) was prepared jointly by IBRD/IDA and the IFC, and in consultation with MIGA. It builds upon the individual and combined strengths of these institutions of the World Bank Group. Their increasingly diversified products give the Group a unique role as India's full-service development partner. CAS formulation also benefited from extensive consultation with civil society and government officials at all levels. Participants urged the Bank Group to re-enter the urban sector and to better integrate its services, particularly in the social sectors and rural development. Other inputs came from Operations Evaluation Department (OED) and project evaluation reports which recommended greater attention to the social context and financial sustainability of some interventions. Lessons were also learned from the collapse of the power sector lending program in the 1990s and difficulties in implementing the assistance program for infrastructure. iv. Bank Group Strategy. The Group's strategy during 1998-2000 involves the following: Focus on reforming states. Indian states, seven of which have populations over 50 million, have major responsibilities for development. In response to economic pressures and political opportunities, some states are choosing to embark upon comprehensive economic restructuring programs. Much of the Bank Group's assistance will go to these states. The aim will be to promote fiscal, pricing and regulatory reforms that put the state's public finances on a sustainable course, and establish a more friendly environment for private investment. Assistance to states which are not yet pursuing comprehensive reforms will be highly selective and focused on support for policy reform and poverty alleviation. The state focus will unfold within the framework provided by the Ninth Plan and the concerned central agencies. * Support for policy reforms. The strategy emphasizes policy reforms in key sectors (rural development, power and urban), and requires a new approach which will entail investing up- front in intensive dialogue at the highest level, and allowing sufficient time for reforms to be prepared, political consensus to be reached and ownership to be built. Instead of imposing conditions on reluctant clients, the Bank Group will engage early with partners who have shared views. * Acceleration of human development and poverty alleviation. The Bank Group's strategy includes working with the public, private and voluntary sectors toward: (a) achieving universal primary education; (b) improving primary care and nutrition policies; (c) consolidating disease control efforts, including AIDS; and (d) upgrading state health systems. These social sector programs, which are among the largest in the Bank, are aimed at the poor and are complemented by a growing emphasis inter alia on: (a) urban poverty alleviation; and (b) rural development, including rainfed agriculture.  -ii- * Increased attention to social and environmental concerns. Involuntary resettlement, a major challenge in the Bank's portfolio, is being addressed by increasing responsibility among corporate clients, building their capacity, and developing sectoral and state resettlement and rehabilitation policies. Efforts are also directed at issues of gender and child labor. On the environment front, an immediate priority is integrating environmental concerns into sectoral policies, especially by exploiting win-win opportunities flowing from the on-going economic liberalization. * Promotion of private andfinancial sector development. This will be done not only by pursuing specific programs in which each institution of the World Bank Group can use its comparative advantage, but also by undertaking joint programs where appropriate. v. IBRDIIDA Lending and Portfolio Management. In 1997 the Government requested an increase in IBRD lending to around US$2.0 billion per year. This major expansion of the IBRD program is necessary to support the assistance strategy outlined above and seems an appropriate Bank response to India's program of accelerated growth and poverty reduction. From the Bank's side, prudent risk management will entail adjustment of the IBRD (and IDA) commitments, and IFC and MIGA operations, to possible changes in the macro-economic situation (particularly the fiscal deficit and the current account deficit), structural policies (including project-specific triggers) and creditworthiness. vi. Satisfactory macro- and micro economic performance would bring IBRD lending in FY98-00 to around US$2.0-2.2 billion a year, which is consistent with the "Concentration Ratio" guideline under the Bank's portfolio risk management policy. Separately, because of India's size and the limited IDA funds, the current IDA allocation to the country is restricted to about US$850 million. Given this restriction, the expected increase in IBRD lending will lead to a significant hardening of the IBRD/IDA blend. vii. The strategy includes a proactive Delhi-based portfolio management system which was put in place in FY97. As a result, disbursements for IDA and IBRD rose from US$1.3 billion in the previous year to US$1.6 billion, and the ratio of disbursements to outstanding commitments rose above the Bank average for the first time in some years. Examples of other improvements include reductions in the average implementation period, the ratio of problem projects, and the ratio of projects at risk. viii. IFC and MIGA. The Government has also requested that IFC increase its level of activities, especially in the infrastructure sector. In response, IFC's program would rise to about US$250-400 million per year during the FY98-00 period (from about US$200 million per year during FY95-97) as reforms progress, particularly in infrastructure. MIGA, meanwhile, has been promoting its services more widely in India and recently issued its first guarantee in the telecommunications sector. ix. Non-lending Services. The strategy calls for more operationally relevant, cost effective and timely non-lending services. Studies of individual states will support the state-focused lending program. Unlike the past, much of this work will be done in partnership with local institutions. Dialogue on national policy issues, including the financial sector, will be supported inter alia through short policy notes in timely response to client requests, and high-level conferences on key issues. The Economic Development Institute (EDI) will be an important partner in these conferences and will also collaborate with IBRD and IFC in sharing international experience in areas such as capital market development. x. Strategy Implementation. Important changes under the Strategic Compact and the Renewal Program are expected to increase the Bank's capacity to implement this strategy, including more effective and efficient management of the portfolio. The changes include:  - iii - * the presence in the field of the Bank's Country Director as well as IFC 's Director for the Asia II Region, which is facilitating continuous and intensive dialogue with clients especially in the states, quick responses to clients' needs and coherence within the rapidly expanding program; * decentralization of staff work to the field, which will also be a cost-effective means of expanding the Bank's program. This will not involve a significant relocation of headquarters staff to Delhi, but incremental staff resources and responsibilities required will be met largely by national staff. Decentralization is expected particularly to permit better portfolio management; * continuous consultations with clients and oversight from the field on project preparation, which should help to eliminate protracted and high-cost project preparations, and the need to drop projects after large expenditures have been incurred; * resources under the 'Refueling Current Business Activity" initiative of the Strategic Compact, which have been allocated for pipeline strengthening. Resources from the Compact have also been allocated to fund new initiatives in rural development, the financial sector and social development, and the strengthening of core services; and e new products, particularly the adaptable lending instruments (APLs), which will facilitate the implementation of the CAS. xi. These changes are already helping the Bank Group to respond quickly and effectively to India's needs in accordance with the new Strategy. In FY98, new IBRD commitments will be more than double the low annual levels of the previous three years. IDA commitments will remain around the same level. Twenty five appraisals are planned for FY98, almost triple the number last year. The comprehensive programs for the two reforming states are at an advanced stage of preparation. APLs to three major states for extensive power reform are planned for Board presentation over the next twelve months. Items for Board Discussion * The credit risk associated with the strategy is compounded by the recent deterioration of the external environment and political uncertainties within India. A related concern is the slow progress in reducing the consolidated public sector deficit and improving the composition of public expenditures. * Given India's size and needs, the Bank Group has to be highly selective, focusing on sectoral policy reforms to drive growth and poverty reduction, and on the few states which have chosen so far to commit strongly to reforms. This selectivity may also lead IBRD/IDA to end lending in states where commitment to reform does not exist. These may include some of the poorest states in the country. IFC likewise will support only sectors and states where the commitment to reforms exists. * As part of a coherent World Bank Group approach to private sector development, IBRD/IDA/IFC are collaborating in a range of sectors--finance (including rural finance), power, infrastructure, urban, rural development, health and education. IFC support may be extended also to reforming sectors such as oil, mining and gas in which IFC has a strategic comparative advantage but in which IBRD and IDA are not involved. * With current limits on India's IDA access, the IBRD/IDA blend will harden significantly relative to recent levels as IBRD lending grows. And lending for agriculture, rural development and water will have to be financed mainly on IBRD terms in order for IDA to cover adequately the rapidly expanding social sector program.  I  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR INDIA A. INTRODUCTION 1. India's 50th year of independence (1997) has generated national debate about its progress and future challenges. For much of the 50 years, public sector-led growth and extensive regulation characterized economic management. Major achievements were recorded, such as the eradication of famines. However, gains have been slow in poverty reduction and human development, which were among India's principal objectives at independence. 2. In 1991, a series of economic reforms began following a macroeconomic crisis. The reform program has led to unprecedented, private sector-led growth. The current Government has now set the ambitious development objective of sustaining high growth rates and poverty reduction. To reach that objective, India must strengthen public finances significantly, further liberalize its economy, invest massively in infrastructure, and accelerate human development. 3. The India-Bank Group partnership is almost as old as India's independence. For many years, the Bank was mainly a provider of long-term concessional capital. The Government recently requested an expanded program of Bank Group support in the context of its emphasis on accelerating growth and poverty reduction. It is to this challenge that this Country Assistance Strategy (CAS) responds. B. COUNTRY CONTEXT Poverty and Human Development 4. India has reduced poverty incidence from 45 percent in 1950 to 35 percent in 1993-94 (latest available survey). Within a democratic political setting, India has eradicated famines, improved social indicators, and created a large pool of technical and scientific talent. However, despite declining poverty incidence, the poor still number about 300 million, almost 50 percent more than in all of Africa. The decline in poverty has been uneven--faster in the south than the north and more likely to empower men than women. In general, economic growth has accounted for far more of the poverty reduction than the various direct government interventions. In individual states, poverty reduction has been correlated with investments in human development and infrastructure, and with agricultural growth. 5. The improvement in social indicators has been slow. Over half of India's children under 5 years of age are still moderately or severely malnourished. Half of the country's labor force is illiterate. One- third of its 105 million children 6 to 10 years old are not in school. Social indicators are worse for women. About 25 percent of the world's maternal deaths occur in India. More than 60 percent of girls do not complete primary school. As with poverty reduction, some states have done much better than others in improving social indicators and reducing gender disparities. These and other aspects of poverty are the subject of the Bank's 1997 Poverty Assessment which is also summarized in Annex 2.  2 INDIA CAS Macroeconomic Gains and Weaknesses 6. The stabilization and the reform of investment, trade and finance that began in response to the 1990-91 crisis have set India oni its way to achieving its ambitious objectives. Growth recovered quickly after the crisis, and rose to an average of 7 percent during 1994-97. Unlike previous recoveries, private investment and saving have risen sharply and have reached record rates. Inflation is low and the country's external position strengthened. Almost all macroeconomic indicators are better than projected in the 1995 CAS. Although the macroeconomic improvements have been remarkable, a number of weaknesses remain, both internally and externally, as discussed below. 7. Public Sector Deficit. The still large consolidated deficit of the public sector is perhaps the most serious economic problem, and could threaten even the projected 6-7 percent growth. The consolidated deficit fell from 12.3 percent of GDP in 1990-91 to 9.6 percent in 1992, but has remained at about 9 percent. In 1996-97 it comprised: (a) the center's gross fiscal deficit (5 percent of GDP, including net lending to states) (Table 1); (b) states' additional deficit or net borrowing other than from the center (1.9 percent); (c) the additional deficit of public enterprises (1.4 percent); and (d) the oil pool deficit to support the oil price subsidy (0.8 percent). In fact, explicit and implicit subsidies were a large aggregate factor in the consolidated deficit and included power (1.7 percent of GDP), irrigation (1.6 percent), fertilizer (0.9 percent) and food (0.7 percent). Table 1: Selected Macroeconomic Indicators, 1990-97 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 GDP growth (% per year) 5.4 0.8 5.3 6.0 7.2 7.1 6.8 Inflation (% per year) 10.3 13.7 10.1 8.4 10.9 7.3 7.0 Domestic Investment (% of GDP) 25.2 22.7 24.0 21.7 24.0 26.2 26.5 Private Investment (% of GDP) 15.8 13.5 15.1 13.1 15.2 18.1 18.2 Current Account Balance as % GDP -3.5 -0.7 -1.7 -0.7 -1.5 -2.1 -1.2 Export Growth (GNFS, real, (% per year) 8.9 10.1 7.5 14.5 9.2 29.1 7.5 Import Growth (GNFS, real, (% per year) 3.2 -11.9 12.7 17.7 17.4 12.0 5.7 Central Govemment Deficit (% of GDP) 8.3 5.9 5.7 7.4 6.1 5.5 5.0 State Governments Deficit (% of GDP) 3.3 2.9 3.0 2.6 2.9 3.4 3.1 For. Exch. Reserves (mos. of GNFS imports) 1.0 2.8 3.0 5.9 6.1 4.1 5.0 External Debt (% of GDP) 30.5 34.0 37.0 36.6 33.8 28.9 25.2 Debt Service (% ~o"ft"o"t"al ..c"u..r're"nt ..re-c-e-ip-ts-) ............3-2-.4....... 29,..0........ 2-84.4....... 2-4.8 25........................62 .92.6.......... 8. The central government cut its deficit from 8.3 percent of GDP in 1990-91 to 5 percent in 1996- 97, and in September 1997 took the difficult political decision to raise administered oil prices to eliminate the subsidy. Otherwise, most of its deficit reduction reflects cuts in capital spending. The much larger-than-budgeted civil service wage increase this year will make it difficult to cut this deficit further. The states have adjusted less than the central government. They too have cut back on investment to fund current deficits, a problem that is likely to be heightened as the government wage settlement filters down. Unless the states can sustainably increase capital and human resource spending, India's development objectives will be hard to attain. 9. The Financial System. Reforms in the financial sector have gone a long way, with liberalization of interest rates, reductions in directed credits, enhanced supervision, tougher prudential norms, increased competition, substantial capital market reforms, and greater access to foreign capital. Nonetheless, problems remain, notably public banks' non-performing assets, which equal 7 percent of their assets (before provisioning). These non-performing assets, plus still-high levels of directed credits  INDIA CAS 3 and inefficient operations, leave the public sector banks subject to potential disintermediation from new sources of funds--private banks, non-banks, the capital market, and foreign lenders--and push up spreads and market rates. Public sector banks will need to continue improving collections and lending policies, with limits on lending placed on those that do not improve. An increase in private capital in the system would enhance incentives for collection, under an umbrella of stronger supervision and a more level playing field between banks and non-banks. 10. Trade and Regulatory Reforms. Structural reforms have continued under the current coalition government, but the process is uneven. Trade liberalization picked up slightly in the 1997/98 budget, which reduced the maximum tariff to 40 percent (from 300 in 1990-91) and cut the (unweighted) average by six-percentage points, to 32 percent. The Government has agreed also to eliminate quotas on consumer goods and agricultural imports in the World Trade Organization (WTO). Nonetheless, protection remains relatively high with large variances in effective protection. The Government recently imposed a three-percentage point, revenue-raising surcharge on many imports, effectively off-setting half of the tariff cut introduced in the 1997/98 budget. Further cuts in protection are increasingly likely to encounter resistance. 11. Domestic liberalization benefited greatly from the reduction of industrial investment licensing regulations, which began in the late 1980s and has been largely completed in the 1990s. Agriculture still suffers from a plethora of public interventions, which are beginning to be reduced. More generally, the business environment continues to be unpredictable, discretionary and burdensome. Regulations governing markets for land, labor, and capital, complicated and discretionary clearance processes, and reservation of activities for small-scale firms have repressed private investment. In addition, resolution of commercial and regulatory disputes is often bogged down by an overburdened judicial system. In infrastructure, liberalization has made private investment possible in telecommunications, power, ports, roads and airlines. However, delays in establishing regulatory framework, constraints posed by links to regulated sectors, and legal challenges have combined to increase commercial and policy risks, to limit private investment, and led to pressures for guarantees as a substitute for a sound policy framework. 12. Public Enterprises. Public enterprises have been exposed to more competition and given more autonomy, but, at the national level, there has been little change in management or restructuring. The main impact of the few partial divestitures has been to raise revenue to finance the budget deficit. The Disinvestment Commission, created in 1996, has recommended full or partial privatization of nine public enterprises, including divestment of 50 percent of the Government's share in seven of them, but as yet no action has been taken. Some states are taking an increased interest in disinvestment, particularly in the infrastructure sectors, and have passed enabling reform legislations. Development Role of the States 13. The Constitution of India gives the states, several of which have populations over 50 million (Table 2), major responsibility for development, notably in public health, water supply and sanitation, primary education, road transport, power, agriculture and irrigation. In the past four decades, however, the dominance of a single national party has meant that state governments did not pursue independent development policies. Today no dominant national political party exists. Several strong regional parties have emerged and regional politics increasingly drives national politics. Consequently, no political party has been able to form a majority government in recent years, leading to frequent changes of governments. A coalition government at the Center is likely to emerge from the mid-term election scheduled for February 1998. 14. In the present political and economic environment, and with the tightening of the fiscal constraint, some states are beginning major economic reforms, abandoning the unsustainable, populist  4 INDIA CAS policies of the past. Andhra Pradesh, for instance, found that those policies limited its development potential. Now, it is pursuing aggressive growth and reform policies along with states like Orissa, Gujarat, Rajasthan and Karnataka. These states are likely to attract private foreign and domestic capital and lead India's development. By contrast, some large, poor states seem to be standing still and others are moving backwards into unsustainable policies. Reflecting the fact that economic pragmatism and development needs, rather than political ideologies, are the driving force behind reform, all the major political parties are represented in the govermments of the reforming states. Table 2: India and Its Major States, 1995-96 State Population '. Per-Capita ' Female Infant Poverty Incidence Income ' Literacy b Mortality Rate (Head-count index) (Million) (US$) (percent) (per 1000 births) * (percent) India * 929 350 39.3 79 35.0 Andhra Pradesh 72 289 32.7 71 29.4 Bihar 95 146 22.9 73 60.4 Gujarat 45 411 48.6 67 33.8c Haryana 18 459 40.5 75 Karnataka 48 301 44.3 73 37.6 Kerala 31 279 86.2 17 29.2 Madhya Pradesh 72 229 28.9 104 44.1 Maharashtra 86 490 52.3 59 43.5 Orissa 34 191 34.7 115 40.3 Punjab 22 521 50.4 , 56 21.6d Rajasthan 48 238 20.4 90 43.5 Tamil Nadu 58 335 51.3 58 34.9 Uttar Pradesh 151 200 25.3 98 40.2 West Bengal 74 251 46.6 65 26.0 (a) Per-Capita income data is based on per-capita gross state domestic product at current rupees and converted to US$ by the average exchange rate; (b) 1991 census; (c) Data pertains to 1992; and (d) Includes Haryana. Source: CSO; CMIE; Planning Commission; World Bank, "India: Achievements and Challenges in Reducing Poverty". C. EXTERNAL CONTEXT 1S. India's external situation has improved dramnatically since the 1990-91 crisis, reflecting both improved macro-management and international environment (lower world real interest rates, large private capital flows, and more favorable terms of trade). The current account deficit has been cut to less than 2 percent of GDP (compared to 3.5 percent in 1990/91), and external reserves now exceed 5 months of imports (versus 1 month) (Tables 2 and 3). Although external debt is still about US$90 billion, concessional terms and rapid export growth have reduced the debt service ratio to a manageable 23 percent (from 30 percent). Trade is up to 27 percent of GDP (versus 18 percent in 1990/91) and foreign direct investment and portfolio investment both exceed US$2.5 billion (versus less than US$200 million). 16. However, export growth has slowed down in the last two years. This partly reflects the slower growth of world trade in 1996. The recent turmoil in East Asia raises further concerns regarding export growth in the short run since the region accounted for 30 percent of India's exports in 1996. Economic growth in the region and in the rest of the world is expected to slip, and this will hurt the demand for Indian exports. In addition, the Asian devaluations will reduce India's competitiveness across the board and, in particular, in price sensitive products such as primaries, textiles and garments.  INDIA CAS S 17. These potential pressures on exports are likely to be offset somewhat in the balance of payments by weaknesses in the prices of imports, including petroleum and related products which account for about 20 percent of India's imports. The pressure will be partly offset by the easing of interest rates. But the medium-term prospects for exports will continue to depend on fundamentals such as productivity growth and the upgrading of quality and technology, which in turn will depend on further economic reforms. 18. India's greater financial integration into the world economy makes it more susceptible than in the past to external shocks and the impact of changes elsewhere in the world. Recent developments in emerging markets highlight once again the turbulence that can result from changes in investor sentiments. India can no longer consider itself as protected from changes in international capital markets as it once was. More than ever, India will need appropriate macroeconomic policies in order to benefit from globalization and minimize its risks. 19. India has avoided the policy errors that would provoke sharp capital outflows, and its financial system is not exposed to foreign exchange risk as in East Asia. Nonetheless, risks exist, in terms of both possible spill-overs in loss of competitiveness, speculative attacks, and a worldwide slowdown in export markets and private capital flows. Prudent fiscal policy would reduce the demand for external funds, increase investor confidence, and help manage the risks. 20. There is comfort in the Governments' conservative balance of payments policies. Portfolio investments are largely in instruments that are costly to reverse. Short-term obligations are estimated at US$6.7 billion, of which non-resident Indian (NRI) deposits total US$3.8 billion, and are less than one- fourth of India's international reserves (US$28 billion including gold). It is the authorities' view that, while full capital account convertibility is a desirable goal, the preconditions are substantial fiscal consolidation, financial sector strengthening, and further trade liberalization. Table 3: India: Balance of Payments (US$ billion) 1995/96 1996/97 1 31 9 1. Exports (GNFS) 39.7 42.6 454 M0; 5 "'625 - - 2.Imports(GNFS) 51.2 54.4 59 of which: Oil Imports 7.5 9.7 10.8 12. 14 ~~~~~~~~~~~~~~~~~~~~~~~~~.::. ..-...... -:- . .. 3. Interest Payments -4.6 -4.5 - - 3 4. Other current transactions (net) 9.4 12.2 1.2 . 1 11a 5. Current Account Balance(=1+2+3+4) -6.8 -4.1 ... -. -X - 6. Foreign Direct Investmnent 2.1 2.4 "4.0 40 45 6 7. Portfolio Investment 2.5 2.7 3.0 40 43 5: . 8. Long-term borrowing (net) 0.5 -0.7 -. 4 : *2 :.1 9. Other capital transfers (net) -3.8 4.7 .1. -. 8 :.5 -. M em Ie s .. . . . .... .... : Foreign Exchange Reserves 17.4 22.4 :2 . 2:8 6 43 3 (excluding gold) ........ OutstandingNR Deposits 13.9 14.9 . :. 16 1 of which: Short term NRI deposits a/ 2.9 3.8 -: 8. ..8 3: Total Debt Outstanding and Disbursed 94.9 89.8 .. : 935';  6 INDIA CAS D. STRATEGY FORMULATION Comparative Advantage of the Bank Group 21. This CAS was prepared jointly by IBRD/IDA and the IFC, and in consultation with MIGA. The World Bank Group is well placed to support India's pursuit of accelerated growth with equity. This derives from its global experience, the partnership between the Bank, IFC and MIGA, and its analytical capacity to generate and catalyze ideas for further policy reforms. The reforms that were initiated in 1991 and the potentially huge market the country offers have generated strong interest in India among private investors. But frustrations have built up, largely because the enabling environment for private investment remains uncertain. For at least the coming 5-10 years, India's access to private capital on reasonable terms will be limited. The Bank Group's ability to provide long-term capital for accelerated growth and to help India to complete the transition to reliance mainly on private capital remains important. 22. The availability of IDA resources enables the Bank Group to continue its substantial support to the successful human development program in India that has been built up over the last ten years. The other large donors, the Asian Development Bank (ADB) and the Overseas Economic Cooperation Fund (OECF), have concentrated largely on infrastructure. The Bank's relatively large resources also enable it to build on pilot activities in human development and poverty alleviation initiated by bilateral donors and to extend assistance to a much larger portion of the population. Meanwhile, IFC could catalyze the increasing interest of the private sector to enter the social sector. Especially with the recent decentralization to the field by both the Bank and IFC and the development of new products and instruments, the Bank Group is well positioned to be a full service development institution in India, with a range of options for engagement with clients, unmatched by any other institution. Consultation 23. That the Bank Group can play an important role in India over the coming decade is very much the view of a wide cross-section of Indian society. In the course of formulating the assistance strategy, extensive consultations, spread over 16 sessions, were held. Participants included I 0 NGOs, 60 private firms, 40 academic institutions and about 300 government officials of all levels. Participants in these consultative sessions want the Bank to step up its role in supporting and deepening reforms and economic change. The Bank is criticized for having withdrawn from the urban sector and for having limited its involvement in infrastructure. Cross-sectoral concerns and complementarities between programs, particularly in the social sectors and agriculture and rural development, are frequently raised. In this context, the Bank is seen as playing a greater role in resettlement and rehabilitation (R&R), environment, and governance. The Bank is also seen as an important player for creating an enabling environment for private sector participation, and for pursuing community and beneficiary participation in development programs. Lessons of Past Experience 24. The India-Bank Group partnership is almost as old as India's independence.1 As partners, the Bank and India have shared the objective of improving human welfare but have not always agreed on the A review of this history is in Jochen Kraske (Historian of the World Bank Group), "India and the World Bank" (Mimeo, August 1997).  INDIA CAS 7 appropriate strategy. For many years, the Bank was mainly a provider of long-term concessional capital. For some time, however, the Bank was increasingly concerned about the dominant role of the public sector in industry, and urged the authorities to liberalize trade and investment. The authorities, meanwhile, viewed the Bank as becoming too prescriptive and decided to target a reduction in the flow of net foreign assistance to zero by the end of the 1970s. Until the 1990s, therefore, the Bank limited its policy dialogue with India to issues directly related to Bank-financed projects. 25. Since the late 1980s, the most successful program of the Bank has been in human development. A recent Operations Evaluation Department (OED) evaluation showed that the health, nutrition and population (HNP) and education projects (like much of the IDA portfolio in India) performed particularly well in terms of outcomes, sustainability and institutional development. OED and other evaluation reports on the IBRD and IDA portfolio also suggest areas for improvement which have been incorporated in the current assistance strategy. For example, there is a need in agriculture to: (a) involve farmers/beneficiaries in irrigation project design, operations, maintenance and cost recovery, especially if social change is implicit in the project; and (b) address insufficient operations and maintenance (O&M) funding, water charges and collection rates. Lessons cited in HNP pertain to: (a) better coordination of health and nutrition interventions to magnify the separate benefits of each; and (b) the need for management information systems (MIS) for mid-course project correction or for planning field activities which should be designed in consultation with users at all levels. In infrastructure, maintenance funding and procedures of the whole road network (including rural roads) have to be improved. In urban water and sanitation projects, financial sustainability should become a priority. In the urban sector, there is a need for simplicity in project design and strong commitment to reform on the part of the state governments. 26. In more recent years the achievement of-CAS objectives in some key sectors has proved difficult. The most significant disappointment has been the collapse of the power sector program (Box 2) and the failure to build up the substantial infrastructure program that had been projected. The last full GAS (1995) presented a lending scenario with an upper limit of US$8.6 billion (of which IBRD was US$5 billion) for the period FY96-98. Over the last two years, there has been a short-fall in IBRD lending by an increasing margin: 35 percent in FY96 and 60 percent in FY97 (Chart 1, p. 17). While the fall in power and infrastructure lending was the main reason, budget constraint was a factor. The total administrative budget for the India program fell by 15 percent from FY95 to FY97. In addition, substantial expenditures (totaling US$2.5 million in FY94 and US$2.2 million in FY97) were incurred for projects which eventually had to be dropped because of lack of client commitment. As a consequence of the budget crunch, operational staff in the field office were reduced by twelve staff between FY95 and FY97. This seriously constrained the objective of strengthening the project pipeline and relationships on the ground. The completion of even the much smaller program required the depletion of the project pipeline. In FY97 the pipeline factor (percentage of FY98 projects appraised in FY97) fell to 20 percent. 27. The achievements of the policy dialogue have been mixed as well. On the human development front, lending and collaborative economic and sector work helped to increase attention to primary education, and to effect a paradigm shift from family welfare to reproductive and child health. But sustainable funding for human development is still a critical issue. The institutional and regulatory framework for private investment in power and telecommunications improved, and the National Highways Authority of India--the body responsible for introducing private investment in highways--was gradually strengthened. But progress in tariff reform, particularly in power and irrigation, continues to be quite slow because of political sensitivities. Taxes in general have also been simplified but there is still scope to broaden the tax base substantially and improve the efficiency of tax administration. There was success in aspects of financial sector reform such as the progressive tightening of prudential norms, reduced pre-emption of bank deposits by the Government, the liberalization of interest rates and the  8 INDIA CAS introduction of private rural banks. But there was no progress in areas such as the liberalization of insurance. The experience is equally mixed in agriculture, with advances in the liberalization of storage, credit and movement controls in commodities, particularly for cotton and oil seeds, and the re- introduction of futures trading in cotton lint, jute and jute goods. But a formidable sector reform agenda is still ahead. 28. In the case of IFC, the relative slowdown in its lending services over the previous two fiscal years can be partially attributed to the increasing devolution of sector policy and regulation from the center to individual states. This resulted in less success than anticipated both in carrying out an effective dialogue and in finding adequate transaction opportunities. However, FY97 witnessed a turnaround in activities as IFC it focused increasingly on specific sectors and states in which the policy frameworks were conducive to private investment. E. THE BANK GROUP'S ASSISTANCE STRATEGY Strategic Objectives 29. The over-riding objective of the Bank Group's efforts in India is poverty reduction. Although India has a wide array of poverty alleviation programs, these have not benefited the poor to an extent commensurate with the resources allocated to them. In recognition of this, the Government of India's A4pproach Paper to the Ninth Five-Year Plan (1997-2002) advocates redesigning these programs, and emphasizes accelerated growth and human and social development to improve the living standards of the poor. The target is 7-9 percent annual growth, compared to the 4.5 percent average of the 1970s and 1980s. If India can maintain its current strategy of accelerated growth with equity over the coming decade, it should be able to make unprecedented progress towards the reduction of poverty and build the basis for sustainable growth over the longer term. Indeed, India should be able to achieve most of the DAC Development Objectives by 2010, about 5 years ahead of the DAC target year. The strategic objective of the Bank Group is to be India's key partner in this development effort over the next decade (Box 1). 30. Selectivity. Despite its role as the major external development partner in India, the Bank Group must be, in a country of India's size and needs, highly selective and focused in its interventions. It, therefore, plans to concentrate its support on those regions and programs which choose to commit to strong, sustainable reforms, and not dissipate its energies and resources where there is no commitment to reform. Moreover, instead of trying to impose conditions on reluctant clients, it will elect to engage early with partners who have shared views. IFC in particular will participate only in sectors where the policy and regulatory environment is conducive to private investment and where its activities have an important demonstration effect. 31. With these considerations in mind, assistance to India will be selective according to the following strategic dimensions: * concentration of assistance in states and programs that choose to commit strongly to reforms; * support to key areas of policy reforms through early engagement and, the building of consensus and ownership with partner clients; * focus on poverty alleviation activities, particularly a large IDA-supported program in the social sectors; * increased priority to the social and environmental impacts of the Bank's operations; and * promotion of private sector development, including in the financial sector.  INDIA CAS 9 Box 1: A Vision of India in 2010 If India successfully sustains its current strategy of accelerated growth with equity over the next decade, the nation's per capita income should double to around US$700 (at 1997 prices) by the year 2010, and the economy would emerge as one of the "big five" economic powerhouses of the developing world and the global market place. More important would be a 50 percent reduction in the incidence of poverty among the population, to about 15 percent. Every child would have access to quality primary education suitable to jobs which would be created mainly in the private sector. Improved health conditions would result in the following gains: * a decline in the population growth rate from 1.9 percent to 1.2 percent; * an increase in contraceptive prevalence to over 60 percent of eligible couples; * a 50 percent reduction in maternal mortality and under-five mortality rates; * halving the proportion of children under five who are moderately or severely malnourished; and * having in place a reliable disease surveillance system. Thus, India would be able to largely achieve the Development Assistance Committee (DAC) Development Objectives significantly before the DAC's target year of 2015. Bank Group Contributions The Bank Group could play a critical role in supporting India in the achievement of this vision. In the social sectors, the continued availability of IDA at the current level would make possible a program comprising, inter alia: * district primary education projects that would increase quality and access to over 60 million children, including 36 million - girls; * state health reform and disease control projects that would improve health care for over 100 million individuals; and * nutrition projects that would improve the health and nutritional status of over 20 million pre-school children, adolescent girls, and pregnant and lactating women. The Bank Group would also make significant contributions to sustaining economic growth averaging 7-9 percent over the decade, including: * support for comprehensive economic and fiscal restructuring in six major states, similar to that initiated in Andhra Pradesh and Rajasthan; * completion of the restructuring of state power sectors in six major states; * financing or co-financing about 12,000 MW of generation capacity, more than 75 percent of which would be in the private sector; 20,000 km of circuit-kilometers (ckm) of extra-high voltage transmission for the national grid; 70,000 ckm of state level transmission; and 200,000 ckm of distribution lines; * financing a major program of infrastructure investment, including 3,000 km of national highways and upgrading and improved maintenance of 64,000 km of state highways; * bringing improved water utility management to ten states; improved quality of services, including 24-hour water supply to major urban centers in these states, that is, up to 50 percent of urban population; and better irrigation maintenance and investment in rural water supply; * disinvestment/commercialization of the State Irrigation Departments and improved water resources management in ten states; and * raising rural income growth in ten states through improved access to better services (technology dissemination, rural infrastructure, soil and water management, safety net programs, well-performing and stable agricultural markets, and non- farm employment opportunities). Focusing on Reforming States 32. As the focus of the reforms has shifted to the states over the past few years, the Bank Group's assistance strategy is itself being reoriented to focus mainly on those states that have chosen to embark on a comprehensive program of economic reforms. These include some of the poorer states, with the worst social indicators. In those states that choose not to undertake comprehensive reforms but which have an acceptable implementation record and in which sustainable investments can be identified, the Bank will continue to invest in specific sectors, provided sound sectoral policies are in place. In those states where the governments choose to pursue policies opposite to the reform trends in the country, or where the governments simply do not have the capacity to pursue coherent development policies or to implement projects efficiently, the Bank will cease new lending commitments. That these states may  10 IND1A CAS include some of the poorer states in India is an implication of the strategy that must be recognized, but one which is consistent with assuring that Bank projects would be effective and sustainable. 33. State level operations are not new to the Bank in India. In the past, however, selection of state projects was done largely on project and sector grounds without great concern for the overall policy of the state. From time to time, there was political pressure to spread Bank operations over as many states as possible, without strategic rationale at the level of individual states. During FY90-96, central agencies and centrally sponsored multi-state projects accounted for 61 percent of the Bank's new commitment. From FY97 to FY00, under the new approach, this proportion will decline to 27 per cent while projects on which agreements are reached with the state authorities will account for 73 per cent of planned new commitment. 34. In the future, the Bank and IFC will jointly develop state-level assistance programs, for states where a comprehensive program of assistance can be structured to cover all relevant sectors, and where the state government's reform is substantially underway. The Bank Group program will be premised on a common understanding between the Bank Group and the reforming state, not only on areas for Bank Group support, but also on a general policy framework within which Bank Group lending should take place. The required fiscal, pricing and regulatory reforms underpinning the Bank's assistance are intended to put the state's public finances on a sustainable path and to establish a more friendly environment for private investment. In support of this strategy, fiscal studies of all the major states, in addition to the four already completed, will be initiated, with the collaboration of a local research institution. 35. The Bank Group's focus on reforming states can go beyond assisting reforming states to demonstrate the benefits of sound economic management. It would demonstrate to other states the Bank Group's willingness to respond in a major way to requests for financial support from states choosing to undertake a comprehensive reform program. The Bank Group will also be able to engage in an intensive dialogue at the highest level in the state and to establish a long-term partnership. 36. Relationship with the Central Government. The state focus of the strategy will be within the framework provided by the national plan, the concerned central government ministries, and national policies. All Bank loans will be to the central government, and then on-lent to the states. The Bank loans to the states will be in addition to their receipts of central government loans and transfers under the existing, formula-based system. 37. The Bank Group will continue to support reform efforts in those priority areas that fall under the responsibility of the central government. These include in particular the legal and regulatory system governing property; poverty alleviation programs; reforms of investment (including infrastructure), finance and trade (including agriculture); and the maintenance of macroeconomic stability and creditworthiness. 38. The need for further policy reform is well understood by the government and general support for reform exists. But the pace of reform is likely to remain uneven, particularly if, coalition nature of the central government continues as expected. The Bank will continue to focus on policy dialogue and sharing successful experiences elsewhere in the world on selected issues, such as agriculture price and trade policy reforms, rural development, disinvestment, financial sector improvements, and the establishment of an enabling environment for private investment in infrastructure.  INDIA CAS 11 Support for Policy Reforms 39. Key to the success of the Bank's assistance strategy will be the ability to support policy reforms in an effective manner, particularly at the state level. As an illustration of the Bank's experience in the past, Box 2 outlines the history of the Bank's involvement in India's power sector, where the Bank's inability to help bring about reforms of the State Electricity Boards (SEBs) was a major reason for the collapse of the IBRD lending program in the 1990s. The strategy calls for a new departure from the manner in which the Bank has traditionally supported policy reforms in India, and will entail the following: * engaging early, where political commitment exists; * investing up-front in intensive dialogue at the highest level, to agree on an explicit policy framework within which Bank lending will take place; * recognizing that sufficient time is required for reforms to be prepared, political consensus to be reached and ownership to be built; and * establishing a close partnership, one that is based on shared views and consensus building, rather than conditionalities, and which can be sustained over a long enough period for reforms to take hold. 40. The democratic process in India will require political sensitivity on the part of the Bank. The key is to help build political consensus. In both Haryana and Andhra Pradesh, for instance, the reform program in the power sector to be supported by the Bank was published by the Government. This was followed by a public consultation process over several months with all stakeholders, including the state assemblies. Even then, reform such as that of the power sector remains highly controversial. It will be essential that the timing of the interventions by the Bank takes full account of political exigencies. 41. The Bank's greater proximity to its clients brought about by the recent decentralization will be a critical factor in ensuring the success of the new approach and enhance the quality and timeliness of our support to policy reforms. Support for policy reforms will also be significantly facilitated by new instruments of the Bank Group such as the APLs. APLs will be the selected mode of intervention in sectors where the Bank needs to demonstrate its commitment to support reforms at an early stage, to overcome strong resistance, and to commit to continued support as reform progresses (see Box 2 on the use of the APLs in the power sector). 42. Support for policy reforms will be a major objective of the Bank Group in all sectors, including: * The Bank's assistance to rural development will focus on supporting policy (e.g., cost recovery, privatization) and institutional reforms (e.g., beneficiary participation, demand- driven funds, commercialization, re-orientation of public sector functions) at the state level to: (a) reduce input subsidies (water, power); (b) promote sustainable natural resource management (water, watershed); (c) improve access to and quality of public spending on rural development (technology dissemination, support services, rural infrastructure, safety nets). At the central level, the Bank Group will intensify the policy dialogue in those reform areas (food, credit and fertilizer policies; centrally-sponsored schemes) that are critical to the performance of the rural economy and the sustainability of state-level reforms. * The Bank Group's assistance to the power sector will focus on supporting reforms at the state level, involving: (a) the corporatization of State Electricity Board (SEB) utility operations under the Companies Act; (b) the privatization of power generation and distribution, as the only effective means to contain technical and commercial losses in the sector; (c) pricing reforms to raise tariff levels and reduce cross-subsidies; and (d) the  12 INDIA CAS establishment of a regulatory commission separate from the state government to ensure tariff reforms are sustained and that utilities meet the commission's performance standards. * In the urban development areas, the Bank will launch a major effort at enhancing city management and municipal services and support state urban sector reforms that implement the provisions of the recent 73rd and 74th Constitutional Amendments for the decentralization of municipal services. The main objective will be to help municipalities and other local bodies build their own institutional and financial capacity to deliver the new functions and services assigned to them as a result of the reforms. * Targeted interventions in selected states and cities will aim at promoting reforms in urban water supply and sanitation. These reforms will introduce policy and institutional changes and improve the technical and financial performance of existing water utilities. They will focus on: (a) separating regulatory and policy functions from operations; (b) increasing the autonomy of the operating utilities; (c) rationalizing tariff structures and tariff-setting mechanisms; and (d) enhancing private sector participation in the management of existing systems. Box 2: Evolution of Bank Operations in the Power Sector During the 1980s and early 1990s, the Bank Group followed a three-pronged strategy in power: (a) it provided extensive support to Central Govemment owned agencies as a means of effecting sector-wide improvements; (b) it financed a number of SEBs; and (c) it financed existing private power utilities and encouraged the Govemment to lower entry barriers for new investors. During the period FY84 to FY93, loans totaled US$8.15 billion. The success of this strategy was uneven. Operations with central and private utilities were generally successful but revitalizing institutionally and financially weak SEBs did not tum out to be feasible and there was no effective mechanism to elicit their cooperation or enforce compliance with the Bank's legal covenants. Eventually, three loans to SEBs were canceled. Of the total US$1.8 billion committed to SEBs from 1984 to 1992, less than US$400 million was eventually disbursed. In 1993 a concerted effort was then made to address the root causes of the SEBs' lack of creditworthiness. A collaborative Government Bank initiative was formally launched at a conference on power sector reforms, in October 1993. The Government sought Bank assistance to prepare power sector restructuring projects in Bihar, Haryana, Rajasthan, Uttar Pradesh and Orissa. However, in spite of intensive dialogue with these states, lending for state power development collapsed. To initiate the reform process, the states needed some financial support from the Bank and, more important, a commitment to continue supporting the program over the longer term. The Bank, however, was unable to provide any loan without substantial reforms up-front or to give any commitment to future support. Only Orissa's reform program reached a stage of readiness for Bank financing in the FY95-97 period (the Orissa Power Sector Restructuring Loan for US$350 million was approved in FY96). This was the only loan to the power sector from FY94 to FY97. The APL will be the new approach to support power sector reform. With the APL, the Bank will enter into a long-term agreement with the state, indicating the Bank's readiness to provide its financial assistance to support far-reaching power sector reforms over an extended period of time. An initial small loan will be extended to facilitate the engagement of the reform process, thereby helping the state to take the first steps in the reform agenda, implement critically-needed investments, strengthen political ownership, and most critically, build wider public support for the program as quickly as possible. Subsequently, a series of larger loans would be extended, the exact amount and timing of which will be agreed between the Bank and the state based on progress achieved in implementing the reform and investment program, and on new investment requirements. Implementation of the reforms will enhance the role of the private sector and trigger a parallel increase in IFC's and MIGA's involvement in the power sector. 43. The Bank Group's effectiveness in supporting sectoral reforms will be significantly enhanced when pursued through the focus on reforming states. A concerted approach to a state's development strategy would build on the synergy of our lending interventions, strengthen the Bank Group's individual sectoral reform initiatives, and ensure consistency of the Bank's policy advice across different sectors.'  INDIA CAS 13 Poverty Alleviation 44. The Bank's 1997 Poverty Assessment suggests that India's slow rate of poverty reduction and large mass of poverty call for the Bank Group's assistance strategy to support India's efforts to accelerate growth in GDP and invest in human capital, infrastructure and rural development (see Annex 2). The Bank will assist India's quest for more equitable growth through its continuing dialogue with the central and state governments on improving the effectiveness of poverty alleviation programs and measures. Utilizing the poverty study and further sector work on poverty-targeted schemes, food and nutrition, which is to be completed in 1998, the Bank can help India to formulate an anti-poverty strategy targeted at those who may not readily gain access to the opportunities offered by growth. 45. India still has some of the lowest social indicators in the world. The link between persistent poverty and inadequate primary health and education services has long been recognized and yet the level and quality of public spending in these sectors has fallen short of meeting the Government's own service priorities. The scale of the problem is a threat to achieving accelerated growth with equity. A key component of the Bank Group's strategy in India, therefore, is one of the largest social sector programs in the institution, which includes the following: * a focus on helping India progress rapidly towards universal primary education, by supplementing increased state government expenditures and increasing further the geographical scope of the highly successful Bank-assisted District Primary Education Program (DPEP). The very success of the DPEP will also require that the Bank focus increasingly on higher levels of the education system, starting with upper primary schooling; * a major and rapidly-growing program of IBRD/IDA assistance to the health sector to: (a) build national health capacity; (b) improve primary care; (c) consolidate disease control efforts, including for AIDS; and above all and (d) improve health systems and institution building in selected states; and * continued IDA support to: (a) improve nutrition policies and the effectiveness and efficiency of India's nutrition-related efforts. This is an area where India's progress continues to lag behind most other social indicators and where past programs have had very mixed results; and (b) reduce fertility and stem population growth through the national reproductive and child health program. 46. The Bank Group's social sector program in India is aimed at the poorest sections of society, and particularly at disadvantaged groups such as women and children. It is complemented by the growing emphasis on: (a) rainfed agriculture in the rural development program (e.g., the Uttar Pradesh Sodic Lands project), which will target the poorest sections of rural society; and (b) beneficiary participation in the planning, financing and operation of the rural development program, notably in integrated watershed development. Lending operations in a range of sectors--from agriculture to urban water supply and low- cost sanitation--are focusing increasingly on developing institutions and mechanisms, and encouraging local level initiatives to enable poor and marginal groups, including women, and scheduled castes and tribes, to participate in employment and income opportunities generated by growth. 47. Although over one-third of India's producers are women, they remain excluded from social and economic programs. The low social status of Indian women is intimately linked to their economic exclusion, and both result, for example, in considerable domestic and community violence against them. Their situation is considerably worse in the north than in the south, and female-headed households are amongst the most disadvantaged in the country. In view of India's wide gender differentials in social  14 INDIA CAS and economic indicators, the Bank's program focuses on improving female access to education, health, nutrition, agricultural extension, technology, credit, land, and other inputs through improved gender analysis and planning and women's participation in implementation. 48. New initiatives at direct poverty alleviation will also be attempted. For instance, a District Poverty Initiative Project (DPIP) is currently under preparation which will finance small-scale infrastructure, services and capacity building to improve the living standards of the poor in some of the poorest districts in three states. This operation involves a high level of community participation and demand-driven investments, and as such is a new approach for the Bank in India. If successful, it could become a model for an expanded poverty-oriented lending program in the future. Social and Environmental Concerns 49. Social Development. To address the complex social issues associated with accelerated growth with equity, the Bank is promoting social assessments to ensure that issues related to gender and scheduled tribes and castes are addressed and that projects benefit all relevant stakeholders, including the most disadvantaged and those excluded from the development process. The Bank is also addressing and mitigating possible adverse impacts of Bank-financed projects, e.g., child labor or involuntary resettlement due to land acquisition. Involuntary resettlement is a major challenge in the Bank's portfolio and is being addressed by increasing the number of technical professionals working on resettlement, in the Delhi office, and building capacity within India through training (EDI), institutional strengthening (i.e., National Thermal Power Corporation (NTPC), Coal India), the development of sectoral (i.e., water resources and highways) and state (i.e., Rajasthan and Andhra Pradesh) R&R policies, and through self-standing environment and social mitigation projects. Indeed, a major rationale for continued involvement with large corporations, like the NTPC and Coal India, is to support these institutions' efforts to assume greater corporate responsibilities for environment and social concerns. The Bank also plans to promote improved governance through strengthening the role of civil society in the preparation and implementation of Bank-financed projects, with special emphasis on greater community involvement upstream in the design of projects. Box 3: Corruption Recent high-profile court cases in India involving allegations of corruption have re-ignited domestic public debate about this issue. Also fueling this debate are recent international business surveys which place India among countries in which corruption is perceived to be high and to be an impediment to investment. Commentators generally agree that contributory factors include excessive discretionary power in the hands of public officials, cumbersome official procedures and lack of transparency in the rules of governance. They also agree that greater economic liberalization is only part of the solution. Another indigenous. solution--a "cleansing from below"--involves the rapid decentralization of political power to over three million elected representatives at the district and sub-district levels (following the 73rd and 74th Constitutional Amendments) and an increasingly assertive citizenry which is vocal and vigorous in its opposition to corruption. The Bank's strategy will complement these indigenous efforts in four main ways: (a) continued support for economic liberalization, including the introduction of independent and transparent regulatory arrangements for liberalized infrastructure services; (b) enhancing client capacity to assess the financial management of development projects (beginning with World Bank Group-funded projects); (c) assisting grass roots organizations serving the poor, especially women, to become more accountable by promoting social audits and piloting a voluntary rating agency for NGOs and other groups that provide rural financial services; and (d) through economic sector work (ESW), assessing the sources and impact of leakages associated with selected government policies and programs. 50. Environmental Concerns. The Bank Group's response in the past to India's growing environmental problems has not benefited from a strategic approach, although there have been significant activities in a number of areas (power sector planning, industrial environmental management, GEF, water supply, and biodiversity and other natural resource management activities). The immediate  INDIA CAS 15 challenge is to develop a coherent dialogue with the government and other stakeholders in areas in which the Bank Group is best placed to assist in policy development, project financing, and building partnerships with civil society and the private sector. Particular attention would be given to exploiting win-win opportunities (e.g., petroleum pricing) flowing from the on-going economic liberalization. 51. The strategic approach will be developed around the three following themes: * "do no harm" policies to avoid and mitigate the potential negative impact of infrastructure, power and other development activities. An important element would be to deal with the weak enforcement of environmental laws and cumbersome project clearance procedures; * integrating environmental issues into sectoral policies. Efforts are underway in the energy, infrastructure and rural sectors, but greater attention will be paid to priority setting and identifying cost-effective approaches. In addition, the Bank Group also expects to work closely with India on key environmental issues in urban areas, building on successful lessons learned from the Metropolitan Environmental Improvemenf Program in Asia. A particularly important aspect of this work will be to address poverty-environment linkages; and * global issues, where our strategy will be to support India in complying with the agreements reached at the Kyoto Conference. The Bank is developing a number of instruments to help address global warming in developing countries. But none of these instruments will be able to substitute for fundamental reform of incentives in the power sector. For the fact remains that the social costs of local air pollution far outweigh any global environmental costs, even under the most pessimistic assumptions of the long-term effects of global warming. Private and Financial Sector Development 52. Despite five years of economic reforms, private investment continues to remain below anticipated levels. A critical element of the Bank Group's assistance strategy, therefore, is to help the central government and the states create the enabling environment for private capital and management to enter various sectors of the economy, particularly infrastructure, and ensure the efficient delivery of financial sector services. This will be done not only by pursuing specific programs in which each institution (IBRD, IFC and MIGA) can use its comparative advantage, but also by undertaking appropriate programs on a joint basis. 53. The promotion of sectoral reforms through lending as well as the provision of advisory services on policy and regulatory changes is an integral part of the Bank's strategy. In telecommunications, which has moved furthest in the reform process, the Bank will finance technical assistance to the newly- established regulatory authority. This will result in numerous investment and guarantee opportunities for IFC and MIGA. State power sector reforms will also create opportunities for the private sector in generation and distribution. In sectors such as urban water supply and roads, the Bank will help the central government and the states lay out the basic foundations for private sector participation, by enhancing the financial viability of the sector (urban water) or formulating the necessary regulatory and contractual framework (roads). IFC's strategy will focus on identifying specific bankable projects with strong sponsors to provide a solid basis for future broader private sector participation in these sectors. 54. A critical component of the private sector assistance strategy is the Bank Group's support for the financial system aimed at: (a) reducing macroeconomic risks that might arise in the financial sector; (b) improving financial sector services, especially outside the main centers; and (c) encouraging the development of capital markets and contractual savings institutions to provide resources for infrastructure. Support at the macro level will consist of non-lending services: sharing experiences on  16 INDIA CAS ways to improve loan collection, strengthen incentives for sound lending, level the regulatory field, maintain prudence in international borrowing, and strengthen regulation and supervision of institutions as well as capital markets. 55. Financing India's massive infrastructure needs will require substantial growth in India's capital markets. Given the major role pension funds will play in the development of a long-term debt market, the Bank will initiate a study of India's pension system. The Bank Group expects to build on its ongoing technical support for the recently established Infrastructure Development Finance Corporation (IDFC), a public/private, India/foreign joint venture, through credit enhancement and liquidity support that will increase IDFC's ability to make strategic investments and guarantees. The Bank and IFC will provide policy advice and technical assistance in the development of long-term debt and equity instruments, such as asset-backed securities and bonds based on municipal and infrastructure revenues. 56. Wherever possible, IFC and MIGA will pursue opportunities in other sectors where private investment can potentially play a much larger role. This is the case in the agribusiness sector, where ongoing policy dialogue between the Bank and the central government may facilitate the modemization and restructuring of the industry and establish a more favorable policy environment for private investment. IFC's involvement in the social sectors is also envisaged to supplement the Bank's support and encourage private provisioning of social services such as in health care. F. BANK GROUP OPERATIONS IBRD 57. In 1997 the Government requested an increase in IBRD lending, to US$2.0-2.5 billion per year. This volume of lending is necessary to support the assistance strategy outlined above and seems an appropriate Bank response to India's program of accelerated growth and poverty reduction. However, the effective use of such an increase in IBRD funding will depend on maintenance of macroeconomic stability and creditworthiness. And, from the Bank's side, prudent risk management will entail adjustment of the IBRD commitments to possible changes in the macroeconomic policies, structural policies, and creditworthiness, especially in light of the risks of unevenness in reform and the possibility of reversals. 58. Reduction in the central government's deficit (adjusted to include the oil price subsidy and to exclude disinvestment proceeds) will serve as a trigger for IBRD lending. This adjusted central government deficit is estimated at 5.8 percent of GDP in 1996-97. The "base case" IBRD lending scenario is based on progress towards reducing this deficit to about 4.5 percent of GDP by 1999-00. On the external front, the trigger will be maintenance of a sustainable current account deficit (less than 3 percent of GDP). On the structural front, the Bank will monitor progress on the central government's reform agenda with particular emphasis on trade and financial sector reform. In the area of trade, the Bank would expect the government to continue to make gradual but persistent progress towards its own goal of reducing tariffs to levels more in line with those prevailing in East Asian countries, and eliminating import restrictions. In the financial sector, the Bank would expect the government to continue to take steps to strengthen the health of the banking system, increase the role of private capital, and further liberalize the financial sector while improving the regulatory framework. 59. A second set of triggers will consist of project-specific policy reforms that make the volume of lending self-regulated. Virtually all projects in the lending program depend on improved micro- economic policies that will contribute to improved efficiency and sustainable fiscal performance, notably power and irrigation sector reform. Failure of project-specific policy reforms would automatically lead to reduced IBRD lending.  INDIA CAS 17 Chart 1: IDA and IBRD Commitments and Disbursements, 1991-2000 (US $ million) 2500 IBRD & IDA Disbursements (Investment Operations Only) 2000 * Commitments 1500 *IDA *IBRD _IDA-low case 1000 lO| | l L J | 1 i - IBRD-low case 500 A I 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Actuale =--===> <== Planned ==> 60. Satisfactory macro- and micro economic performance would bring IBRD lending in FY98-00 to around US$2.0-2.2 billion a year (Table 4). This limit is consistent with the "Concentration Ratio" guideline under the portfolio risk management policy of the Bank. Under these circumstances, India's share of the IBRD portfolio will remain largely unchanged at 8 percent while IBRD debt service will fall from around 4 percent to 2 percent by 2002 (Table 5). Table 4: IBRD/IDA Lending, FY95-FYOO (US$ million) FY95/97 FY98 FY99 FY00 FY98 FY99 FY00 Average - Base Case----- -----Low Case----- per year *. IDA 1,050 855 855 855 855 600 600 IBRD 841 2,000 2,100 2,200 1,200 600 600 Blend (IDA/IDA + IBRD) 56% 30% 29% 28% 42% 50% 50% Note: IDA lending in SDR converted to US$ at assumed rate of US$1.35 per SDR. Table 5: World Bank Exposure, 1995-2002 (Base Case) 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Total IBRD debt (US$ million) 9849 8768 8635 8442 8298 8406 8862 Exposure Indicators: IBRD debt service/exports 3.6 2.8 2.9 2.7 2.5 2.3 2.0 Incremental IBRD DS/exports 0.2 -0.4 0.2 0.1 0.0 0.0 0.0 IBRD DS/public DS 14.0 12.9 16.8 18.2 19.0 19.0 17.2 Incremental IBRD DS/publicDS 1.0 -1.7 1.1 0.4 0.0 0.2 0.0 Pref. Cred. DS/public DS 36.4 27.7 31.8 32.7 33.6 32.0 29.4 Share of IBRD portfolio (%) 8.7 8.3 8.0 7.7 7.5 7.6 8.1  18 INDIA CAS 61. On the other hand, if macroeconomic conditions were to deteriorate, the Bank would need to adjust lending with the view to gradually reduce IBRD exposure in India, concentrating on projects in which favorable sectoral conditions prevail. The "low case" scenario therefore calls for the reduction of IBRD lending to US$600 million a year, which implies a decline of India's share in the IBRD portfolio from 8.3 percent in 1997 to 6.5 percent in the year 2002. IDA Allocations and Blend 62. India's needs for IDA resources are among the largest in the world. Its per capita income remains one of the lowest in the world and the country has the world's largest concentration of poor people. Its access to foreign private capital remains limited and net private capital inflows (US$5 per capita in 1996/97) are still below that of most IBRD/IDA blend borrowers. India has also demonstrated its ability to use IDA resources effectively. A recent OED evaluation showed that the performance of India's IDA portfolio was above average in all respects--outcome, sustainability and institutional development. The IDA program in the social sectors has developed rapidly in recent years and is expected to make a major contribution to poverty reduction and social development in the country over the coming decade (see Box 1, p. 9). 63. Because of India's size and the limited IDA funds, current IDA allocation to the country is restricted to about US$855 million (SDR 633 million) a year or less than US$1 per capita per year, compared to the average of about US$2.6 per capita for all IDA recipients (excluding China). However, because of the unexpectedly low level of IBRD lending during FY95-97, IDA lending rose to 57 percent of total IBRD/IDA lending, a considerably "softer blend" than in the 1980s or early 1990s (Table 4). 64. In the context of the significantly stronger support of the Bank Group that is part of the new strategy, it seems necessary that IDA allocations be linked more closely than in the past to the country's overall economic performance. The unsatisfactory outcome of the macroeconomic performance indicators described above, or the self-regulating sector reform linked to IBRD operations, should lead to not only a significant reduction in IBRD lending, but also a possible reduction in IDA commitments. For example, if the IBRD program were to be reduced to US$600 million a year due to unsatisfactory macroeconomic or sector reform performance, new IDA commitments would also be reduced to US$600 million, resulting in a total IBRD/IDA program of about US$1.2 billion and a 50/50 blend (Table 4). The US$600 million would finance a core social sector program to enable the Bank Group to continue its efforts at poverty alleviation in India, especially in the poor states with some of the worst social indicators in the world. 65. Given the constraints on IDA allocations to India, there appears to be no IDA upside to the scenario. Indeed, on the basis of its performance, the allocations to India should be far higher than currently (IDA recipients with the same performance rating as India today receive allocations averaging US$11 per capita, compared to US$1 per capita for India). Good performance, however, would lead only to more IBRD lending. In the "base case" scenario, the blend for India would immediately decline to 30 percent in FY98, and then harden further as IBRD lending continues to rise slightly. The planned lending for the social sectors in the coming years will require virtually all IDA resources available. Thus, lending for agriculture, rural development and water which had hitherto been mainly on IDA terms would have to move to IBRD terms. A sustained level of IDA support over the next decade, however, would make major contribution to India's achieving most of the DAC Development Objectives by 2010 (Box 1) at which time the phase out of India from access to IDA resources could be considered.  INDIA CAS 19 IFC 66. IFC has had a long standing relationship with India, and its program has been predicated on the principle of maximum development impact. IFC's outstanding portfolio in India (Box 4) is its third largest exposure worldwide. From an average of US$200 million in the last three fiscal years, and assuming continued progress in the implementation of reforms, IFC's program is expected to expand to about US$250-400 million per year for the period FY98-00. Within the context of the World Bank Group's overall country strategy, IFC's areas of focus over the medium-term will be: (a) the development of infrastructure, i.e. power, telecom, ports, roads and urban infrastructure; (b) the development of the financial sector; (c) greater participation in agribusiness as agriculture reforms progress; and (d) support to export-oriented industries. IFC is also strongly supporting the Government's privatization efforts, and is currently exploring opportunities to invest in companies to be privatized, prior to their actual disinvestment, so as to facilitate a successful sale. MIGA 67. India became of member of MIGA in 1994 and the first MIGA guarantee was issued recently in the telecommunications sector. Currently, another 40 preliminary applications (representing US$7.7 billion in potential investments) are being examined. In addition, MIGA has been promoting more widely the use of its guarantees by Indian businesses making investments in other developing countries. For example, at the invitation of the Export Import Bank of India, MIGA recently concluded six seminars in five Indian cities to discuss specific investments by Indian companies abroad. Such intensive interaction with the Indian business community will be sustained during most of the CAS period. Similar efforts will be made for potential foreign investors in India, particularly in reforming states. Bank Group Guarantees 68. The Bank Group will continue to explore opportunities, where appropriate, for the use of IBRD partial risk guarantees as an additional tool to IFC's and MIGA's support in promoting private sector development in infrastructure. Partial credit guarantees may also be considered to help public sector entities such as Powergrid and NTPC to mobilize finance in the international capital market for longer maturities than they would obtain on their own. Thus far, however, the central government has taken a cautious approach in considering the possible use of the guarantee instrument in support of private investment, given the contingent liabilities that would ensue. Non-lending Services 69. Non-lending services will be more operationally relevant, timely and cost effective. Studies of individual states will support the state-focused lending program. These studies will cover state fiscal performance; the private investment climate, including investment in infrastructure; urban problems; and environmental issues. Unlike the past, much of this work will be done in partnership with local institutions. Dialogue on national policy issues, including the financial sector, will be supported through (a) poverty studies; (b) short, focused, Economic Updates, done in the field, which will continue to form the background documents for the annual consortium; (c) short policy notes in timely response to client requests, bringing to bear international experience; (d) studies of deregulation in the rural sector; (e) studies on key issues like pensions; and (f) high level conferences on key issues. EDI will be an invaluable partner in these conferences and will also collaborate with IBRD and IFC in sharing international experience in areas such as capital market development. Work in the financial sector and the rural sector will be partly supported by the Strategic Compact. Institutional development will be supported by effective use of Development Grants.  20 INDIA CAS G. IMPLEMENTING THE STRATEGY 70. The Challenge. The strategy presented in this paper is for the Bank Group to respond with unprecedented speed and intensity to the challenge posed by India today. This strategy is based on the expectation that important changes that have been introduced under the Strategic Compact and the Renewal Program would significantly increase the Bank's capacity to respond immediately, including: * the presence of the Bank's Country Director in the field, which will make possible continuous and intensive dialogue with clients especially in the states, quick responses to clients' needs and coherence within the rapidly expanding program. IFC's Regional Director for Asia II has also relocated to New Delhi, thus facilitating enhanced collaboration between the two institutions; * decentralization of staff work to the field, which will also be a cost-effective means of expanding the Bank's program. This will not involve a significant relocation of headquarters staff to Delhi, but incremental staff resources and responsibilities required will be met to a large extent by national staff. Decentralization is expected particularly to result in more effective and efficient supervision and portfolio management; * continuous consultations with clients, which should help reduce expenditures on projects which may eventually have to be dropped. Oversight from the field on project preparation should also help avoid the protracted and high-cost preparation of some projects experienced in the past as well as the need to drop projects only after large expenditures have been incurred; * resources under the "Refueling Current Business Activity" initiative of the Strategic Compact, which have been allocated for pipeline strengthening, particularly for the build-up of the transport and urban programs. The objective is to increase the pipeline factor from 20 percent to over 80 percent in the next two years. Resources from the Compact have also been allocated to fund new initiatives in rural development, the financial sector and social development, the strengthening of core services, and decentralization costs; and * new products, particularly the adaptable lending instruments, which will facilitate the implementation of the CAS. Six adaptable program loans (APL), representing 14 percent of the total number of planned operations (or 11 percent of total planned lending volume), are planned for FY98-00, mainly to support restructuring of the power sector. 71. These changes should help the Bank to respond quickly and effectively to India's needs in accordance with the new Strategy. In FY98, new IBRD commitments are expected to be about US$2 billion, more than double that of the low annual level of the previous three years, while IDA commitment will remain at around US$850 million. To strengthen the pipeline (raising the pipeline factor from 20 percent to 80 percent), 25 appraisals are planned for this year, almost triple that of the previous year. The comprehensive programs of support to the two reforming states are at an advanced state of preparation. APLs to three major states to support extensive restructuring of the power sector, comprising a series of loans amounting to about US$2.5 billion over the next 5-7 years, are expected to be presented to the Board over the next twelve months. An improved portfolio management system aimed at increasing disbursements from the US$1.3 billion in FY96 to over US$2.0 billion and the disbursement ratio from the FY96 level of 14 percent to over 20 percent in the next few years has also been introduced (Box 4).  INDIA CAS 21 Box 4: Portfolio Management IBRD/IDA Portfolio Performance. On November 30, 1997, undisbursed balances were US$4,411 million (67.5 percent of original commitments) for IDA and US$3,950 million (72.3 percent) for IBRD. From FY96, the average disbursement ratio was 14.4 percent, well below the Bank average. Strong efforts to improve this portfolio management have therefore been made during the last year and will continue to be a high priority. During FY97, disbursements for IDA and IBRD rose from US$1.3 billion in the previous year to US$1.6 billion, and the ratio of disbursements to outstanding commitments was 16.4 percent, above the Bank average for the first time in some years. Disbursements are expected to rise to over US$2 billion in the next few years, and the disbursement ratio to over 20 percent. Other indicators also show improved performance in FY97. For example: (a) the average implementation period for projects fell from 4.66 years (FY96) to 4.43 years (current); (b) the ratio of problem projects fell from 20.2 percent (FY96) to 10.3 percent (current); and (c) the ratio of projects at risk fell from 20.8 percent (FY96) to 11.8 percent. Proactive Approach to IBRD/IDA Portfolio Improvement. A central part of Bank strategy for improving the portfolio is increased collaboration with the government in reviewing the portfolio and the pipeline with the main clients (states or central ministries). Such review are chaired by the Head of the Bank/Fund unit in DEA and by the Bank's Country Director, and they take place every six months in key states and central ministries, attended by Bank staff and high government officials. Project ratings, supervision plans and preparation schedules are shared at these reviews, and management meetings are held with DEA afterwards to discuss problem projects and special issues. Mr. Wolfensohn and the Finance Minister have agreed personally to provide oversight to these reviews. Other strategic initiatives which are expected to have an important impact on the quality of the portfolio and the cost effectiveness of Bank supervision are: (a) greater leadership by national professional staff; (b) increased concentration of core services (audit, financial management, procurement) in the field office to enhance impact on the ground, especially through better advisory services and client training; (c) delaying new lending until key actions (staff appointment, procurement planning, social and environmental safeguards) have been completed; and (d) focusing more directly on restructuring projects and/or canceling surplus commitments. IFC's Portfolio. As of November 30, 1997, IFC's outstanding portfolio in India was US$880 million, which accounts for 8 percent of its total portfolio and IFC's third-largest exposure worldwide. IFC's program declined from about US$280 million in FY95 to US$101 million in FY96, mainly due to a lack of progress in the reform program, particularly in the infrastructure sectors. In FY97, IFC's program improved substantially, with gross approvals of US$212 million, reflecting some progress in reformns and a liberalization of the external commercial borrowing guidelines. H. RisKs 72. The rapid build-up of the India program over the past twelve months has raised expectation both within the Bank Group, as well as in India, especially in those reforming states most advanced in dialogue with the Bank. The cost of failure to deliver the agreed program is therefore high, and risks remain, for the following reasons: * Delays in Consensus Building. Addressing the issues confronting various sectors and states will require a consistent policy dialogue, supported by sound analytical work and innovative operations. The Bank Group and the Government agree that the dialogue should be consultative and participatory. This approach is likely to foster greater consensus and ownership by clients and other stakeholders, but it could also lead to unanticipated delays. * Delays in Project Processing. While the Government is committed to a much-expanded program of Bank assistance, successful delivery will require changes in the Government's own procedures and its attitude towards the Bank. Red tape, lengthy clearance processes, lack of transparency in decision making and unclear relationships between central and state agencies have in the past frequently caused delays in the processing and implementation of Bank operations. * The government, on the other hand, has expressed concern that the Bank's lending process often generates new, or tougher conditions as loan preparation proceeds. It also has  22 INDL4 CAS expressed concern that new, more complicated procurement procedures, may also delay disbursement. The Bank Group needs to take action to define the project more clearly up- front, and to put in place procurement procedures before loan effectiveness. Unsatisfactory Implementation of Approved Operations. Though progress has been made of late, poor performance of the portfolio remains a problem in India. The realism of an ambitious new lending strategy depends on the borrower's ability to remove the backlog of undisbursed commitments. 73. To help overcome these problems, the Bank's Delhi office and the Ministry of Finance have established a joint monitoring system for both projects under preparation and projects under implementation. Periodic reviews are held with sectoral ministries and state governments to ensure efficient processing and also to focus attention on implementation problems. 74. For the Bank Group as an institution, the strategy outlined in this document also carries risks, including: * Credit Risk. The rapid expansion of Bank Group lending to India, involving a significant hardening of the IDA/IBRD blend, carries additional credit risk for the institution. The slow progress in reducing the consolidated public sector deficit and improving the composition of public expenditures is of particular concern. Although on the country level the triggers for lending volume will help manage this risk, there could be a substantial lag between increased lending and a possible deterioration of the country's creditworthiness. In any event, the magnitude of the increased lending to a large country like India will require extra attention in overall risk management by the Bank. * Deterioration of the International Environment. The crisis in East Asia is likely to lead to increased competition in India's export markets, and, perhaps, a slowdown in private capital flows and economic growth. These developments may make it more difficult for India to grow faster and reduce poverty, and to service external debt. The Bank will encourage even greater deregulation efforts and agile macroeconomic management to counter these risks. * Concentration of the Bank's Exposure to afew States. Although concentrated lending to a few states does not by itself increase credit risk, large external borrowing by a few large states may have creditworthiness implications for the central government. More important, the possibility of financial failures in states strongly supported by the Bank implies reputational risk to the institution. Failure of the reform program in the focus states would not only undermine the Bank's credibility but also reduce its potential impact on India's whole reform process. * Uncertain Political Environment. The continuity of economic policies enjoyed through several recent changes of government at the center could end. Since future coalitions may be composed of political parties with different economic philosophies, economic reforms may become hostage to political exigencies. Political conditions in the reforming states are more stable but are still subject to the influence of an uncertain situation at the center. Competitive populism remains a feature of state politics in India; administrative inefficiencies and infrastructure bottlenecks may also constrain the ability of the reforming state governments to show results within the relatively short electoral cycle. Changes in the political leadership of the reforming states leading to a major reversal of policies cannot be ruled out.  INDIA CAS 23 75. Without doubt, these risks are considerable. However, India is the country with the largest number of poor people in the world and failing to respond to its needs would in itself be a significant risk to the Bank as a development institution. Managing these risks successfully, on the other hand, will enable the Bank Group to make a more important contribution to growth and poverty reduction in India over the coming decade. James D. Wolfensohn President By: Caio Koch-Weser Jannik Lindbaek   Annex 1 Page 1 of 9 INDIA CAS: Country Program Matrix (FY98-00) STRATEGIC STRATEGIC ACTIONS | PROGRESS INDICATORS BANK GROUP'S ASSISTANCE OTHER ASSISTANCE OBJECTIVES l 1. Sustained Rapid Growth with Equity, Especially in Rural Areas A. Reduce the consolidated * Broaden tax base; disinvest from * Adjusted central govemment fiscal deficit * NLS: Policy dialogue in collaboration with the * ADB: Program loan to one state fiscal deficit, public enterprises at the central reduced from 5.8 percent of GDP in 1996- IMF; short-term economic monitoring; macro (Gujarat) approved and another 1-2 level; rationalize expenditures; 97 to 4.5 percent by 1999-00. assessment; state fiscal restructuring studies under discussion. reduce subsidies at * 2-3 state economic restructuring programs (Punjab, Haryana, Assam, Tamil Nadu, * DFID collaboration with Bank on the center (e.g. food, fertilizer, oil) initiated over the next two years. Kerala, Delhi, Maharashtra). policy-based lending to selected and at the state level (e.g. power, * LEN: Support for state economic restructuring, states under consideration. water). beginning with Andhra Pradesh and Rajasthan. EDI: Training and capacity building at state and municipal levels. B. Strengthen thefinancial sector. * Improve banking. * Restructure public banks. * Non-performing assets reduced to below * NLS: Financial sector studies and major * DFID assistance for strengthening * Further deregulate bank lending. 7% of total assets, capital adequacy conference. bank regulation and supervision. * Further improve supervision, increased to at least 8%, taking into account * NLS: Continuous and informal advice. * USAID assistance for financial including off-site surveillance. the conservative treatment of provisioning. * LEN: Possible follow-up operation (to the on- institutional reform and expansion. * Reserve requirements and forced lending to going Financial Sector Development Loan), govemment and priority sectors further focused inter alia on payments system reduced. development and personnel upgrading. * Interest rate deregulation completed. * IFC: Support for regional diversification of * Share of private bank lending increased. private sector banks and for diversification of * Some public banks disinvested. credit-worthy leasing companies. * Level the playing field for banks and * Risk-focused supervision methods adopted. * IFC: Assistance to improve financial large non-bank finance companies * Off-site surveillance capacity upgraded. reporting, treatment of non-performing assets (NBFCs). and capital adequacy. * IFC: Possible assistance for housing finance and mortgage securitization. * Technical assistance on NBFCs' regulatory friamework.  Annex 1 Page 2 of 9 STRATEGIC STRATEGIC ACTIONS PROGRESS INDICATORS BANK GROUP'S ASSISTANCE OTHER ASSISTANCE OBJECTIVES * Improve capital markets. * Promote development of domestic * Liquidity of govemment securities * NLS: Joint Bank Group (including EDI): capital markets, especially for long- improved. Support development of long-term debt term debt instruments. * Insurance sector and pension funds market. liberalized. * NLS: Development of new instruments * Capital market infrastructure further through continued advice and TA to the improved. recently established Infrastructure Development Finance Company. * NLS: Study of pension system. * IFC: Work on institutions for credit enhancement for long-term financing of infrastructure projects, especially those outside the main money centers. * IFC: Invest in private insurance companies. * Improve rural finance. * Improve financial viability of the * Regional rural banks restructured. * NLS: Rural finance studies continued, with * Coordinated program of assistance rural financial system and increase * Role of NABARD redefined. focus on cooperatives and rural branches of (in rural finance) involving SDC, financial flows to new areas. * Private rural banks established. commercial banks. KfW, GTZ, CIDA, DFID, OECF, * Improve access of women and the * Access (especially for women and the * EDI: Review/re-visit experience in grass-root USAID and AUSAID. poor to sustainable financial underserved poor) improved. management training for poor women. services. * LEN: Support for rural finance reform, including micro-finance. * IFC: Support for local private banks in rural areas. C. Promote private sector * Disinvest public enterprises. * Disinvestment program accelerated. * NLS: Preparation of a country framework for development. * Promote foreign direct investment. * Govemment monopolies in financial private investment in infrastructure. * Improve the enabling environment services, utilities, etc. eliminated. * NLS: Continued efforts to promote private for private investment in * Administrative processes for foreign direct foreign investment in India, through varied infrastructure. investment streamlined, domestic and intemational partnerships, for example, with institutions in Japan and Singapore. * MIGA guarantees for foreign investors involved in privatization.  Annex 1 Page 3 of 9 STRATEGIC STRATEGIC ACTIONS PROGRESS INDICATORS BANK GROUP'S ASSISTANCE OTHER ASSISTANCE OBJECTIVES D. Spurfaster and sustainable agricultural growth and rural development. In states with project interventions: * Improve technical, * Promote state-level comprehensive * Ag. productivity by unit of water increased. * NLS: Completion and dissemination of water * EU: irrigation projects in Kerala. financial, environmental water resources restructuring * Cost recovery improved; irrigation subsidy resource management study and development * Germany. Water resources performance of irrigation programs. reduced. of broad-based policy framework. management (Bihar, UP, systems. * Support service institutions (water * O&M in state budgets fully funded. * EDI: Training and TA in water resource Rajasthan, Himachal Pradesh, and users' associations (WUAs), Water * Water Authorities established. management, farmers organization. Tamil Nadu); watershed Authorities) financially, * State multi-sectoral water policy * LEN: At least one project each year at the development in Maharashtra and managerially self-reliant, and framework, including groundwater state level to support state level restructuring Kamataka. responsive to multi-sector users. legislation, adopted. programs. * Netherlands: Rural water supply. * Increase cost recovery, establish Ganga Action Plan support. water tariff *mmissiou/mechanism * DFID: Kerala minor srrigation. to ensure financial sustainability. * Rationalize public spending. * Improve the composition * Promote state-level comprehensive * Ag. GDP growth rate above 3 percent per * NLS: Develop rural development strategy for * Netherlands: Rural development- and delivery effectiveness agriculture & rural restructuring annum by 2000. more effective use of public resources and North Bengal. of public spending in ag. programs. * Decline in the growth of total factor state interventions. * DANIDA: Orissa integrated & rural programs to close * Create the environment for private productivity halted and reversed by 2000. * LEN: In reforming states, one project per livestock development project. productivity gaps in sector participation in the delivery of * Private sector participation in the provision year (Agriculture Development Projects * EU: Kerala horticulture irrigated and rainfed agricultural support services and of agricultural and rural services and inputs (ADP)) piloting demand-driven and development project; Kerala agriculture. inputs. increased. participatory approaches to agriculture and agriculture markets project; vet. * Enhance institutional capacity for * Cost-sharing by beneficiaries increased. rural development. livestock services for disease community-based, participatory * Evidence of participatory decision-making * In non-reforming states where the incidence control. approach to ag. and rural in ag & rural development programs, and of of poverty is high and the project * DANIDA, EU, OECF: Integrated development programs. strengthened local responsibility, implementation record is satisfactory, pilot watershed management projects. * Promote development of the rural accountability and financial sustainability. technological and institutional innovations in * SDC: Study of RNFS. non-farm sector (RNFS). the delivery of selected programs such as land reclamation (UP), rural water supply (Maharashtra), and integrated watershed management. * Develop technology. * Research effectiveness improved. * LEN: National agricultural technology * FAO: Plant quarantine project * Increased private sector participation in project. technology generation. _  Annex 1 Page 4 of 9 STRATEGIC STRATEGIC ACTIONS PROGRESS INDICATORS BANK GROUP'S ASSISTANCE OTHER ASSISTANCE OBJECTIVES * Improve food security * Phase out non-tariff barriers and * Price distortions between domestic and * NLS: Disseminate commodity studies. * EU: Kerala agriculture markets and price stability. export restrictions for international prices reduced. Complete studies on food grain marketing; project. agriculture/forestry products as per * Regulatory constraints to agricultural trade food security & nutrition. the WTO agreement and agro-industry eliminated or relaxed. * IFC: Support private sector investments in * Create a price policy and regulatory * Distortionary government interventions in agro-industry if policy framework improves; environment for greater, efficient selected markets (rice, wheat, sugar) and in dedicated terminal, storage and and stabilizing private sector reduced. marketing infrastructure. participation in agricultural trade * Targeting of Public Distribution System and agro-industry. (PDS) improved; alternative food transfer * Provide effective safety nets to the mechanisms successfully piloted. poor. E. Ensure Environmental sustainability. * Strengthen forestry & * Develop more effective processes, * Policy, legislative and institutional reforms * NLS: Review of forestry policy; develop * EU: Natural resources management bio-diversity systems and skills to manage natural adopted. environmental strategy. (Gujarat); and rehabilitation of management. resources. * Area under participatory management of * EDI: Conference on environmental common lands. * Implement the National Forest natural resources between public sector sustainability. * Ford Foundation: Strategic support Policy which aims to sustain agencies, communities and NGOs * Supervision of ongoing projects. to joint forestry. ecologies, provide livelihood increased. * OECF: Forestry projects sources for local people, and * Sustainable adoption of improved forest and (Rajasthan, Gujarat, Tamil Nadu & provide sources of wood and other natural resource management technologies. Kamataka). forest products. * Successful integration of bio-diversity * USAID: Trade in environmental * Support bio-diversity, including conservation and natural resource services and technologies; and coastal zone management. management practices in rural development biodiversity support program. activities. * UNDP: Bio-village demon. project; and Wildlife Institute of India support. * DFID: Forest management (Kamataka and Himachal Pradesh); & biodiversity (Kamataka). * SIDA: Tamil Nadu and Orissa social forestry. * DANIDA: Land development in Tamil Nadu. * WWF: Tiger conservation. * MacArthur Foundation: Andamans biodiversity conservation.  Annex 1 Page 5 of 9 STRATEGIC STRATEGIC ACTIONS PROGRESS INDICATORS BANK GROUP'S ASSISTANCE OTHER ASSISTANCE OBJECTIVES E. Ensure Environmental sustainability cont'd. * Abate industrial, * Strengthen GOI pollution control * Ambient environmental conditions in hot- * NLS: Preparation of Bank Group's * USAID: Trade in environmental municipal, and policies, compliance systems, and spot areas improved. environmental strategy for India. services and technologies. agricultural sources of enforcement. * Industrial compliance rates improved. * NLS: Exploratory analytical work under the * DFID: Research on salinity due to water pollution and * Create economic incentives for * Investment in pollution control and clean South Asia Regional Development Initiative. poor water management. energy sector sources of pollution abatement by both private technologies increased. * LEN: Recent Environmental Management * OECF: Support to the West Bengal air pollution. and public sector polluting entities. * Efficiency of coal-fired power generation Capacity-Building Project, in support of State Pollution Control Board. * Promote clean coal and alternate and power T&D raised. policy, regulatory and enforcement activities fuels in the power sector, and * Investments in clean coal, demand-side in several agencies and NGOs. cleaner fuels and technologies in the energy efficiency, and renewable energy * LEN: Additional support to hazardous waste transport sector. sources increased. management and disposal to supplement on- * Explore renewable energy and * Access improved in both urban and rural going lending for industrial pollution control. energy efficiency strategies. areas to sanitation. * LEN: Environment Management Project, * Expand investments in sanitation, * More timely data collection, and focusing on key urban environment issues. both urban and rural. publication of data, on ambient IFC: Support for non-traditional projects -- environmental conditions. energy efficiency. * Mitigate the * Adopt a pro-active approach during * Improved stakeholder involvement in EA * NLS: Review of environmental issues in the * OECF: Conservation and town environmental and social enviromental assessments (EAs), monitoring and compliance. power sector. development. impact of infrastructure based on education and training of * R&R template adopted. * In consultation with 301, develop template * DFID Conservation management investments, including in borrowers, and partnerships with * Projects under implementation with for addressing R&R issues. center. sensitive areas such as stakeholders. successful mitigation programs increased. * SPN: Strengthen borrowers in power, coal and coastal zones. transport to take concerted action to mitigate environmental and social impact of investment I EDI: Training in R&R. II. Human Resource Development A. Increase overall literacy * Stimulate demand for schooling and * Progress towards net enrollment ratio of * LEN: Annual projects in support of basic * EU and DFID are expected to also rates and increase level of increase capacity to enroll, with 950/., (overall SC/ST and girls). education at the district level (in UP, Bihar, support further investments in education achievement. special emphasis on disadvantaged AP, Rajasthan); a multi-state DPEP follow- primary and upper primary groups. up. education. * Increase access to upper primary * Progress towards net enrollment ratio of * LEN: Upper primary education project. education, especially for girls. 75% (overall, SC/ST). * NLS: Upper primary education study. * Improve classroom practice through teacher training and improved _ instructional materials. * Increased leaming achievement as * EDI: Seminar on multigrade teaching. measured on math and language tests.  Annex 1 Page 6 of 9 STRATEGIC STRATEGIC ACTIONS PROGRESS INDICATORS BANK GROUP'S ASSISTANCE OTHER ASSISTANCE OBJECTIVES A. Increase overall literacy * Increase the efficiency and * Progress towards national qualification * NLS: Technology and scientific manpower * DFID is considering participating rates and increase level of responsiveness of technical and framework to facilitate mobility across sub- development training. in the sector work. education achievement scientific training institutions to the sectors as well as participation of non- cont'd. changing labor market. traditional students. * Progress toward open transparent funding mechanisms with incentives for private funding. B. Reduce population * Reduce unwanted fertility by * Fertility reduced to replacement level of 2.2 * LEN; Support for reproductive and child * DFID: Population services, women growth. emphasizing choice of reproductive births per woman within the next decade. health. and child health. methods and community * Infant mortality reduced to 60 per 1,000 * EDI: Regional conference on population * USAID: Innovations in family participation, as well as better live births, and matemal mortality reduced economics and policy. planning services. integration with other maternal and to below 200 per 100,000 live births within * UNFPA: Family planning services. child health services. the next decade. * Reduce wanted fertility through * Coordinated monitoring of outcome education for girls and employment indicators in population, health and opportunities for women. education established in selected districts. C. Improve access to and * Rationalize service norms. * Efficiency improved such as in bed turn * EDI: Health finance tralning. * Several donors, including DFID: quality of health services. * Update technological approaches over rates, bed occupancy rates and average * LEN: Project support for AIDS. Mother and child health (Orissa); (TB, malaria). length of stay. * LEN: Projects extending state health systems health and welfare; * Implement referral mechanisms. * Effectiveness also improved in areas such as reform to other states. * DANIDA: Community * Improve management and planning. major surgeries/deliveries, and post LEN: Project for food and drug capacity ophthalmology and blindness. * Achieve sustainable financing. operative infection rates. building and for surveillance and disease * USAID: AIDS prevention and * Improve the regulatory framework * Quality improved in areas such as in-patient control. control; health and nutrition for private provision of health care. satisfaction, staffing, equipment and drug * NLS: Public and private roles in health care. support. norms. * IFC: Support for private investments in * DFID, DANIDA, WHO assistance * User charge policies implemented. tertiary health care and technology transfers. for TB. * Netherlands: Andhra Pradesh health education. * KfW: Assistance to Maharashtra. * Partnership with CDC-Atlanta on disease control. D. Reduce malnutrition. * Address nutrition issues through * Moderate and severe malnutrition halved in * NLS: Nutrition review. * UNICEF supported preparation of interventions linked with education, next decade. * LEN: Possible projects for AP ICDS and for WCD project, and is interested in health, and social welfare services, * Incidence of low birth weight halved in next women and child development (WCD) in five micronutrient malnutrition. based on lessons of experience. decade. states. * SIDA, CIDA and WFP: Maternal * Anemia incidence among women halved in amemia. next decade.  Annex 1 Page 7 of 9 STRATEGIC STRATEGIC ACTIONS PROGRESS INDICATORS BANK GROUP'S ASSISTANCE OTHER ASSISTANCE OBJECTIVES _ E. Provide effective, * Reform programs to improve * Budget for subsidies reduced as share of * NLS: Poverty Assessment 11 (including scope * Examples include: DFID: sustainable safety nets. targeting while reducing budgetary GDP. for insurance schemes for the poor, especially rehabilitation of blind people. impact; remove subsidies which do * Targeting of safety net programs improved. women). * WFP: Employment through forestry not reach the poor; pilot targeted * Incidence of rural poverty reduced. * LEN: Experimentation with bottom-up and tribal development. food and fertilizer subsidies. * Medium-term strategy to address the approaches to designing and implementing * Netherlands: Training village Investigate market-based insurance economic dependence of women formulated targeted anti-poverty programs. women in agriculture. products for the poor, especially and adopted. * EDI: Conference on growth, information * IFAD: Tamil Nadu women's women. technology and social insurance. development * IFAD: Andhra Pradesh participatory tribal development. * NORAD: Women's economy program. IIL Investment in Physical Infrastructure A. Reduce infrastructure Power: bottlenecks. * Promote comprehensive state power * Reform legislation adopted in several states. * LEN: Several state power sector restructuring * ADB: Various investments; Gujarat sector restructuring programs. * Central and State Electricity Regulatory projects (e.g., Haryana AP, Rajasthan). power sector loan. * Establish new commercial utilities Commissions established. * IFC: Optimize the combined IBRD/IFC * DFID: TA support to state power to function in a competitive and * Tariff adjustments implemented, leverage in support of reforming states. sector restructuring programs appropriately regulated power particularly in agriculture. * IFC: Support captive power plants/lPPs where (cofinancing with IBRD)(Orissa, market. * Privatization strategy for NTPC and appropriate, and non-traditional projects. Haryana, Andhra Pradesh). * Institutionally strengthen NTPC, POWERGRID prepared. * LEN: Support modemization and renovation * KfW: Rehabilitation of generating POWERGRID and other central * Number of IPPs increased. of the national grid network plant in Haryana public sector utilities to enable them * LEN: Strengthen environmental capacity in * Various investments by to leverage greater investment. power system planning (transfer to reforming OECF/JEXIM (e.g., Faridabad CC * Create an enabling environment for states planning model used for sector study on Project, POWERGRID) private investment in the sector. environmental issues in the power sector). * SDC: Photovoltaic markett * EDI: Training in infrastructuring finance. renewable energy project. * MIGA and IBRD: Guarantees for foreign * SIDA: HVDC thermal conversion. investors in infrastructure. * SIDA: hydroelectric project. * NLS: Initial analytical work on regional * USAID: Energy management dimensions under the South Asia Regional training/private power TA. Development Initiative.  Annex 1 Page 8 of 9 STRATEGIC STRATEGIC ACTIONS PROGRESS INDICATORS BANK GROUP'S ASSISTANCE OTHER ASSISTANCE OBJECTIVES A. Reduce infrastructure Energy Resources: bottlenecks cont'd. * Liberalize coal pricing and * Liberalization program implemented. * NLS: Fuel supply strategy and options. * JEXIM: Cofinancing distribution. * Private sector's share of the market * Intensive supervision of the recent Coal Sector * DFID: Coal sector training * Mitigate environmental impacts. increased. Rehabilitation Project. * Australia: Coal mining project. * Gradually reduce govemment * IFC: Support private investment in coal control in oil, gas and mining. mining (Sarshatali coal mine, West Bengal) and other potential mining sectors, including iron ore and bauxite. Highways/Roads: * Improve strategic planning and * Length of roads under construction or * LEN: Two state highways per year each * ADB: National Highway. maintenance effectiveness. upgrading increased. involving 1,000 km of roads. Also National Development Program (TA); series * Facilitate private investments in * Rational and credible plans developed for Highways project. of national highway projects under viable niches and more effective road expenditures and revenues. * IFC: Support initially, moderate size preparation; Delhi-NOIDA bridge private sector involvement in * Systematic management of maintenance commercially sound projects with bankable (private sector loan). engineering, construction and evident. concession agreements. * OECF: Possible financing of a maintenance. * Private investment framework in place; * EDI: Training in regulatory framework for future National Highway project. projects initiated and delivered. roads. * NLS: Initial analytical work on regional dimensions under the South Asia Regional Development Initiative. Ports: * Expand major port capacity. * Public and private sector investment in * NLS: Discussion of trade logistics study. * Netherlands: Modernization of the * Reform regulatory environment for major ports increased. * NLS: Initial analytical work on regional Rajabagan dockyard. private investment in major ports * Private sector operations of major ports issues under the South Asia Regional * ADB: Bombay and Madras port and address labor-related issues. increased. Development Initiative. improvement projects. * Continue reforms of state * Additional private investment in minor * Joint Bank Group: Provide advice on private * BOT schemes. regulations for minor ports. ports. sector development. * Increased traffic handled with same or * IFC: Support investments in minor ports and reduced ship waiting. provide advisory services on privatization (Gujarat); focus on minor ports and major ports where labor and regulatory issues are resolved; and include dedicated terminal facilities. Telecoms: * Complete reforms. * TRAI fully operational. * Joint Bank Group: Provide TA for private * Australia: Telecoms network * Strengthen institutional capacity of * Private investment increased. sector development in telecoms. management project. the Telecoms Regulatory Agency of * IFC: Support projects in basic, cellular and India (TRAI). paging services. * IFC: Support second/third tier projects.  Annex 1 Page 9 of 9 STRATEGIC STRATEGIC ACTIONS PROGRESS INDICATORS BANK GROUP'S ASSISTANCE OTHER ASSISTANCE OBJECTIVES B. Support urban Urban/Municipal Development: development. * Develop a policy framework for * National policy for urban reform * LEN: Urban development fund; * USAID: Financial institutions urban reform and performance-based formulated. urban infrastructure; and municipal services. reform and expansion project. incentive system. * Institutional arrangements developed for * IFC: Urban solid waste disposal and general * Establish institutional and finar.cial devolution of power to local governments urban water and waste treatment facilities. capacity to plan and implement (implementation of the 74th Constitutional urban projects, including R&R Amendment). components. * R&R policy for urban infrastructure * Involve women's groups in planning formulated. and implementation. * Concerns of women (e.g. child safety) incorporated in design. * Employment generated for women in implementation, and pay converges. Urban Water Supply and Sanitation: * Formulate comprehensive state- * Framework for policy reform and * LEN: Two to three urban water supply * ADB: Tirupur area development level reform programs to enhance commercialization of water utilities projects. project envisaged (private sector financial and operational viability of developed. * IFC: Advisory services on private investment loan). water utilities. * Private sector involvement in management in selected urban water supply and sanitation * OECF: Urban city water supply. * Promote private sector participation. of selected water utilities increased. projects (e.g., Cochin). * Tariff structures improved. Urban Transport * Develop for one major city a policy * Planning and budgetary mechanism * Mumbai Urban Transport II. * OECF: Proposal to assist Delhi and institutional framework for between the state, the city and Indian urban rail. improved planning, construction railways established. * GTZ light rail study for Mumbai and operation of urban transport. * Improved procurement and construction and BOT project for Bangalore. framework established. * Efficient framework for R&R established. General Infrastructure Support * General help developing a cross- * Overall private investment in infrastructure * NLS: Preparation of a country framework for sectoral framework to attract private increased. private investment in infrastructure. investment. . LEN: Private infrastructure financing facilities through financial intermediaries.  I  Annex 2 The 1997 Poverty Assessment and the Country Assistance Strategy Key Findings of the Poverty Assessment Country Assistance Strategy (June 1997) Proposals * Although the incidence of poverty has declined * Support India's push to achieve East Asian levels of steadily, the pace has been slow. Between 1951 and GDP growth and poverty reduction. Also emphasize 1993, the incidence of poverty in India went from 45 human resource development and private sector percent to 35 percent. The absolute number of India's development, infrastructure and rural development. poor (312 million in 1993-94 compared to 164 million in Experiment with bottom-up approaches to targeted 1951) remains very large. In contrast, the incidence of antipoverty interventions for individuals who are unlikely poverty in Indonesia fell from 58 percent in 1970 to 8 to benefit from the growth process. percent in 1993. * In general, the incidence of poverty has been higher * Develop and implement both a rural and urban in rural India (where about 70 percent of the country's development strategy. population resides) than in urban areas. However, both were unacceptably high in 1993-94: 31 percent (urban) and 37 percent (rural). * Between 1970 and 1994, growth accounted for * Support India's push to achieve East Asian levels of almost 100 percent of poverty reduction. Agricultural GDP growth. Also, invest in human capital. Promote investments were a key contributor. Most anti-poverty agriculture sector reforms. Experiment with alternative, programs have been expensive and ineffective. more effective targeted anti-poverty interventions. * Social indicators have improved but this too has * With the continued access to IDA, ESW and lending been a slow process. For instance, infant mortality rates, for health, nutrition, family welfare and primary as one example, fell from 146 deaths per thousand births education will continue. Among the newer efforts will be in the 1950s to below 90 at the start of this decade. strengthening micronutrient initiatives and preparatory Nevertheless, the Indian rate was still close to the average work on non-communicable diseases. IFC is for Sub-Saharan Africa and one of the highest in the concentrating on tertiary health care. IFC is also world. considering projects in the education sector. * India's social indicators are even worse for women, * Human development interventions that particularly about 80 percent of whom suffer anemia. More than 60 target women and girls (e.g. reproductive and child percent of girls do not complete primary school. Adult health, district primary education projects). Also literacy rates for Indian females was 34 percent compared experiments with bottom up approaches which are based to 64 percent for males in 1991, figures almost identical on careful social assessments (e.g. the district poverty to those for Sub-Saharan Africa and far behind those in initiatives project). China. Matemal mortality (437 per 100,000) is the highest in the world. * Large regional disparities remain. For instance, * State-focus lending to maximize leverage and during 1993-94 the proportion of rural population of the impact. Still, some poor states may not receive much state of Bihar in absolute poverty was 64 percent--more bank assistance if they do not reform. than two-and-a-half times higher than the proportion (25 percent) of the (combined) states of Punjab and Haryana. * Although overall poverty has declined, villages * Increase district (ground) level work (for example, studies have identified pockets of increasing poverty. DPIP, DPEP) and better understanding of social and This is true, for example, for the elderly and disabled in economic relationships through social assessment. some villages, where economic transformation has eroded traditional social support systems. * High cost and ineffectiveness of anti-poverty * Policy dialogue (with states and center) to include programs. refocusing programs. Policy-based lending to selected states to promote better-targeted poverty alleviation programs and direct more expenditures toward human development programs.  4  Annex 3 Page 1 of 2 India at a glance 1117197 POVERTY and SOCIAL South Low- India Asia Income Devslopment diamond Population mid-1996 (millions) 943.2 1,264 3,229 Lffeexpedancy GNP per capita 1996 (US$) 380 380 500 GNP 1996 (billions US$) 358.4 481 1,601 Average annual growth, 1990-96 Population t%J 1.7 1.9 1.7 GNP Gross Labor force(X) 2.0 2.1 1.7 per primar Most recent estimate (latest yearavailable since 1989) capita enrolimen Poverty: headcount index (% of population) 35 Urban population (% of total population) 27 26 29 Life expectancy at birth (years) 62 61 63 Infant mortality (per 1,000 five biths) 68 75 69 Access to safe water Child malnutrition (% of children under 5) 63 Access to safe water (% of population) 63 63 53 Illiteracy (% ofpopulation age 154) 48 50 34 Inca Gross primary enrollment (% of school-age population) 102 98 105 Male 113 110 112 tLow-income group Female 91 87 98 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1995 1996 Economic ratlo GDP (billions USS) 91.0 214.3 328.3 355.8 Gross domestic investmentUGDP 20.8 24.2 26.2 26.5 Openness of economy Exports of goods and servceGDP 6.2 6.0 12.1 12.0 Gross domestic savingslGDP 20.4 21.1 22.7 231 Gross national savingsJGDP 20.6 21.6 24.2 25.3 Current account balancelGDP 0.0 -2.8 -2.1 -1.2 Interest payments/GDP 0.3 0.6 1.4 1.3 Savings Investment Total debWGDP 15.1 19.1 28.9 25.2 Total debt servicelexports 13.1 22.7 26.9 22:6 Present value of debtGDP .. .. 22.8 Present value of debtlexports .. .. 161.4 Indebtedness 197545 1986-96 1995 1996 1997.05 (average annual grwth) Incia GDP 4.2 5.6 7.3 7.6 6.5 GNP per capita 1.9 3.5 5.4 5.2 Low-ncome group Exports of goods and services 3.9 11.5 31.6 7.5 10.3 STRUCTURE of the ECONOMY (% of GDP) 1975 1985 1995 1996 Growh rates of output and investment Agriculture 40.5 33.0 27.9 27.8 30- Industry 23.7 28.1 30.1 29.2 (%) Manufacturing 16.7 17.9 19.7 20.1 15 Services 35.8 38.8 42.1 43.0 Private consumption 70.2 67.8 66.8 66.4 93 92 93 94 es 9o General government consumption 9.4 11.1 10.5 10.5 Importsofgoodsandservicas 6.6 9.1 15.6 15.3 -3GDI GDP 197545 1986-96 1995 199s (average annual grwth) Growth rates of axporte and Impoot ) Agriculture 2.5 3.6 -0.1 5.7 40 Industry 5.3 6.6 11.6 7.0 Manufacturing 5.5 6.7 13.6 8.1 20 Services 5.1 6.7 8.8 7.4 Private consumption 4.5 4.8 2.6 6.8 o General government consumption 6.5 3.9 5.1 7.2 2 oa 94 r' rB Gross domestic investment 4.1 7.1 17.9 8.5 20 Imports of goods and services 9.1 6.0 17.3 5.7 -Exports I Iports Gross national product 4.1 5.4 7.2 6.7 Note: 1996 data are preliminary estimates. All GDP data other than sectoral value-added are in market prices. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data ere missing, the diamond will be incomplete.  Annex 3 Page 2 of 2 India PRICES and GOVERNMENT FINANCE 1975 1985 1995 1996 Domestic prices Inflation (%) (% change) Is Consumer prices .. 5.8 10.2 7.0 Implicit GDP deflator -1.5 7.5 7.3 7.0 10 Government finance (% of GDP) o 0 Current revenue .. 23.8 24.7 25.2 91 92 93 94 95 go Currentbudgetbalance .. 2.2 1.0 1.3 -GDPdef -O--CPI Overall surplus/deficit *- -11.0 -10.1 -10.4 TRADE 1975 1985 1995 1996 (millions US$) Export and Import levels (mill. US$) Total exports (fob) .. 8,793 32,311 33,638 sooro Tea .. 512 352 290 Iron 473 515 484 40,000 Manufactures .. 5,640 24,540 24,749 30,00_ Total imports (cit) .. 15,957 43,670 46,121 Food .. 1.321 1.293 11,35 2000 Fuel and energy 7 1 4,054 7.526 9,879 i0,0on Capital goods .. 3,502 4,560 4,513 Export pnce index (1980=100) .. 98 104 103 90 91 92 93 94 95 9s Importpnceindex(1980=100) .. 84 115 116 Terms of trade (19877100) .. 118 90 89 rjE5pofls aimports BALANCE of PAYMENTS 1975 1985 1995 1996 (millions US$) Current account balance to GOP ratio (%) Exports of goods and services 5,650 12,773 39.668 42.556 e - Imports of goods and services 5,990 19,422 51,213 54,431 |90 92 93 94 95 99 Resource balance -340 -6,649 -11,545 -11,875 Net income -150 -1,552 -3,735 -4,118 Net current transfers 470 2,207 8,506 11,888 |2 Current account balance, -6,774 -4,105 before official capital transfers -20 -5,994 Financing items (net) 20 6,542 3.050 10.095 Changes in net reserves 0 548 3,724 -5.990 4| Memo: Reserves including gold (mill. US$) 2,065 9,493 21,246 26,160 Conversion rate (locaL4S$) 8.7 12.2 33.5 35.5 EXTERNAL DEBT and RESOURCE FLOWS 1975 1985 1995 1996 (millions US$) Composidon of total debt 1996 (mill. USS) Total debt outstanding and disbursed 13,708 40,960 94,858 89,827 G A IBRD 436 2.396 9,849 8,768 62G A88 IDA 2,809 9,750 17,499 17,616 6726 8768 Total debt service 822 3,532 13,346 12,867 IBRD 89 313 1,713 1.514 / IDA 24 124 357 364 F 17616 Composition of net resource flows 28565 Official grants 511 450 345 408 C Official creditors 1,260 1,424 -1,048 -163 1313 Pdvate creditors 83 2,277 589 -1,102 D Foreign direct investment 85 106 2,133 2,359 E 29 Portfolio equity 0 0 2,471 2,775 23891 Wodd Bank program Commitments 917 2,882 1,697 1,725 A-IBRD E- Blateral Disburmements 531 1,375 1,318 1,828 B-IDA D-Other mLitlateral F-Private Principal repayments 63 157 1,169 1,074 C-IMF G-Short-term- Net flows 467 1.218 149 554 1 _ Interest payments 50 280 901 804 Net transfers 417 938 -752 -250 Development Economics 11f7/97  Annex 4 India - Selected Indicators of Bank Portfolio Performance and Management (As of October 31, 1997) Indicator FY1995 FY1996 FY199Z FY122L a Portfolio Assessment Number of projects under implementation b 92 89 87 78 Average implementation period (years) c 4.69 4.66 4.47 4.39 Percent of problem projects b,d by number 17.4 20.2 13.8 10.3 by amount 13.7 17.5 12.9 11.2 Percent of projects at riskb, e by number 16.3 20.8 14.5 11.8 by amount (US$ millions) 12.7 18.1 14.6 12.8 Disbursement ratio (%/e)f 17.3 13.9 16.4 5.2 Portfolio Management CPPR during the year (yes/no) Y Y Y Planned Supervision resources (total US$) 5,180.7 5,572.0 6,089.4 1,668.3 Average supervision (US$/project) 56.3 62.6 70.0 21.7 Memorandum item Since FY80 Lastfive FYs Projects evaluated by OED by number 183 82 by amount (US$ millions) Percent with outcome rated Unsatisfactory 26.8 25.6 by number 49 21 by amount (US$ millions) a. FY98 data are as of year-to-date. b. As shown in the Annual Report on Portfolio Performance (except for current FY). c. Average age of projects in the Bank's country portfolio. d. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). e. As defined under the Portfolio Improvement Program. f. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: investment projects only.  Annex 5 Page I of 5 India - Bank Group Program Summary, FY 1998-2000 Proposed IBRD/IDA Base-Case Lending Program, FY 1998-2000a Strategic Implementation rewardsb riSks b FY Project US$(M) (HIMIL) (HIMIL) 1998 Agriculture KERALA FORESTRY 40.0 M M NAT'L AGR TECHNOLOGY 188.0 M H U.P. FORESTRY 65.0 M M U.P. DIVERSIFIED AGR. SUPPORT 150.0 M M Education DPEP III (BIHAR) 152.0 H H U.P. BASIC EDUCATION II 59.4 H L Electric Power & Energy HARYANA POWER SECTOR 60.0 H H POWERGRID 11 400.0 M L RAJAS ST. PWR RESTR. 65.0 H H RENEWABLE ENERGY II 170.0 M L Mining COAL SECTOR REHAB 532.0 H H Population, Health & Nutrition FOOD & DRUG CAPACITY BUILDING 150.0 M L WMN & CHILD DEVELOPMENT 200.0 M L Public Sector Management AP ECONOMIC RESTRUCTURING 500.0 H H Transportation HARYANA STATE HWYs 275.0 M L Subtotal 3,006.4  Annex 5 Page 2 of 5 Strategic Implementation rewards' risks FY Project US$(M) (HIMIL) (HIMIL) 1999 Agriculture RAJASTHAN WRCP 250.0 H M UP SODIC LANDS II 150.0 M L Education DPEP IV-RAJASTHAN I 100.0 H M Electric Power & Energy A.P. POWER RESTRUCT. 100.0 H H HARYANA PWR SECT. II 200.0 H M Population, Health & Nutrition AIDS PREVENTION II 150.0 H L STATE HEALTH SYS III (ORISSA) 100.0 M M STATE HEALTH SYS IV 250.0 M M Transportation ST. HWYS IV(RAJASTH) 325.0 M L ST.HWY III (GUJARAT) 325.0 M L Urban Development MUMBAI URBAN REHAB 100.0 H H URBAN DEV. FUND 200.0 M M URBAN INFRASTRUCT. I 200.0 M M Water Supply & Sanitation HYDERAB. URB. WTR II 300.0 M L MADRAS URB.WATER III 200.0 M L Subtotal 2,950.0  Annex 5 Page 3 of 5 Strategic Implementation rewardsb riskS b FY Project US$(A) (HIM/L) (HIMIL) 2000 Agriculture UP/MAHARASHTRA WRCP 200.0 H M RAJASTHAN ADP II 200.0 H M WTRSHED MGT HILLS II 200.0 M M Education DPEP VI - APC I 200.0 H M DPEPV-RAJASTHAN II 100.0 H M Electric Power & Energy AP POWER RESTRUCT II 300.0 H H RAJAST. PWR SECT II 235.0 H H Population, Health & Nutrition DISEASE SURVEILLANCE 120.0 M L Urban Development CALCUTTA URBAN 200.0 M M URBAN INFRA-W.BENGAL 300.0 H H Transportation STATE HIGHWAYS V (TAMIL NADU) 300.0 M M STATE HWY VI (WEST BENGAL) 350.0 M M MUMBAI URBAN TRANSPORT 300.0 H H Water Supply & Sanitation MAHARASHTRA RWS 150.0 M M Subtotal 3,155.0 Total, FY 1998-2000 9,111.4 a. This table presents the proposed program for the next three fiscal years. b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or low (L).  Annex 5 Page 4 of 5 India - IBRD/IDA Lending Program (As of November 26,1997) Past Current Planned' Category 1995 1996 1997 1998 1999 2000 Commitments (US$m) 2063.5 2077.7 1529.5 3006.4 2950.0 3155.0 Sector (%)b Agriculture 25.5 14.0 23.1 14.7 13.6 19.0 Education 12.6 20.5 0.0 7.0 3.4 9.5 Electric Pwr & Engy. 0.0 16.8 0.0 23.1 10.5 17.0 Environment 8.1 6.8 3.3 0.0 0.0 0.0 Finance 33.9 9.9 0.0 0.0 0.0 0.0 Mining 0.0 3.0 0.0 17.7 0.0 0.0 Popultn, Hlth & Nutn 6.4 16.8 37.6 11.6 17.0 3.8 Public Sector Mgmt. 0.0 0.0 0.0 16.6 0.0 0.0 Transportation 0.0 0.0 36.1 9.2 22.0 30.1 Urban Development 0.0 0.0 0.0 0.0 17.0 15.9 Water Supply & Santn 13.4 12.1 0.0 0.0 17.0 4.8 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 Lending instrument (%) Adjustnment loansc 0.0 0.0 0.0 0.0 0.0 0.0 Specific investment loans and others 100.0 100.0 100.0 100.0 100.0 100.0 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 Disbursements (US$m) Adjustment loansc 259.6 0.0 0.0 0.0 0.0 0.0 Specific investment loans and others 1523.3 1309.5 1563.3 1618.0 1905.0 2145.0 Repayments (US$m) 1062.3 1148.6 1070.0 1350.8 1424.8 1489.5 Interest (US$m) 906.7 886.0 792.1 892.1 873.7 859.01 a Ranges that reflect the base-case (i.e., most likely) Scenario. for IDA countries, planned commitments are not presented by FY but as a three-year-total range; the figures are shown in brackets. A footnote indicates if the pattern of IDA lending has unusual characteristics (e.g., a high degree of frontloading, backloading, or lumpiness). For blend countries, planned IBRD and IDA commitments are presented for each year as a combined total. b For future lending, rounded to the nearest 0 or 5%. To convey the thrust of country strategy more clearly, staff may aggregate sectors. Structural adjustment loans, sector adjustment loans, and debt service reduction loans.  Annex 5 Page 5 of 5 India - IFC and MIGA Program, FY95-97 Past Category 1995 1996 1997 IFC approvals (US$m)' 186.23 48.08 182.30 Sector (%) 0.00 0.00 0.00 Cement & Construction 11.00 0.00 0.00 Chemicals & Petrochems 0.00 0.00 0.00 Financial Services 34.00 30.00 57.00 Food & Agro-Business 0.00 21.00 0.00 Indust &,Consumer Svcs 0.00 0.00 12.00 Infrastructure 42.00 13.00 1.00 Manufacturing 0.00 13.00 14.00 Mining & Metals 0.00 1.00 12.00 Mining & Minerals 0.00 17.00 0.00 Oil Refining 13.00 0.00 0.00 Other 0.00 0.00 4.00 Textiles 0.00 5.00 0.00 TOTAL 100.00 100.00 100.00 Investment instrument (