India - Country assistance strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14509-IN MEMORANDUM OF THE PRESIDENT OF THE INTERANTIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR INDIA MAY 19, 1995 Country Department II South Asia Region 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 reviewed by the Executive Directors on May 12, 1994 CURRENCY EQUIVALENTS (As of December 1994) Currency Unit = India Rupees (Rs) Rs. 1.00 = Paise 100 US$1 = Rs. 32.4 FISCAL YEAR April I - March 31 MEASURES AND EQUIVALENTS 1 Kilometer (km) = 1,000 meters (m) = 0.6214 miles 1 Megawatt (MW) = 1,000 kilowatts (kW) = I million watts I Kilowatt-hour (Kwh) 1,000 watt-hours I Megawatt-hour (Mwh) = 1,000 kilowatt-hours I Gigawatt-hour (GWh) 1,000,000 kilowatt-hours ABBREVIATIONS AND ACRONYMS CPPR - Country Portfolio Performance Review DPEP - District Primary Education Program EAP - Environmental Action Plan ESW - Economic and Sector Work FSDP - Financial Sector Development Project GEP - Global Economic Prospects IDF - India Development Forum NDO - New Delhi Office OSEB - The Orissa State Electricity Board PDAT - Procurement, Disbursement and Audit Team PPA - Power Purchase Agreement PPF - Project Preparation Facility RBI - Reserve Bank of India SEBs - State Electricity Boards  FOR OFFICIAL USE ONLY INDIA: COUNTRY ASSISTANCE STRATEGY Table of Contents Page No. Summary ....................................i A. Recent Econonic and Social Performance ................................1 Macroeconomic Development and Policies ................................. 2 Structural Policies. 2 Sustainability of Stabilization and Reforms ........ ... 3 B. The External Environment ...................... 5 C. The Challenges Ahead ...................... 7 Evolving a Policy and Institutional Framework for Private Investment in New Areas . . 8 Improving States' Finances .......................................... 8 Reforming Agriculture ......................... 9 Establishing the Basis for Urban Development ......... .................... 10 D. Bank Group's Assistance Strategy . .................................... 10 Key Objectives and Instruments . ..................................... 10 ESW Plans, Technical Assistance and Policy Dialogue ........................1 I Lending Plans and Risks .... .... .............. ...... 12 Portfolio Management ................... I ........ 17 Resident Mission in Delhi ..................................... 19 IFC and MIGA Activities .................................... 19 Other Agencies Activities and Aid Coordination . ............................ 20 Areas of Special Emphasis ....................................... .. 20 E. Agenda for Board Consideration ........................... 22 Attachments and Annexes Attachment 1: Status Report on the Sectoral Objectives to be Supported through IBRD and IDA Operations Attachment 2: Sector Level Reforms in the States Attachment 3: Macroeconomic Management and Prospects Attachment 4: Fourth Country Portfolio Performance Review 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.  Annex 1: Selected Indicators of Portfolio Performance and Management Annex 2: Bank Group Fact Sheet, FY92-98 Annex 3: Summary of Economic and Sector Work Annex 4: Social Indicators Annex 5: Key Economic Indicators Annex 6: Key Exposure Indicators Annex 7: The Status of Bank Group Operations in India Annex 8: National Accounts Annex 9: Exports and Imports Annex 10: Balance of Payments Annex 11: External Debt Stocks and Flows Annex 12: Public Finance Annex 13: Monetary Survey  SUMMARY 1. In 1991, India faced a major economic crisis. Poor macroeconomic policies throughout most of the 1980s had led to unsustainable fiscal and external imbalances. The external current account had reached an unprecedented 3.7 percent of GDP (US$11 billion), and the central government fiscal deficit was approaching 10 percent of GDP. Capital flight was putting tremendous pressure on foreign exchange reserves. By June 1991, with reserves virtually exhausted, India was on the verge of defaulting on its external debt obligations for the first time in its history. 2. In July 1991, the newly elected Congress Party coalition responded to the crisis by introducing a comprehensive program of stabilization and structural reforms. Four years later, the program has turned the economy around. More fundamentally, it has achieved a quiet economic revolution. The reforms focused on the five key areas of investment and trade regimes, the financial sector, taxation, and public enterprises. They effectively ended four decades of central planning, significantly shifted resource allocation decisions from the public sector to the private sector and markets, and started integrating the country into the world economy. There are now very few areas where private investors--domestic or foreign--cannot invest; the extremely high barriers to international trade have been dramatically lowered; the financial system's capacity to provide effective intermediation of domestic and foreign savings has been significantly improved; and the tax system has been made considerably more efficient. In addition, a number of well-articulated social sector initiatives and programs, particularly for primary education and basic health, have provided a more solid foundation for the acceleration of human resource development. 3. By virtually any measure, the economy has responded well. GDP growth has remained positive throughout the adjustment period, reaching 5.3 percent in 1994-95. Annual inflation has declined from a 17 percent peak in 1991 to around 9 percent in recent months. The improvement in India's balance of payments has exceeded the most optimistic forecasts. Strong export performance (an average 18 percent real growth in the last two years) has reduced the current account deficit to 0.4 percent of GDP (US$1.3 billion). Fueled by foreign portfolio investment, foreign exchange reserves are at an all time high of US$20 billion. The rupee is now fully convertible for current account transactions; India achieved IMF Article VIII status in August 1994. 4. Challenges Ahead. Despite this dramatic turnaround, a challenging "unfinished agenda" remains to be addressed if India is to attain East Asian rates of growth and poverty reduction. This agenda consists of (a) improving the public sector's financial performance--including the financial performance of the states which have a key role in the provision of public infrastructure and social services; (b) concluding the reforms in the five areas indicated above; and (c) extending the policy reforms to key sectors of the economy. 5. Improving the finances of the public sector is of critical importance. The central government fiscal deficit remains high. It was 6.7 percent of GDP in 1994-95 and is planned to be 5.5 percent for 1995-96. The finances of public enterprises have not improved. And the financial performance of India's 25 states is deteriorating gradually but persistently. This is damaging the development of the country's infrastructure and human resources (the states are responsible for 50 percent of public spending in infrastructure and 90 percent of public spending in social sectors). It is also affecting the delivery of some of the most important nation-wide anti-poverty programs, such as the Integrated Child Development Services (which provides nutrition supplements for pregnant and nursing women and infants), and the Family Welfare Program. In essence, the poor financial performance of the public sector remains a major threat to the attainment of India's development objectives. Equally important is to conclude the process of structural reform started in 1991. Restrictions on imports of consumer goods and international trade of agricultural commodities are still obstacles to the full integration of India in the world economy. Some of the most important financial sector reforms still ahead consist of reforming the rural financial system, developing the government bond market, increasing the commercial orientation of state-owned banks, reducing the government equity stake in such banks, and liberalizing the insurance industry. Finally, reforms need to be extended to key sectors of the economy. The government has yet to articulate a strategy to liberalize  - ii - resource allocation in agriculture. In infrastructure, the existing policy and institutional framework needs to be reformed so that India can overcome the transport and power bottlenecks which currently hamper long-term development. 6. Assistance Strategy: Objectives and Key Instruments. The Bank is India's largest creditor. IDA and IBRD account for US$27 billion of India's US$95 billion external debt, and our lending relationship goes back 40 years. Our most recent CASs (reviewed by the Board in December 1992 and May 1994) have, at the government's request, supported the implementation of the unfinished reform agenda, with particular attention to reforms in the central government's areas of primary responsibility (investment and trade regimes. financial sector, taxation, and public enterprises). We have been supporting this effort with the full range of our assistance instruments (ESW, lending, portfolio management, technical assistance and aid coordination). We have had, along with the IMF and some bilaterals, an important role in helping India overcome its balance of payments problems and in transforming its development strategy. Since FY92 our support has taken the form of US$8 billion of loans and credits, US$1.3 billion of it for adjustment operations in support of key structural reforms and of improved social safety-nets. An increasing proportion of the IDA program has been devoted to the provision of basic social services, particularly public health and primary education. In close collaboration with the authorities, the 1990 portfolio of US$14 billion of committed but undisbursed loans and credits was restructured (cancellations totalled US$4.7 billion), and the disbursement ratio rose from 13.5 percent in FY93 to 16.6 percent in FY95. The IFC has played an important role in the reform process through projects which supported the restructuring of India's economy and stimulated the participation of the private sector in areas previously reserved for public investment. India's Aid Consortium has been transformed into the India Development Forum (IDF), which encompasses not only official agencies but now also the private investors who are so crucial to India's future. 7. The FY96-98 assistance strategy proposed in this document contains, at the request of the authorities, three specific enhancements to the previous CASs: (a) an increased focus on state-level fiscal adjustment; (b) assistance to the government in establishing a framework for efficient private investment in infrastructure; and (c) support in restructuring social programs to increase their effectiveness, and ensure that they provide the poor with the health and skills that will enable them to participate in a more competitive market economy. 8. While supporting the central government reforms initiated in 1991 will of course remain important, we will increasingly need to focus our efforts on state-level sector and fiscal adjustment issues. Therefore, this CAS proposes that: (a) ESW and policy dialogue should include fiscal and sectoral analyses at the level of selected states; (b) lending should pay increasing attention to the "financial sustainability" of Bank-financed projects and programs--financial sustainability issues related to our ongoing portfolio and to new lending will become the starting point of discussion of state-level fiscal adjustment and sector reform; (c) portfolio restructuring should continue, so as to highlight financial sustainability issues and safeguard the ultimate development objectives of our operations; and (d) a restructuring of the Resident Staff in India should be completed to enhance support for the evolving assistance priorities. 9. The FY96-98 lending program envisages preparations that could amount to commitments of up to US$8.1 billion (an additional US$0.5 billion is in the form of guarantees). This comprises IBRD of up to US$4.5 billion for investment loans with a strong policy content. As in the past, IDA resources (up to US$3.6 billion) proposed in the program would be deployed in areas where they can most directly alleviate poverty, accelerate the development of human resources, and support the sustainable use of India's natural resources--an issue of particular importance for the poor. At the aggregate level, continued improvements in the macroeconomic framework--with particular emphasis on fiscal imbalances and economy-wide incentives--will determine the upper limit of resources the Bank will commit in India. Within this overall framework, sector policy change and fiscal improvements will be an integral part of project preparation and implementation. Thus, the actual lending that will result from our preparations will depend on progress in sector-level reforms and improvements in state  - 111 - finances. This will determine when the operations Three-Year Lending Program -- Past and Projected now being prepared can be undertaken. (US $, millions) 10. The consequence of making individual projects conditional on the implementation of sector reform Sctor FY9O-92 FY93-95 PY96-98 and improvements in state finances is that, within the Total 1/ 6,181 5,829 8,116 envelope set by macroeconomic performance, the volume of both IBRD and IDA lending is regulated by Poverty 500 the pace of reforms and fiscal adjustment at the level Agriculture 824 1,437 1,466 of the states. As demonstrated in FY94, this makes Power 1,398 960 1,450 for considerable volatility in our lending. However, Ol, Gas & Coal 60 12 500 the authorities and management believe it important to continue to use the Bank's operations to stimulate Transport 306 94 1,000 policy, institutional and fiscal improvements in the Urban& Water 200 368 485 sectors and states where they take place--because if the Priv. Infrastructure 0 0 1,050 objective is to increase the developmental impact of our lending, the best loan is the loan that has not been Industry & Ind. Poll. 901 868 150 made until the basis for its effective use is established. PHN 676 618 1,090 As a result of this strategy, significant year-to-year 567 425 425 fluctuations in lending levels are possible, particularly Education in FY96 as the country prepares for general elections Disaster Relief 210 246 TBD to be held before May 1996. Adjustment 500 800 0 11. Risk Management. With close to 9 percent of IBRD's portfolio (9.5 percent of IFC's) in India, with Memo Items the preferred creditor share in public debt service at IBRD (lending) 3,388 2,358 4,530 50 percent (but falling rapidly to 30 percent as the IMF is repaid), and with net transfers from IBRD in IDA (lending) 2,793 3,471 3,586 this mature lending relationship having turned negative Guarantees (IBRD) 500 to the tune of US$800 million, IBRD's exposure to No. of Operations 32 32 29 India is significant. Country risk management is therefore of strategic importance. In FY96 the pace 1/ Excludes guarantees. of fiscal adjustment and reform may slow as attention in India shifts to the national elections. In addition, administrative decisions essential for the processing of projects and implementation of ESW may be delayed. A hiatus may thus develop in next year's assistance program. However, we believe that the underlying consensus for reform is strong and that fiscal adjustment and reform will be taken up with renewed vigor once the electoral process has been completed. The above notwithstanding, there is a risk that fiscal indiscipline and policy stagnation at both the central and state governments will extend beyond FY96. This would compromise the strength of the overall supply response, and could erode India's capacity to service its external debt. Offsetting this risk, and strengthening the country's creditworthiness, are India's conservative debt management, its high level of net foreign exchange reserves, and its significantly improved export performance. Our assistance strategy also addresses these risks through: (a) close monitoring of India's fiscal and balance of payments developments, and external debt management; (b) a lending volume conditional on sustained improvements in macroeconomic performance--with particular emphasis on fiscal and balance of payments performance; and (c) a policy-based investment lending program regulated by the pace of reform at both the central and state level.  9  MEMORANDUM OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR INDIA A. Recent Economic and Social Performance 1. India is a federation of 25 states, of which 13 have populations in excess of 20 million people, 6 in excess of 60 million, 3 in excess of 80 million, and one with a population of 140 million. These states are vastly different in terms of their natural resources, language, ethnic composition, religious orientation, administrative capacity and economic and social performance. India has the world's largest concentration of poor people. About 300 million people--a third of the population--live below the official poverty line. Their social indicators are on a par with Sub-Saharan Africa's poor people. Per capita income is US$310. 2. Pre-Reform Development Strategy. At Independence, Indian economists and policy makers viewed capital scarcity as the main cause of India's low income and widespread poverty. Development policies thus focused on building the capital stock, particularly in the industrial sector, which was seen as critical for long-term development. The state took a leading role, based on detailed Five-Year Plans, and government regulations controlled private business decisions. High tariff walls and quantitative restrictions were erected to protect the infant industries. With the focus on physical capital, human resources development received less emphasis; the government's anti-poverty strategy centered around large-scale investments in agriculture, redistributive transfer programs and subsidies. For the most part, conservative macroeconomic policies prevented the emergence or persistence of fiscal and balance of payments imbalances. 3. Results. This strategy produced important results. It generated steady growth which allowed per capita income to rise by 2 percent per annum on average. Inflation rates generally stayed below 10 percent. The incidence of poverty declined from over 50 percent in the 1960s to around 30 percent in the late 1980s, and the social indicators improved markedly--with primary enrollment rates doubling and infant mortality rates halving. These accomplishments took place against a backdrop of considerable political development. India's democratic system is well established and has provided its population an unusual degree of political freedom and stability. 4. Crisis. During the late 1980s, as East Asia's successes and Eastern Europe's failures began to be globally recognized, India's dissatisfaction with its own performance grew. Growth was lower than in other countries with lower savings and investment rates. Meanwhile, fiscal imbalances were reaching unsustainable levels--threatening India's ability to maintain and expand its capital stock, and to provide essential social services. Frequent changes in government had delayed the correction of serious internal and external imbalances. The Central Government fiscal deficit reached 8.4 percent of GDP in 1990-91 and, if uncorrected, would have exceeded 10 percent of GDP in 1991-92. Inflation was rising--and actually peaked at 17 percent in August 1991. The external current account deficit soared to US$11 billion in 1990-91--some 3.7 percent of GDP--and capital flight drained reserves. In June 1991, with reserves at less than US$1 billion, India was on the verge of defaulting on its external debt for the first time in its history. 5. July 1991: Change in Course. The new Congress Government that came to power in June 1991 fundamentally changed India's development strategy. Its program of reforms focused on restoring macroeconomic stability and reforming structural policies governing the investment regime, foreign trade, the financial sector, taxation, and public enterprises. Progress under the program has been assessed in detail in the last three Country Economic Memoranda and briefly reviewed in the last CAS. Attachment 3 provides a detailed account of challenges in the management of India's fiscal and external accounts. A summary update follows.  - 2 - Macroeconomic Developments and Policies 6. Internal and External Balance. There has been significant progress in stabilizing the economy, but fiscal management remains a major challenge. The Central Government deficit as a share of GDP is now 2 percentage points less than in 1990-91, but remains high and consolidated public sector saving has actually declined. Meanwhile, the improvement in the balance of payments has exceeded the most optimistic forecasts. With a sharp increase in export growth rates (average of 18 percent in real terms in the last two years), the current account deficit declined to US$0.7 billion in 1993-94 (0.3 percent of GDP), and US$1.3 billion (0.4 percent of GDP) in 1994-95. Foreign portfolio and direct investment has risen sharply. This has boosted reserves to an all time high of US$20 billion, but has also complicated exchange rate and monetary management (see below). 7. Growth. The economy has recovered from the contractionary effects of the initial stabilization measures and, helped by an unprecedented sequence of good monsoons and a strong industrial recovery, real GDP in 1994- 95 grew 5.3 percent (after 1 percent in 1991-92, and 4 percent in 1992-93 and 1993-94). Thus, India has avoided the sharp and prolonged declines in GDP growth rates which have accompanied stabilization and structural reform experiences elsewhere, and to which low income groups are particularly vulnerable. 8. Inflation. Contractionary fiscal and monetary policies reduced annual inflation from the 17 percent peak in August 1991 to 7 percent in mid-1993. Then, because the manufacturing sector was facing one of its worst recessions since Independence, fiscal and monetary policies were relaxed to stimulate the economy. This led to an acceleration of inflation to 10-12 percent last year. Since December, the Reserve Bank of India (RBI) has been more restrictive. Monetary growth has been reduced. Interest rates on 3 month Treasury Bills have risen--from 8-9 percent in the second half of 1994, to 11-12 percent in early 1995. Inflation has come down to around 9 percent in recent months. 9. Social Impact of Reforms. There has been considerable debate in India about the impact on the poor. The effect of inflation is of particular concern. In the absence of firm data, definitive answers are not possible. But Indian poverty studies consistently indicate that the health of the rural economy--especially agricultural wages --is a major determinant of poverty levels. Agricultural real wages have continued to grow, and this suggests that an increase in the incidence of poverty is unlikely to have occurred. This points to the importance of extending the reforms to the agriculture sector. Meanwhile, the Government has accelerated the development of human resources. Major new initiatives have been launched to expand primary education, improve the provision of basic health, and extend poverty alleviation programs to areas with a high incidence of poverty. Central Government expenditure on social services has increased in the case of programs for disease control and primary education. At the federal level, resources for poverty programs, particularly rural employment programs, have been increased by about 50 percent. But deteriorating state fiscal developments could have a negative impact on the poor through reduced funding of important anti-poverty programs. Structural Policies 10. Liberalization of Investment. Over the past 40 years, private investment was not allowed in most areas of the economy. But with the sweeping reforms introduced in 1991, India's foreign investment regime now compares favorably with East Asian countries'. In telecomnmunications, power, and mining, it is significantly more open than its East Asian neighbors. Since the last CAS was discussed, the Government has taken the landmark decision to allow private investment in telecommunications (including foreign participation up to 49 percent of equity). Insurance and railways are the only sectors of the economy still reserved exclusively for the public sector. 11. Trade Policy. India use to have one of the world's most restrictive trade regimes. But maximum tariffs have been reduced from over 400 percent in 1990-91 to 50 percent in 1995-96, the average tariff has been  reduced from 87 percent to 27 percent, and pervasive licensing restrictions on imports of intermediate and capital goods have been eliminated. Since the last CAS was discussed, the Government has reduced maximum tariffs (from 65 percent to 50 percent) and has also taken additional measures--albeit modest--to liberalize consumer imports. However, restrictions on imports of consumer goods and trade in agricultural commodities still limit the full integration of India into the world economy. The Government has announced that it will take further steps in the next two years to reach its medium-term target of a trade regime free of licensing restrictions on imports, a maximum tariff of 30 percent on non-consumer goods, and an average tariff rate of about 25 percent. The rupee has been made fully convertible for current account transactions, and India achieved IMF Article VIII status in August 1994. 12. Financial Sector Reform. As discussed in the Financial Sector Development Project (FSDP) approved by the Board in March 1995, the liberalization of the financial sector has continued. There have been significant reductions in the Statutory Liquidity Ratio and Cash Reserve Requirements, commercial banks have been given considerably more independence on how to conduct their lending, minimum lending rates have been eliminated for loans over Rs 200,000, legislation has been amended to allow private equity participation in public commercial banks up to 49 percent of equity, restrictions on expansion of banks' branches have been abolished, and a new Board of Financial Supervision has been established. To strengthen public banks, the Government has taken steps to improve their autonomy, and increase their capital base. It has allowed 10 new private banks to open, including 3 foreign. The Government has begun a three year phase-out of the automatic monetization of the fiscal deficit; this will help accelerate market development for government securities and significantly increase the ability of the RBI to conduct independent monetary policy. Important financial sector reforms still ahead consist of restructuring the rural financial system, developing the Government bond market, increasing the commercial orientation of state-owned banks, reducing the Government equity stake in such banks and liberalizing the insurance industry. 13. Tax Reform. As noted in the last CAS, the Government introduced a comprehensive tax reform in 1994- 95. There have been no significant additional tax reforms since then, but further steps towards a VAT are under consideration. In addition, the previously adopted tax rationalization measures discussed in the last CAS have enabled the Government to improve tax administration significantly, and income tax collections have increased by 10 percent in real terms in 1994-95 in spite of a reduction of rates. 14. Public Enterprise Reform. There has been less progress on public enterprise (PE) reform. PEs privileged access to budgetary resources, commercial bank credit, and protected markets have been virtually eliminated. Also, PEs operating in the tradable sector are now subject to internal and external competition and state-owned banks are also subject to competition. However, PE managers still lack authority to restructure, retrench, reorganize, close sell units, and form joint ventures with private investors. Despite some equity sales, the Government remains the majority shareholder. With few exceptions, PE performance has not improved. Sustainabili!v of Stabilization and Reforms 15. In several policy and discussion papers, the Government has indicated that reduction of fiscal imbalances was a central objective of its macroeconomic policies. While the Central Government fiscal deficit was reduced significantly in 1994-95 (by 1 percentage point of GDP, to 6.7 percent of GDP), and a further reduction is envisaged for 1995-96 (by a further 1.2 percentage point of GDP to 5.5 percent of GDP), this fiscal deficit would still be around 2 percent of GDP above its sustainable level. However, further adjustments will be difficult in the near term. Non-interest expenditure has already borne the brunt of fiscal adjustment and not much room is left for further reductions. It declined from 16 percent of GDP in 1990-91 to 13 percent of GDP in 1994-95--the categories most affected being subsidies (from 2.3 percent of GDP to 1.4 percent of GDP), defence (2.9 percent of GDP to 2.6), transfers to states (5.2 percent of GDP to 4.3), wages (2 percent of GDP to 1.7) and loans to public enterprises (0.7 percent of GDP to 0.5). Thus, besides further reducing subsidies, particularly for  - 4 - fertilizer, and readjusting oil prices, achieving a further fiscal deficit reduction of around 2 percent of GDP will need to rely on (i) continuing the tax reform process; and (ii) reducing Central Government financial assistance to state Governments--which including transfers of taxes has been at 7-8 percent of GDP. 16. There seems to be agreement among political analysts that the reforms initiated in 1991 will not be reversed--as demonstrated by the reform plans and actions in states with non-Congress Party Governments. However, while reforms are believed to be irreversible, there is also agreement that the public sector deficit could come under increasing pressure as the country prepares for general elections before May 1996--and that the 5.5 percent of GDP Central Government fiscal deficit target for 1995-96 may be difficult to achieve. In addition, the fiscal situation of the states has been deteriorating, and the financial performance of public enterprises has not improved. As a result, consolidated public sector saving has declined. This is not only a threat to macroeconomic stability, but also reduces the economy's ability to absorb the larger levels of investment--public and private--India needs to accelerate its growth rate. Thus, as indicated in last year's CAS, despite progress, insufficient improvements in the fiscal situation continue to be a major threat to the attainment of India's development objectives. 17. Balance of Payments. For the past two years, a key issue for the authorities has been to prevent large surpluses in the capital account--the response to the reforms--from leading to an appreciation of the real exchange rate and a deceleration of export growth. Thus far, the RBI has maintained the nominal exchange rate (in theory a float) constant at Rs 32/US$ by purchasing all the excess supply of foreign exchange at that rate. However, as discussed in attachment 3, this has led to an expansion of money supply and acceleration of inflation to 11-12 percent in the latter part of 1994, a level at which it remained until it began declining in recent months following RBI's more restrictive monetary policies. This inflation has caused the real exchange rate to appreciate vis-a-vis the US$. There has been no noticeable impact on exports yet, probably because, inter-alia, the US$ has depreciated vis-a-vis other major currencies--in real effective trade-weighted terms the rupee has not appreciated. However, the authorities are concerned with the effect of capital inflows on inflation, the real exchange rate and export performance. They have responded to capital account surpluses through administrative measures that seek to discourage potentially volatile capital inflows and, following a procedure established at the time of the last IMF Stand-By (November 1992-May 1994), by continuing to set annual limits for external commercial borrowing (see attachment 3 for more details). 18. Current Account and External Debt. The Eighth Plan projections assume that over the 1992-97 period the current account deficit of the balance of payments would be 1.6 percent of GDP. This target will clearly be exceeded and an average of one percent of GDP for the period is more likely. Assuming a gradual increase to two percent of GDP towards the end of the decade, this would reduce India's external debt from 33 percent of GDP at present to 26 percent of GDP by the end of the decade. As a share of current account receipts, the debt service ratio would decline from 25 percent at present to 17 percent towards the end of the decade. These appear to be extremely conservative targets, particularly if foreign direct investment grows as expected. 19. Macroeconomic Prospects. The projections in the Annex summarized in the Table below represent our most likely scenario. They assume gradual fiscal deficit reductions, and gradual improvements in public saving. They also assume that reforms will proceed at a sustained but uneven pace. It is possible that fiscal adjustment and public enterprise reform will accelerate after elections in 1996. This would reduce fiscal deficits below the levels anticipated in the Table below, and provide the basis for a stronger public saving performance and more rapid achievement of a sustainable fiscal position. In this case, growth could rise above the levels indicated in our most likely scenario. However, this possibility is not fully articulated here. In our most likely scenario, driven by the expansion of industrial exports, private investment, and sustained agricultural performance, GDP growth rates are projected to reach 6 percent by 1997-98. The projections also assume that the Government will be successful at maintaining the competitiveness of exports. Accordingly, real export growth rates are projected  - 5 - KEY MACROECONOMIC INDICATORS, 1993-98 1993-94 1994-95 1995-96a' 1996-97a' 1997-98a ______ ______ (Prelim ) __ _ _ _ __ _ _ _ _ _ _ GDP growth (% per year) 4.3 5.3 5.5 5.7 6.0 Inflation (% per year) 8.1 10.5 9.0 8.5 8.0 Domestic Investment/GDP 21.3 23.0 24.4 25.5 25.8 Public 8.9 7.7 7.6 8.1 8.3 Private 12.4 15.3 16.7 17.4 17.6 National Savings/GDP 21.0 22.6 23.5 24.1 24.3 Public 0.3 0.2 0.7 1.4 1.7 Private 20.8 22.4 22.8 22.7 22.6 Current Account Balance/GDP (-deficit) -0.3 -0.4 -0.9 -1.4 -1.5 Export Growth (merchandise, real) 23.1 13.5 13.7 9.7 9.3 Central Government Deficit/GDP 7.7 6.7 5.5 5.0 4.5 Central Government Primary Deficit/GDP (- is 2.6 0.9 0.5 0.0 -0.5 surplus) Foreign Exchange Reserves (billion USS) 15.5 20.7 23.2 23.9 26.2 In months of imports (goods and NFS) 6.4 7.2 6.9 6.2 6.0 Source: Annexes 8-13 " Projected. to be in the 8-9 percent range--except in 1995-96 because recent infonnation suggests a better performance. With these export growth rates, the current account deficit is expected to be around 1.0-1.5 percent of GDP over the next three years. B. The External Environment 20. As indicated in the most recent Global Economic Prospects (GEP) report, external conditions are expected to be favorable for the remaining of the decade. India's economic performance will mostly depend on the quality of its economic policies. Helped by the successful conclusion of the Uruguay round, world merchandise trade is projected to grow at over 6 percent a year, faster than at any time since the 1960s. Trade in services will advance even faster as technological advances in computing and telecommunications expand trade in long-distance services such as data-entry, accountancy, software and computer support. Real long-term interest rates are expected to remain moderately high, near current 4-4.5 percent levels, although short-term interest rates are expected to be higher than at present. Commodity prices are expected to be stable. 21. Current Account. With its substantial pool of skilled and unskilled labor, India is well poised to benefit from these favorable external prospects. Exports of goods (US$26 billion at present) are well diversified; they consist of primary products (fish, tea, coffee, rice, iron ore and other minerals) which account for one-fifth of India's exports; manufacturing products such as textiles and garments (25 percent), gems and jewelry (17 percent), engineering goods (ranging from simple handtools and bicycles to machine tools and spare parts for airplanes (13 percent), leather products (7 percent), and chemicals (mostly drugs, 7 percent). India's export markets also are increasingly diversified; for exanple, the share of exports to East Asian economies (Singapore, Thailand, Malaysia, Japan) has increased from less than 10 percent in 1991-92 to 14 percent at present. Regarding services, exports of software have grown at over 20 percent a year in the recent past, and are expected to reach US$1 billion before the end of the decade; services from Indian satellites are being provided to several  - 6 - OECD countries; several large European firms have moved their accounting departments to India; and tourism is growing. Clearly, to benefit fully from these favorable prospects, the authorities will need to maintain the competitiveness of the exchange rate, and improve the provision of infrastructure important for exports such as roads, ports and telecommunications. In addition, agreements under the Uruguay Round commit India within 10 years to switch from a process patent regime to a product patent regime, and domestic legislation will need to be amended accordingly. On the imports side, sharp real price increases are not expected for commodities of which India is a net importer, mostly oil. At US$5 billion, interest payments on India's external debt are the largest component of imports of factor and non-factor services. While the GEP report projects a significant increase in nominal 6 months US$ LIBOR (from 4.6 percent to 6.3 percent during 1995-2004), only 34 percent of India's US$95 billion debt (of which US$12 billion is debt to the former Soviet Union repayable in rupees at fixed interest rates) is at variable interest rates. The anticipated increases in interest rates would amount to about 2 percent of exports of goods, a significant but not unmanageable increase. 22. Capital Account. Prospects for the capital account are mostly favorable. Since the liberalization of the investment regime started in July 1991, its size, democratic institutions, western-style legal system, economic potential and skillful management of reforms have made India an important destination of foreign direct investment. Foreign investors, including many American, European and Japanese multinationals, have shown strong interest in investing in India in all areas of the economy--light and heavy manufacturing, agro-processing, financial and non-financial services, energy, telecommunications, ports and roads. Officially registered foreign investment plans rose from less than US$300 million a year before 1991, to over US$3 billion more recently. Actual inflows have increased from US$200 million a year to close to US$1 billion at present. India's investment needs in manufacturing, and all areas of infrastructure such as power (where 100 percent foreign ownership is allowed) and telecommunications (49 percent) are so large that this figure could be several times higher in a few years. This will require, however, significant improvements in sectoral policy and institutional frameworks which are not yet fully supportive of private investment, foreign or domestic (para. 28). Regarding external commercial finance, well before Moody's Investors Service upgraded India's credit rating in December 1994, international commercial banks had already resumed term-lending to Indian borrowers at spreads over LIBOR which have been declining from 350 basis points in 1992-93 to around 120 basis points in recent months; in February 1995 there were several transactions with a spread below 100 basis point. Foreign currency accounts from Non-Resident Indians (NRIs, that is accounts which can only be opened by Indians citizens residing abroad which now amount to US$14 billion) have continued to increase in spite of rising reserve requirements and reductions in interest rates on such accounts; for some accounts, interest rates are now below US short-term interest rates. They thus are another important source of external financing, although one that has proven volatile in the past. Portfolio investment has soared to US$4 billion a year in 1993-94 and 1994-95 after Indian firms in good financial standing were allowed to raise funds abroad through convertible debentures and equity issues, and foreign institutional investors were allowed to invest in all non-Government securities traded in India's primary and secondary markets; no more than 24 percent of issued share capital in any one company may be held cumulatively by foreign institutional investors and no more than 30 percent of their portfolio can be invested in debt instruments. Taxes on capital gains realized before one year are 30 percent; 10 percent after one year. 23. Vulnerabilities. Notwithstanding favorable external prospects and the recent positive developments in India's current and capital accounts, India's balance of payments and external debt position continue to be vulnerable in several important respects. In particular, of India's US$95 billion external debt (which includes US$4 billion of short-term debt), about US$24 billion is due to be repaid in the next four years with a peak of US$7 billion in 1996-97. This is in addition to the roll-over of the short-term debt and the roll-over of NRI accounts. Added to the financing requirements of the current account deficit, this means that over the next 4 years India will need to mobilize about US$40 billion of external finance--excluding the roll-over of short-term debt and NRI accounts. These vulnerabilities are tempered by India's strong liquid position--US$20 billion in reserves versus short-term liabilities (including NRI deposits with remaining maturities of less than one year) roughly half that size.  - 7 - C. The Challenges Ahead 24. Over the last four decades, India's population has doubled to about 900 million people. In a country with a high incidence of poverty, limited land and water resources, scarce capital, and enormous social needs, meeting the needs of this "second India" while reducing the incidence of poverty has been a daunting challenge. In the next 30 years, taking into account ongoing family planning efforts, India's population will increase by another 450 million. This "third India" will put enormous additional pressure on the country's natural resources, social programs, and already strained infrastructure. With the pace of urbanization accelerating, the consequences of population growth will be particularly serious in urban areas where the provision of sanitation and public health services as well as infrastructure is already below standard, and the absolute number of poor is increasing. 25. New Directions. Since Independence, the authorities have taken the view that meeting these challenges required accelerated capital accumulation through an increase in the country's saving and investment rates. More recently, and particularly since 1991, the authorities have added two important elements to this basic orientation of India's development policies. First, they are placing considerably more emphasis on improving the policies and institutions which govern how efficiently capital is allocated and utilized in the different sectors of the economy. Second, they are taking important steps to expand the provision of key social services--basic health, primary education, and anti-poverty programs. These changes are consistent with the evolution of development thinking over the last 10-15 years: development outcomes are determined as much as by the policies and institutions which influence the effectiveness with which capital is allocated and utilized, as by the pace at which it is accumulated. Investments in human resources are critical not only to increase labor productivity and growth, but also to ensure an equitable income distribution. 26. Steps Taken. The structural reforms introduced over the last four years have made considerable progress towards reorienting India's development strategy along these lines. They have significantly improved the investment and trade regimes, the functioning of the financial sector, and the efficiency of taxation--and have considerably improved economy-wide incentives for the efficient deployment of resources. The private sector now plays a much more important role in India's development process, and an incentive regime more conducive to a pattern of labor-intensive growth is being established. In addition, the acceleration of human resource development is being firmly grounded in a number of well-articulated initiatives and programs, particularly for primary education and basic health. This notwithstanding, and as the authorities have highlighted repeatedly in a number of policy papers, there remains a large "unfinished" reform agenda which will take several more years to implement. This "unfinished agenda" includes improving the public sector saving performance, concluding the structural reforms started in 1991 in the five areas which have been given priority and which are the primary responsibility of the Central Government, and extending the process of policy reforms to key sectors of the economy. 27. Unfinished Agenda. Improving the fiscal situation is of critical importance. Notwithstanding significant reductions since 1991, the Central Government fiscal deficit remains high, the financial performance of states and public enterprises has not improved--and the poor savings performance of the public sector remains a major threat to the attainment of India's development objectives. Equally important is to conclude the process of structural reforms started in 1991. Further liberalization of international trade, further liberalization and strengthening of the financial system, continuing the tax reform process, and restructuring public enterprises are among the more challenging remaining tasks. Finally, reforms need to be extended to key sectors of the economy, an issue where the participation of the states is critical because of their important role in formulating and implementing sector policies (Attachment 2 provides an overview of the sector reforms necessary at the state level). This is particularly the case in agriculture where there is an urgent need to expand the role of market forces in resource allocation; in the social sectors, where there is not only a need for larger investments in basic social services (dependent on improvements in state finances), but also a need to increase the effectiveness of delivery; and in  -8 - infrastructure where the removal of formal barriers to private investment needs to be followed by the establishment of policy and institutional frameworks supportive of such investment (see the case of power in Attachment 2). Private investment in infrastructure is not a panacea, however, and India has enormous infrastructure bottlenecks that can be addressed only through better public sector institutional and financial performance (see the case of roads in Attachment 2). There is thus a complex agenda of sector-level reforms to be articulated and implemented across a wider spectrum of central ministries and state Governments than has been the case until now. The sections below review some that require special attention. Evolving a Policy and Institutional Framework for Private Investment in New Areas 28. There is an urgent need to evolve a framework enabling the private sector to invest in areas from which it was previously excluded, particularly infrastructure (telecommunications, power, ports, roads, urban infrastructure, water supply), but also in areas such as hydrocarbons. With public investment declining in the process of fiscal adjustment, this is urgent to maintain the dynamism of the economy. Until 1991, because the public sector dominated the investment process in all areas of infrastructure, the regulatory framework was formulated with the public sector in mind and is not appropriate to encourage the massive private investments India needs in these areas. Regulations governing entry, evaluation of bids and tenders, pricing in monopolistic conditions, the conduct of regulatory authorities, dispute resolution and arbitration are not transparent, and in some cases do not lead to efficient private investment. In some cases, this has become the source of litigation which is delaying investment with high returns. Most of these issues fall under the purview of several central ministries, and also state Governments (for power, roads, urban infrastructure). It is clear that establishing an adequate regulatory framework for private sector investment in infrastructure will be a complex process, albeit one which is critical to enable India to meet its infrastructure development needs and maintain investment at high levels. As discussed in Section D, assistance on this issue is an objective of growing importance in our work. We are pursuing it through lending (see the case of power reform in Orissa, Box 1), Economic and Sector Work (ESW) (the 1995 CEM deals with this issue), and IFC (para. 64) and Bank technical assistance provided in the context of our loans and sometimes as administrators of bilateral grants (see para. 35). Improving States' Finances 29. There are pressing reasons for adjusting state finances. Contrary to some federated Latin American countries, India's states cannot directly precipitate a fiscal crisis. Without the Central Government concurrence, they are not permitted to access domestic financial markets, and the Constitution does not empower them to borrow abroad. However, first, without a significant improvement in their finances, the states will be unable to maintain and expand the provision of infrastructure, basic health, primary education, and anti-poverty programs for which, according to the Constitution, they have primary responsibility. The states account for about half of public spending on infrastructure with concentration in agriculture, irrigation, roads, power, water supply and urban infrastructure (while the Central Government specializes in railways, ports, airports, telecommunications, national highways and some power). Similarly, the states are responsible for 90 percent of public spending in social sectors. India's ability to improve and expand social programs is thus critically dependent on the states' ability to mobilize resources for these purposes. Second, because financial assistance to the states is such a large proportion of Central Government total expenditure (para. 15), it would be difficult to improve Central Government finances without corresponding improvements in the finances of the states. Finally, unless the states can generate enough resources to provide counterpart funds and maintain and operate the assets created through internationally funded projects and programs, these operations will fail to have a sustained development impact. 30. For several decades, state Governments' expenditure in infrastructure and social services has grown persistently supported by (i) large unconditional grants and loans from the Central Government; and (ii) resources from financial intermediaries (conmmercial banks, insurance companies, pensions funds) who were directed by the Central Government to hold a share of their portfolios in securities issued by state Governments. Access to  -9 - Box 1: The Orissa Power Sector Restructuring Program Orissa gowe;r fysem. The Orissa State Electricity Board (OSEB) and the Department of Energy of the Government of Orissa own and operate Orissa's power generation plants (respectively 70 percent and 30 percent) which service about 1. I million consumers. OSEW's operational performance has been the poorest among state electricity boards in India. The current power shortage is estimated at about 40 percent of peak demand and the energy deficit at about 20 percent; both are more than twice India's average. This situation has developed in spite of significant investtnent in power which was allocated 20-25 percent of the state investment program over the last decade. Because of inadequate tariffs, subsidies to the OSEB became an increasingly large burden on the budget exceeding one percent of the state GDP in FY94. Orissa's Power Reform Program. Solutions to Orissa's power problems have been actively explored within the state Government of Orissa and OSEB since 1992, and have been discussed with the Bank which has been involved in the Orissa power sector since the early 1980s. A comprehensive power sector reform program was agreed with the Government of Orissa and the OSEB in November 1993, which is now being implemented. Successful completion of the program would eliminate power cuts and supply restrictions by 1998 and help realize Orissa's power potential based on vast coal and significant hydro resources. To restore the financial viability of the power sector and provide a sound financial base for the reform program, the Government of Orissa authorized four tariff adjustments from April 1992 to July 1994 which cumulatively increased power tariffs by 50 percent. Further tariff adjustments of the same order are planned for the 1995-98 period to meet the financial targets of the new power companies (as per current legislation and tariff notifications). The Obiectives of the Reform Program. The program aims at restructuring and substantially privatizing the power sector in Orissa; to make power supply more efficient and to be able to meet the investment needs of the sector. The Government of Orissa's ultimate objective is to withdraw from the power sector as an operator of utilities, having instead privately-managed utilities operating in a competitive and appropriately regulated power market. Power sector industry and market structures to be established under the power sector reform program have been defined to facilitate the realization of this ultimate objective. The Scone of the Program. The program involves the (a) unbundling and structural separation of generation, transmission and distribution into separate companies; (b) private sector participation in hydro-generation and privatization of thermal generation and distribution; (c) competitive bidding for new generation; (d) the establishment of a power sector regulatory agency (with no utility assets and no involvement in operations); and (e) electricity tariff reforms at bulk power, transmission and retail levels. The reform program is under implementation and is being supported by the Bank and the IFC; a Bank loan and an IFC operation for this project are expected to be presented to the Board in FY96. these sources of finance has reduced incentives for states to strengthen their own resource mobilization efforts. In the aggregate, states' own resources finance only half of their total current and capital expenditure. However, as the Central Government seeks to stabilize its own finances, its transfers of resources to the states have been declining. As the financial sector is liberalized, forced placement of state Governments' debt instruments with financial intermediaries has been significantly reduced and market demand for state Governments' securities is limited to only a few states. In the absence of strong measures on the part of the states to improve resource mobilization, their development expenditure is being negatively affected. While the required responses to this situation vary from state to state, our analysis suggests that the most urgent measures needed to improve the fiscal situation of the states are, in this order, (a) to increase tariffs for power supplied through the State Electricity Boards (SEBs) (which currently subsidize power at an annual financial cost of 2 percent of GDP) and for water supplied for irrigation and industrial and domestic uses; and (b) to increase taxes. Reformin p Agriculture 31. Agriculture is responsible for about 35 percent of India's GDP, and 70 percent of its total employment. Its performance is central to the welfare of the roughly 240 million poor who live and work in rural areas. Over the last ten years, annual growth has accelerated by one percentage point to 3 percent, and is starting to spread  - 10 - more evenly across regions and crops. However, these higher growth rates are not sustainable. They are attributable to the growing use of highly subsidized intermediate inputs, such as water, power, and fertilizer-- which are at the origin of many of the states' fiscal problems. The contribution of total factor productivity growth has been declining. While many factors account for this decline, some of the main causes are sharp reductions in expenditure on research and extension, and numerous market distortions which encourage the inefficient use of subsidized inputs (power and water in particular). In addition, domestic agricultural markets are not fully integrated because state Governments impose restrictions on inter-state trade, storage by private traders, forward trade of agricultural products, and investment in some agro-industries. Unless these restrictions are lifted and India's agriculture becomes more commercially oriented, agricultural growth will suffer, and so will the poor. Piece-meal reforms notwithstanding, the Government has yet to articulate an agricultural reform strategy similar to what has been done for other reform areas. Supporting the formulation of an agriculture reform agenda, and establishing a dialogue with the states is an important objective of our assistance strategy, and is being pursued through ESW (para. 36), and lending focused on revitalizing research and extension, and improving the management of water resources. Establishin2 the Basis for Urban Development 32. One-fourth of India's population (including a rapidly growing share of the absolute poor) already lives in urban areas--and this proportion is expected to increase rapidly. There is ample recognition that for several decades there has been substantial under-investment in India's urban areas and that this is now creating a wide range of problems from environmental hazards and sanitation problems to the lowering of productivity of investments in urban areas. Some of the reasons for this situation are that (a) political districting is still based on the 1971 Census with the result that urban populations are substantially under-represented in state assemblies; and (b) until Constitutional amendments were enacted in 1993, local Governments did not have constitutional recognition and had limited financial autonomy. Consequently, investments in urban areas have not only fallen considerably short of needs, but states have also made limited efforts to help cities increase their tax base while capital grants have been unpredictable and well below urban areas' needs. The urban resource base has been eroded by state legislation imposing rent controls and ceilings on the amount of urban land an individual could hold; state guidelines limiting the intensity of land use; and unrealistically low water charges. In addition, fiscal revenues in some cities (such as Bombay) are excessively dependent on extremely inefficient taxes which need to be eliminated--such as octroi which considerably reduces returns on investments in roads. Thus, any program of urban reform would need to include (i) measures to improve urban areas' use of the existing resource base (such as better enforcement of existing taxes); (ii) measures to strengthen urban areas resource base and make it more efficient (such as lifting rent controls, eliminating octroi, and establishing efficient urban land markets); and (iii) establishing a rule-based, efficient system of capital transfers to replace the present system which is discretionary and unpredictable. The 1993 Constitutional amendments are expected to be the beginning of a comprehensive process of urban reform. As indicated in Section D, assistance in the formulation and acceleration of urban sector reforms is an important objective of our ESW. D. Bank Group's Assistance Strategy Kea Obiectives and Instruments 33. At the Government's request, our last two CASs (reviewed by the Board in December 1992 and May 1994) have aimed to support the implementation of the unfinished reform agenda highlighted in para. 27 with particular attention on reforms in the areas which are the primary responsibility of the Central Government (investment and trade regimes, financial sector, taxation and public enterprises). The instruments of our assistance (ESW, technical assistance, lending, portfolio management, and aid coordination) are being deployed to this effect. The FY96-98 assistance strategy proposed in this document contains three specific enhancements requested by the authorities: (a) increased focus on state finances and sector reforms beyond the five areas on  - 11 - which structural change has focussed since 1991; (b) assistance to the Government in establishing a framework conducive to efficient private investment in infrastructure; and (c) support in restructuring social programs to increase their effectiveness, and ensure that they provide the poor with the health and skills that will enable them to participate in a more competitive market economy. 34. Supporting the reforms initiated in 1991 at the level of the Central Government will of course remain important, but we will increasingly need to focus our efforts on state-level sector and fiscal adjustment issues. In terms of strategic thrust, this CAS proposes: (a) ESW technical assistance and policy dialogue to include fiscal and sectoral analyses at the level of selected states; (b) lending with increased attention to the "financial sustainability" of Bank-financed projects and programs--financial sustainability issues related to our ongoing portfolio and to new lending will become the starting point of discussion on state-level fiscal adjustment and sector reform; (c) portfolio management, including restructuring, to highlight financial sustainability issues and safeguard the ultimate development objectives of our operations; and (d) strengthening of the Resident Staff in India to support better the evolving assistance priorities. ESW Plans, Technical Assistance and Polica Dialogue 35. As indicated in last year's CAS, the success of the Bank's policy dialogue and lending strategy depends to a large extent on the production and effective dissemination of timely, high quality ESW. The last CAS also highlighted how comprehensive reviews of the policies governing trade, industry, financial sector, public enterprises undertaken in the late 1980s and early 1990s have enabled the Bank to conduct a productive economic dialogue in recent years when reforms were being implemented in all these areas and rapidly prepare adjustment operations when this was needed. More recently, reports on irrigation, power, energy, forestry, health, education and nutrition completed in the last 2-3 years have helped reshape our lending strategies, and design the policy content of our investment operations. They have also been extensively used to build consensus on needed reforms through seminars and workshops. An irrigation sector report completed in 1992 is still being used in seminars which bring together state Departments of Irrigation, NGOs, and users' associations. A health report completed last year has been of help in supporting some states' efforts to redirect their health expenditures towards basic health. A port sector report completed earlier this year provides the basis for the policy dialogue in this area. In its sequel the Bank is also providing technical advice on how to improve the regulatory framework to induce private investment in new facilities and in the management of existing facilities--even though no lending is envisaged. Similarly, in addition to the analysis of the railways in the Transport Sector report also completed earlier this year, the Bank is also assisting in the analysis (with funding from Japan) of the railways network to improve its management, but again no lending is envisaged in this case. A private sector assessment prepared in collaboration with the IFC helped identify some of the main constraints to private sector development and provided important inputs to our policy dialogue. Rapid implementation of reforms quickly overtook many of its recommendations, however, and the report was consequently never published. 36. For the future, ESW and policy dialogue will continue to deal with stabilization and the structural reforms started in 1991, and will provide the basis for resuming adjustment lending should the need arise. ESW and policy dialogue are also being broadened to go beyond the customary review of external and domestic balances and policies of central Government concern to include fiscal and sector analyses at the level of the states. Specifically, taking "sustainability" of projects and programs as the point of departure in both state-level portfolio management and new project development, we aim to establish over time policy dialogues on fiscal adjustment with selected states. Financial sustainability issues related to a specific project also are a natural starting point for the discussion of specific sector reforms because so many of the structural reforms required at the level of the states have financial implications--such as pricing for power and water resources, or the bias towards tertiary health of most states' health systems. To support this process, an evaluation of the financial situation of individual states, in which the IMF will collaborate (para. 65) is scheduled to start this fiscal year. Sector work on agriculture also scheduled to start this year will include an analysis of state-level interventions in the sector,  - 12 - as an input into the articulation of a comprehensive reform strategy for the sector. An urban sector report underway is expected to articulate an agenda of reforms enabling municipalities to improve their finances, and the provision of essential services. The report will also review mechanisms for allocating state grants to local Governments. Other ESW activities consist of ongoing work on environmental issues in the energy sector which will complement the comprehensive treatment of the environment in the last CEM. Sector reports underway in the social sectors (on family planning, education, state health systems) to be completed this fiscal year should provide the basis for the next stages of IDA involvement in these areas. The most recent CEM deals in detail with issues of private investment in infrastructure. ESW dissemination will continue to be pursued through meetings, workshops, and seminars, involving users' groups, Government officials and NGOs. 37. We also intend to allocate significant resources for ESW on poverty. India has been a pioneer in the study and assessment of poverty. It has developed comprehensive household surveys which enable the tracing of poverty for a period of over four decades. A poverty assessment completed in 1990 benefitted considerably from the wealth of studies carried out by Indian academics. Where the Bank could now contribute is in areas which have been explored only partially in India such as the identification and quantification of measures leading to gains both in efficiency and income distribution. For example, removal of investment restrictions in the sugar refining and rice milling industries would reduce production costs and at the same time improve the living standard of the poor. Relaxation of regulations on land markets in urban areas would reduce the price of land thus reducing the cost of housing for the poor. Also, there are public expenditure programs that are economically sustainable and have a positive impact on the living standards of the poor. The redistributive impact of public expenditure programs, particularly in the social and rural infrastructure sectors would help clarify the extent to which the poor have access to existing social and rural infrastructure programs and the determinants of this access. These issues are major themes of a poverty assessment underway. This study could be of importance to inform policy makers on the choice and design of public expenditure programns. It is a data-intense exercise, however, unlikely to be concluded before FY97. 38. ESW Budget. ESW resources will decline from 23 staff years in the early 1990s to around 20 staff years for the foreseeable future, a level which we consider sufficient to keep current on economic and policy developments, maintain an analytical basis for interpreting current trends, and anticipate potential problems. We expect to reduce our ESW costs by concentrating on more focussed reports and increased collaborations with IFC, IMF, AsDB and Indian academic institutions. 39. Technical assistance is being provided through several channels. Bank Institutional Development Funds (IDFs) are currently helping the Government strengthen tax reform at the level of the states and local Governments, and supporting the consolidation of laws and regulations governing foreign investment in India. The IFC has been providing advice on the establishment of a regulatory framework for telecommunications conducive to private sector participation (para. 64). Technical assistance is also being provided in the context of preparing and implementing projects; the last CAS provided several examples of such instances. Efforts along these lines will continue in all priority sectors. Lending Plans and Risks 40. Sector Focus and Reform Obiectives of Lending. The key sectors on which our lending is focused and related sector-level policy objectives have been discussed in the text and summarized in Attachment 1 of last year's CAS and have been updated in Attachment 1 to this document. In addition, our ongoing ESW and policy dialogue on poverty and social sectors issues aims to prepare the basis for a series of direct anti-poverty interventions appropriate for IDA support. Similarly, recently completed and ongoing ESW on issues of environmentally sustainable development together with the experience gained with several ongoing operations (for pollution control) are leading us to develop an expanded lending program in this area. Except for these additions, the list of sectors in Attachment 1 of last year's CAS remains unchanged. Besides the financial sector, it consists  - 13 - of: (a) agriculture; (b) social sectors (family welfare, health, nutrition, and primary education); (c) power; (d) coal; (e) urban infrastructure; and (f) roads. All loans being envisaged in these areas will be investment operations with policy actions. As discussed in last year's CAS, the list of sectors on which our direct lending focuses excludes, inter alia telecommunications, ports, gas and oil sectors where there is considerable private sector willingness to invest. At the Government's request, we are considering providing to private investors in infrastructure term-financing and guarantees through financial intermediaries. Such operations would be designed to support the establishment of policies and regulations conducive to efficient private investment in infrastructure-- with particular emphasis on power, telecommunications and ports. These operations could play a catalytical role in mobilizing finance for private investment in infrastructure with more appropriate maturities than those currently available. They would also assist financial intermediaries in developing appraisal and risk evaluation procedures for large private infrastructure projects--an area in which India's financial sector has limited experience. 41. Lending Volumes. We are preparing operations that could amount to up to US$8.6 billion (including US$0.5 billion in the form of guarantees) for the three-year period FY96-98, of which on present planning assumptions US$3.6 billion would be IDA-financed. The actual lending that will result from ongoing preparations will depend first, on the rate of progress in improving the macroeconomic framework and economy-wide incentives. This will determine the upper limit of the aggregate level of resources the Bank will commit in India. In this regard, the specific criteria for assessing progress will be: (a) continued reduction of the Central Government fiscal deficit--attainment of the 5.5 percent fiscal deficit target for 1995-96 and further reductions thereafter geared to achieving fiscal sustainability will be of particular importance in assessing progress; (b) maintenance of a competitive real exchange rate, a sustainable current account deficit of the balance of payments and foreign exchange reserves at no less than 4 months of imports; and (c) progress in the implementation of the Central Government reform agenda (outlined in para. 27). These objectives have been discussed with the authorities and are consistent with their own program. As indicated in the last CAS, significant shortfalls against these objectives would lead to progressive reductions in lending beginning with IBRD operations where the prospects of reform essential for project viability appear less promising--to only one or two operations a year for a total of US$300400 million. Policy slippage and sustained deterioration in the macroeconomic framework would also lead us to re-examine the size and the content of the IDA lending program. IDA operations aimed at poverty alleviation, human resource development, and biodiversity conservation would be the last to be curtailed provided implementation performance is satisfactory. 42. Second, within the envelope set by the macroeconomic performance, the actual lending that will result from our preparations will also depend on progress in sector-level reforms and project-related actions that would improve state finances and project sustainability. As indicated in the last two CASs, the policy and institutional reform content of investment operations (outlined in Attachment 1) continues to increase gradually but persistently. See for example the case of power in Box 1 and the financial strengthening of Coal India in para. 49. 43. By making individual projects conditional on the implementation of sector reforms and improvements in state finances, the volume of both IBRD and IDA lending becomes regulated by the rate of progress on these two fronts. Were the policy environment related to specific projects to deteriorate, lending volumes would automatically decline and a low case scenario can be thought of as one emerging from failure to introduce sector- level reforms or measures to improve state finances. However, the exact quantification of this low case is difficult. The policy- and state-sensitive nature of our operations introduces important safeguards which ensure the development impact of our lending, but also makes lending volumes more volatile and harder to predict. It is also difficult to predict where reductions may be necessary; that will depend on the degree to which specific sectoral policies and state finances fail to improve. IBRD lending in FY94 was a mere US$100 million because some operations were delayed until there was evidence of progress on the policy framework related to these operations--but will reach US$1 billion in FY95 as a result of faster progress in policy reform. Year-to-year fluctuations of a similar magnitude are possible in the future, both for IBRD and IDA lending.  - 14 - 44. The main areas where shortfalls are possible, and triggers for deciding our support in each case are the following: (a) power projects (for which IBRD US$1.5 billion is envisaged) are contingent to the implementation of reforms similar to those introduced in Orissa; (b) road projects (for which IBRD US$1 billion is envisaged) are contingent on evidence that the states' finances can sustain the increases in future maintenance associated with the expansion of the road network supported through our projects, reform their Public Work Departments, and introduce other measures outlined in Attachment 1; (c) the Coal project (for which IBRD US$500 million is envisaged), is contingent on continued progress in the reform of the coal sector, along the lines outlined in Attachment 1; (d) projects in support of private investment in infrastructure through financial intermediaries (for which US$1.1 billion of loans and US$0.5 billion of guarantees are envisaged) are dependent on evidence that the pace of financial sector reform is being sustained, and that a policy, regulatory and institutional framework supportive of efficient private investment in infrastructure is being established; (e) water and irrigation projects (for which IBRD US$200 million and IDA US$450 million are envisaged) are dependent on actions to bring water tariffs closer to their economic cost, and other policy reforms outlined in Attachment 1; and (f) the high priority lending for primary education and state health systems (for which IDA US$0.8 billion is envisaged) is dependent on the participating states taking steps to ensure the financial sustainability of the education and health services established with IDA support and to meet the sector policy targets indicated in Attachmnent 1. 45. Therefore, even if there is a satisfactory macroeconomic performance, lack of progress in sector specific policy actions and in improving the financial environment underlying the projects above, could reduce our lending from US$8.1 billion to possibly as little as US$2.3 billion. Nevertheless we believe that on developmental grounds it will be important to continue making our loans vehicles for policy and institutional improvements in the sector where they take place, even if this entails more volatile or temporary slow downs in lending--because if the objective is to increase the development impact of our lending, the best loan is the loan that has not been made until the basis for its effective use is established. 46. Another downside risk--which may affect mostly the FY96 lending program--stems from the general elections to be held before May 1996. As discussed in para. 16, we do not expect political development to interfere with the medium-term structural reform process started in 1991. However, there are some fiscal risks, at both the Central and State Government levels, that may lead us to reconsider the timing of some operations. In addition, as attention shifts to national elections, the pace of reforms may slow temporarily in the pre-election period. Finally, administrative decisions essential for the processing of projects may be delayed. A hiatus may thus develop in next year's lending program. 47. IDA. As has been the case in the past, IDA resources will be deployed in areas where they can most directly alleviate poverty, accelerate the development of human resources, and support the sustainable use of India's natural resources--an issue of particular importance for the poor. The impact of the IBRD lending on the poor will be through the effect it has on the efficient accumulation and use of capital, and labor-intensive growth. 48. Lending Channels. Excluding guarantees for US$0.5 billion, the operations envisaged in our lending program consist of (a) loans to the Central Government (28 percent of total); (b) loans intermediated through the financial sector (14 percent); and (c) loans channeled to states (the remaining 58 percent). 49. Central Government. The main objective of our loans to the Central Government is to support the implementation of the reforms started in 1991. For example, the FSDP approved in March 1995 has been an important vehicle to support the systemic changes being introduced in India's financial sector. A proposed coal project (FY96) aims at accelerating the restructuring of public enterprises. It supports the implementation of an ambitious program of reforms for Coal India, India's second largest public enterprise with about 700,000 employees. The program envisages liberalizing pricing, reducing tariffs on imports of coal, and financial and corporate restructuring. A loan for the Central Government power generation and distribution companies should provide the basis for structural reforms in Central Government public enterprises in the power sector. Loans for  - 15 - the Central Government for the social sectors are for problems best addressed at the national level such as those dealing with the management of natural resources, and endemic diseases (tuberculosis and malaria in FY96 and FY98), and nation-wide social programs when this is warranted, such as in the case of the Integrated Child Development Services. In agriculture, a National Hydrology Project (FY96) will support the upgrading of hydrology data, measurement, storage, retrieval and analysis for better water planning and management and provides a basis for a second National Water Management Project (FY97). A National Agricultural Technology project (FY98) aims at strengthening the national agricultural research system and focusing its research priorities on the most urgent needs. In the environment, building on experience from ongoing forestry projects, a conservation of biodiversity project with GEF support will seek to implement an eco-development strategy in and around seven protected areas in India. 50. Financial Sector. With a financial savings rate of over 13 percent of GDP (over half the domestic saving rate), India's financial sector has a key role in the allocation of the country's savings, and has reached a level of sophistication well above what could be expected in a country with a US$310 per capita income. This gives an opportunity to use the financial sector's capacity to evaluate projects and risk to allocate capital where it can generate the highest returns. There is evidence, however, that intermediation costs still are relatively high--in part because of high directed credit requirements--and that the financial sector's ability to provide credit to some key sectors of the economy with appropriate maturities falls short of needs. This is particularly the case for (a) agriculture where the specialized intermediaries are in urgent need of reform; (b) infrastructure, where private sector entry in telecommunications, power, and other areas of infrastructure has created a large demand for finance with maturities longer than those typically available; (c) investments in pollution control where there is a need to introduce new technologies and strengthen institutions; and possibly (d) small scale industries where the existing institutional framework constrains small enterprises' access to credit. Lending operations being envisaged at this time include loans to lengthen the maturities of finance for infrastructure through financial intermediaries--this would provide much needed long-term resources for private investment in infrastructure. As indicated earlier, these operations would only materialize if there is sufficient evidence of progress in the implementation of a framework supportive of private investment in infrastructure. Finally, a project aimed at supporting the reform of the rural credit system is in the early stages of discussion with the Government. 51. State Governments. Under the current lending plans, state-level operations focus on agriculture, irrigation, roads, water supply, power, environment and urban and social sectors. Besides direct financial support for investments, these operations also provide vehicles for furthering the agenda outlined in Attachment 2 such as for example the Tamil Nadu Water Resources Consolidation Project presented together with this document, which will be followed by similar projects for individual states or group of states. This line of projects has a key role in developing at the level of the states a financial, policy, and administrative framework conducive to the efficient use of India's scarce water resources. Similarly, several power projects will provide vehicles for comprehensive power sector reform at the state level of the kind being implemented in Orissa: Uttar Pradesh, Haryana, Rajasthan and Bihar have been granted project preparation facilities to prepare such operations. A recently completed Transport Sector Report provides a framework and recommendations for improvement of policies and institutions in the road sector, and in particular, for the reform of the PWDs. Besides providing resources for essential upgrading and maintenance for the most important parts of the road network in selected state, several state highway projects will support the implementation of these recommendations and will, inter-alia, seek to introduce more private sector engineering expertise in road projects design and construction, and competitive procedures in the selection of contractors. State forestry projects are helping the introduction of new approaches to forestry which seek to increase the participation of local groups in forest management and protection. A state-level Health System Project (FY96) will help improve efficiency in the allocation of resources in the health sector of selected states by improving the design of health programs and service delivery, and other institutional improvements similar to those introduced in the recently approved Andhra Pradesh Health Sector Project (December 1994). A second District Primary Education Project (DPEP) (FY96) will extend the approach introduced through the first one (Box 2). In the urban areas we are focusing our efforts on large cities with the  - 16 - Bombay Sewerage Project (FY96), Bombay Urban Transport (FY97), and similar operations in other cities. We Box 2: The District Primary Education Program intend also to develop a broader approach A New Mechanism for Center-State Financing Relationships for the urban sector as a whole in the TheGovernmnentofIndiacreatedtheDistrictPrimaryEducation Program (DPEP) in 1994 to manage a centrally-financed investment (para. 36). program under the Revised National Policy on Education (1992) aimed at improving the: quality of rural primary education. Through the 52. Guarantees. The Central program the>GO0 providesgrants to states equivalent to 85 percentof the Government has announced it would not cost of approved investments, with the states providing the balance. extend guarantees beyond the first eight DPEP differs from other centrally-sponsored schemes that provide private power projects already under resources to states for the implementation.-of standard program designs consideration and has requested the Bank iin the following ways: (i) proposals for financing of sub-projects are developed by each participating district and state; (ii) proposals are appraised by the DPEP Bureau of the national department of Education support the second generation of private against technical, managerial and, financial criteria; (iii) participating power investments. The objective of such states must make DPEP grants fully additional to normal growth of Bank guarantees would be to improve the education budgets in real terms; (iv) funds are made available to states terms at which private resources can be and districts annually on the basis of performance reviews and proposals attracted in the sector. Their scope would for the next year--and poorly performing sub-projects can be dropped have to be more restricted than those frorn the program and replaced; and (v4 implementation support and already agreed by the Central technical assistance are made: available to states and districts through Government as they could not underpin contracts with research and development agencies. the cash flows to be generated from All substantial external assistance to primary education in India power purchase agreement (PPAs) is to be channeled through DPEP. These resources are in turn made between private power producers and available to districts 'with below average female literacy rates. As a SEBs, but instead would be in support of technical and financial intermediary mechanism, the DPEP enables the external debt service default to GOI to hold states to quality standards as articulated in program criteria commnercial and private lenders, in the and guidelines as a condition of financing, while at the same time event of non-compliance by SEBs or encouraging. decentralized lplanning of local solutions to fit local circumstances. The program has been supported by a grant from the other public agencies of their obligations European Union and an IDA credit approved in November 94; additional under the PPA or other related project financing from UNICEF, UK ODA and other donors is anticipated. agreements. In response to a Governrnent Expanding the program to a larger number of states will be the objective request, the Bank is developing a of another IDA operation in FY96. framework for the use of such Bank guarantees. It will clearly outline the parameters under which the guarantees could be issued and the process by which guarantee operations could be undertaken in the context of India's power sector. In particular, active consideration of guarantee applications would be conditional on the willingness of the concerned state to undertake state power sector reforms (para. d in Attachment 2) and improve the financial standing of the SEBs (whose financial obligations would be the object of guarantees). Bank guarantees would thus be part of the financing package the Bank would be ready to provide to reforming states. In addition to private power generation, guarantees will also be considered for private sector power distribution, and private investments in other areas of infrastructure. 53. Administrative Budget. In developing the FY96-98 lending program, we will have to change our working procedures to accommodate the recent budget cuts: resources for the India Department were cut by 4 percent in real terms this year, and the budget guidelines for South Asia envisage a further 14 percent real reduction over the next two years. More extensive use of multi-state projects such as the recently approved DPEP will be required to enable the Bank to support state-level reforms while gradually reducing the number of projects to about 8 a year. The Bank will also have to transfer to borrowers a larger share of project preparation and  - 17 - supervision costs. The proposed CAS can only be implemented within the reduced budget if these changes can be effected. 54. Exposure Indicators. Last year, under the lending program envisaged for FY95-97, the India share of the IBRD portfolio was projected to decline from 9.1 percent in 1993-94 to about 7.5 percent at the end of the decade. Assuming that the lending plans outlined in this section for FY96-98 materialize fully, and that similar IBRD lending volumes are maintained in the future, this share (which excludes the possible use of guarantees) would increase to 8.6 percent (partly on account of a reduction in the projected growth rate of the overall IBRD portfolio). Under the current account and external financing projections underlying the macroeconomic prospects discussed in para. 19, after peaking at 5 percent (of exports of goods and services and workers' remittances) in 1992-93, the service burden of IBRD debt is expected gradually to decline from 4.4 percent in 1994-95 to 4.1 percent in 1995-96, and 3.1 percent towards the end of the decade. The IBRD share of India's public debt service which is at present 21 percent (slightly above the guideline of 20 percent) is expected to increase to 22 percent later in the decade, and to decline to below 20 percent early next century. The preferred creditor share of public debt service is projected to decline gradually, from 50 percent at present to 30 percent towards the end of the decade (reflecting declining repayments to the IMF), thus below the Bank guideline of 35 percent. Portfolio Management 55. In FY94, the India portfolio consisted of 101 investment operations and two adjustment operations, for a total of US$15.3 billion (net of cancellations), and US$9.1 billion undisbursed at the end of FY94. Based on our current lending program and projection of closing dates, the FY95 India portfolio is expected to comprise 86 operations valued at US$16 billion. The disbursement ratio for investment operations improved from 13.5 percent in FY93 to 16.6 percent in FY95. With judicious management of closing dates and selective cancellation of problem projects, the number of long-gestating projects has also declined. By the end of June 1995, the portfolio is expected to include five projects under implementation for more than eight years, down from 16 at the end of FY94. Intensive pursuit of remedial action on the part of the Government and the Bank has resulted in a reduction in the number of problem projects over the past two years (from 17 in FY92 to 13 in FY93 and 10 in FY94). However, a worrisome recent development has been the visible deterioration in the portfolio performance caused by weakening state-finances. With increasing frequency, project implementation is being seriously slowed or even stalled because the project funds are not being made available to project entities at the state level. Central allocations for IBRD loans and IDA credits are channeled through the State Governments' consolidated accounts. There is evidence that authorities in specific states have tried to manage their worsening fiscal positions by freezing all development expenditures, except salaries, and reallocating funds budgeted for Bank and IDA-financed activities to other uses. 56. The Disconnect. In view of the historic "disconnect" which has been identified in the India portfolio between ratings of the projected development impact during implementation and the assessment of the PCR/ICR by OED, we are keeping the disconnect problem under close review. Any disconnect which arises from OED reports on the PCR/ICR is identified and discussed with the managing division. More specifically, our tracking of PCRs issued between January and December 1994 reviewed by OED shows only two cases of more favorable ratings by our staff during supervision. Both cases suggest some genuine differences in judgement. They also highlight the importance of incorporating specific indicators of development impact in project design and SAR, particularly for institutional development components, where objectives have in the past been poorly specified. 57. Oualitv at Entry. The last two CASs described the strategy adopted by the Government and the Bank to address the various generic implementation issues and to improve "quality at entry". Major elements of this strategy included (a) keeping the design of new projects simple; (b) ensuring key actions on procurement, land acquisition, environmental and other government clearances prior to project approval; (c) improving the mechanisms for channeling central funds for externally-aided projects to the states; (d) restructuring projects  - 18 - where appropriate and selectively canceling components with little scope for improvement; and (e) making greater use of private engineering consultants for the supervision of construction work. These principles have continued to guide our portfolio management practices. We have intensified our reviews of problem projects and long- gestating projects, and as part of the implementation of the "Next Steps" Action Program adopted: a number of supervision and "quality at entry" practices including mid-term reviews for all projects; use of model bid documents for projects under supervision as well as new operations; and the requirement that prior to negotiations, final design engineering and the preparation of actual tender documents for the first two years of implementation be completed. 58. CPPR. During the fourth annual country portfolio performance review (CPPR) with government officials held in December 1994 in New Delhi, the Government and the Bank agreed on a plan of action summnarized in Attachment 3. In addition to the consolidation of the results of the prior years' efforts, an important theme of this year's CPPR discussion was the division of responsibility between the Government and the Bank for portfolio management and ensuring "quality at entry". 59. Over the years, we have allowed a pattern to develop whereby in our zeal to accelerate project implementation we have too often stepped in directly to provide substantive assistance in project management, running the risk of pre-empting the Government's project execution functions and undermining its ownership and accountability. In so doing, we have also incurred a high supervision cost structure. There is now an explicit agreement that the Bank would limit its role in portfolio management to its mandatory core responsibilities (end- use supervision and monitoring of credit/loan covenant compliance) in addition to providing advice, and some highly selective facilitation. In cases where an implementing agency or a beneficiary state Government require additional implementation and monitoring assistance to complement their technical and administrative resources, Bank support would increasingly take the forn of financing Third Party Supervision and Certification under the technical assistance components of the relevant credits/loans. New projects in the India program are beginning to incorporate the concept of third party supervision in their design. For example, the District Primary Education Project (approved by the Board in November 1994) will have its intermediary organization, DPEP Bureau, supported by an implementation support group including consultants. Consulting firms or in appropriate cases NGOs will assist in project supervision, evaluation and monitoring. The Government and the Bank decided during the recent CPPR discussions that the need for such TA-funded implementation support would be explored more systematically for new projects during preparation. Where a good case can be made for such implementation support, the TA component will be designed by the Government and implementation agencies early in the project cycle and the terms of reference for consultants agreed at negotiations. For ongoing projects, the need for such TA resources would be explored at the time of the mid-term reviews. 60. For ensuring client ownership at entry, it has also been reaffirmed that the Government will arrange and lead project preparation activities, and the Bank will play a supportive role by helping to secure financing (PPFs, Trust Funds) for preparation and by facilitating the sharing of experience across countries. Given the cumbersome government procedures associated with trust fund utilization and the administrative weaknesses of some beneficiary institutions, the Bank had come to substitute for the beneficiaries as a trust fund executing agency. The Government and the Bank also agreed to reverse this trend. The Government is taking a hard look at government procedures with a view to relaxing administrative rules for contracting consultants, especially on policies and processes for setting consultant rates and handling taxation issues. To meet the pressing need for trust fund utilization in the short term, the Government and the Bank are now working together to develop appropriate mechanisms for assigning trust fund execution pro ter to a qualified "contracting agency". In addition, a tripartite steering committee comprising of the Ministry of Finance, executing agencies and the Bank has been established to expedite decisions on recruitment of consultants under PPFs.  - 19 - Resident Mission in Delhi 61. Another key element of our evolving portfolio management strategy is the devolution of portfolio management functions to the New Delhi office (NDO). Since 1991, NDO's staff has had supervision responsibilities for the entire agriculture portfolio. With the establishment of a procurement, disbursement and audit team (PDAT) in 1994, procurement review functions below certain thresholds have been delegated to the field as well. The overriding objective for this devolution has been to improve our portfolio performance through more timely response to our clients. We have continued this process with the selective delegation of supervision responsibility for our education, population, health and nutrition and energy portfolio through the posting of senior sector specialists in the New Delhi office, and devolving additional disbursement, auditing and accounting functions to PDAT. 62. NDO is also being restructured to enhance its support to our evolving priorities. In addition to greater responsibilities in portfolio management, NDO will also play an important role in supporting a larger Bank involvement in infrastructure, dealing with some of the strategic aspects and policy issues related to this expansion. NDO will also establish policy dialogues with selected states, and assist headquarters in subcontracting to appropriate Indian institutions ESW related to establishing this dialogue, as well as ESW in other areas. Finally, NDO will formulate and implement a public affairs strategy. 63. We have also created in NDO a social unit comprising specialists in social issues of mutual interest to the Government and the Bank such as resettlement and rehabilitation, environment, gender and tribal people. We attach value to our field presence for work in these subject matters because they enable us to draw on local knowledge, language and cultural sensitivity. IFC and MIGA Activities 64. As opportunities for the private sector have expanded in India, so have IFC activities. IFC has been selective and given priority to projects supporting the restructuring of India's economy and the increasingly large role the private sector is expected to play in sectors previously reserved for public investment. IFC has placed considerable emphasis on supporting the entry of new participants into such areas as power, telecommunications, the banking sector and the mutual funds industry. In particular, the Corporation has played a key role in structuring five of the first private power sector undertakings under the liberalized regime. In FY94, of 21 operations approved (for which IFC provided US$200 million of financing, and organized financing for an additional US$400 million) two were greenfield power projects, one was for a private commercial bank, and two were for private mutual funds. IFC has also provided advice on issues ranging from the treatment of non-voting shares, to the privatization of India's largest machine tool company, and the policies to be pursued to manage the large private capital inflows and the pressure they put on the exchange rate to appreciate. In addition, IFC underwrote three Euro-issues and made a major effort in syndication (for an unprecedentedly high US$320 million). Besides supporting the entry of new participants into the industrial and financial sectors, IFC is now working with the Bank on the privatization of Orissa's power industry; helping the authorities establish a regulatory framework for telecommunications conducive to private sector investment; and is also considering several projects in power generation and distribution (which do not require government guarantee), telecommunications, banking, and possibly insurance if the public sector monopoly in this area is eliminated. India became a member of MIGA in January 1994. While thus far MIGA has not issued any guarantee for investments in India, it is working on several projects which are expected to be brought to completion during the course of 1995. In addition, MIGA is also considering support for Indian firms interested in investing overseas.  - 20 - Other Agencies Activities and Aid Coordination 65. IMF. The Bank and the IMF have closely collaborated in mobilizing resources critical for the implementation of the Government's stabilization program and successful resolution of the country's external payments problems. Given the favorable evolution of the balance of payments and foreign exchange reserves, India is not expected to access IMF resources in the foreseeable future. However, the Bank and IMF staff continue to exchange views on India's macroeconomic prospects; an IMF Article IV consultation mission visited India after the 1995-96 budget was presented to Parliament. In addition, the Bank and the IMF are making plans to collaborate in the preparation of ESW on state finances and the financial sector each institution drawing in its respective areas of expertise. In the case of state finances, the IMF will focus primarily on states' tax policies and tax administration, and the Bank on states' expenditure programs. In the case of the financial sector, the IMF will focus on government securities markets and foreign exchange markets issues; and the Bank will focus on issues related to access to credit and banks' restructuring. 66. Other Development Agencies. Japan, AsDB, Germany, UK, USA, the Netherlands and Sweden are, in that order the largest bilateral and multilateral development agencies active in India, and are responsible for about half the US$4 billion multilateral and bilateral agencies have disbursed in India in recent years; IBRD and IDA being responsible for the other half. They are mostly involved in hydrocarbons (AsDB), infrastructure (mostly Japan, AsDB and Germany), and, except for AsDB, virtually all agencies are involved in social sectors and agriculture, often in collaboration with the Bank. AsDB has also had operations in support of capital markets development. Several donors have contributed to enhance the quality of the Bank's projects. WHO and UNICEF have developed pioneering approaches on which IDA projects in health and education would be modeled. USAID is developing an innovative project where for the first time in India a commercial financial intermediary will finance urban investments. Several other donors have pioneered innovative approaches in the provision of social services and in collaborating with NGOs, which the Bank has incorporated in the design of its projects. The Japan Grant facility has had an important role in financing pilot approaches which supported the formulation and design of Bank projects. It also provided financial support for technical studies for the railways and highways (Attachment 1, pages 9 and 10). 67. The first India Development Forum (IDF) meeting was held in June 1994. Besides a discussion on India's needs for official development assistance, and a special session where the Government presented its Environmental Action Plan (EAP), the meeting included discussion of the program of reforms with private investors. The meeting was considered a success because it helped the Government gain a better understanding of the problems confronting domestic and foreign private investors in a variety of areas, and also private investors gained a better understanding of the Central Government objectives. The next IDF meeting will be held in June 1995. The discussion with official donors is expected to focus on India's continuous needs for concessional assistance, and the need to focus development programs at the level of states. A review of the Government's efforts to expand primary education in the forthcoming CEM will provide the basis for a special session to discuss the Government's plans and programs in primary education. Discussions with the private sector are expected to focus on the regulatory framework governing private investment in infrastructure. The CEM being prepared for the forthcoming IDF will also provide the basis for these discussions. Areas of Special Emphasis 68. Reducing poverty, developing the private sector, improving environmental protection, strengthening institutions, increasing the role of beneficiaries and NGOs in project design and implementation, and enabling women to participate more fully in the development process are all important objectives of the  - 21 - Bank's activities in India. The last two CASs reviewed in considerable detail Box 3: Poverty Reduction in India: More Emphasis how these objectives were pursued on Growth, Health and Education through the overall objectives of IBRID Since Independence, India's policy makers have always considered and IDA lending, individual project that the sheer dimensions of poverty in the country meant that poverty design and implementation, and reduction could not rely on transfer programs alone, but required a initiatives taken by the Department to prolonged period of sustained and rapid growth. Until reforms started in increase task managers' awareness of 1991, however, and in spite of robust investments and savings rate, the development policies in place kept India's growth rates well below their the possibilities and benefits of more potential. In addition, whatever growth was achieved was of a capital- extensive use of participatory intensive nature, and was thus not translated into the increases in approaches and closer collaboration employment and real wages that would have been possible with a more with NGOs. The last two CASs also labor-intensive pattern of growth. As a result, the incidence of poverty in India has declined at a much slower pace than would have been possible, and highlighted how gender issues were than what has been witnessed in East Asia. addressed both through specific project components, and design features taking The reforms which are being introduced since July 1991 have into account women's views and considerably improved the prospects for a rapid reduction in the incidence interests. Our activities will continue to of poverty in India. They have begun establishing a framework from which considerably higher growth, and also more labor-intensive growth, can be pay attention to these issues. For derived from the country's labor and capital resources. example, the district primary education project approved last October is aimed However, to translate this potential into reality, a number of additional steps need to be taken. First at the mnacroeconomic level, the at disrictswith lw femle litracy, declining trend in public savings needs to be rapidly reversed. This is State Forestry projects and a essential because it provides the macroeconomic foundations for higher biodiversity project under preparation investment levels and growth rates. Second, the reforms started in July 1991 are integrating in their design need to be brought to their logical conclusion, and reformns also need to be participation of women in the planning, extended to agriculture and other sectors of the economy. This is essential participation to ensure that India's resources are put to their most ptoductive use--and that decision making and benefits sharing of a pattern of labor-intensive growth is fuilly established. Third, improvements social forestry and biodiversity in their finances are critical to enable the states to expand the provision of protection. The recently approved social services which will provide the poor with the health and skills that will Andhra Pradesh Health project provides enable them to participate in, and benefit from, the growth process. This facilities targeted to women. Box 3 three-pronged approach to poverty should enable India to reduce poverty omuch faster than it has in the past. Transfer programs should be seen as a summarizes our overall approach to complement to this approach, not a substitute. poverty which--as discussed in the last CAS--is supplemented by more direct project and programs interventions (such as the Bihar Plateau project). Two additional areas of special emphasis warrant discussion. 69. Beneficiary Participation and Resettlement and Rehabilitation. In a country with widespread poverty, high population density, and enormous pressures on natural resources, any investment project has strong redistributional consequences. In particular, any infrastructure project implies the dislocation of people. Managing this process satisfactorily and compensating the losers has proven to be a daunting challenge. There is no single formula to meet this challenge but, as highlighted in last year's CAS, the department has made considerable efforts to raise the awareness of task managers to these issues, and develop their expertise -- including the establishment of a departmental task force to encourage a more systematic use of social assessments; participant observation; involvement of NGOs; and the development of appropriate R&R strategies and procedures early in project design, preparation and implementation. These issues have been the focus of several workshops for task managers. Last year's CAS also provided numerous examples of projects where these methodologies were being applied, mostly in social and rural infrastructure projects. The expertise gained in these areas is now being applied to infrastructure projects, such as the one for Coal  - 22 - India and other projects in power. The department sees the use of participatory approaches not only as essential to ensure social fairness in the distribution of benefits generated by development projects, but also essential to their successful design and implementation as well as sustainability. 70. Environment. As indicated in Attachment 2, India has developed a comprehensive policy and institutional framework for the management and protection of the environment. India is also signatory to international environment conventions including those on international trade of endangered species, wetlands, conservation of biological resources and Montreal Protocol. The Government's environmental goals and priorities have been articulated in the EAP of December 1993 which has been discussed in the last CEM (May 1994), and were the focus of a special session in last year's IDF. The Government environmental strategy recognizes the trade-offs between poverty reduction and protection of the environment, and emphasizes actions where complementarities are the strongest. In particular, considerable attention is being paid to the management of natural resources which have a strong positive impact on the living standards of the poor--conservation and sustainable utilization of biodiversity, including forests (an objective supported by several Bank projects for forestry and biodiversity protection); soil and water conservation (an objective supported through several agriculture development projects and water consolidation projects); and industrial pollution control--an objective being supported through two ongoing Industrial Pollution Control projects which besides strengthening State Pollution Control Boards, also finance industrial waste prevention, common treatment and water recycling plants. The Bank is also working with the Government and the GEF to implement several environmental conventions: a Renewable Energy Resources project is already under implementation, and several other projects supporting the use of renewable sources of energy and the phasing out of Ozone Depleting Substances under the Montreal Protocol are under preparation. The Bank is now also discussing with the Government possible environmental projects which would strengthen the capabilities of the institutions and agencies in charge of formulating and implementing environmental policies; monitoring and enforcing environmental legislation; and also financing public investments where required to address area-wide environmental issues such as air pollution; solid waste management, including hazardous wastes; sewerage disposal and sanitation. E. Agenda for Board Consideration 71. In July 1991, the Indian Government started to liberalize the economy with a reform program focused on the investment regime, trade policies, the financial sector, taxation, and public enterprises. Since that time, many important measures have been taken which have effectively ended four decades of centrally planned development, and opened India to international trade and private investment--both domestic and foreign. By virtually any measure, the economy has responded well to the program. Nevertheless, as the authorities have highlighted in a number of policy papers, there remains a challenging "unfinished agenda" which needs to be addressed if East Asian rates of growth and poverty reduction are to be attained. As indicated earlier in this document this "unfinished agenda" includes improving the public sector saving performance, concluding the reforms started in 1991, and extending the process of reform to key sectors of the economy. 72. Strategic Objectives. The proposed Bank assistance strategy focusses on supporting the Government in addressing this "unfinished agenda", including supporting improvements in the states' finances and sector-level policy frameworks. It does not envisage the need for balance of payments operations, but proposes ESW to help the Bank stand ready quickly to develop such operations should the need arise. Key instruments for pursuing our objectives are ESW, technical assistance, and investment projects with a high policy content. 73. Risks. Later in the year, attention in India will be shifting to the national elections, which have been scheduled for the spring of 1996. The pace of reform and fiscal adjustment may then slow. In addition,  - 23 - administrative decisions essential for the processing of projects and sector work may be delayed. A hiatus may thus develoD in next year's assistance program. However, we believe that the underlying consensus for reform is strong--driven by India's aspirations for the improved living conditions that its East Asian neighbors have achieved. We thus expect India's long standing democratic processes to validate these aspirations and to provide the basis for fiscal adjustment and reform to be taken up with renewed vigor once the electoral process has been completed. 74. The above notwithstanding, there is a risk that fiscal indiscipline and policy stagnation at both the central and state Government levels will extend beyond FY96. This would have a negative effect on the strength of the overall supply response, and could erode India's capacity to service its external debt. Offsetting this risk, and strengthening the country's creditworthiness, are India's conservative debt management, its high level of net foreign exchange reserves and its significantly improved export performance. In addition, our assistance strategy addresses these risks through: (a) close monitoring of India's fiscal and balance of payments developments, with particular attention to progress towards reaching fiscal sustainability, and the behavior of the real exchange rate, exports, the current account deficit and debt management; (b) a lending volume conditional on sustained improvements in macro-economic performance--with particular emphasis on fiscal performance; and (c) a policy- based investment lending program regulated by the pace of reform at both the central and state level. Richard H. Frank President ad interim   Attachment I Page 1 of 10 India - Country Assistance Strategy Status Report on the Sectoral Objectives to be Supported through IBRD and 1DA Operations Outlined in the 1994 CAS Sectoral Reform Agenda ESW Operations Reform Status Financial Sector: * Promoting efficiency and competition * A Financial Sector Report * The Financial Sector Development * Significant progress has been in banking and other financial services; completed in 1990 provides our Project to be reviewed by the Board achieved towards all objectives * further deregulation of interest rates; basic thinking on financial sector in March 1995; outlined in the first column. * reduction in pre-emption of bank funds reform issues; * possible technical assistance for the by government and rationalization of * a Financial Sector Report modernization of the payments priority sector lending, including rural completed in March 1994 provides system under consideration would credit; an assessment of progress achieved strengthen the efficiency of the * implementation of internationally during the first three years of banking system. accepted income recognition and financial sector reform, and capital adequacy norms; outlines future priorities; * restructuring of publicly-owned banks, * a Financial Sector Strategy Paper to with particular emphasis on the weaker be completed in FY96 will identify banks; and the next priorities for financial o deepening of the government securities sector reform. market.  Attachment I Page 2 of 10 Sectoral Reform Agenda ESW Operations Reform Status Agriculture: * Rationalizing public expenditures to * The 1994 Public Expenditure * The WRCP Tamil Nadu (FY95) * Significant reform progress (cost reduce recurrent outlays and increase Review provides the basis for state supports action on power pricing as recovery, national resource investment in public infrastructure and level agricultural operations; well as improvements on public management, beneficiary improved technology; * the 1991 Irrigation Sector Review, expenditure and service delivery, participation) is being achieved in * increasing cost recovery for and the 1994 EDI conference on the WRCP Orissa (1996) supports the irrigation and forestry sectors in government-supplied goods and devolution to water users continue similar objectives; the states of Haryana, Orissa, West services; to provide the strategy for dialogue * the National Hydrology Project Bengal, Tamil Nadu, Andhra * liberalizing internal trade; and operations in water and (FY95) supports improvement in Pradesh, Maharashtra; * eliminating restrictions on agro- irrigation; national resource management and * limited progress on domestic and industries and on the movement of * the 1993 Forestry Sector Review efficiency in expenditure; external trade reforms; agricultural inputs and outputs; along with EDI conference (1994) * the MP Forestry Project (FY95) * limited progress on rural financial * initiating a timebound program to forms the basis for policy dialogue supports improvement in national sector reform. improve the financial integrity and and state level operations in resource management, inter-alia efficiency of rural financial institutions forestry; through extensive local community and cooperatives; * the results of the Livestock Review participation; * improving natural resources will be discussed in a workshop in * the Assam Rural Infrastructure management (forests and water) and June 1995; Project (FY95) strengthens public strengthen local participation. * a Cooperative Sector Review is expenditure planning and underway; implementation in rural areas; * an Agricultural Strategy Review is * The Human Resources Project scheduled to be completed in FY96; (FY95) to strengthen agricultural * a workshop on an ongoing research and education will Agricultural Credit Study is being increase the effectiveness of public organized. spending this area.  Attachrnent 1 Page 3 of 10 Sectoral Reform Agenda ESW Operations Reform Status Family Welfare: * Funding the operation of the Family * A study: changing the signals * Five Population projects currently * The Government has enunciated Welfare Program increasingly at a level ( 1989) provided the basis for our being implemented in I I high revised policies supporting a move needed to provide fully for required approach in Family Welfare; fertility states and urban slums in 7 away from a focus on sterilization inputs in staff, equipment, * the Public Expenditure Review cities, and a Child Survival and and strongly supported the concept pharmaceuticals, and maintenance; (1994) identified the key issues of Safe Motherhood project in 90 high of Reproductive Health at the recent * decreasing the emphasis on underfunding. A study entitled mortality districts are strengthening International Conference on sterilization and increasing the focus Issues in Women's Health (1994) the Family Welfare program by Population and Development, the on temporary methods; identified key issues in women's improving the service delivery population policies now are closely * improving the logistical support for the health that impact on fertility, norms, staffing, equipment and linked to poverty reduction and family welfare system; mortality and well-being, and is maintenance, quality of care and human development; * focusing increasing attention on high currently being discussed with the IEC; * a high level Population Committee fertility districts and urban slum areas; government; * discussion on a possible future has made recommendations to the * tapping PVO and private sector * a study on India's family welfare project will focus on a paradigm National Development Council for activities to enhance service delivery program is currently underway, and shift within the Family Welfare a national population Policy and and monitoring; aims to address (a) the fundamental program to broaden the focus from mechanisms for its * strengthening efforts outside the constraints that continue to hamper achieving sterilization targets to implementation., these mechanisms population field that can speed fertility the effectiveness of the Family providing oriented good quality include Population and Social reduction such as increasing female Welfare Program; and (b) major reproductive health care and Development committees at education and training; gaps between policy and narrowing the gap between policy national state district and local * completing development and targeting implementation. This study is and implementation.. levels to promote political and of the safe Motherhood Program providing the vehicle for a community involvement in family productive dialogue with the welfare issues, and the government and is expected to establishment of a Population and inform future lending. Social Development Fund under the Ministry of Health and Family Welfare.  Attachment I Page 4 of 10 Sectoral Reform Agenda ESW Operations Reform Status Health: * Revising funding patterns to focus * Three pieces of sector work: Health * The government supplemented the * Modest progress has been achieved public expenditure on adequate levels Sector Financing: Coping with budget to cover costs of a in enhancing the effectiveness and of public funding for high return areas Adjustment Opportunities for fundamental restructuring of efficiency of public expenditure on that benefit the poor, such as primary Reform (1992); Policy and Finance priority disease control programs. health in the Center and in some health care, endemic disease control, Strategies for Strengthening Implementation of these programs states; and public health; Primary Health care services is supported by IDA-assisted * significant progress has been * reducing the share of public (1994); and the Burden of Disease projects which are ongoing in achieved in the restructuring of the expenditure on health which goes to and Cost-effectiveness in Andhra AIDS, leprosy and cataract enhanced health programs with tertiary care and increasing cost Pradesh (1994) provided a thorough blindness, and are in the pre- more effective approaches, recovery among those who can pay for understanding of key health appraisal stage for tuberculosis; a strategies, and technical standards; secondary and tertiary care; financing issues in India. malaria control project is being * significant progress has been * implementing the enhanced programs prepared; achieved in the participation of the for AIDS, blindness control, leprosy * The state health systems initiative private and PVO sector. control, and TB; supported by IDA currently planned * developing an approach to more or initiated in 4 states will redress effective efforts in malaria control; the imbalance in resource allocation * developing improved technical in favor of primary and secondary standards for service delivery at the levels at the expense of teniary secondary level and for the training level, and will enhance cost and utilization of health manpower; recovery and subcontracting of and support services to the private * tapping the private and PVO sector to sector; enhance service delivery. * the PVO sector is directly involved in the enhanced disease control programs, the Indian Medical Association is also being tapped.  Attachment 1 Page 5 of 10 Sectoral Reform Agenda ESW Operations Reform Status Nutrition: * Revising funding patterns to focus * A 1994 Public Expenditure Review * Being addressed through the ICDS * Good progress in Tamil Nadu, attention on the malnourished, and on included of a review of the I and II and the ongoing Tamil joining multi-donor effort to children under three years of age; effectiveness of the existing Nadu nutrition project; promote these changes elsewhere; * increasing access to programs for nutritional progress. * being addressed through the Child * definite progress through the CSSM nutrition supplementation among the Survival and Safe Motherhood program, with less progress above groups; program and ICDS I and II evidence in ICDS. * strengthening the effectiveness and projects; and possibly operations in efficiency of the ICDS programs; FY96-98. * strengthening the effectiveness and efficiency of programs for micro- nutrient supplementation through more effective links with health and famnily welfare services and the private sector.  Attachment I Page 6 of 10 Sectoral Reform Agenda ESW Operations Reform Status Education: * Revising funding patterns to focus * A Central and State Education * District Primary Education Project * Government of India continues to attention on basic education; Finance Review completed in 1994; (DPEP), supports capacity building shift federal education allocations * reducing the share of public provides an assessment of the and quality improvement in states away from higher and toward basic expenditure used for tertiary education effectiveness of public expenditures and districts; focuses on improving education; and recovering a larger share of costs in this area; access and quality, closing gender * fiscal capacity of states to maintain from those who can afford to pay for * studies of public/private school and caste gaps, strengthened and sustain substantially higher tertiary education; cost-effectiveness completed; decentralized management; special commitments to primary education * improving access to primary education, * collaborative program of research funds for PVO activities; increasingly high on the reform particularly among girls in rural North on primary education with Indian * task management of agenda but the extent of progress is India; institutions well established; (initial implementation support for unclear in the aggregate.. * enhancing the quality of basic outputs used in special chapter for primary, and technical education, education through better supervision, 1995 CEM) will identify measures and vocational training shifted to improved teacher training, more that strengthen the delivery of Resident Mission. appropriate learning materials and primary education. improved monitoring and evaluation of educational outcomers; and * tapping PVO and private sector activities more effectively through grant and contractual arrangements.  Attachment I Page 7 of 10 Sectoral Reform Agenda ESW Operations Reform Status Power: * Clear demarcation of functions between . A discussion Paper Regulatory * Orissa Power Sector Restructuring * Significant progress towards the State (regulation) and the power Reform in the Power Sector was Project (FY96) under appraisal objective achieved in Orissa; sector enterprises (operations); completed in October 94, it outlines would unbundle power sector, * some evidence that other states will . restructuring of State power sector issues and option on regulatory privatize generation and follow. operations along commercial lines with matter; distribution, create an independent significant private participation, . competitive bidding handbook for regulate and reform prices; unbundling of services and private power was completed in . project preparation facilities (PPFs) introduction of competition in December 94. to prepare similar projects in generation; Haryana, Rajasthan, Bihar and . reduction and progressive elimination Uttar Pradesh. of agricultural power subsidy, full coverage of the remaining subsidy through State budgets and corresponding reductions in the cross- subsidies currently borne by other consumer categories; * improved collection of tariffs and control of widespread theft of power; . financial work-outs to ensure that operating entities in the State power sector become financially viable and creditworthy enterprises; and * continued commercialization of the operations of the central entities - NTPC, POWERGRID and the Power Finance Corporation.  Attachment 1 Page 8 of 10 Sectoral Reform Agenda ESW Operations Reform Status Coal: * Adoption of measures to improve * Coal Sector Rehabilitation Project * Private Investment in captive mines efficiency of operation of Coal India (FY96) would provide support to all is now allowed; Limited, including closure of mines the policy reforms outlined in the * import duty on coal has been that are unlikely to become profitable; first column. reduced to 35%. * opening up of sector to private investment; and * introduction of competition by reduction in the duty on imported coal and liberalization of internal trade to strengthen incentives for production of higher quality coal. Urban Infrastructure: * Clarification and assignment of * Following preparatory work * Significant progress has been made * India's recent 74th Constitutional institutional responsibilities for service underway, a comprehensive review with the evolution of the successful Amendment (i) constitutes state delivery and revenue collection at the of urban infrastructure financing is Tamil Nadu Municipal Urban Finance Commissions to advise state and local levels including revenue to start in FY96. Development Fund (under the state legislators on resource sharing arrangements; Tamil Nadu Urban Development mobilization at the municipal and * increased resource mobilization Project) into an independent local levels and on state-local through both taxation and user-charges financial intermediary; Andhra resource sharing; (ii) constitutes at the local level; Pradesh is to undertake studies into District-level Planning; and, (iii) * improved land management, with focus financial intermediation as part of requires elected urban local on the supply side and the efficient preparation for the proposed second governments; these important operation of property markets; and Hyderabad Water Supply and innovations are at various stages of * establishment of organized lines of Sanitation Project; intermediation implementation in India's 25 states. credit to local governments for the ideas have been discussed with the financing of infrastructure, regional development authority in Bombay; ongoing and proposed projects continue to lay stress on resource mobilization and service delivery enhancement at the local level.  Attachment 1 Page 9 of 10 Sectoral Reform Agenda ESW Operations Reform Status Transport: * Rationalization of container services on * A recent Transport Sector: Long * Linked with the Container * The liberalization in the civil fixed schedules, delegation of more Term Issues Green Cover Report Transport Logistic Project, (FY94), aviation sub-sector was formalized responsibilities to the port authorities provides a potential sectoral reform the Governmnent has taken steps to by legislative measures regularizing and the promotion of private scenario in India, the report will sell on the market 20 percent of its the operations of several private participation in areas such as terminal serve as background paper for two shares in the Container Corporation airlines and the trend toward operations and container handling; days seminar with private and of India, appoint non-official privatization of road passenger * establishment of an effective, public sector participation; members to its Board of Directors transport continued. However, only operational national Highway * India Port Sector Strategy Green and clarified current customs partial measures taken regarding Authority, privatization of highway Cover Report, submitted in early procedures to facilitate inland needed regulatory framework, engineering design and supervision 1994, was discussed with movement of containers, including particularly regarding safety and services, rigorous prequalification of Government and written comments by road; environment; consulting engineers and contractors received. Grey Cover Report to be * as part of project preparation, * several measures have been taken to together with sound competitive issued in March. Bank also helped several States have agreed to encourage private sector bidding procedures; organize preparation of extensive use of consultants for involvement in ports with contracts * significant increase in outlays for international standard tender highway network analysis to or concessions worth some $400 investment and maintenance on the documents for inviting private establish priorities, carry out proper million having been awarded and congested road network, partly sector tender for port operations; feasibility and engineering studies, others are under discussion; the financed through user fees and charges, these are still awaiting formal and for implementation and Government is currently preparing including vehicle and fuel taxation; Cabinet approval; supervision of civil works. These certain legislative measures to and * Bank is serving as Administrator studies also include measures to facilitate private sector investments * adoption of measures to place the for a PHRD grant for development improve the efficiency of the and increase autonomy of Port operations of Indian Railways on a of a Long Range Decision Support administration and improve cost Trusts. Several measures have also sound commercial footing by giving System for Indian Railways which recovery. been taken to remove some of the higher priority to profitable freight will assist Indian Railways develop constraints facing the growth of operations through reductions in a decision support system to Indian shipping, particularly subsidies for passenger, suburban and evaluate decisions that affect high - private sector shipping; meter gauge services and through the * there is a growing recognition of corporatization/privatization of its the need for greatly improving the manufacturing actives. road network through increased private sector participation and also strengthening of the Central and State administrative capacity as well as funding availability. Guidelines for private sector toll  Attachment 1 Page 10 of 10 Sectoral Reform Agenda ESW Operations Reform Status Transport contd. density railway capacity in a actively being prepared and such comprehensive, system-wide, multi investments are prepared and such modal context. System investments are actively being development is progressing solicitated. Measures to review the satisfactorily. institutional framework and * The Bank is also serving as capacities of State road transport Administrator for a second PHRD organizations have been accepted as grant for assistance in (a) preparing part of project lending. The an operational plan for the National National Highway Authority has Highway Authority and (b) been activated and is preparing for preparing network planning and its major role in central highways highway section feasibility studies. development and management; The studies are progressing * In the railway subsector, the Report satisfactorily. The Bank also of the Committee to Study reviewed and provided comments Organizational Structure and on draft guidelines prepared by the Management Ethos of Indian Government regarding private railways was issued in early 1994 sector participation in toll road with a significant number of developments. It is assisting in recommendations and small developing project based measures committees have been established to to partly privatize road design and formulate detailed action on many construction activities in several of the recommendations. Indian States. Railways is actively seeking private * The ICR for the Electrification and sector participation through own- Workshop Modernization Project your-own-wagon schemes, has been expanded to consider the contracting out of services and lessons to be learnt from the last supplies, and BOT or BOLT five lending operations ($1.2 billion arrangements for rolling stock, over 14 years). As such it electrification or doubling of lines represents the basis for a railway etc. lending strategy and as such serves the dual purpose of PIR and informal sector work.  Attachment 2 Page 1 of 4 SECTOR LEVEL REFORMS IN THE STATES (a) Agriculture. Based on legislation introduced to cope with scarcity situations associated to World War II and famines--the latter was still a problem in India about two decades ago--most states intervene extensively in the marketing and processing of agricultural products. These interventions change over time in response to market conditions. At one time or the other they have taken the form, inter-alia, of (i) licensing requirements for wholesale trade, storage and processing of virtually all agricultural commodities (particularly severe in the case of sugar refineries and rice mills); (ii) official permits required for out-of-state sales of some commodities (paddy in Tamil Nadu and Andhra Pradesh, edible oil in Gujarat, cotton and alcohol in Maharashtra); and (iii) limits on storage of key agricultural products such as rice (in Maharashtra, Punjab, and Andhra Pradesh), wheat (in West Bengal and Madhya Pradesh), sugar (in Kerala), and virtually all food commodities in Uttar Pradesh and Tamil Nadu. Needless to say, although precise estimates are not available, the cost of these economic distortions is likely to be large. On the institutional side, there is an urgent need to strengthen state governments' management of agricultural research and extension services (to address better the development needs of India's vast non- irrigated agriculture) and natural resources (water and forests). (b) Water Resource Management. In view of a growing scarcity of water in several major river basins, coupled with the depletion of the aquifer, there is a need for coherent state water resources policies incorporating river basin planning as a whole (requiring coordination and agreements among several states), all uses of water (drinking, municipal and industrial, irrigation), and improved water resource data collection and analysis. Part of the process of improving water resource management is the need to improve the performance of the state departments of irrigation. The propagation of the green revolution in India has relied on the large-scale expansion of irrigation systems in the Northern and Southern states--which have provided the basis for India's success at increasing food production, eliminating dependence on food imports, and eradicating famines. However, in most states, maintenance expenditure is totally inadequate, cost recovery is considerably short of needs, and State Irrigation Departments urgently need to improve their financial, managerial, and technical performance; increase their financial and administrative autonomy; and increase farmers' involvement in water management, maintenance of micro-networks, and micro-networks design and construction. (c) Forests. Forest areas play an important role in environmental protection through conservation of soil and water resources and biological diversity. Most of India's forests are degraded, and productivity is poor, however, because of population pressures which lead to over exploitation, encroachment, and also deforestation. Forestry was the responsibility of state governments until 1977, when it was classed as a concurrent subject, that is, the central and the state governments share responsibility and control over forestry matters. However, management responsibility remains with the states who decide on the staffing and resources required to implement policies. Programs introduced by the state forestry departments to respond to the objectives of the new policy but a number of issues remain to be addressed. These vary from state to state, but in general can be grouped in five categories: (i) local people have not been sufficiently motivated to cooperate in forest protection; (ii) government regulations and procedures discourage the private sector from engaging in farm forestry and agroforestry; (iii) technological development has not kept up with the investments in afforestation; (iv) forest  Attachment 2 Page 2 of 4 administrations and human resource development need to be strengthened; and (v) forest departments have discouraged other public and private sector agencies from sharing responsibility for sector development. (d) Power. State governments own the State Electricity Boards (SEBs) and other power companies which together generate 75 percent of India's electricity supply and distribute 90 percent, the remaining 10 percent being distributed by private companies. Although the Electricity Act of 1948 grants the SEBs considerable autonomy, in practice they have lost autonomy and must obtain state government approvals often at the highest level for the most important business decisions, including tariff adjustments. This permission being seldom granted, and with state agencies being most prominent in their non-payment of electricity bills, most SEBs have been in a precarious financial situation for some time, and have been unable to generate sufficient resources to operate efficiently and expand their power generation capacity in line with demand. As a result, power shortages have been a serious and recurrent problem while the financial cost of power subsidies has been an increasingly large burden on state finances. Addressing these issues requires more than just increasing tariffs. As the government of Orissa is demonstrating (Box 1), it requires reforming the power sector policy and institutional framework to (i) privatize power generation, transmission and distribution; (ii) depoliticize tariff adjustments and other major business decisions in the power sector; and (iii) introduce competition. State power sector reforms are a pre-requisite for successful and sustainable private investment in power. Launched in September 1991 by an amendment to the Electricity Act of 1948, the new policy opened the power sector to private investment, both domestic and foreign up to 100 percent of equity, providing a generous package of incentives for the establishment of private generating companies and enhancing the legal and regulatory provisions governing distribution licenses. The policy announcement clearly generated significant interest among domestic and foreign investors. A long list of project proposals, essentially for greenfield generation project, ensued. In essence, the new policy introduces a cost-plus tariff structure, providing for a guaranteed rate of return on the equity invested on the basis of normative operational parameters which are, in most cases, relatively easy to exceed. Because in the implementation of the policy little effort has been made to promote competition among developers, it has been difficult to ensure minimization of capital costs. In addition, as long as the structure of the state power sectors remains the same, these power plants can only sell to the SEBs. Because SEBs are not considered bankable risks, guarantees from state governments have been sought to backstop the SEBs' payment obligations under the related power purchase agreements (PPAs). These have been provided without being accompanied by an overall program of reforms in the sector. As the financial position of most states is weak, private investors have also asked for counter-guarantees from the central government -- which the latter has been reluctant to provide because of the potentially large contingent liabilities this creates to the Treasury. In order not to stall the implementation of the private power initiative, the government has agreed to provide its counter-guarantee for the first eight projects under development--at a potential cost of 1.3 percent of GDP per year. It has however announced that such comfort would no longer be available for the next generation of projects, thus making state power sector reforms all the more necessary. This welcome decision needs to be accompanied with changes in the way the policy is implemented, particularly with regard to the adoption of clear competitive bidding procedures for the selection of the lowest cost producers. In addition, to ensure a viable and sustainable development of the sector, it is essential to improve incentives for private investment in distribution. This will require the setting of appropriate rules for competition and the establishment of independent regulators.  Attachment 2 Page 3 of 4 (e) Roads. The very large number of unfunded road projects with economic returns in excess of 40 percent indicate that too little investment is going into roads. The problem is both one of funding and of absorptive capacity. Public Works Departments (PWDs), the state agencies in charge of building and maintaining the states' roads network, have not been able to utilize even relatively modest available funds and turn them into good quality physical infrastructure in any reasonable time frame. Reverting this situation requires (i) strengthening PWDs' planning capabilities; (ii) improving engineering and construction procurement practices through the privatization of engineering investigation, design and supervision services and the simultaneous downsizing of these in-house PWD services; and (iii) transferring modern road design and construction technologies to domestic constructions firms. Simnilar problems exist in the recently established National Highway Authority responsible for the national roads. (f) Environment. The Central Government has overall responsibility for environmental legislation, but the State Pollution Control Boards (SPCBs), are responsible for implementing these laws and issuing rules, regulations and notifications which prescribe the standards for emissions and effluents. The State Department of the Environment is the competent authority for the approval of project sites. Depending on the nature and location of the project, the sponsor is required to submit to the SPCB (or the Ministry of the Environment and Forests for certain categories of projects) a comprehensive Environmental Impact Assessment Report and Environmental Management Plans (EMPs). Monitoring compliance with national and State environmental standards and ensuring that EMPs are duly implemented are largely the responsibility of the SPCBs and the State Environment Departments. Their capacity to successfully undertake these functions is limited because of the lack of appropriately trained staff, facilities, equipment and funding. The result is that the monitoring of compliance and enforcement of environmental standards is typically weak and varies widely across states. Capacity building for environmental protection is required also in other state sector Departments, in industry and in the professional community which assist in the preparation of environmental assessments and EMPs. (g) Social Sectors. The states have direct responsibility for the provision of social services. Even social programs conceived, sponsored and financed by the central government are implemented by the states (the Integrated Child Development Services; programs to strengthen basic education; national programs focused on endemic diseases; family planning and maternal and child health services). Accordingly, the states have a major role to play if India is to meet the social development goals articulated in recent official policy papers such as the National Health Policy, the Action Plan for Revamping the Family Welfare Program, the new National Nutrition Policy, the National Policy on Education. The states' ability to effectively deliver critically needed social services is partly a financial issue, but as in the case of the roads sector, the most immediate constraint is perhaps the states ability to effectively transform available financial resources into concrete supply of good quality educational and health services. It is thus of critical importance that together with increased social spending, the states take steps to improve service delivery--by controlling quality; ensuring availability of key current inputs; and improving programs' design. The concrete flaws in program design and system delivery vary from one social service to the other (teachers training and availability, and teaching materials for primary education; excessive emphasis on sterilization in the Family Welfare Program; spending patterns biased towards tertiary health), and they also vary from state to state (lack of schools is a problem in Uttar Pradesh; but it is less of an issue in Kerala, Maharashtra or Tamil Nadu). (h) Poverty Alleviation. With few exceptions (such as the Maharashtra Employment Guarantee Scheme, the Tamil Nadu nutrition program, and the Rajasthan's Apna Gao Apna Kam), the central  Attachment 2 Page 4 of 4 government sponsors and finances most poverty alleviation programs. The implementation of these schemes, however, is the responsibility of state governments. Experience under these programs is mixed but, on the whole, suggests that considerable improvements in their effectiveness are possible. Although there is an agency structure for rural development administration extending down to the Block (the smallest administrative unit in India) level and interfacing with village authorities, its ability to implement complex programs and to use precise targeting in selection of beneficiaries is highly variable, and regulations governing the flow of funds are a cause of implementation delays. There are, however, also clear, localized, patterns of success where implementation is based on local initiative and extensive beneficiary participation. The successful implementation of poverty alleviation programs is thus dependent on state governments willingness to promote decentralized, participatory approaches to planning and implementation of their poverty interventions.  Attachment 3 Page 1 of 4 Macroeconomic Management and Prospects 1. Several of the macroeconomic targets of the five-year Eighth Plan (1992-97) will be achieved. In particular, the targets for the external accounts (external current account deficit of 1.6 percent of GDP, and export growth of 14 percent in real terms) will be exceeded. As indicated in the main text, in the last two years, the external current account deficits have been significantly smaller than the Plan target. After a modest performance in 1992-93 (mostly result of falling demand in the former Soviet Union) the real export growth rate has been above target in 1993-94 and 1994-95. If the 1994-95 5.3 percent GDP growth rate is sustained over the next two years, the GDP growth rate for 1992-97 will be close to 5 percent, slightly below the target of 5.6 percent. However, the fiscal targets of reducing the central government fiscal deficit to 3-4 percent of GDP (a level we consider sustainable), and increasing central government saving to negative 1.1 percent of GDP by 1995 have not been met and only gradual progress is expected for the next few years. More importantly perhaps, the target of increasing public saving to 2 percent of GDP has also not been met--consolidated public saving has continued to decline and is now estimated to be marginally above zero. Fiscal Manaeement 2. In addition to the Eighth Plan document, the government has indicated in several other policy and discussion papers that fiscal consolidation was a central objective of macroeconomic policies. This is extremely important for the attainment of the government growth objectives. While the central government fiscal deficit was reduced significantly in 1994-95 (by 1 percentage point of GDP, to 6.7 percent of GDP), and a further reduction is envisaged for 1995-96 (by a further 1.2 percentage point of GDP to 5.5 percent of GDP), this target would still be around 2 percent of GDP above its sustainable level--i.e a level that, in a long-run sense, and with the existing composition of expenditures, would render it possible to bring inflation down to 6 percent, increase real GDP growth to 6.5 percent, and stabilize the stock of public debt in relation to GDP. Evidently, a better public saving performance would increase the sustainable fiscal deficit, but further adjustment will not be easy to achieve in the near term. Non-interest expenditure has already borne the brunt of fiscal adjustment and not much room is left for further reductions. It already declined from 16 percent of GDP in 1990-91 to 13 percent of GDP in 1994-95--the categories most affected being subsidies (from 2.3 percent of GDP to 1.4 percent of GDP), defence (2.9 percent of GDP to 2.6); transfers to states (5.2 percent of GDP to 4.3), wages (2 percent of GDP to 1.7) and loans to public enterprises (0.7 percent of GDP to 0.5). Thus, besides further reducing subsidies, particularly for fertilizer, and readjusting oil prices, achieving a further fiscal deficit reduction will need to rely on (i) continuing the tax reform process--besides improving the efficiency of the tax system, the March 1994 measures (described in the last CAS) resulted in sharply increased collections; and (ii) reducing central government financial assistance to state governments--which including transfers of taxes has been at 7-8 percent of GDP. 3. Besides reducing fiscal imbalances, there is also a need to improve the composition of expenditure. Since stabilization began, several unproductive central government programs have been curtailed, central government social expenditure has been increased, and the allocation for employment  Attachment 3 Page 2 of 4 programs targeted to the poor has been sharply increased (by 50 percent). However, a number of programs with low returns have continued to be funded while programs with high rates of return (such as in roads where rates of return exceed 40 percent) have been delayed for lack of resources. More generally, the government has yet to implement recommendations contained in the Eighth Plan and other official reports, to establish procedures to evaluate and rank projects on a continuous basis, and discontinue projects with low economic or social returns. 4. The national debate on the benefits of reform (especially for the poor), and the future course of economic reforms has intensified following the state elections held in late 1994 and early 1995. It will intensify further as the date for national elections approaches (to be held May 1996). While the ramifications of these political developments are difficult to predict, there seems to be agreement among analysts that the reforms initiated in 1991 are difficult to reverse as demonstrated by the ambitious plans which have been or are being drawn for structural reform in states with non-Congress Party governments. However, while reforms are believed to be irreversible, there is also agreement that the consolidated public sector deficit could come under increasing pressure as the country prepares for general elections before May 1996--and that the 5.5 percent of GDP central government fiscal deficit target for 1995-96 may be difficult to achieve. Another source of fiscal pressure is expected from the Pay Commission which will give in mid-1995 its recommendations on civil service pay (the last Pay Commission recommended a 25 percent increase). While central government's expenditure on wages is relatively small (1.7 percent of GDP), states' expenditure on wages has been 4-5 percent of GDP and significant wage increases could considerably further erode states finances. In addition, salaries in PEs are based on pay levels in the civil service. A significant increase in civil service pay would thus also considerably erode PEs' finances. 5. Therefore, the probability of a derailment in fiscal adjustment over the next year or two is more than marginal and three risks should be kept in mind. First, while in theory the states have no discretion to increase their own fiscal deficits beyond the financing authorized by the central government, they can do so indirectly by delaying payments to creditworthy central government enterprises which in turn access financial markets. They can also delay payments on their debt to the central government. Interest payments on the states' debt to the central government account for 13 percent of central government revenues. Thus far, the central government has made no concessions. Public enterprises have been directed to discontinue supplies to non-performing states. Coal India introduced a "cash-and-carry "policy", and in some cases states' assets have been seized. In addition, the central government has also used as an incentive for good financial performance its lending to the states (1.5 percent of GDP, which finances programs in the Central Plan, and states' general deficit). However, in 1994-95, for the first time since Independence, net transfers from the central government to the states turned negative. This may considerably weaken the states' ability to comply with their financial obligations vis-a-vis the central government and could become one avenue whereby state's fiscal imbalances influence the central government's. Second, interest payments on the central government debt account for over half its revenues (the figure is 16 percent in the US). This is excessively high in a situation in which the central government is increasing its reliance on market borrowings and discontinuing the forced placement of securities with the RBI and commnercial banks. Third, while structural reforms are conceptually different from stabilization, fiscal deficits could in practice derail a number of key structural reforms. Excessive fiscal deficits would raise interest rates, and increase the recapitalization needs of public banks to a point which may render it necessary to reintroduce interest rates controls. Similarly, to contain the interest payments on the government debt, reductions in the forced placement of government securities (a key component of financial sector reforms) may be reversed. In the trade policy area, continuous high fiscal  Attachment 3 Page 3 of 4 deficits will render it difficult to accommodate the revenue losses from lower import tariffs and an increase in tariffs may be necessary. 6. Therefore, as indicated in last year's CAS, despite progress, high fiscal deficits continue to be a major threat to the implementation of India's reform program and the attainment of its development objectives. Further reductions in the central government fiscal deficit are of utmost importance. With strong pressures on expenditure expected in the next year of two, it will be essential to maintain the momentum of the tax reform process started last year, with a view to further improving tax administration and collections, and introducing a Value Added Tax. The government will also need to take steps to increase economic and social returns on public expenditure programs. Balance of Payments and External Debt Management 7. On the external front, for the past two years, a key issue for the authorities has been to manage the effects of large surpluses in the capital account. Surpluses in the capital account have surged while the current account deficit is negligible and have thus put pressure on the nominal exchange rate to appreciate. The Reserve Bank of India (RBI) has maintained the nominal exchange rate (in theory a float) constant at Rs 32/US$ by purchasing all the excess supply of foreign exchange at that rate. Foreign exchange dealers believe that in the absence of such interventions the nominal real exchange rate would have appreciated by about 20 percent, preventing the rapid expansion of exports witnessed in the last two years. However, these interventions have led to significant monetary expansion. The money base grew by 25 percent in the twelve-months period ended in March 1994, 30 percent in the one ended in June 1994, and 25 percent by end-January 1995, entirely on account of foreign reserves accumulation. As a result, after declining for two years from a peak of 17 percent in August 1991, annual (point-to-point) inflation drifted upwards from 7 percent in mid-1993, peaked at 12 percent in May 1994, fell below 10 percent in the second half of 1994, but then increased to 11-12 percent in the latter part of 1994, a level at which it remained until it began declining in recent months following RBI's more restrictive monetary policies. This inflation has caused the real exchange rate to appreciate by 14 percent vis-a-vis the US$ in relation to the level prevailing in March 1993 when the exchange rate was reunified. There has been no noticeable impact on exports yet, probably because (i) the liberalization of the trade regime has reduced its bias against exports; (ii) the effect of the appreciation has been offset by productivity gains brought about by the reform program; and (iii) the US$ has depreciated vis-a-vis other major currencies which meant that in real effective trade-weighted terms the rupee has not appreciated. However, the authorities are concerned with the effect of capital inflows on inflation, the real exchange rate and export performance. 8. The authorities have responded to capital account surpluses through administrative measures that seek to discourage three categories of capital inflows (i) following a procedure established at the time of the last IMF Stand-By (November 1992-May 1994), the authorities continue to set annual limits for external commercial borrowing (US$3.5 billion during the Stand-By); (ii) new guidelines in May and October 1994 for Indian firms rising funds abroad have established a maximum of one (two) issue(s) per year per company (group of companies), require that money raised abroad be for physical investment projects, and stipulate that these funds must not be brought into the country until a clear use for them exists; and (iii) as indicated earlier, NRI deposits have been made less attractive. Together with recent increases in US interest rates and adverse developments in emerging markets, these measures have contributed to bring inflows to more manageable levels in recent months (and has created an opportunity for more restrictive monetary policies, which the RBI has seized). It is evident, however, that the impact  Attachment 3 Page 4 of 4 of developments in the capital account on the competitiveness of the real exchange rate and export growth will continue to be an area of concern for some time. 9. The Eighth Plan projections assume that over the 1992-97 period the current account deficit of the balance of payments would be 1.6 percent of GDP. This target will clearly be exceeded and an average of one percent of GDP for the period is more likely. Assuming a gradual increase to two percent of GDP towards the end of the decade, this would reduce India's external debt from 33 percent of GDP at present to 26 percent of GDP by the end of the decade. As a share of current account receipts, the debt service ratio would decline from 25 percent at present to 17 percent towards the end of the decade. These appear to be extremely conservative targets, particularly if foreign direct investment grows as expected. Targeting a small current account deficit evidently implies also keeping surpluses in the capital account at moderate levels. The cost of this approach is that some Indian firms that could borrow abroad at international interest rates, are forced to borrow domestically at higher rates. Benefits of this approach are that the growth of external debt is kept under control, international banks are willing to lend to India with spreads that have been declining, and India is more likely to avoid external debt problems. With a large share of the population living at the border line of survival, the authorities are determined to avoid boom and bust episodes and macroeconomic shocks that have been so costly elsewhere in terms of growth and increases in the incidence of poverty. 10. In addition, in spite of dramatic improvements since 1991, India's external accounts continue to be vulnerable in several important respects. First, in spite of the more inviting approach towards foreign oil investors adopted in recent years, domestic oil production (40 percent of national consumption at present) will level off towards 1998 and oil imports will consequently increase rapidly thereafter. Second, of India's US$95 billion external debt (which includes US$4 billion of short-term debt), about US$24 billion is due to be repaid in the next four years with a peak of US$7 billion in 1996-97. This is in addition to the roll over of the short-term debt and the roll over of NRI accounts. Added to the financing requirements of the current account deficit, this means that over the next 4 years India will need to mobilize about US$40 billion of external finance--excluding the roll over of short-term debt and NRI accounts. Third, at US$14 billion, NRI foreign currency accounts continue to be a potential source of pressure since in theory they can be withdrawn on demand subject to a small penalty and create some vulnerability. Fourth, IBRD and IDA have historically been important sources of external finance, and account for US$27 billion of the country's US$95 billion external debt. However, with the current lending plans (which assume India can maintain its access to IDA at present levels) net IBRD disbursements are projected to be virtually nihil for the remaining of the decade, and net transfers from IBRD and IDA combined are projected to be negative US$200-300 million. This will force India to substitute commercial for non-commercial sources of finance. Fifth, while India has enjoyed an unprecedented sequence of good monsoons the probability of a bad one has not changed. Sixth, recent developments in emerging capital markets have highlighted the macroeconomic turbulences that sudden changes in market sentiments can bring about. While portfolio investment in India has taken place in instruments that are costly to reverse, and the authorities have maintained foreign exchange reserves at a level sufficient to accommodate portfolio outflows, there is a always a risk that it could trigger other outflows, such as those associated to NRI foreign currency accounts. For all these reasons, while some increase in the current account deficit target may be warranted, the authorities would need to continue to exert utmost caution.  Attachment 4 Page 1 of 5 MNDIA: FOURTH COUNTRY PORTFOLIO PERFORMANCE REVIEW DECEMBER 5-16, 1994 The fourth annual Country Portfolio Performance Review (CPPR) was held from December 5-16, 1994 to discuss and review the performance of Bank financed projects in India. Detailed review of the portfolio was held for the power and road sectors with the relevant Union Ministries. An extensive review of Bank projects in the states of Maharashtra and Rajasthan was also held. A final meeting to discuss generic issues affecting portfolio performance and a review of the progress of the action plan agreed during the last CPPR meeting was held with the Department of Economic Affairs. A new action plan for the next 12 months was agreed and is provided in the attached. H. ergn \l K. Sing 6 - Director \ Additional Secretary SA2 Department Department of Economic World Bank Affairs Ministry of Finance Government of India December 16, 1994 December 16, 1994.  Attachment 4 Page 2 of 5 Table 2: Fourth Country Portfolio Performance Review, Agreed Action Plan December 14-16 Implementation Issue Required Action Responsible Performance Timing Agency Indicator 1. Ouality at En Weak environmental impact Improved liaison between DEAIMOEF/S Reliable and timely Immediate assessments (ElAs) DEA and MOEF / SPCB, to PCB EIA summaries ensure borrowing agencies consistent with the have obtained necessary Banks OD 4.01 environmental clearances (EIA, site, Forest) and are in compliance with GOI and state environmental guidelines. Improved Portffol Manaaement a) Central Portfolio Management Need for improved Consultants to be recruited DEA Development of MIS Beginning montioring by DEA on under the IDF grant system January generic issues affecting the approved for the DEA 1995 portfolio. Central Ministries and state PMU. PMU, Central Ministries DEAJCentral Strengthened July 1995 and State level PMUs to be Ministries, organizational operational State support Governments b) Need to familiarize new Orientation training on WB More effective March Fund-Bank Division staff in Bank policies and portfolio 1995 DEA on Bank procedures procedures management by and policies, DEA staff c) Audi Need for improvement in Formulation of IDF grant to WB, Auditor IDF grant approved April 1995 project accounting and improve project accounting General's auditing systems systems Office d) Implementation Support Assistance to executing Bank to review with DEA WB, DEA A short report June 1995 agencies (EA) for improving the possible role, functions project implementation and and benefits of monitoring implementation support across sectors. New projects: Technical WB, TA for Immediate assistance (TA) for Executing implementation implementation support to Agencies, support included in be identified selectively in DEA selected new consultation with Borrowing projects Agency during preparation of Terms of Reference for implementation support to be agreed at negotiations.  Attachment 4 Page 3 of S Ongoing Projects: Bank WB, Project Immediate mid-term review to explore Executing implementaion the need for TA resources Agencies, improved for implementation support. DEA e) Follow-up Supervision Mission Regortinn Department Director to WB Improved audit trail Immediate Delays affecting Project highlight to State, Chief implementation Secretaries in follow-up letters, substantive and strategic implementation issues identified by Bank supervision missions f) Portfolio Rationalization Large number of old Biannual tripartite review of Executing Reduced number of Beginning projects (i.e. those that projects six years and Agencies, extensions granted April 1995 have had a number of older. DEA and WB extensions) Timely cancellations Executing Reduced Immediate Agencies, undisbursed DEA and WB balances g) DQsbursement Improving disbursement so Bank to provide a list to WB Disbursement ratio June 1995 that the India disbursement DEA for follow-up of of at least 16% in FY ratio is closer to the Bank- projects where there is a 95 wide average pronounced disconnect between implementation performance and disbursements. Bank to provide project WB Improved February management tracking disbursements 1995 information to DEA Bunching of claims in Ensure withdrawal DEA Bunching reduced in Immediate March applications are submitted March on a continuous basis Ill Fundino Inadequate funds for Ensure adequate funds for DEA to Adequate funds for January Project implementation project entities are provided coordinate projects in FY 1995 for FY 95/96. with Central 1995/96 Ministries, State Govemments and Planning Commission Untimely release of funds Ensure 25% Advance DEA Adequate funds for April 1995 for project implementation Central Assistance (ACA) projects in FY for project entities are 1995/96 provided for FY 95/96, at the beginning of the fiscal year List of Projects with ACA DEA Project entities are April 1995 amounts to be sent to made aware of their project entities at the same entitlement time it is sent to State Finance Departments Funds being diverted once Explore possibilities for DEA/State Project entities June 1995 released to State having a separate account receive adequate  Attachment 4 Page 4 of 5 Governments at the State level for Govemments funds extemally aided projects. IV. Procurement The need to complete GOI to agree with WB on WB, DEA Mandating of SBD April 1995 standard bidding SBD documents (SBD) on consultant, pharmaceutical and supply erection and commissioning. The need to disseminate Explore possibilities of WB Soon agreed standard bidding obtaining EDI assistance to documents to states and conduct seminars and project entities workshops Need for improving quality IDF grant to be formulated DEA Approval of IDF January of cost estimates to review cost estimates Grant 1995 (including updating rate schedules to reflect market rates) Need for improving Satisfactory arrangements Executing Improved asset Immediate construction quality. to ensure quality of AgencylWB quality construction through the use of competent supervision engineers I consultants Rejection of work that does Executing Improved asset Immediate not meet specifications Agency/WB quality Expeditious action to recruit Executing Increased Immediate Poor disbursements under consultants and implement Agencies disbursements in FY IDF grants grants 95 Future IDF grant requests Executing Improved Immediate to be prepared by Agencies/ performance of IDF beneficiaries DEA grants VI. Project Prfepcarato Faciltv PPFs) Steering Committee DEA, WB, Consultants to be Immediate Slow implementation of comprising DEA. WB and Executing recruited within 3 PPFs. Executing Agency to be Agency months from date of established to expediate issue of RFP to decisions on recruitment of contracting consultants. Quarterly review by DEA Improved Beginning Additional Secretary, DEA, implementation of January of PPF utilization by Project PPF's 1995 entities VII. TrustFund Working Committee -(DEA DEA, WB Report to be Immediate The requirement by the and Bank staff) to develop submitted to the Bank to transfer mechanisms to transfer Bank and GOI by responsibility of Trust Fund Trust Fund management April '95 Management to GOI from Bank to other intermediaries e.g. ICCI, including modaliites, regulations covering consultant rates and taxes etc.  Attachment 4 Page 5 of 5 VlI I. IDA Faclv Increasing requirements to Agreement to establish an WB, DEA Agreement reached July 1995 address environmental and IDA facility and decide on in the size, scope social issues during project the modalities for the and operational preparation and implementation of the details of the facilty implementation faclity (comprising IDA and bilateral grants) to be formulated  Annex 1 India: Selected Indicators of Portfolio Performance and Management Estimated Indicator FY92 FY93 FY94 FY95 Portfolio Performance Number of Projects Under Implementation 113 112 103 86 Average Implementation Period (years) a/ 5.2 5.1 5.3 5.2 Percent of problem projects rated U or HU bi (for past years, rated 3 or 4) Development objectives cl 6.9 9.3 10.3 8 Implementation progress (or overall status for past years) d/ 15.9 10.7 12.6 9 Canceled during FY (US$ million) $1,533 $1,857 $670 $520 Disbursement ratio (%) e/ 14.2 13.5 14.9 16.6 Disbursement lag (%) f/ 30.6 15.4 30.3 30.0 Memorandum item: % completed projects rated unsatisfactory 8.3 h/ Portfolio Management Supervision resources (total US$ thousands) i/ $5,778 $6,565 $7,044 $6,175 Average supervision (US$ thousands/project) $51.2 $58.6 $68.3 $71.8 Supervision resources by location percentage headquarters 61.1 57.8 57.5 58 percentage resident mission 38.9 42.2 42.5 42 Supervision resources by rating category (US$ thousands/project) j/ Projects rated 1 or 2 $49.2 $56.0 $68.5 $71.8 Projects rated 3 or 4 $56.2 $64.1 $67.8 $71.8 Memorandum item: date of last CPPR Dec. 1994 a/ Average age of projects in the Bank's country portfolio. b/ Rating scale: "HS" denotes 'Highly Satisfactory," "S" denotes 'Satisfactory,", "U" denotes "Unsatisfactory", and HU denotes "Highly Unsatisfactory." c/ Extent to which the project will meet its development objectives (see OD 13.05, Annex D2, Preparation of Implementation Summary (Form 590). d/ Assessment of overall performance of the project based on the ratings given to individual aspects of project implementation (e.g., management, availability of funds, complaince with legal covenants) and to development objectives (see OD 13.05, Annex D2, Preparation of Implementation Summnary (Form 590)). The overall status is not given a better rating than that given to project development objectives. e/ Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: investment projects only. f/ For all projects comprising the Bank's country portfolio, the percentage difference betewen actual cumulative disbursements and the cumulative disbursement estimates as given in the "Original SARJPR Forecast" or, if the loan amounts have been modified, in the "Revised Forecast." The country portfolio disbursement lag is effectively the weighted average of disbursement lags for projects comprising the Bank's country portfolio, where the weights used are the respective project shares in the total cumulative disbursement estimates. g/ For projects rated in the FY only: from the OED database. h/ For current FY only: from the OED database. For reference, the percentage of unsatusfactory projects in 1980 to FY94 cohort is approximately 27 percent. i/ Dollar costing was not used in the Bank during FY92 and FY93. Costs for those years are calculated by multiplying actual sfaff weeks by a dollar cost factor based on FY94 actual dollar figures and staff weeks, assuming a five percent increase in costs each year. j/ There is a large variance in supervision costs both for projects in categories HS and S (or I and 2), and projects in categories U and HU (or 3 and 4). The reason why supervision costs in both ratings groups have been close in the last two years is that for some projects rated S and HS which are performing well there are environmental and resettlement and rehabilitation issues, or multi-state components. Also, several problem projects in categories U and HU have been closing. They thus require fewer resources and reduce the average supervision costs for problem projects. N.A. = Not Available.  Annex 2 INDIA-Bank GrouD Fact Sheet. FY92-98 IBRD/IDA Lending Program, FY92-98 Prst Current Pltaned 1/ - Category FY92 FY93 FY94 FY95 2/ FY96 FY97 FY98 Commitments (USSm) 2191.5 2,677.70 92S.3 2,222.00 2,426 3,100 2,590 Sector (%) Agriclture 11 14 41 31 22 10 24 Indutry and Finance - 11 - 39 - 5 16 Power andEnergy 35 37 - 35 23 15 Public Sector Management - - - ifiastructure and Urban Development 3/ 14 3 37 12 S 56 23 HumanResources 17 35 22 1S 35 6 37 Multisector 23 - - - - - TOTAL 100 100 100 100 100 100 100 Lending inatnsnent (%) Adjustment loans 4 23 30 0 0 0 0 0 Specific investment loans and others 77 70 100 100 100 100 100 TOTAL 100 100 100 100 100 100 100 Disbusements (USSmn) Adjustment loan 569 394 241 260 0 0 0 Specific investment loan and othen 1,661 1,560 1,475 1,430 1,940 1,954 1,968 Repayments (USSM) 674 304 930 1,143 1,19 1,292 1,386 Intrest (USSm) 769 792 792 924 922 915 903 1/ Ranges that reflect the most likely scenario. 2/ Whole-yer estimate. 3/Includer S1.05 billion of loans inFY96 and FY97 intermediated through the financial system. 4/ Strcturl adjustment loam, sector adjwtment loans, and debt and debt service reduction loans. INDIA - IFC Proeram. FY95-FY98 * Estinated Category FY92 FY93 FY94 FY95 IFC Approvals (USSm) 151.3 82.6 221.7 250 (Own Account) Sector (5) Agribusiness - - 0.3 Capital Markets 70 20 17 26 Chemr./Fertilizers - - - 20 Infraswrcture 34 5 53 31 Manufacturing 59 74 30 22.5 Oil/Mining I - 2 100 100 100 100 TOTAL Investment Instrument (5) Loans 82 53 68 70 Equity 17 24 23 30 Quasi-equity 1 18 4 - TOTAL 100 100 100 100 * Draft - These estimates will be revised.  Annex 3 India: SummarW of Economic and Sector Work (US$ thousands) 1/ FY94 Category Actual FY95 FY96 FY97 FY98 Agriculture 293.5 524.3 541.1 495.2 229.5 nstry, Fiance & Macroecomnics 1,601.5 1,178.7 1,492.1 1,501.0 1,459.0 Power and Energy 318.1 322.9 16.4 130.2 360.7 Infrastructure & Urban Development 313 293.8 229.5 132.0 180 Hunan Resources 197.1 465.9 475.5 324.6 276.4 Enviromnent 107.9 276.7 65.6 219.7 180 Mulisector/Odier 261.6 112.8 508.3 737.8 737.8 TOTAL 3,092.7 3,175.1 3,328.5 3,540.5 3,423.4 in SYs: 21.5 18.6 19.5 20.7 20.1 I/ includes staff salaries, consulta fees, and travel. Note: In constant dollars for FY95-98 0 $170,520 per undiscounted staffyears.  Annex 4 Page 1 of 2 India Mf| Same qea/ie.. N~u AW sine r_ r Um ef _2" Sn Lo. Lc Indctor _r. 1745 1945 I*_3 "Ask income A g, Prority Poverty Indicators POVERTY Upper poverty line locl cutr. Headcountindex * of pop. 43 .. 2S 19 LeWr poventy lineC bec curr.......... Headcount index of pop. .. GNPpercapita USS IS0 2S0 300 310 3S0 I.590 SHORT TERM INCOME INDICATORS Unskiled urban waps loc.l curr. Unskld rural wags' Rl trms of trade .. 94 Cosumer price index 1937.100 45 i5 171 LA1 income*... . .. Froda 27 Urbm .3 176 Ruml SOCAL INDICATORS Pblic expenditur on basic socu serices * oODP Gross enlment rntos Priggy * sehool Agc pop. 79 96 106 106 108 104 Male ' 94 111 118 Its 116 Female J 62 S0 93 101 Modality Infat morulity pordao. live births 132.0 106.0 S0a U3.7 63.1 39.0 Under 5 mortality .. 122.0 1213 IOIA 61. Immnizaon Mmiaes I Sp .. .. 3.3 H5.i 373 77.6 DFr 3 *- 41.0 90.2 90.2 ".9 32.2 (tl meinutrition (under-5) *- 630 60.4 40.3 LA expmancy - Totl 50 53 61 60 62 67 peine advantage * 1.9 03 0.1 0.4 2.1 5.9 Totl fcthility rawe 1ijl per WOan 54 4.5 3.7 4.0 3.6 2.9 Mhtenl mortlity rae per 100.000 live birh .. 4 420 420 .. Supplementary Povery Indicators Expendimues on socu secuty *of eot pv't exp. .. . .. .. _ Social security coveage * aIoL active pop. .. .. .. Acceswtosafewater totad *ofpop. 31.0 563 74.5 69.5 67.0 ud * 80.0 76.0 79.0 73.8 73.7 Rd ra.0 50.0 73.0 67.2 62.0 Acow health 70.. 7.0 100.0 9J.3 Population growth rate GNP per capita growth rate Devdopment dlmondb 6 (_a aver, pent) (s0AMIa aveas VPnt) ll peunco 4 S _____________________ O0 CNP C a 2 ~~~~~~~~~~~~~~~~~~~~~~~~per primar 0:-I I I .5 1 :_ f -i -2 410 19775 1935 19393 1970-75 193045 1933193 Acnmsaf wa Indhiba - Ini - Lowaincome -Low4ome a See e technical nos, p387. b. 7d tmw diaooA bad on fobr bIicmd. e dws aap level1o devdlopent in t acouy coapaed with iw income goop. See td inuduh  Annex 4 Page 2 of 2 India Moe San repgiwuicome group N Lassit single y,ar rTw hih UA* Of *-ian e Seouh LAW LInCa [ildicator rg Z975 1985s 1943 Ask we pff Resources and Expenditures HUMAN RESOURCES Population mrel993) thousnds 620.701 762.875 898.200 1.193.503 3.091.764 1.096,665 Age dependency rauo atio 0.77 0.72 0.70 0.74 0.67 0.69 Urban %of pop. 21.3 24.3 26.3 25.7 27.6 54.7 Population growth rate anal % 2.2 2.0 2.0 2.1 1.9 1.6 Urban 3.7 3.0 3.0 3.5 3.9 2.9 Laborforce(15-64) thoiOnds 243,481 293,193 341.460 437.138 1,442.452 459.196 Agriculture % oflaborforce 71 70 .. lndustry* 13 13 .. .. 3i FEmale 28 26 2533 31 Femles per 100 males Udrn mer 81 88. Rural 96 94 NATURAL RESOURCES Area dxo sq. km 3.237.59 3,287.59 3237.59 5.133.49 39,091.96 40.,267 DensitY pop. per sq. km 188.80 232.05 267.69 227.55 77.60 26J2 Agricultural land * of land aea 60.13 60.36 60.S9 59.03 52.82 39.61 iange in agricultural land ana % 0.47 40.07 0.03 0.00 0.03 4.13 Agricultural land under irrigation % 18.65 23.09 25.30 29.34 18.0 12.66 Forsts and woodland thou. sq. km 0.55 0.52 0.66 7.15 5.95 Deforestauon (net) anmal % .. .. 0.63 INCOME Household incomne Sbu of top 20% of households % of income 49 41 41 Sba of bonom 40% of households 16- 20 21 Shbe of bottom 20% of households 6 a 9 EXPENDrIURE Feed % ofGDP 43.6 35.3 .. .. .. Staples 20.6 12.4 .. MeaL fish. milk. chese. eggs * 6-5 7.4 Caea imports dou. metric tonnes 7,669 205 694 6,211 34,420 66,281 Pood aid in cereals * 1,5S2 304 276 1,624 83,34 5.477 Food production per capita 1987 =100 95 104 113 III 113 101 Fertilizer consumption k4h 19.3 47.0 67.5 70.2 59.9 4th Sbu of agriculture in GDP do(GDP 36.6 29.5 28.2 27.4 26.3 15.7 Houing i of GDP 4.4 7.1 .. .. .. Avage household size p1m15 per household 5.2 .. Urbn 4.8 Fued investment: housing %ofGDP 2.3 2.8 .. Fud and power % Of GDP 2.4 2.3 .. Ergy consumption per capia kgofoilequiv. 123 170 243 216 364 1.59S Houeholds with clectricity Urban % of households .. .. .. Rural ......... Tranport and communicatlon iEofGDP 4.7 5.1 .. Fixed investment: transport equipment 1.4 2.3 Total road length thor. km 1.375 1,546 1,636 INVESTMENT IN HUMAN CAPITAL Health Population per physician paloas 4,958 2,515 2446 2,850 .. 32 Populabtion per nurse 3.756 1,696 Populauon per hospital bed 1,720 1.296 1,364 1.638 1,016 604 Ord rehydyration therapy (under'5) 9 of ases .. .. 37 37 38 lAwation (he enrollment ratio Seco lndary % of chool-age pop. 26 38 44 40 41 53 FnaIle * 16 26 32 29 34 Pupil-eeacher ratio: primary pupils per teace 42 53 63 61 39 PupU-teacher ratio: secondary 21 21 26 26 20 Pupils reaching grade 4 % of cohort 51 58 .. Rcpaerrate: primary S oftlenroll 76 52 54 41 19 Dummray I of pop. (aSp 15+) 66 65 4 i Fanlne %of &M (A g15+) .. 71 66 69 53 Ncwspapercirculation perthouop. 15 26 31 26 .. 74 ~~=;pni enfC CAt1W ApmU19  Annex 5 Page 1 of 3 India: Key Economic Indicators Actual Estim. Projection Indicator 1990 1991 1992 1993 1994 1995 1996 1997 National accounts (% GDP at current market prices) Gross domestic product 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Agriculture' 27.8% 28.6% 27.5% 27.3% 26.6% 25.9% 25.3% 24.6% Industrya 26.0% 24.9% 25.2% 25.3% 25.8% 26.3% 26.6% 27.0% Servicesa 35.4% 36.1% 36.3% 37.2% 37.6% 37.9% 38.0% 38.3% Total consumption 76.3% 76.6% 78.0% 78.9% 77.6% 76.5% 75.8% 75.7% Gross domestic investment 26.6% 24.0% 23.3% 21.3% 23.0% 24.4% 25.5% 25.8% Government investment 9.4% 9.5% 10.4% 9.8% 7.7% 7.6% 8.1% 8.3% Private investmentb 17.2% 14.5% 12.9% 11.5% 15.3% 16.8% 17.4% 17.5% Exports (GNFS)C 7.9% 9.6% 10.1% 11.4% 11.3% 12.1% 12.6% 13.1% Imports (GNFS)c 10.8% 10.2% 11.5% 11.6% 11.9% 13.0% 13.9% 14.7% Grossdomesticsavings 23.7% 23.4% 22.0% 21.1% 22.4% 23.5% 24.2% 24.3% Gross national savings 22.9% 22.7% 21.6% 21.0% 22.6% 23.5% 24.1% 24.2% Memorandum items: Gross domestic product 297141.3 251095.6 242739.9 250647.1 291320.9 311263.9 331982.8 354044.2 (US$ million at current prices) Gross national product per 360.0 330.0 310.0 290.0 310.0 -- -- -- capita (US$ Atlas method) Real annual growth rates (%, calculated from 1980 prices) Grossdomesticproductatfactorcost 4.9% 1.1% 4.6% 4.3% 5.3% 5.5% 5.7% 6.0% Gross domestic income 4.6% 0.6% 4.9% 3.6% 4.7% 5.0% 5.6% 5.8% Real annual per capita growth rates (%, calculated from 1980 prices) Gross domestic product at market prices 3.1% -1.3% 2.8% 1.5% 4.8% 3.3% 4.2% 4.4% Total consumption 0.6% 0.5% 2.0% 2.5% 2.5% 1.7% 2.9% 3.9% Private consumption 0.4% 0.9% 1.4% 4.3% 2.2% 2.1% 2.8% 4.0% (Continued)  Annex 5 Page 2 of 3 India: Key Economic Indicators Actual Estim. Projection Indicator 1990 1991 1992 1993 1994 1995 1996 1997 Balance of payments (US$m) Exports (GNFS)C 23606.0 23999.0 24615.0 28659.0 32948.1 37692.2 41802.3 46516.0 Merchandise FOB. 18477.0 18266.0 18869.0 22700.0 26531.9 30625.9 34200.5 38336.0 Imports (GNFS)C 32063.0 25590.0 27855.0 29167.0 34621.4 40502.4 46268.2 51987.4 Merchandise CIF 27914.0 21064.0 23237.0 23985.0 29249.8 34602.3 39861.5 45107.0 Resource balance -8457.0 -1591.0 -3240.0 -508.0 -1673.2 -2810.2 -4465.8 -5471.4 Net current transfers 2530.0 3145.0 3136.0 4195.0 4854.4 4920.6 4999.7 5116.3 (including official grants) Current account balance (after -10400.1 -2882.7 -3844.1 -314.8 -798.7 -2219.4 -4056.7 -5169.3 official capital grants) Net Foreign Investments 165.0 150.0 341.0 620.0 1000.0 1245.0 1499.0 2300.0 Long-term loans (net) 4356.4 5501.9 2613.7 3894.5 3283.0 3235.0 1129.5 2743.0 Official 2354.7 2901.5 1995.6 1448.5 2402.2 2424.9 1423.8 967.8 Private 2001.7 2600.4 618.1 2446.0 880.8 810.1 -294.3 1775.2 Other capital (net, including 3079.3 -158.2 627.4 4338.2 2875.0 1949.9 3051.0 3147.2 errors and omissions) Change in reservesd 2799.5 -2611.0 262.0 -8537.9 -6359.3 -4210.5 -1622.9 -3020.9 Memorandum items: Resource balance (% of -2.8% -0.6% -1.3% -0.2% -0.6% -0.9% -1.3% -1.5% GDP at current market prices) Real annual growth rates (1980 prices) Merchandise exports' 1.4% -3.2% -1.0% 23.1% 13.5% 13.7% 9.7% 9.3% (FOB) Primary 12.9% -2.9% 3.7% 24.0% 5.8% 5.1% 5.9% 7.1% Manufactures 8.5% 12.2% 11.5% 20.2% 12.3% 15.6% 13.0% 12.2% Merchandise imports' 3.8% -10.0% 17.7% 5.1% 10.3% 11.8% 12.2% 10.4% (CIF) (Continued)  Annex 5 Page 3 of 3 India: Key Economic Indicators Actual Estim. Projection Indicator 1990 1991 1992 1993 1994 1995 1996 1997 Public finance (% of GDP at current market prices)f Current revenues 23.6% 23.7% 23.3% 22.7% 22.6% 22.2% 22.5% 22.6% Current expenditures 23.8% 23.6% 23.0% 22.4% 22.4% 21.5% 21.2% 20.9% Current account surplus (+) -0.2% 0.1% 0.3% 0.3% 0.2% 0.7% 1.4% 1.7% or deficit (-) Capital expenditure 11.8% 10.4% 10.6% 10.0% 8.0% 7.9% 8.4% 8.6% Foreign financing 0.8% 0.9% 1.4% 1.2% 0.9% 0.7% 0.5% 0.7% Monetary indicators M3/GDP(atcurrentmarketprices) 49.8% 51.5% 52.2% 55.1% 55.2% 55.2% 55.2% 55.3% Growth of M3 (%) 15.1% 19.3% 15.7% 18.2% 16.3% 14.8% 14.9% 14.6% Price indices (1980=100) Merchandise export price index 114.8 105.4 99.3 98.3 104.7 107.0 107.4 108.4 Merchandise import price index 108.6 101.0 94.1 92.3 103.4 108.7 111.8 114.7 Merchandise terms of trade index 105.6 104.4 105.6 106.5 101.2 98.4 96.0 94.5 Index real avg. exchange rate (1980 = 100)' 137.1 166.8 187.5 182.9 170.5 170.5 172.2 175.6 Real interest rate h -1.8% -3.8% 3.8% -0.6% -- -- -- -- Consumer price index 9.0% 13.9% 11.8% 6.4% 10.5% 9.0% 8.5% 8.0% (% growth rate) GDPdeflator(%growthrate) 11.0% 14.6% 8.9% 8.1% 10.5% 9.0% 8.5% 8.0% Note: Data are in Indian fiscal years. For example, '1990' indicates Indian Fiscal Year 1990-91: April 90-March 91. a. Estimated at factor cost. b. Includes increase in stocks. c. 'GNFS" denotes "goods and nonfactor services." d. Includes use of IMF resources. e. Commerce. f. General government and non-financial public enterprises. g. An increase in US$/Rupees denotes appreciation. h. Based on implicit yield at cut-off price (for the last auction at the end of March). Nominal rate used is 182-day T-bill for 1990-91 and 364-day T-bill onwards.  Annex 6 India: Key Exposure Indicators Actual Estim. Projection Indicator 1990 1991 1992 1993 1994 1995 1996 1997 Tetaldebtoutstandingand 81994.1 83952.1 90130.6 91781.3 94250.0 96576.4 97152.5 99666.8 disbursed (TDO) (US$m)' Net disbursements (US$ m)' 6427.9 4800.9 3172.7 1369.5 2468.7 2326.5 576.0 2514.3 Total debt service (TDS) 7991.7 7987.2 7723.8 8942.5 9663.3 10621.5 11793.0 9834.4 (US$m)' Debt and debt service indicators (%) TDO/XGSb 320.9% 316.3% 337.6% 289.4% 258.6% 233.3% 213.0% 197.6% TDO/GDP 27.6% 33.4% 37.1% 36.6% 32.4% 31.0% 29.3% 28.3% TDS/XGSb 31.3% 30.1% 28.9% 28.2% 26.5% 25.7% 25.9% 19.5% Concessional/ TDO 47.6% 46.2% 46.9% 46.7% 47.5% 48.4% 49.3% 48.9% IBRD exposure indicators (%) IBRDDS/publicDS 18.8% 19.2% 21.3% 19.0% 21.1% 21.4% 17.9% 22.7% PreferredcreditorDS/publicDS 37.3% 34.1% 35.2% 27.9% 44.3% 49.7% 33.4% 37.3% IBRDDS/XGSb 4.3% 4.4% 5.0% 4.7% 4.4% 4.1% 3.9% 3.7% ShareoflBRDportfolio 8.5% 8.4% 8.8% 9.1% 8.3% 8.3% 8.2% 8.1% IFC (US$m)c Loans 229.6 458.8 547.3 557.0 590.4 758.0 -- -- Equity and quasi-equityd 36.9 68.3 96.5 115.4 147.5 193.0 -- -- Share of IFC Portfolio 7.1 9.6 10.0 9.4 9.5 -- -- -- MIGA MIGA guarantees (US$m) -- -- -- -- -- -- -- -- a. Includes public and publicly guaranteed debt, private nonguaranteed debt, use of IMF credits and net short-term capital. b. 'XGS' denotes exports of goods and services, including workers' remittances. c. Outstanding balance (disbursed & undisbursed) of June 30 of each year. d. Includes equity and quasi-equity types of both loan and equity instruments.  ANNEX 7 PAGE 1 OF 4 THE STATUS OF BANK GROUP OPERATIONS IN INDIA IBRD Loans and IDA Credits in the Operations Portfolio (As of March 31, 1995) Difference between Actual and Last ARPP US$ Million expected Supervision Rating (net of cancellations) Disburse- -------------------- Loan/ FY of ----------------------------------- ments * Development Overall Credit U Approval Purpose IBRD 1/ IDA 1/ Undisbursed 2/ (US5 million) Objectives Status 1/ 133 Loans/ 10523.6 198 Credits fully disbursed/cancelled 14339.8 SF-12-IN 1984 Tamil Nadu Water Supply - 36.50 0.55 23.04 S 1454-IN 1984 Tamil Nadu Water Supply - 36.50 0.20 2582-IN 1985 Kerala Power 126.00 - 28.09 -47.14 S S 1643-IN 1986 Gujarat Urban - 50.34 15.01 -11.10 S S 1621-IN 1986 Maharashtra Composite Irrigation - 128.82 62.59 -109.08 S S 1631-IN 1986 National Agricultural Research II - 57.21 13.23 -8.33 S S 1750-IN 1987 Bombay Water Supply & Sewerage III - 145.00 61.71 -93.96 S S 2769-IN 1987 Bombay Water Supply & Sewerage III 20.00 - 20.00 2796-IN 1987 Coal Mining & Quality Improvement 322.78 - 16.22 -33.46 S S 1757-IN 1987 Gujarat Rural Roads - 96.75 29.67 -32.99 KS S 2846-IN 1987 Madras Water Supply 53.00 - 18.43 -33.53 S S 1754-IN 1987 National Agric. Extension III - 66.62 4.86 -12.24 S HS 2844-IN 1987 National Capital Power 373.00 - 76.32 -188.32 S S 1770-IN 1987 National Water Management - 114.00 2.43 13.95 S S 2845-IN 1987 Talcher Thermal 367.00 - 130.15 -116.15 HS S 1780-IN 1987 Uttar Pradesh Urban Development - 120.95 47.31 -69.29 S S 1931-IN 1988 Bombay & Madras Population - 57.00 20.15 -12.07 HS S 2928-IN 1988 Indus. Fin. & Tech. Aset. 334.27 - 6.96 -32.68 HS S 2893-IN 1988 National Dairy II 200.00 - 111.00 -271.00 S S 2935-IN 1988 Railway Modernization III 252.50 - 4.19 -141.69 HS HS 1923-IN 1988 Tamil Nadu Urban Dev. - 254.73 85.27 -121.70 S S 3093-IN 1989 Electronics Industry Dev. 8.00 - 7.24 -208.64 HS S 3058-IN 1989 Export Development 120.00 - 7.43 -175.43 RS HS 3096-IN 1989 Maharashtra Power 354.00 - 215.35 -183.15 HS S 3024-IN 1989 Nathpa Jhakri Power 485.00 - 356.64 -236.24 HS S 1952-IN 1989 National Seeds III - 147.24 56.46 -49.86 S S 2022-IN 1989 National Sericulture - 133.35 54.21 -27.82 S S 2057-IN 1989 Nat'l. Family Welfare Trng. - 72.76 37.64 -113.60 S S 3044-IN 1989 Petroleum Transport 50.00 - 6.33 -296.33 HS S 2994-IN 1989 States Roads 115.00 - 64.44 -191.94 U U 2010-IN 1989 Upper Krishna Irrigation II - 160.00 29.12 -139.81 S S 3050-IN 1989 Upper Krishna Irrigation II 45.00 - 45.00 2008-IN 1989 Vocational Training - 163.85 100.29 -136.20 U U 3196-IN 1990 Cement Industry Restructuring 293.18 - 64.47 -63.11 HS S 2115-IN 1990 Hyderabad Water Supply - 79.90 54.07 -12.38 HS S 2064-IN 1990 Industrial Technology Development - 55.00 45.99 -175.60 HS S 3119-IN 1990 Industrial Technology Development 135.00 - 46.60 3237-IN 1990 Northern Region Transmission 485.00 - 426.89 -301.09 S S 2133-IN 1990 Population Training VII - 63.96 34.04 -34.91 S S 3239-IN 1990 Private Power Utilities I (TEC) 98.00 - 19.13 -18.33 HS S 2076-IN 1990 Punjab Irrigation/Drainage - 145.28 100.82 -30.73 S S 2158-IN 1990 Tamil Nadu Integrated Nutrition II - 67.52 36.95 -11.07 HS HS 2130-IN 1990 Technician Education I - 210.74 135.05 -55.59 S S 2100-IN 1990 Watershed Development (Hills) - 75.00 56.17 -35.66 S S 2131-IN 1990 Watershed Development (Plains) - 55.00 46.11 -7.70 S S 3325-IN 1991 Dam Safety 23.00 - 23.00 -60.61 S U 2241-IN 1991 Dam Safety - 130.00 126.37 3364-IN 1991 Gas Flaring Reduction 450.00 - 21.49 -17.99 S S 2173-IN 1991 ICDS I (Orissa & Andhra Pradesh) - 74.35 46.21 -20.69 U S 3334-IN 1991 Industrial Pollution Control 124.00 - 55.46 8.04 HS S 2252-IN 1991 Industrial Pollution Control - 31.60 34.16 2234-IN 1991 Maharashtra Rural Water Supply - 109.90 90.09 -51.73 S S 3258-IN 1991 Petrochemicals II 12.00 - 9.31 -98.43 HS S 3259-IN 1991 Petrochemicals II 202.70 - 108.32 3344-IN 1991 Private Power Utilities II (BSES) 200.00 - 42.41 -14.31 HS S 2215-IN 1991 Tamil Nadu Agricultural Development - 92.80 59.86 -15.45 S S 3300-IN 1991 Tamil Nadu Agricultural Development 20.00 - 20.00 S S 2223-IN 1991 Technician Education II - 255.73 210.35 -99.82 S S 2300-IN 1992 Child Survival and Safe Motherhood - 214.5.0 85.80 -39.95 S S  ANNEX 7 PAGE 2 OF 4 Difference between Actual and Last ARPP USS Million expected Supervision Rating (net of cancellations) Disburse- -------------------- Loan/ FY of ----------------------------------- ments * Development Overall Credit # Approval Purpose IBRD IDA 1/ Undisbursed 2/ (US$ million) Objectives Status