Statement by Matthias Meyer at the Board meeting of January 15, 1998

International Bank for Reconstruction and Development International Development Association 86760 Intemational Finance Corportation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS98-12 January 14, 1998 Board Meeting of January 15, 1998 Statement by Matthias Meyer India CAS India's recent economic achievements are impressive: Accelerated GDP growth over the last 5 years, a strengthened of 6.4% external position, export growth of some and a reduced current account deficit. 20% per annum, They resulted from strong structural initiated in 1991 -- in particular the gradual, changes and reforms but well-sustained deregulation of the economy. I agree that fiscal deficit (public sector deficit of 9% of GDP) is the single most challenge ahead. It is driven mostly important by a) high levels of subsidies not well goods or poverty grounds (1997 Poverty justified on public Assessment estimates subsidies on "non 11% of GDP), b) loss-making state-owned merit goods" at administration. These are all politically enterprises and c) the size of the public sensitive issues. Reforms are badly needed fiscal deficit and free up resources for to reduce the social spending, in particular for the highly successful IDA supported education poverty-relevant and and health programs. These reforms politically more acceptable and will must become certainly take some time. We fully elements of the Bank's approach to supporting agree with two key policy reforms through: * upfront engagement in high level policy dialogue and partnership to develop and consensus on conditions for Bank shared views support; * focus on policy dialogue at both the central and state levels to reduce the and prevent spending reductions consolidated deficit at the central government from being compensated by states. In this respect undercut or the progress indicator in the CAS matrix solely the central government's deficit quantifying reduction is not entirely satisfactory. Overall the CAS is convincing, and we compliment staff for the high analytical and relevance of the CAS. Accelerated quality growth and investment in human capital the right strategic priorities. Given the development are large gender disparities with regard to to social services, we welcome the Bank's poverty and access focus on improving female access to and nutrition. Likewise, the Bank's education, health assistance in formulating India's anti-poverty crucial and should lead to better-targeted, strategy is fiscally sustainable anti-poverty programs. agree with the proposed lending scenarios We also and triggers, whereby both IBRD and IDA lendn are linked to reform perform,9nce- to a lesser extent This document has a restricted distribution and may be used by recipients only performanceof their official duties. Its in the contentsmay not otherwisebe disclosed World Banlc authoization without  2 We understand and support the basic principle of concentrating assistance to states committed to reforms and accept the trade-offs in terms of reduced assistance to less committed, often poorer, states. However, we also see the risk that such a strategy may contribute to widen the gap between marginal states (e.g. North and Northeastern states for which political and security issues are priority concerns) and more advanced states. This risk becomes more serious when considering the choices the private sector would make, becoming increasingly interested in infrastructure investment. While supporting the basic approach of being selective, we wish to stress the importance of other CAS elements which will benefit non-reforming poor states: * Capitalizing on the demonstrative effect of successful reforms and proactively promoting dissemination to other states through policy dialogue and EDI training. • Non-lending activities, e.g. fiscal restructuring studies in less reform-committed states * Piloting institutional innovations in selected sectors (e.g. rural watershed management and water supply pilots). * Focusing IDA-financed human development investments, particularly district basic education projects, on poorer states. The rural sector is key for any poverty alleviation strategy in India. We welcome the focus on policy reforms (particularly the reduction of high levels of water and agricultural input subsidies), institutional reforms aiming at improved participation and demand-orientation, and improving effectiveness of public spending (e.g. for rural extension, rural infrastructure). We especially like the following strategy elements which focus on the quality of rural GDP growth (in terms of poverty and environment) as opposed to growth stemming purely from productivity increase in agriculture: * Increased focus on rain-fed agriculture (e.g. in agricultural services); • Better integration of environment issues in agricultural sector policies through a) reduced irrigation subsidies resulting in greater efficiency of water use; b) reduced fertilizer subsidies resulting in its more appropriate use; * Increased emphasis on the rural non-farm sector; * Promotion of policy reform (deregulation in the agro-industry sector) and IFC support to private sector investments in agro-industry; * Greater emphasis on natural resources management (e.g. lending for integrated watershed management; water resources management study).