India - Fiscal Reform and Economic Growth in Orissa

Document of The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL Report No. 19234-IN INDIA Fiscal Reform and Economic Growth in Orissa June 9, 1999 Poverty Reduction and Economic Management Unit South Asia Region CURRENCY Rs/ US$ Currency Official Unified Market a Prior to June 1966 4.76 June 6, 1966 to mid-December 1971 7.50 Mid-December 1971 to end-June 1972 7.28 1971-72 7.44 1972-73 7.71 1973-74 7.79 1974-75 7.98 1975-76 8.65 1976-77 8.94 1977-78 8.56 1978-79 8.21 1979-80 8.08 1980-81 7.89 1981-82 8.93 1982-83 9.63 1983-84 10.31 1984-85 11.89 1985-86 12.24 1986-87 12.79 1987-88 12.97 1988-89 14.48 1989-90 16.66 1990-91 17.95 1991-92 24.52 1992-93 26.41 30.65 1993-94 31.36 1994-95 31.40 1995-96 33.46 1996-97 35.50 1997-98 37.16 Jan 1999 42.51 Feb 1999 42.46 Mar 1999 42.44 Note: The Indian fiscal year runs from April 1 through March 31. Source: [MF, International Finance Statistics (IFS), line "rf"; Reserve Bank of India. aA dual exchange rate system was created in March 1992, with a free market for about 60 percent of foreign exchange transactions. The exchange rate was reunified at the beginning of March 1993 at the free market rate. Vice President Mieko Nishimizu Country Director Edwin Lim Sector Manager Roberto Zagha Task Leader Stephen Howes Table of Contents Abbreviations and Acronyms Preface and Acknowledgments Orissa at a Glance Introduction and Summary A. Overview B. Launching the Reform Program .............................................................................. v C. Adjusting Expenditure............................................................................................ vi D . Strengthening Revenue.......................................................................................... vii E. Intensifying Sectoral Reform s .............................................................................. viii 1. Economic Development in Orissa A . Introduction............................................................................................................. B. Econom ic Growth.................................................................................................... 2 C. Agriculture............................................................................................................... 4 D . Industry and Services .............................................................................................. 5 2. Fiscal Crisis A . Orissa's Fiscal and Debt Position............................................................................9 B. Recent Fiscal Developm ents..................................................................................13 C. Reform Strategy.....................................................................................................15 3. Expenditure A . Introduction...........................................................................................................19 B. Salaries and Civil Service Reform ......................................................................... 19 C. Subsidies................................................................................................................ 23 D. Capital Expenditure, Non-wage O&M, and Public Expenditure Management..... 25 E. Sectoral Com position of Expenditure....................................................................26 4. Taxation A . Background ...........................................................................................................29 B. Sales Tax Reform ..................................................................................................31 C. Other Taxes and Non-tax Revenue........................................................................ 33 5. Sectoral Reforms A . Agriculture............................................................................................................. 37 B. Irrigation................................................................................................................38 C. Social Sectors ........................................................................................................ 43 D . Public Enterprise (PE) Reform .............................................................................. 45 E. Power ..................................................................................................................... 49 F. Transport ................................................................................................................ 50 6. Scenarios and Sustainability .................................................................................................. 53 A n n ex es ..............................................................................................................................6 1 Annex A Orissa : Gross State Domestic Product & Population................................................. 62 A nnex B R ainfall in O rissa ........................................................................................................ 63 A nnex C D ebt Profile of O rissa ................................................................................................. 64 A nnex D O rissa Fiscal Sum m ary ............................................................................................... 70 Annex E Local Government in Orissa ....................................................................................... 74 A nnex F O rissa R evenue D ata................................................................................................... 77 Annex G Public Enterprise Data and Reform Status..................................................................79 A nnex H Scenario A nalysis....................................................................................................... 82 R efere n c es ..................................................................................................................................... 8 9 Tables Table 1.1 Selected Indicators of Social Development................................................................. Table 1.2 Sectoral Composition of Real GSDP in Orissa and All India, 1980/81-1995/96 (%) 1 Table 1.3 Infrastructure in India, Orissa and Various Other States.............................................2 Table 1.4 GSDP Growth in Orissa and Other States, 1980/81-1997/98 (Annual average growth rate , % ) .........................................................................................................................4 Table 1.5 Sectoral Contributions (%) to Aggregate Real Growth, 1980/81-1997/98..................4 Table 1.6 Agricultural Sector Growth in Orissa and Other States 1980/81-1997/98 (Annual average grow th rate, % )................................................................................................4 T able 1.7 A griculture in O rissa.................................................................................................... 5 Table 1.8 Non-Agricultural Growth in Orissa and other States, 1980/81-1997/98 (Annual average grow th rate, % )................................................................................................6 Table 2.1 Fiscal Indicators in Orissa and All States, 1985/86 to 1998/99 (% of GSDP)...........9 Table 2.2 Debt Composition, 1986 to 1998: % GSDP (% of total debt).................................. 12 Table 2.3 Outstanding Guarantees, Orissa and Other States..................................................... 13 Table 3.1 Economic Classification of Expenditure, 1990/91-1998/99 (% of GSDP............... 19 Table 3.2 Government of Orissa Salary Bill, 1989/90-1998/99................................................ 20 Table 3.3 Civil Service Salary Bill Growth, 1979/80-1997/98 ................................................. 20 Table 3.4 Cost of the "Fifth Pay Commission" Salary Increase in Orissa, 1995/96-1999/00 ...21 Table 3.5 Payment of Interim Relief and Salary Arrears, 1995/96-1999/00 (Rs billion).........21 Table 3.6 Implicit and Explicit Subsidies, 1992/93-1997/98..................................................... 24 Table 3.7 Sectoral Composition of Expenditure, Orissa and Other States (Average for 1990/91- 19 9 6 /9 7 ). .................................................................................................................... 2 7 Table 3.8 Spending on Key Items: Education, Health, Irrigation, Transport and Welfare (1985/86 - 1996/97, % of GSDP).............................................................................. 27 Table 3.9 Sectoral Composition of Capital Outlays, 1995/96 -- 1997/98.................................. 28 Table 4.1 Revenue by Source, 1985/86-1998/99 (% of GSDP) ................................................ 29 Table 4.2 Buoyancy of Major Revenue Sources, 1985/86-1997/98.......................................... 30 Table 4.3 Revenue Yield from Proposed Tax Reform Measures .............................................. 36 Table 5.1 Irrigation Coverage in Orissa, All India and Selected States by Type of Coverage, 19 9 2 /93...................................................................................................................... 4 3 Table 5.2 Composition of Health and Education Budget Expenditure: Primary, Secondary and Tertiary Levels (Percentage of State Health and Education Budget, 1995/96)... 43 Table 5.3 Expenditure on Welfare in Orissa and Other States, 1985-1996...............................44 Table 5.4 Spending on Selected Welfare, Rural Development and Nutrition Programs, 1990/9 1-1997/9 8 . .......................................................................................................45 Table 6.1 Summary Comparisons of the "No More Reform" and "Intensified Reform" S c en ario s ....................................................................................................................5 6 Table 6.2 Contributions to Fiscal Correction Under the Intensified Reform Scenario, 1998/99 - 2004/05 ......................................................................................................57 Figures Figure 1.1 Per Capita Output, India and Orissa, 1987/88-1997/98 (1980/81 prices)....................2 Figure 1.2 GSDP and Agricultural Growth (1980/81 prices)........................................................3 Figure 2.1 Debt-Service and Interest Payments as a Percentage of Total R evenue, 1990/91-1998/99............................................................................... 1 Figure 2.2 Budgetary Revenues and Expenditures, 1985/86-1998/99......................................... 12 Figure 6.1 Real Growth in GSDP Per Capita Under the Two Scenarios.....................................55 Figure 6.2 Fiscal, Revenue and Primary Balances Under the Two Scenarios (% of GSDP)......56 Figure 6.3 Debt Servicing (including Provident Fund Repayment) as Percentage of Revenue R e c eip ts ...................................................................................................................... 5 7 Figure 6.4 Expenditure Composition Under the Two Scenarios (% of total expenditure)..........58 Figure 6.5 Agent of development or employment agency? Salaries, pensions and interest payments as a percentage of revenue receipts............................................................ 59 Boxes Box I Sum m ary of Reform M easures....................................................................................iii Box 2.1 Orissa in Comparison: a low tax, high revenue, high expenditure state.................... 10 B ox 2.2 Scenarios v. A ctuals ................................................................................................... 14 Box 2.3 Orissa Public Sector Reform Project.......................................................................... 17 Box 3.1 Investm ent Inefficiencies in Irrigation....................................................................... 25 Box 5.1 Social Exclusion and Land Administration in Orissa................................................. 39 Box 5.2 The Disconnect: irrigation investments and agricultural growth in Orissa in the n in etie s ......................................................................................................................4 0 Box 5.3 The Andhra Pradesh Irrigation Sector Reform Program............................................42 Box 5.4 The Big Seven: Orissa's large non-power public enterprises....................................47 Abbreviations and Acronyms AP Andhra Pradesh NTPC National Thermal Power ARAPB Annual Review, Action Plan, & Corporation Budget O&M Operations and Maintenance BIFR Board for Industrial and OBC Other Backward Castes Financial Reconstruction OHPC Orissa Hydro Power CMIE Centre for Monitoring the Corporation Indian Economy OLIC Orissa Lift Irrigation CSO Central Statistical Organization Corporation DA Dearness Allowance OPGC Orissa Power Generation DFID Department for International Corporation Development OSEB Orissa State Electricity Board DEC Development Economics Group PDS Public Distribution System GDP Gross Domestic Product PE Public Enterprise GOI Government of India PF Provident Fund GOO Government of Orissa PS Panchayat Samiti GP Gram Panchayat PWD Public Works Department GRIDCO Grid Corporation of Orissa RBI Reserve Bank of India GSDP Gross State Domestic Product RCF Report on Currency and Finance IDCOL Industrial Development r.e. revised estimates Corporation of Orissa SFC State Finance Commission IMFL Indian Made Foreign Liquor SRTC State Road Transport IMT Irrigation Management Transfer Corporation Kg/ha kilogram per hectare SSA Small Savings Account LIC Life Insurance Corporation ST Scheduled Tribe LNG Liquefied Natural Gas TFC Tenth Finance Commission MIP Medium Irrigation Project ULB Urban Local Body MP Madhya Pradesh UP Uttar Pradesh NCB Normal Cash Balance UTI Unit Trust of India NGO Non-Government Organization VAT Value Added Tax NIPFP National Institute for Public WMA Ways and Means Advances Finance and Policy w.r.t. with respect to WUA Water Users Association Preface and Acknowledgements This report has been prepared as part of the World Bank's response to the request made by the Government of Orissa (GOO) in September 1998 for financial assistance to back its reform program ("Proposal for Fiscal Restructuring in the State of Orissa"). The report updates the Bank 1996 report "India: Strategy and Options for Fiscal Stabilization in Orissa" (referred to as the "1996 Study"). This report is self-standing, though it tries not to repeat analysis already provided in the 1996 Study. The report has been prepared based on close and extensive collaboration with GOO authorities. Two preparatory missions were undertaken in October and November 1998. The former was undertaken by V.J. Ravishankar and Farah Zahir and focused primarily on debt issues. The latter was the main mission for the report. Mission members included Stephen Howes (growth and sectoral issues), V.J. Ravishankar (expenditure), William McCarten (tax) and Kanishka Ghoshal and Farah Zahir (research analysts). A draft report was shared with the Government in February 1999. This was discussed and revised through a series of visits over the period of February to April, 1999. We are grateful in particular to Messrs. S.M. Patnaik (Development Commissioner), P.K. Mishra (Additional Chief Secretary), K.B. Verma (Principal Secretary, Finance), P.K. Nayak (Additional Secretary, Finance), U.K. Das (Joint Secretary, Finance Department), G.C. Pati (Commissioner Commercial Taxes), J. Mohapatra (Secretary, Revenue Excise Department), R.N. Senapati (Commissioner cum Secretary, Water Resources Department), and S. Pradhan (Special Secretary, Department of Public Enterprises & Commerce). We would also like to thank the many other officials, especially Messrs. D.K. Jena, T. Biswal and B.K. Tripathi, in the Department of Finance, who assisted us with data, analysis and logistical support. The report was produced by Stephen Howes (task leader) and Kanishka Ghoshal, with contributions, in addition to those listed above, from Fahrettin Yagci (growth), Tapas Sen (consultant on fiscal issues) and Bhaskar Kalimili (cross-state comparisons). Invaluable contributions were made by our sectoral colleagues, including Keith Oblitas and S.J. Rajagopal (irrigation), Deepak Ahluwalia (agriculture), Mohinder Gulati and Rajesh Sinha (power), Clive Harris (PE reform), Tawhid Nawaz (health) and Ward Heneveld and Keith Hinchcliffe (education). Shahrokh Fardoust (Team Leader, India States Economic Team) and Fahrettin Yagci reviewed the report and provided very useful comments, as did Roberto Zagha (Sector Manager, South Asia, PREM). Rita Soni worked above and beyond the call of duty on the word-processing and layout of the report..The report's three peer reviewers, John Williamson, Chief Economist, South Asia Region, Vinaya Swaroop, Senior Economist in the Research Department, and Ashok Lahiri, Director, NIPFP, provided stimulating comments which greatly improved the report's contents. Finally, the report benefited greatly from a series of background papers and reports written as part of the preparation for the DFID-financed Orissa Public Sector Reform Project. These included reports on: public expenditure management; civil service reform; public enterprise reform; and tax administration. John Hoy of DFID provided very useful assistance and advice throughout the course of the report's preparation. Orissa at a glance SOCIAL INDICATORS All- Orissa India Population Growth Rate Population, 1997 (million) 36 958 (annual average growth) GSDP/GNP per capita, 1997 (US$) 204 430 Average annual growth, 1990-97 Population (%) 1.8 1.92.02 Most recent estimate (latest year available since 1988) Poverty: % of population below poverty line 48.7 36.1 0.51 Urban population (% of total population) 13.4 25.7 Infant mortality (per 1,000 live births) 105.0 72.0 80-84 85-90 91-97 Access to safe water (% of households) 39.1 62.3 -Loo E-Orissa A-India Access to electricity (% of households) 23.5 42.4 Access to toilet facilities (% of households) 9.8 23.7 Literate population (% of total population) 51.2 56.5 Proportion attending primary school (aged 6 to 10) 54.7 61.3 Male 58.8 67.3 Female 50.5 54.4 STRUCTURE of the STATE ECONOMY 85-90 91-96 1995-96 1996-97 1997-98 Growth rate of output(%) (% of GSDP, current prices) Agriculture 42.7 35.4 35.3 29.9 31.9 20.0 Industry 24.0 27.3 28.2 29.9 29.2 15.o Manufacturing 12.6 12.8 13.6 13.3 13.1 t. Services 33.3 37.3 36.5 40.2 38.9 - - 5.0 (compound annual real growth,'80-'81 prices) 0.0 - Agriculture -4.5 -4.1 -3.0 -24.0 31.3 -s.o Industry 8.7 3.9 13.5 -3.3 12.8 0 Manufacturing 5.9 2.7 21.1 -8.2 12.5 Services 4.9 3.4 7.2 1.0 9.4 -15.0 -20.0 Gross State Domestic Product ('80-'81 prices) 1.6 3.1 5.2 -8.3 16.3 - - GSDP per capita ('80-'81 prices) -0.2 1.6 3.4 -9.9 14.3 LOrissa - --- All-india STATE FINANCE 85-90 91-96 1996-97 1997-98 1998-99 Gross Fiscal Deficit and Debt (% of GSDP) Debt (% of GSDP) GFD Total Revenue 16.6 17.9 18.5 17.1 16.3 60 12.0 States Own Revenue 6.8 7.4 7.9 7.3 7.4 5o 10.0 Central Transfers 9.8 10.5 10.6 9.9 8.9 40- 8.0 Total Expenditure 22.1 23.8 26.2 23.8 26.6 30 6.o Revenue Expenditure 17.3 20.0 22.0 20.5 23.2 20 4.0 Interest payment & debt servicing ** 2.7 4.2 5.5 5.9 6.8 to 2.0 Capital Expenditure (net) 4.8 3.8 4.2 3.3 3.4 o - . .oo 91- 92- 93- 94- 95- 96- 97- 98- Revenue Deficit (-)/ Surplus (+) -0.7 -2.2 -3.6 -3.3 -6.9 92 93 94 95 96 97 98 99 Gross Fiscal Deficit (-)/ Surplus (+) -5.5 -6.0 -7.7 -6.7 -10.3 r-Debt/GSDP I PRICES -*-Gross Fiscal Deficit GSDP Deflator 8.1 10.2 5.3 0.2 9.0 *1997 indicates 1997-98. ** without provident fund repayments SASPR Introduction and Summary A. Overview 1. Orissa is a very poor state. Of India's 14 major states, Orissa has the second lowest income per capita (ahead only of Bihar). It has had, since 1980, the second lowest growth rate in income per capita (ahead again only of Bihar). Increasing Orissa's growth rate is thus critical, but will not be possible unless the state addresses its fiscal problems. 2. With a fiscal deficit for the just completed 1998/99 estimated at 10.3% of state output (Rs. 31.6 billion or 3,160 crore), it is no exaggeration to say that Orissa today is in a fiscal crisis. Salaries, pensions and interest payments now more than exhaust total revenues. The authorities are facing a "fiscal crunch" in the very practical sense of finding it difficult to provide the cash to pay the government's bills. The crisis is already harming the state's growth prospects. If unattended to, it will leave government solely as a bankrupt employment agency, unable to perform any developmental role at all. Although Orissa has a track-record of reform, it needs to enter a new phase of intensified reform if it is to solve its fiscal problems and grow more quickly. 3. Articulating the goal of fiscal adjustment is easier than achieving it. In 1996, the World Bank produced a report on Orissa's fiscal problems titled "India: Strategy and Options for Fiscal Stabilization in Orissa" (referred to as the "1996 Study"). Since 1996, the fiscal situation in Orissa has further deteriorated. The fiscal position today is in most cases similar to, and in some cases worse, than it was predicted to be under the 1996 Study's "no reform" scenario (see Box 2.2 in Chapter 2). 4. Some factors behind the fiscal crisis are external in their origin. Like most states, Orissa has suffered from a decline in financial support from the Government of India compared to the early nineties. No state has been hurt more by this than Orissa, since it receives more central support (as a percentage of Gross State Domestic Product or GSDP) than any other major state except Bihar. And Orissa has also been badly hit by the salary increases at the central level which state governments have been unable to avoid passing through to their employees. This pay increase will add at least 2% of GSDP annually to the salary bill; in addition, the Government has to find resources to finance the back-dating of the pay increase to 1996. 5. But that Orissa is so subject to external influences only makes it seem more unlikely that it will escape from its current debt trap. Certainly it will be difficult. There are, however, at least three reasons for thinking that Orissa can succeed. 6. First, Orissa's growth, though slow (an average of 3.7% of GSDP in constant prices for 1990/91 to 1997/98), is at least not on a downward trend as is the case for some other poor, fiscally-stressed states, such as UP and Bihar. With a resolution of its fiscal crisis, and further sectoral reforms, the state should be able to achieve higher growth, resulting in faster poverty reduction, and a much better fiscal outlook. 7. Second, Orissa has in recent years implemented a number of positive fiscal policy measures. Since 1994/95, it has reversed the decline in own-tax revenue (as a percentage of GSDP). There have also been some positive expenditure trends, at least until the havoc wrought by the recent round of salary increases. Non-wage operations and maintenance (O&M) and capital outlays have been protected; subsidies have been reduced; and civil service growth restricted. 8. Third, Orissa now has a track record of reform which extends well beyond the fiscal domain into key sectoral policies. Orissa is well-known as India's leader in power sector reform. It is also a leader in public enterprise reform, with significant closure and sales. And the state is moving to bring the private sector in to develop desperately needed infrastructure, including ports, to enable Orissa to at last exploit its coastal position. It is too early to see these sectoral reforms already converting into a higher growth rate, but the continuation, acceleration and broadening of these reforms could support an acceleration of growth in the coming years. 9. The challenge for Orissa is thus not to change course, but to do more - to undertake deeper, more comprehensive, and quicker reforms. Success will not come easily or quickly. Bringing the deficit down from 10% of GSDP to a sustainable level will be a challenge, and Orissa's historically high debt levels, and recent pay settlement, will take their toll whatever happens. By the same token, it should not be thought that the goal of fiscal adjustment with growth is an impossible one, or hopelessly ambitious. 10. To demonstrate that there is a feasible reform path open to the Government, the final chapter of the report undertakes a scenario analysis, and contrasts what would happen if the Government intensified its reform program to what would happen if the reform program is halted. The "intensified reform" scenario, as it is called, is based on a number of reform measures outlined in the report, some of them difficult, but all of them doable. The reform package succeeds in stabilizing Orissa's fiscal position. Within three years (i.e., by 2001/02), the debt stock stops rising as a percentage of GSDP, and thereafter it starts to decline. By 2004/05 the fiscal deficit is reduced to 4.5% of GSDP, and the primary balance is in a slight surplus. This fiscal adjustment is achieved more or less equally by revenue increases and expenditure cuts. On the expenditure side, the scenario achieves a large change in expenditure composition, away from salaries and towards capital expenditure and, especially, non-wage operations and maintenance. This shift in composition, combined with important sectoral policy reforms, should enable Orissa to significantly increase its average annual growth rate over the next five to ten years from its current level of 1.5% per capita to 4.0% per capita. 11. The scenario analysis also demonstrates the costliness of not reforming. Under the "no more reform" scenario, debt as a percentage of GSDP continues to rise reaching 60% by 2004/05. Capital outlays and non-wage O&M are squeezed to 4% of GSDP (compared to the 7% achieved in the nineties). With reduced productive spending, and an absence of policy reform, growth will fall, or at least not rise, from its current low level over the medium term. 12. The need to accelerate reform is recognized by the Government. To assist in this very important effort, the report takes a number of proposals for reform taken from a variety of sources, such as the experience of other countries and other states, and the ideas of concerned experts and government officials. It combines these into a four-part program for comprehensive reform, which can be summarized as: launching the reform program; adjusting expenditure; strengthening revenue; and intensifying sectoral reforms. The sections following expand on these themes or imperatives, which are dealt with sequentially in Chapters 2 through 5, while Box I provides a summary of the suggested policy measures. - 111 - Box 1 Summary ofReform Measures This Box summarizes, under the four headings used in the executive summary, the reform measures put forward in this report. Unless otherwise indicated, all these reforms could be implemented, or at least initiated, very quickly: some are already under consideration or implementation. A. Launching the Reform Program Aim: Build support for and launch a comprehensive reform program on the themes of ending the fiscal crisis, increasing growth and reducing poverty, and improving governance. Actions: 1. Issue White Paper on fiscal crisis and reform program. 2. Present next budget in context of medium-term (e.g. 5-year) fiscal framework and consistent with key medium-term fiscal targets (e.g. deficit, debt-to-GSDP ratio, guarantees). 3. Establish Reform Cell/Secretariat to strengthen internal capacity for reform implementation. B. Adjusting Expenditure Aim: Adjust expenditures and strengthen expenditure management to reduce the unsustainable fiscal deficit, to increase the productivity of spending, and to improve the transparency of government operations, and reduce corruption. Actions: 1. Undertake civil service reform. In the short term: a) Introduce regular monitoring of civil service size (positions and actual size), attrition and entry. b) Develop and implement a policy for downsizing the civil service involving abolition of positions, rationalization of functions, freezes on hiring with exceptions for high-priority categories (e.g., teachers, technical staff), and maximum use of redeployment and retraining. c) Announce and adhere to annual targets for downsizing the civil service. d) Contain unaffordable salary increases (e.g., limiting/postponing dearness allowances). In the longer term: e) Develop better monitoring and forecasts for salary-related variables (salary bill, pensions, provident fund). f) Review feasibility of voluntary retirement scheme for certain classes of civil servants. g) Develop targets for overall salary bill in preparation for the next pay commission. h) Implement comprehensive manpower planning and administrative reform program. 2. Reorient spending a) Amend legislation to freeze spending on grants-in-aid of salary to private colleges. b) Freeze aggregate explicit subsidies at current nominal level. c) Cap grants-in-aid to colleges at current levels, reduce them over time, and free these colleges from government control. d) Protect high-priority expenditures - in categories of non-wage maintenance, capital outlays, social sector spending - and increase spending as fiscal position stabilizes. 3. Strengthen public expenditure management a) Improve planning and budgeting, especially the development of mechanisms to identify potential budgetary savings. b) Increase financial accountability, including auditing functions. c) Strengthen performance management. C. Strengthening Revenue Aim: Adopt revenue reform measures to raise about an extra 1.2% of GSDP over the next three to four years. Actions: 1. Sales tax reforms a) Increase diesel and petrol rates as part of road fund establishment. b) Increase tax revenue from motor vehicles (a luxury item) through increasing sales tax and/or entry tax to prevent trade diversion. c) Introduce one-time settlement scheme to clear back-log of pending cases. d) Phase out sales tax incentives, beginning with incentives under 1989 Industrial Policy; monitor costs and benefits of all remaining incentives (sales tax and others), and compliance with incentive program guidelines. e) Introduce self-assessment for most taxpayers with adequate audit safeguards. f) Reduce the current number of rates to three to reduce tax evasion and classification disputes. g) Prepare for introduction of VAT in the medium term. h) Strengthen administration, including through computerization. - IV - Box 1 Cont. Summary of Reform Measures C. Strengthening Revenue (cont.) 2. Develop new Excise Policy a) Combat evasion at the wholesale level (e.g., through labeling or state control). b) Strengthen monitoring of enforcement by excise officers and take rotation/promotion decisions accordingly. c) Reduce rates on low-strength liquor to compete with (untaxed) country liquor. 3. Revamp stamp duties a) Rationalize and lower rates. b) Introduce guidelines for valuation verification. c) Close legal loopholes. d) Modernize and computerize administration. e) Introduce one-time settlement scheme to clear back-log of pending cases. 4. Introduce a professions tax. 5. Replace octrol by an accounts-based entry tax. Develop mechanisms to ensure automatic sharing with municipalities. 6. Work with municipalities to strengthen property tax. 7. Undertake review of mining sector to investigate scope for raising more revenue. D. Intensifying Sectoral Reforms Aim: Accelerate sectoral reforms currently underway to promote growth and contribute to fiscal balance. Actions: 1. Agriculture and forestry reform a) Commnission study to investigate causes of low agricultural growth, and suggest remedies. b) Legalize tenancy with appropriate safeguards. c) Encourage private participation in provision of agricultural inputs, including fertilizer and seeds. d) Introduce cost recovery for agricultural services provided by Government. e) Develop new pro-poor Forestry Policy based on principles of Joint Forestry Management and rationalization and liberalization of current marketing arrangements. 2. Irrigation reform a) Carry out regular public expenditure reviews of irrigation spending (Annual Review, Action Plan and Budget). b) Increase cost-recovery to 100% of O&M (revenue expenditure) for irrigation as well as industrial and household water supply. c) Accelerate roll-out of Water User Associations within a new legislative framework. d) Privatize Orissa Lift Irrigation Corporation by accelerated transfer of facilities to farmers and rural poor. 3. Social sectors (education, health and welfare programs) a) Increase cost-recovery in higher education and hospitals. b) Protect social sector spending, and increase spending as fiscal position stabilizes. c) Increase share of primary education and primary and secondary health in respective overall education and health budgets. d) Improve targeting and monitoring of social sector spending for greater effectiveness. 4. Continue with public enterprise reform a) Sell additional stake of Orissa Power Generation Corporation. b) Expand and accelerate the program, e.g., by closing or privatizing the large loss-making PEs. c) Ensure that funds are available for retrenchment payments and one-time settlement. d) In 99/00, make maximum use of Tenth Finance Commission privatization/debt-retirement scheme. e) After 99/00, use all privatization proceeds to write off debt. 5. Continue with power sector reform, including agreement on financial restructuring plan for GRIDCO. 6. Transport a) Develop new Roads Policy, with provision for road fund. b) Undertake institutional study for PWD, including options for downsizing, and implement recommendations. c) Continue and expand private sector participation initiatives in transport sector (roads, ports). -V- B. Launching the Reform Program 13. Building consensus. Experience with adjustment programs around the world suggests two key lessons. First, internal support for reform is of an order of magnitude more important than external support. And second, the potential for internal support for reforms is strongest at times of crisis. This is now such a time of crisis, and the public should be made fully aware of this. One strategy which has been used elsewhere to develop internal support (e.g. Andhra Pradesh, Rajasthan, Uttar Pradesh) has been the issuance of a White Paper to explain to all stakeholders the severity and causes of the current financial crisis. The White Paper could legitimately point to the successful pursuit of fiscal policy reforms undertaken over the last few years, the adverse fiscal developments (especially the salary increases), external in origin, and the consequent need for a faster, more comprehensive reform program as a result. 14. It will be particularly important to build a consensus on the prime importance of ending the fiscal crisis given the point of "no return" which the state's finances have reached. Without a reduction in the deficit, no attempt to increase growth will succeed or survive. And without a consensus to reduce the deficit, it will be difficult to implement tax reforms and expenditure cuts. However, to succeed in its reform program, the Government will need broader objectives. Fiscal reform will only be of value, and will only win public support, if it can be shown to lead to more effective government, faster growth and quicker poverty reduction. A three-pronged set of goals for the reform program is therefore suggested around the themes of: * ending the fiscal crisis * increasing growth and reducing poverty * improving governance 15. Since improving the state's fiscal position is itself a long-term project, it would be useful for the Government to point the way forward by developing a multi-year fiscal framework with medium-term targets (e.g. for the deficit, debt-to-GSDP ratios, and guarantees). Illustrative targets are developed in Chapter 6 of the report. Successive budgets could be designed to put Orissa on the path to achieving these goals (and, equally importantly, should be based on realistic assessments of revenue availability). 16. It will also be important to build a consensus on the longer-term objective of increasing growth and reducing poverty. The ultimate rationale for fiscal correction should be the freeing up and more efficient utilization of resources to make the government a more effective agent for poverty reduction. As studies in India and elsewhere have shown repeatedly, the main strategy for poverty reduction must be an increase in the growth rate, especially rural growth. This is particularly important for Orissa given its poor agricultural growth record. The Government will also need to address other issues such as the provision of education and health, access of the poor to land, access of tribal communities to forest produce, and the effectiveness of Orissa's welfare programs (see Chapter 5 for further discussion). 17. A third goal alongside ending the fiscal crisis and reducing poverty could be improving governance. The public will not support attempts to raise additional revenue if it believes that the funds raised will be wasted due to corruption or poor management. Civil service and public expenditure management reforms to improve efficiency and transparency need to be a central part of any reform program. These governance reforms, further discussed in Chapter 3, need to be conceived broadly not only as internal reforms within the bureaucracy but also as dealing with issues such decentralization and privatization. 18. One of the very important steps the Government has taken towards developing this three- pronged strategy is to initiate an Orissa Public Sector Reform Project, with support from the Department for International Development (DFID, UK). This project includes components to assist with all three of the strategic goals mentioned above. To promote poverty reduction as a - vi - central goal, a high-level Poverty Task Force has been established with the goal of developing a poverty reduction strategy for the state. To promote better governance, the project will strengthen expenditure management and planning, including financial control and audit systems, to allow better monitoring of expenditure, and also initiate a comprehensive civil service reform through pilots in two departments. To help reduce the fiscal deficit, the project will support strengthening of tax administration. The Government is to be commended for undertaking such a wide-ranging reform project. 19. External support. Orissa is now in such a difficult fiscal position that even a comprehensive reform program cannot be assured of success. The Government will need to mobilize a large amount of external support in the form of both private investment and official grants and concessional financing to maximize its chances. These resources are needed not only to cover the costs of reform (e.g. voluntary retrenchment payments) but also, more importantly, to allow the state to move away, during this transitional period, from more expensive forms of debt such as small-savings deposits. 20. Reform Cell/Secretariat. Implementing a comprehensive reform program is a major undertaking requiring cooperative and coordinated action across departments. Like any sectoral reform effort (for example in the power sector), it will require dedicated staff and the support of consultants: Many governments have found it useful to establish a reform cell or secretariat to implement reform, often under the guidance of an inter-departmental committee, and Orissa may wish to consider this model. C. Adjusting Expenditure 21. Expenditure adjustment is needed in Orissa for two reasons: first, to reduce the deficit; and second to make expenditures more productive. Spending on salaries and subsidies largely benefits the better off. Shifting spending towards maintenance, capital outlays and social sectors will lift growth, improve the quality of life, and benefit the poor. 22. Civil service reform. Even before the recent salary increases, too much of government expenditure in Orissa went to salaries. Compensating measures need to be taken with respect to the salary bill, especially through controlling the size of the civil service. The Government has succeeded in the nineties in reducing the rate of growth of the civil service, but now needs to go much further. There are four measures which can be taken to restrain salary bill growth in the short term. First, GOO needs to establish control over civil service size via regular monitoring. The data is available to do this, but is not used on a regular basis. Second, the Government needs to develop and implement a policy for downsizing the civil service involving abolition of positions, rationalization of functions, freezes on hiring with exceptions for high-priority categories (e.g. teachers, technical staff), and maximum use of redeployment and retraining. Implementation of this policy will require strong political will. Third, annual targets for civil service down-sizing should be announced as part of the policy and adhered to. Fourth, the impact of unaffordable salary increases needs to be limited, e.g, by reducing or postponing dearness allowance payments. 23. There are also four measures which are longer term, but which can be quickly initiated. First, in addition to developing better monitoring for civil service size, better monitoring and forecasts are needed for related variables, such as the salary bill, pensions, and the provident fund. Second, a review of the feasibility of introducing voluntary retirement schemes for public servants needs to be undertaken. This would be a continuation of Orissa's pioneering tradition in reform as it would be a first for India. Third, there is a need to prepare for the next pay commission, the sixth. Orissa simply cannot afford another massive pay increase in the coming years, and has to look at pay scales as something under its control, rather than that of Delhi. It - vii - needs to announce, and achieve consensus on, targets for the overall salary bill with the implication that generous pay settlements have to be offset by further reductions in staff size. 24. Finally, the Government is already initiating, as part of its public sector reform program (para. 18) a comprehensive manpower planning and administrative reform program involving an overhaul of organizational structure, allocation of functions, staffing levels, and personnel-management systems. This will be essential to reorient the role of government and to improve the quality of government services, as well as to identify further scope for down-sizing. 25. Reduction of subsidies. In addition to paying the salaries of its own staff, GOO also provides grants-in-aid of salaries to educational colleges, among other bodies. There is a massive over-supply of such colleges (Orissa has more college seats than secondary-school graduates), and legislation needs to be introduced to freeze these grants-in-aid at their current level, and then reduce them as teachers retire. Orissa also provides a number of other explicit subsidies. While some of the subsidies have social value (e.g., food subsidy for the poor in tribal areas), many do not (e.g., subsidies for public enterprises). While power subsidies have already been abolished, rationalization and elimination of the remaining wasteful subsidies could allow Orissa to freeze its overall spending on explicit subsidies at current nominal levels, or possibly even to reduce them. Implicit subsidies are even larger than explicit, and tend to favor the rich (the largest subsidy is for higher education). Reducing subsidies would allow Orissa to protect high-priority expenditures - capital outlays, non-wage O&M and social sector spending - and to increase spending on these categories as the fiscal position stabilizes. 26. Orissa has in fact done much better than many other states in protecting high-priority expenditures (though at the cost of running up the highest deficit and debt-to-GSDP ratio in India). However, the returns have been disappointing. Indeed one puzzle is to reconcile the high levels of capital outlays with the state's low growth. The problem of low public sector capital productivity needs to be addressed head on through better public expenditure management (as well as related measures to improve service delivery such as privatization and greater beneficiary participation). The Government's proposed program in public sector management (part of the Public Sector Reform Project) includes the aims of: improving planning and budgeting (e.g. by introducing a medium-term expenditure framework, and linking expenditures to outcomes); increasing accountability (e.g., by computerizing accounts, using these accounts for budget monitoring and cash-flow management, and by a major upgrade in internal audit capacity); and strengthening performance management (e.g., by strengthening performance and efficiency review functions). 27. To promote growth, Orissa's spending levels on capital and non-wage O&M should be protected or, indeed, increased. For the next few years, however, Orissa will have to keep a tight control on both capital spending and non-wage O&M with the aim of not only restoring fiscal balance, but also bringing about efficiency improvements. D. Strengthening Revenue 28. The underlying cause of Orissa's fiscal problems is that it has been spending too much given its revenue. Even if expenditures are reduced to pre-salary-increase levels, revenues will have to be increased. Shared revenue and grants from the central government are growing very slowly, and are falling as a share of GSDP. Additional revenue efforts will be needed to combat this. 29. Sales tax reform. While sales tax performance is good considering Orissa's agrarian and undeveloped economy, there are a number of reforms which could substantially lift revenue. The Government has already passed legislation to introduce a one-time settlement scheme for the huge volume of pending sales tax cases. It has also just moved to a system of self-assessment which should free up considerable staff resources, and is computerizing the system. For - viii - immediate relief, the tax on diesel and petrol, currently 18%, could be lifted to 20%. Proceeds from this increase could be admitted into a road fund to help finance road upgradation and maintenance. Tax revenue from cars (a luxury item) could be increased with a corresponding entry tax introduced to prevent trade diversion, as is done in a number of other states. Sales tax incentives constitute a huge drain on revenue with little tangible and lasting gain to the state's economy. These should be phased out over time, beginning with amendment of the 1996 Industrial Policy to bring to an end incentives offered under the 1989 Policy. GOO has retained NIPFP to advise it on longer-term reforms to sales tax. The current eight rates need to be rationalized to, say, three to reduce tax evasion and classification disputes. A medium-term goal should be the replacement of sales tax itself by a value-added tax. Rationalizing and improving the administration of the sales tax will contribute to the successful introduction of a VAT, and should be regarded as the next steps towards this ultimate goal. 30. Orissa's excise tax performance is poor, with actual yields at about 40% of their potential. A new excise policy needs to be introduced to clamp-down on evasion at the wholesale level, and to strengthen monitoring of enforcement within the excise administration. Rates on low-strength Indian Made Foreign Liquor (IMFL) could be reduced to compete with locally-brewed country liquor, which is illegal in many districts under the state's partial prohibition policy. 31. Stamp tax revenue could also be raised substantially. NIPFP is just completing a study with detailed recommendations, but important reforms would include the rationalization and lowering of rates - in line with the recommendations of the Committee of Finance Ministers on the subject - the introduction of simple guidelines for valuation verification to combat under- valuation, and the modernization and computerization of administration. As with sales tax, introduction of a one-time settlement scheme would help raise revenue and clear the back-log of pending cases. 32. Introduction of a professions tax, as done in several other states, would be an efficient and equitable revenue raiser. The Government is currently considering replacement of the archaic octroi by an accounts-based entry tax, as has been done in other states. Even after compensating municipalities for loss of revenue from octroi, considerable revenue gain can be anticipated from this change on account of the broader base of the entry tax. However, while the entry tax is an improvement over octroi, it is not an ideal solution since, like the octroi, it will act as a barrier to trade. As the sales tax is made more efficient, the entry tax could be reduced and eventually done away with. Moreover, the experience of other states suggests that the entry tax can lack buoyancy, and it will be important that municipalities are assisted to improve their property tax collections. 33. On the non-tax side, Orissa benefits from significant, and rapidly growing, mining revenue. Indeed, this is the second largest source of revenue after the sales tax. A review of the mining sector with the aim to further increasing revenue from it, while at the same time mitigating the environmental and social costs of the sector, could produce high returns. E. Intensifying Sectoral Reforms 34. Orissa's non-agricultural growth, helped by strong mining growth, is around the all-India average. But the agricultural sector is stagnating. On account of the strong relationship between rural growth and poverty reduction, low growth in agriculture is the main factor behind not only the low growth of Orissa's economy but also the persistence of high poverty in the state. As an initial step, the Government needs. to undertake a study to investigate the constraints to agricultural growth, and especially to explain why heavy spending on irrigation has not been translating into higher agricultural output. While this study would provide the basis for a comprehensive reform program, there are already some areas where it is clear that action is needed, some of which have already been covered by the Government's 1996 Agricultural Policy. - ix - The most important of these, aside from the reform of the irrigation sector which is covered separately below, is probably the legalization of tenancy with appropriate safeguards. Tenancy, though widespread, is currently illegal, and the lack of a secure contract makes it difficult for tenants to secure credit, and acts as a disincentive against investment. Improved availability of fertilizer and seeds through greater private sector participation will also boost productivity. 35. Forestry is also a sector with a large poverty impact. Many tribal communities in particular receive substantial amounts from the sale of non-timber forest produce. Reforming Orissa's policies in this area could have a dramatic impact on the poor. Current policies - which rely heavily on state and private monopoly buyers - are widely perceived to have failed, and to be working against the interests of the tribal pickers, and are currently under review by the Government. Specific proposals for reform are beyond the scope of this study, but there is an urgent need to develop and implement a new pro-poor Forestry Policy, based on principles of Joint Forestry Management, and liberalization and rationalization of current marketing arrangements. 36. Inadequate irrigation is widely believed to be the single most important constraint on agricultural productivity in Orissa. GOO has for years been investing heavily in irrigation but with no increase in total agricultural production through the nineties. The Government has been pursuing over the last few years a program of reform in the irrigation sector, but this has been moving too slowly. Now that power sector reform is well underway, accelerated reform of the irrigation sector should be the Government's highest sectoral priority. 37. Better public expenditure management needs to be introduced to improve the efficiency of irrigation investments and O&M, including an annual public expenditure review for irrigation, and better monitoring of non-wage maintenance. 38. Cost recovery in irrigation (as well as in household water supply) needs to be quickly lifted from its current level of about 10% to cover 100% of operations and maintenance (revenue expenditure). This will require that Orissa Lift Irrigation Corporation, which loses Rs 400 million annually, should be privatized (likely by sales of its small irrigation facilities to groups of framers). Collection rates need to be improved, and water rates, though they were raised in 1998/99, will have to be increased again. 39. Water Users Associations have so far only been introduced through a pilot project. They need to be mainstreamed to bring in benefits from beneficiary participation (including better cost recovery) and an appropriate legislative framework for this is required. 40. Social sector spending is at average (health) or above (education) levels in Orissa as a percentage of state output. But Orissa's social indicators are low, and social sector spending, especially for primary health and education, should be first protected and then increased as the fiscal situation stabilizes. One of the biggest implicit subsidies in Orissa is for government-run higher and technical education. College fees need to be phased in. As has been done for hospital user charges, these fees could be retained by the charging bodies and used to improve facilities. This would reduce resistance to the introduction of fees and also take some of the budgetary pressure off the Government. A large number of welfare and anti-poverty programs are administered by GOO. Given the high degree of poverty in Orissa, the Government needs to spend on anti-poverty programs. Better targeting and monitoring of these programs, as well as of education and health spending, would make social sector expenditures more effective. The poverty reduction strategy (Box 2.2) currently under development as part of the Orissa Public Sector Reform Project (para. 18) will assist in this regard. 41. Orissa is a recognized leader in public enterprise reform, and the Government has privatized and closed down a number of companies. The public enterprise reform program needs to be continued by divestment through private placement of the planned subsequent tranche of the Orissa Power Generation Corporation (OPGC). Given its success to date, the PE reform program -x - could be accelerated and broadened by privatizing or closing the state's large loss-making PEs, namely the Orissa Lift Irrigation Corporation, the Orissa Textile Mills and the Orissa State Textiles Corporation, by accelerating the transfer of co-operatives to the private sector, and by considering as candidates for privatization the more commercial PEs initially excluded from the reform program. To succeed in its program, GOO will also need to ensure sufficient funds are available to meet labor retrenchment and one-time settlement costs. 42. Orissa's successful privatization has helped it finance its very large fiscal deficit. This at least has had the benefit of preventing capital outlay and non-wage O&M being severely cut, but it has done nothing to reduce Orissa's debt burden, and is not a sustainable practice. The Government could aim in 1999/00 to utilize its quota of debt-relief under the Tenth Finance Commission, as no other use of privatization proceeds will have as high a rate of return to the state. As the fiscal situation stabilizes, GOO could use all its privatization proceeds in subsequent years to repay debt. This would not only reduce the debt burden, but also send a very positive signal to prospective investors in Orissa. 43. Power sector reform. Orissa is a leader among Indian states with respect to reform of the power sector. At the time of writing, the state is completing the sale of 51% of the four distribution subsidiaries of GRIDCO, formerly the State Electricity Board. But power reform still has a long way to run, with the privatization process only partially complete, and the sector is still in financial disarray. GRIDCO has a very important position in Orissa's power sector as the single buyer of power from generators and seller of that power to the four new distribution companies. While its financial health will improve over time as the privatized distribution companies improve collections and thus increase the cash coming into the sector, its current precarious financial position is a cause for concern, and especially could lead to adverse actions by suppliers. GRIDCO has engaged consultants to assist it in the development of a financial restructuring plan, and this will need to be negotiated and agreed with the Government of Orissa. 44. Roads. Upgrading and maintenance of roads is an important sectoral priority. GOO is inviting in the private sector into roads (and ports), but will also need to invest more in roads itself. To provide funding for this, the government could establish a road fund by increasing the sales tax on diesel and petrol as recommended earlier. The Government is currently undertaking an institutional study for the reform of the Public Works Department. Overstaffing appears to be a particular problem in the infrastructural sectors, and this might be one area where voluntary retrenchment schemes could be introduced. Government is planning to issue a new roads policy shortly. This would provide a good opportunity for it to introduce many of these reforms. Chapter One: Economic Development in Orissa A. Introduction 1.1 Orissa comprises 4.74% of India's landmass and, with 32 million people (as of the 1991 Census), 3.74% of the population of the country. Nearly 87% of its population lives in rural areas. As per the 1991 Census, Scheduled Tribes constitute 22% of Orissa's population, compared to a nationwide proportion of 8%. Orissa has a higher proportion of Scheduled Tribes than any other major state except Madhya Pradesh. 1.2 Orissa lags the rest of India on most social indicators (Table 1.1). It is 6t" from the bottom out of the 14 major states for both overall and female literacy. It has the second highest level of infant mortality, and of poverty. Population growth is below the all-India average: the decennial growth rate of population during the period 1981 to 1991 was 20.1%, lower than the national average of 23.5%. Table 1.1: Selected Indicators of Social Development Unit Orissa * All India Best State Worst State Poverty Headcount Ratio ('93) % 48.7 (2) 36.1 11.5 (Punjab) 55.2 (Bihar) Infant Mortality ('96) per '000 96 (2) 72 14 (Kerala) 97 (Madhya Pradesh) Overall Literacy ('93) % 51.2 (6) 56.5 91.6 (Kerala) 42.0 (Bihar) Female Literacy ('93) % 38.9 (6) 43.9 88.5 (Kerala) 22.0 (Rajasthan) * Number in parentheses refer to Orissa's position in a rankingfor the various indicators among the major 14 Indian States (in ascending order for literacy and descending orderfor poverty and infant mortality). Sources: CMIE (1997) for literacy; World Bank (1998) for poverty head-count ratio (percentage of people poor);GOI (1998)for infant mortality. 1.3 Development levels vary greatly within Orissa. The state is divided into three agroclimactic regions - Coastal, North, and South. The Coastal and North regions both have rural poverty head-count ratios of 45-46%, but the South has 69% of its rural population below the poverty line. Indeed, out of 68 agroclimatic regions, the poorest in rural India is South Orissa. 1.4 Agriculture dominates Orissa's economy, with 32% of GSDP in 1995/96 compared to the all-India average of 26% (Table 1.2; see also Annex A). Mining is also of increasing importance: 5.7% of GSDP in 1995/96, the highest of all the major states. Orissa is rich in minerals, with 26% of India's iron ore, 23% of its coal, and 70% of its bauxite.2 Table 1.2: Sectoral Composition of Real GSDP in Orissa and All India, 1980/81-1995/96 (%) 1980/81 1985/86 1990/91 1995/96 Agriculture & Allied Services Orissa 50.2 (12) 49.0 (13) 35.8 (7) 32.4 (7) All India 38.1 34.6 30.9 26.0 Industry Orissa 19.5 (2) 19.0 (1) 26.7 (8) 28.0 (8) All India 25.9 27.6 30.0 31.4 Mining Orissa 2.4 (12) 2.4 (11) 4.6 (13) 5.7 (14) All India 1.5 1.7 2.0 1.9 Services etc. Orissa 30.3 (5) 32.0 (6) 37.5 (8) 39.6 (8) All India 36.0 37.8 39.1 42.6 Notes: The number in parenthesis is Orissa 's share ranking among the major 14 states in ascending order (e.g. '1' denotes the smallest share). Allied services refer to forestry, logging and fishing. 1980/81 prices are used. Source: World Bank States Database, for this and subsequent tables and graphs in this chapter relating to growth. 1 World Bank (1998), Annex 1, Table 3. Numbers are calculated using 1993-94 NSS data. 2 1991 data, extracted from Table 1.1 of the 1996 Fiscal Study. -2- 1.5 Orissa is a relatively underdeveloped state in terms of infrastructure, as Table 1.3 shows. On most measures, it lags the all-India average, and scores in a similar range to other poor states such as Bihar, Madhya Pradesh, and Uttar Pradesh. It suffers from a particular lack of railways and telecommunications infrastructure. Orissa does well in terms of roads but only for unpaved, not for paved roads where it lags. Orissa also does well in terms of the power deficit, which is small compared to most other states. The credit/deposit ratio lags the all-India average, but at 55% is significantly above the 32-34% seen in Bihar and UP. Table 1.3: Infrastructure in India, Orissa and Various Other States Unit Year All India Orissa Bihar Madhya Rajasthan Uttar Andhra Pradesh Pradesh Pradesh Railways km per'000 sq km 1996/97 19.1 14.1 30.2 13.3 17.2 30.3 18.4 Road Length km per'000 sq km 1995/96 731 1350 492 449 393 806 628 vehicle density per sq km 1993/94 8.3 3.5 7.0 4.3 4.2 8.3 5.9 % surfaced roads 1995/96 55.5 19.9 38.5 44.1 54.3 52.4 59.0 Telecommunications lines per 100 persons 1993/94 0.9 0.4 0.2 0.7 0.7 0.4 0.7 Power (Utilities) surplus as % ofrequirement 1995/96 n.a -4.7 -30.1 -8.8 -3.2 -11.4 -4.9 Petroleum Consumption kg per person 1993/94 68.1 38.4 31.5 39.7 59.8 43.8 56.4 Population per Bank Office '000 1995/96 14.7 15.9 19.4 16.4 15.6 17.7 14.8 Credit / Deposit Ratio % 1995/96 61.9 54.8 32.0 57.1 46.6 34.2 80.8 Source: CMIE (1997). B. Economic Growth 1.6 Figure 1.1 compares per capita output for Orissa (per capita GSDP) and all India (per capita GDP) for the last decade. The rest of India has outgrown Orissa. Whereas the per capita growth rate for all India over the period 1987/8-1997/8 was 3.9%, Orissa's rate over the same decade was only 1.0%.' As a result, the ratio of Orissa-India per capita output has fallen from 70% in 1987/88 to 52% in 1996/97. For the period 1991/92-1996/97, Orissa's average per capita income was above only that of Bihar out of all 14 major Indian states. Figure 1.1: Per Capita Output, India and Orissa, 1987188 -1997198 Rs (1980181 prices) 3,500 3,000 India Per Capita GDP 2,500 2,000 Ois e aiaGD 1,500 1,000 500 1.7 Orissa's record at poverty reduction is better than its growth record as it has been basically able to keep up with all-India trend declines in both urban and rural poverty (World 1.9% population growth rate is assumed for both Orissa and India. Log-regression estimation is used. -3- Bank, 1997). While this finding deserves further analysis, extensive statistical analysis of Indian state data has shown a strong relationship between output growth and poverty reduction, both over time and across states (Datt and Ravallion, 1997). The link is particularly strong for agricultural growth, less so for industrial. To reduce poverty in Orissa, it will be critical to lift growth, and we focus in the remainder of this chapter on Orissa's growth record and prospects, with an emphasis on agricultural growth. (Chapter 5 follows up with policy recommendations, as well as addressing other issues of relevance to the poor, such as access to land, and forestry policy.) 1.8 One of the important features of Orissa's growth is its volatility, as demonstrated by Figure 1.2. Figure 1.2 also shows the cause for this volatility - the economy's dependence on agriculture - and that there is no sign of diminishing volatility over time. 1996/97 saw a decline in 8% in GSDP due to a 24% collapse in the agricultural sector. Recovery came the following year: agriculture was up 31%, leading to real growth of 16%. Figure 1.2 GSDP and Agricultural Growth (1980/81 prices) 40% 30% - 0% 1 1 \ . -__ + - 1 0 % - - - - - - - - - - - - - - - - - - - - - - - -0% - GSDP- -30% - Agriculture & Allied Services -40% C- N M~ IT UO (0 r1- CO 02 0) - (N M' IT V) to r- 02 2 2 202 00 02 0o 0o 020 0 2 0M 02 M2 0) 0) 02 a) o N(2~U Dt- 00 CD CN M' Z U) WD I- 02 02 02 00 002 m 2 02 W M 00 M2 0) 02 IM CF 02 0M 02 0) 0 2020 2 0 0 2 a) 02 20 20 20 1.9 Table 1.4 summarizes Orissa's growth over the last two decades, and compares it with the average of the four low income states (Bihar, Orissa, MP and UP) and for India as a whole.4 In each of the three sub-periods, 1980/81-1985/86, 1985/86-1990/91, and 1990/91-1997/98, growth in Orissa has been below the all-India average. For the overall period 1980/81-97/98, only Bihar grew more slowly than Orissa. 1.10 The only positive feature of the aggregate growth picture is that growth in Orissa hasnot declined in recent years. For 1990/91-97/98, GSDP grew at 3.7%, for the first time higher than the average for the low income states (3.0%). UP and Bihar grew slower in the nineties than the eighties, but not Orissa. With a resolution of its fiscal crisis, and further sectoral reforms, the state should be able to achieve higher growth, resulting in faster poverty reduction, and a much better fiscal outlook. 4 The log-regression (least squares) method is used to estimate the growth rates in Tables 1.4, 1.6 and 1.8. On account of the volatility in Orissa's growth, end-to-end growth rates can easily mislead. -4- Table 1.4: GSDP Growth in Orissa and Other States, 1980/81-1997/98 (Annual average growth rate, %) 1980-85 1985-90 1990-97 1980-97 Orissa 4.0 (4) 3.6 (1) 3.7 (3) 3.5 (2) Low-income States 4.2 5.1 3.0 3.9 All India 5.0 6.4 6.0 5.5 Notes: The number in.parenthests is Orissa's growih ranking among the major 14 states in ascending order, (e.g., '1 denotes the lowest growth). '/980'refers to 1980/8/. Low-income states are Orissa, MP, UP and Bihar. The period of growth for low income states and for comparisons with other states extends only until 1996/97. 1980/81 prices are used 1.11 The main reason for Orissa's slow growth has been slow agricultural growth, the slowest of all the major Indian states for 1980/81-97/98. In fact, official statistics show no growth at all for that period. This absence of agricultural growth has been painful given the dependence of Orissa on agriculture. In 1980/81, Orissa was the second most agricultural state in India, though the share has since fallen on account of agriculture's slow growth (Table 1.2). Table 1.5 shows the meagre contribution of agriculture to aggregate growth. For the overall period 1980/81-97/98, agriculture contributed only 14% to Orissa's total growth, despite an initial share of agriculture in GSDP of 50%. Services and industry both contributed more than their share; mining alone contributed 9% of overall growth, despite an initial share of only 2.4%. Table 1.5 Sectoral Contributions (%) to Aggregate Real Growth, 1980/81-1997/98 Agriculture & Allied Services 14.4 Industry 35.8 Mining 9.1 Industry excluding mining 26.6 Services 49.9 Gross State Domestic Product 100.0 Notes: The contribution of a particular sector to growth in Orissa has been calculated by calculating the change in the value added in the sector over the time period in question and expressing it as a percentage of the change in the GSDP over the sante time period. C. Agriculture Table 1.6: Agricultural Sector Growth in Orissa and Other States 1980/81-1997/98 (Annual average growth rate, %) 1980-85 1985-90 1990-97 1980-97 Orissa 3.1 (8) -1.4 (1) 0.2 (2) 0.0 (1) Low-income States 3.2 1.7 1.0 1.5 All India 3.2 4.6 2.7 3.0 Notes: The number in parenthesis is Orissa's growth ranking amiong the major 14 states in ascending order. (i.e., '1' denotes the lowest growth). '1980 refers to 1980/81. Low-income states are Orissa, MP, UP and Bihar. The period ofgrowth for low income states and for comparisons with other states extends till 1996-97. 'Agricultural sector' refers to agriculture and allied services, and so includes forestry, logging andfishing. 1980/81 prices are used. 1.12 The official verdict of zero agricultural growth from Table 1.6 is somewhat misleading on two counts. Firstly, the production index for non-foodgrains changed in 1990/91 when Department of Statistics figures replaced those of the Department of Agriculture, exacerbating the negative impact of floods that year on recorded crop output. If one assumes that actual growth in 1990/91 in non-food grains equaled growth in food grains, then average agricultural growth for the period 1980/81 to 1997/98 jumps from 0.0 to 1.2%. Secondly, any calculation of average growth rates is hampered by the volatility which agriculture displays. As already mentioned, 1996/97 saw a bad drought and a resultant 24% drop in output, followed by a year of recovery in 1997/98. Annual average growth over the period 1980/81 to 1995/96 (adjusting also for the change in index) was 1.8%. However, even if one makes these adjustments, it is striking that agricultural growth in Orissa has remained below the Indian average, below the average for the -5- other low-income states, UP, Bihar and Madhya Pradesh,s and, indeed, at or below the population growth rate. And even after correcting for the statistical bias, agricultural output has not, in the nineties, exceeded its 1989/90 level (in real terms). Looking at recent years, agricultural output declined every year between 1993/94 and 1996/97, and even in 1997/98, a rebound year, failed to achieve its 1993/94 level. Finally, foodgrain production growth has also been negative in the nineties (see Box 5.2). 1.13 The difficulties faced by agriculture in Orissa can be seen from Table 1.7. Average farm size, irrigation coverage, and fertilizer consumption are all below the national average. The gap is greatest in respect of fertilizer consumption. Average fertilizer consumption, at 25.2 kg/ha in 1995/96, is well below the India average of 74.8 kg/ha, and is in fact the lowest for any Indian state.' The cumulative result of these factors is low productivity: a per hectare yield of food grains significantly below the national average. Table 1.7: Agriculture in Orissa All Madhya Uttar Andhra Unit Year India Orissa Bihar Pradesh Rajasthan Pradesh Pradesh Ave. Size of Operational Holdings hectares (ha) 90/91 1.6 1.3 0.9 2.6 4.1 0.9 1.6 Marginal Holdings as % of Total % 90/91 59.0 53.6 76.6 37.3 29.7 73.8 56.1 Net Irrigated Area as % of Net Sown % 92/93 35.1 32.8 46.7 24.4 26.4 65.6 38.5 Fertiliser Consumption kg/ ha 95/96 74.8 25.2 77.0 34.7 31.9 101.4 137.3 Power Consumption in Agriculture ha 93/94 379 35 142 228 190 351 738 Yield of Food Grains kg / ha 94/95 1547 1250 1480 1080 910 1920 1750 Rice Prod'n as % of Foodgrains % 97/98 42.8 93.5 52.5 25.8 1.4 29.1 77.8 Sources: CMIE (/997), GOO (1996a) and (1998) 1.14 The volatility of agriculture in Orissa is one of its most important features, and has already been noted (Figure 1.2). The sources of the large rises and falls in agricultural output are threefold: low irrigation coverage; an erratic climate (as documented in Annex B, which shows deviations in rainfall of 20% or more every third year for the last thirty); and, most strikingly, a very high degree of dependence on a single crop: rice makes up 94% of foodgrains grown in Orissa, probably the highest degree of dependence of any state on a single crop. Given the water- intensive nature of rice, such reliance on it when neither nature nor irrigation can be depended on for water is risky indeed. 1.15 The Government of Orissa recognizes the need to boost agricultural growth and diversify the rural economy and adopted a new agricultural policy in 1996. Obviously there is a long way to go, and Sections A and B of Chapter 5 outline the reforms needed to get agriculture back on track. The key is irrigation, but other sectoral actions are also important, including the legalization of land-leasing, more private-sector participation in input industries, such as fertilizer and seeds, and the development of rural infrastructure. D. Industry and Services 1.16 Orissa's record in industry and services is better than in agriculture. Growth in both sectors has been close to the all-India average. Industrial growth has in fact equaled the all-India average on account of rapid mining growth: the latter has been 10% over 1980/81-1997/98, the highest for all the major states. Industry excluding mining has grown at the rate of 5.7% over the same period, still only slightly below the 6.5% industry average for all India. s The average annual growth rate for agriculture and allied services for UP, Bihar and MP for 1980-1997 is 2.1%. 6 GOO (1998). -6- Table 1.8: Non Agricultural Growth in Orissa and Other States, 1980/81-1997/98 (Annual average growth rate, %) 1980-85 1985-90 1990-97 1980-97 Industry Orissa 5.1 (6) 9.7 (13) 5.6 (8) 6.4 (7) Low-income States 5.1 9.1 4.3 5.8 All India 6.3 7.9 7.0 6.5 Mining Orissa 4.4 (9) 15.2 (12) 9.7 (13) 10.3 (14) Low-income states 3.9 11.9 5.4 7.5 All India 6.1 9.2 3.5 6.2 Services etc. Orissa 4.8 (3) 5.7 (4) 5.3 (6) 5.5 (6) Low-income States 5.1 6.5 3.9 5.2 All India 5.8 6.9 7.4 6.6 Notes: The number in parenthesis is Orissa's growth ranking among the major 14 states in ascending order (i.e., '' denotes the lowest growth). '1980' refers to 1980/81. Low-income states are Orissa, MP, UP and Bihar. The period of growth for low income states and for comparisons with other states extends only till 1996/97 1.17 In the past, the Government of Orissa has given the public sector a large role in diversifying the economy away from agriculture towards industry and services. It has invested heavily in its public enterprises and it has built up a large civil service. The Government has now realized that this strategy has been neither successful nor sustainable, and has been reorienting the role of the public sector over the nineties to give the private sector a greater role. The policy changes being implemented by the Government are discussed in Chapter 5, but include privatization of public enterprises and the power sector, and the promotion of private-sector infrastructure projects. 1.18 These efforts, combined with a promotion campaign to attract private capital to the mining industry, appear to have been quite successful. Data on private investments flowing to different states are contradictory, with CMIE data on "per capita investments in hand" showing Orissa actually leading the pack, whereas Ministry of Industry data on Industrial Entrepreneur Memoranda (for the delicensed sector) and Letters of Intent (for the licensed sector) put Orissa near the bottom in per capita terms. But, wherever Orissa comes relative to other states, it has been successful in terms of attracting a number of individual, large projects. More than 20 large private projects - covering oil refining, LNG, petrochemicals, alumina and aluminum, pig iron, steel and power - with total cost of about $12 billion have been submitted to GOO in recent years. Land acquisition for 10 of these projects has already been completed, and most of the projects are expected to be completed in the next 4-6 years. These projects are resource-based, but mostly integrated: that is, they combine extraction and processing of the mineral resources. GOO has also set up a High Powered Committee chaired to identify and encourage the supporting and downstream industries that could be developed in growth centers around these projects. 1.19 The efforts being made by the Government of Orissa have been recognized by business. A survey conducted by Business Today at the end of 1997 rated Orissa as the 15"' most popular destination for investors out of the 27 states surveyed. 15t" is still a long way from the top, but a significant improvement over the ranking of 20"' Orissa received in the same survey in 1995, leading the journal to categorize Orissa as a "potential growth center."7 Business Today, December 22, 1997. -7- 1.20 GOO is also moving to promote the more labor-intensive service sectors. Given that much of Orissa's growth is coming into capital intensive extraction and heavy industry ventures, and that there is a need to reduce the pressure on the public sector to act as an employment agency, increasing employment in the private sector is critical. This will be helped by more agricultural growth and also by growth in labour-intensive services. The large number of temples and wide beaches in the state provide an excellent opportunity to further develop the tourism industry. Puri-Konark-Bhubaneswar (the "golden triangle") has been identified as one of the I I "Travel Circuits" in India for intensive promotion. GOO is also preparing a promotion campaign to attract foreign private capital to develop several projects in this location. 1.21 Given all this activity and the promising signs, it is something of a puzzle as to why non- agricultural growth did not accelerate in Orissa in the nineties. Two factors which adversely affected industrial growth in Orissa until the early nineties are no longer a constraint. GOI monopolies on mineral resources have been unwound, and private sector participation in mining is much more common; and the transport subsidies given to all major mineral inputs, under the policy of freight equalization, which deprived Orissa of its natural comparative advantage in mineral-based industries, have been eliminated. These policy changes at the central level, combined with Orissa's favorable policies, and its success in attracting private investment, should have pushed non-agricultural growth above the level in the eighties. Indeed, given its coastal location, and its resource base, Orissa should be able to grow at well above the all-India average for industry and services. That this has not yet happened, and that growth has not yet accelerated, may be due to several factors. First, it may simply be too early to see the impact of the new investment. Second, the low commodity prices facing Orissa's heavy industries may be a deterrent to growth. Third, there is some evidence that Orissa's lack of infrastructure (e.g. railways) may be holding back investment, and preventing investment proposals from becoming actual projects. Fourth, the liberalization of the nineties and consequent disappearance of central control may have benefited the richer states with better infrastructure and human capital rather than the poorer, less developed states such as Orissa (see, for example, Rao, Shand and Kalirajan, 1999). And, fifth, low agricultural growth may be holding back non-agricultural growth in rural areas. 1.22 Probably all of these factors are at play, but more analysis, and probably a longer passage of time, will be needed to disentangle their relative importance. Already, however, two policy implications are clear. First, while no-one can deny the need to diversify away from agriculture, in fact non-agricultural growth will be helped by an acceleration of agricultural growth. And, second, improving Orissa's infrastructure will remain a priority. Better infrastructure will help induce private investment, and thus lift employment, not only in industry, but also in services, especially tourism.8 1.23 Both of these policy imperatives - relating to agriculture and infrastructure - are taken up in Chapter 5 on sectoral reforms. The intervening three chapters ire taken up with Orissa's fiscal crisis and the mechanisms for solving it. Without a resolution of the fiscal crisis, no amount of sectoral reform will lift the growth rate. Although this report does not tackle environmental issues, they are important for Orissa in a number of sectors. These include: mining, where there have been a number of environmental and social disputes; tourism, where failure to protect the environment may be endangering the potential of this sector, will also be important for the development of tourism; and forestry. Analysis of and action on environmental issues could yield high social returns for Orissa. Chapter Two: Fiscal Crisis A. Orissa's Fiscal and Debt Position 2.1 Fiscal position. Orissa occupies a distinctive place among Indian states in terms of its fiscal position (Box 2.1). As a poor agrarian economy, its tax take is low (as a percentage of GSDP, as for the comparisons following); however, equally by virtue of being poor, its receipts from GOI are high - making its overall revenue take the second highest in India. But Orissa's expenditures are even higher. Not only is its current expenditure among the highest in India, but its capital outlays are in fact the highest, making its total expenditure also the highest. Finally, while all Indian states face a gap between revenue and expenses, none faces a larger gap than Orissa, which, again as a percentage of GSDP, continues to run the largest fiscal deficit of all of India's states. 2.2 Fiscal deterioration. Against this background, it is not surprising that Orissa has long been suffering fiscal stress, nor that it is currently facing a fiscal crisis. Of course, Orissa's fiscal position worsened sharply in 1998/99 - largely on account of the huge salary increases awarded across India - when its fiscal deficit rose from 7% to 10% of estimated GSDP. But the worsening in this year, while sudden, is consistent with a fiscal deterioration underway since at least the mid-eighties. In this section, we analyze long-term fiscal trends. Section B of the chapter deals with recent fiscal developments, and Section C sets out a broad strategy for reform to escape the fiscal crisis, which is then developed in subsequent chapters. 2.3 Debt stock. Table 2.1 shows the key measure of fiscal sustainability, the debt-to-GSDP ratio, as well as other summary fiscal variables. There is a lot of volatility evident in the various indicators, reflecting Orissa's erratic growth path (see Figure 1.4 in Chapter One). But debt is clearly increasing: from 1985/86 to 1997/98 the debt-to-GSDP ratio increased from 34 to 46%, and the estimate for 1998/99 is close to 50%. Orissa now has the highest debt-to-GSDP ratio of all major Indian states. Table 2.1: Fiscal Indicators in Orissa and All States, 1985/86 to 1998/99 (% of GSDP) 1985/86 1987/88 1989/90 1991/92 1993/94 1995/96 1996/97 1997/98 1998/99 Total Expenditure Orissa 18.6 24.1 21.0 24.0 23.6 22.0 26.2 23.8 26.6 All States 17.6 18.7 17.6 18.1 17.2 16.7 16.6 17.4 NA Total Revenue Orissa 13.8 17.5 15.8 17.5 18.4 16.2 18.5 17.1 16.3 All States 14.3 14.9 13.8 14.6 14.4 13.6 13.3 13.5 NA Fiscal Deficit Orissa 4.8 6.6 5.2 6.5 5.2 5.8 7.7 6.7 10.3 All States 3.3 3.8 3.8 3.5 2.8 3.1 3.3 3.9 NA Revenue Deficit Orissa 0.9 1.0 1.0 1.3 1.6 3.4 3.6 3.3 6.9 All States -0.3 0.4 0.9 1.1 0.5 0.8 1.4 1.5 NA Primary Deficit Orissa 2.9 3.9 2.4 3.1 1.3 1.9 3.1 1.9 5.4 All States 2.1 2.2 2.0 1.5 0.7 0.9 1.0 1.5 NA Total Debt Orissa 33.8 39.0 35.6 37.6 40.2 39.0 47.1 45.8 49.1 All States 22.9 23.2 22.4 22.7 21.7 21.1 21.1 21.7 NA Interest Payment Orissa 1.8 2.7 2.8 3.4 3.9 3.9 4.6 4.8 4.9 All States 1.3 1.7 1.8 2.0 2.2 2.2 2.2 2.4 NA Notes: In this and the tables and graphs which follow in the remainder of the report, Orissa fiscalfigures up to 1997/98 are actuals, and 1998/99 figures are revised estimates, slightly modified by the authors as explained in notes to Table 3.1 and Table 4.1; for All States, figures up to 1996/97 are actuals, and 1997/98 are revised estimates. For Orissa 1998/99 GSDP estimates, see Annex H. Source: World Bank States Database for this and allfiscal tables and graphs following in this chapter. - 10 - Box 2.1 Orissa in Comparison: a low tax, high revenue, high expenditure state It is instructive to put Orissa's fiscal performance in a comparative perspective. The list below summarizes Orissa's position out of India's 14 major states on a number of key fiscal variables. Rankings for Key Fiscal Parameters (as % of GSDP), 1991/92-1996/97 Category Orissa's Ranking Top or bottom state Total Expenditure Highest Orissa Revenue (Current) Expenditure 2nd from top Bihar Capital Expenditure Highest Orissa Total Revenue 2" from top Rajasthan Own Revenue 3rd from bottom Bihar Own Tax Revenue 2nd from bottom Bihar Own Non-tax Revenue 5th from top Haryana Central transfers 2nd from top Bihar Share in Central Taxes 2nd from top Bihar Central Grants Highest Orissa Fiscal Deficit Highest Orissa Current (Revenue) Deficit 4th (equal) from top Bihar Summarizing, Orissa has, as an average for the period 1991/92 to 1996/97 and relative to its GSDP, the highest total expenditure of any of the 14 major states, the second highest revenue, and the highest fiscal deficit (0.8 of a percentage point higher than the next state - UP). On the expenditure side, Orissa spends more on capital expenditure than any state except Rajasthan. Its level of current expenditure is just below that of Bihar, by only 0.2 of a percentage point. On the revenue side, Orissa's revenue is the second highest of the 14 states (again just 0.4 of a percentage point behind Rajasthan). Its own revenue is the third lowest of the states - its position is helped by good non-tax revenue on account of mining royalties. Orissa is the second highest beneficiary of central transfers (just behind Bihar). One can understand why, given Orissa's huge reliance on central grants, their reduction (as described in the text) has been so costly. Orissa's favorable treatment in respect of grants is a reflection of the progressiveness of Indian fiscal federalism, especially the transfers mandated by the quinquennial Finance Commissions, which favour poor states. Fiscal Parameters During 1991/92-1996/97 (% of GSDP) Orissa Low Middle High 6 Fast- 14 All India Income Income Income Growing Major states States States States States Total Expenditure 23.6 20.5 19.9 16.5 17.9 18.7 17.4 Revenue Expenditure 19.9 17.9 17.5 14.2 15.6 16.3 15.0 Capital expenditure 3.6 2.5 2.4 2.2 2.3 2.4 2.4 Total Revenue 17.9 16.1 16.4 13.3 14.8 15.1 14.1 Own Revenue 7.4 7.8 10.9 10.2 11.1 9.8 8.6 Own Tax Revenue 4.9 5.4 8.7 7.5 8.4 7.3 6.4 Own Non-tax Revenue 2.5 2.4 2.3 2.7 2.7 2.5 2.2 Central transfers 10.5 8.4 5.4 3.1 3.7 5.3 5.5 Share in Central Taxes 6.0 5.2 3.2 1.8 2.2 3.2 3.0 Central grants 4.5 3.2 2.2 1.2 1.5 2.1 2.5 Fiscal Balance -5.7 -4.3 -3.6 -3.2 -3.0 -3.6 -3.2 Current (Revenue) Balance -2.0 -1.8 -1.1 -0.9 -0.8 -1.2 -0.9 Notes: High Income States - Gujarat, Haryana, Maharashtra, Punjab and West Bengal; Middle-income States - Andhra Pradesh, Karnataka, Kerala, Rajasthan and Tamil Nadu; Low-income States - Bihar, Madhya Pradesh, Orissa and Uttar Pradesh. The six fast growing states identified based on average annual growth in real GSDP during the period 1980-96 are Maharashtra, Rajasthan, Haryana, Tamil Nadu, Karnataka and Gujarat. Of course, it is important to remember that the above analysis is conducted in terms of shares of GSDP. Orissa is one of India's poorest states. A per capita analysis of Orissa's fiscal indicators gives similar results to the GSDP analysis in terms of own revenue (very low) and central transfers (very high), but shows Orissa to be less of an outlier in terms of overall revenue (11"' highest), total expenditure (10" highest) and its fiscal deficit (7"' highest). - 11 - 2.4 Interest payments have risen even more sharply than debt stock and have more than doubled as a percentage of GSDP since 1985/86. Figure 2.1 shows that interest payments are now equivalent to 30% of revenue receipts (up from 17% in 1990/91). Debt-service has also risen sharply especially in recent years and is now equivalent to 38% of revenue if provident fund repayments are excluded, and 47% if they are included.' As a percentage of GSDP, interest payments in 1997/98 were 4.8% compared to 5.3% of GSDP raised through own-tax revenue. Put differently, 90% of GOO's own tax revenue is now spent on interest payments. Figure 2.1: Debt-Service and Interest Payments as a Percentage of Total Revenue, 1990/91 - 1998/99 50 . Debt Servicing (w/ Provident Fund Repayments) 45 Debt Servicing (w/o Provident Fund Repayments) ---- A,Interest P3ymnents 35 30 25 20 15 1990/91 1991/92 1992193 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 2.5 Primary deficit. The underlying cause for Orissa's deteriorating and unsustainable fiscal position is that for the last ten years GOO has been spending and thus borrowing too much given its revenue growth. The result has been a faster growth rate in debt stock and interest payments than revenue. This unsustainability can be predicted from the size of Orissa's primary deficit (the fiscal deficit excluding interest payments), which is the key determinant of future debt levels. Table 2.1 shows that Orissa's primary deficit is without trend over the last ten years. It has averaged just over 2% of GSDP (excluding the 1998/99 exceptional result of 5.4%). But, as the 1996 Study showed, even with a real growth rate in revenue of 6%, a primary deficit of higher than 0.6% would result in an increasing debt-to-GSDP ratio (i.e., an unsustainable fiscal position). Real revenue growth in Orissa has in fact been in the range of 3-4%. Hence the increasing debt burden: like most state governments, GOO has borrowed as much as it can based on today's expenditure needs rather than as much as it can afford based on future financing capability. 2.6 Figure 2.2 gives more detail on the revenue and expenditure totals underlying the primary deficit. Except for the blow-out in 1998/99, expenditures have basically followed revenues up and down. (The peaks in both expenditure and revenue in 1987/88, 1990/91 and 1996/97 are all due to negative GSDP growth in these years.) Restraints on non-interest expenditure are in evidence in the nineties, but evidently these have not been sufficient to close the gap: to bring the primary deficit down to a manageable level. ' Provident funds and their treatment in debt-service calculations are discussed further in Annex C. The debt-service figures exclude the repayment of short-term debt. - 12 - Figure 2.2: Budgetary Revenues and Expenditures, 1985186 - 1998199 28 26 24 22 a. a 20 U) 18 16 14 Total Expenditure 12 _WNon-Interest Expenditure Revenue Receipts 10 2.7 Debt composition. Orissa has been financing its large deficit through the usual financing channels: loans from Central Government, market borrowings, and loans from its own employees, through their provident and insurance funds. Table 2.2 shows the changing composition of Orissa's debt stock. While outstanding liabilities to the Central Government have remained around 20% of GSDP, liabilities to financial institutions and to GOO's own employees (through provident and insurance funds) have both risen sharply. As a result, debt to the centre is now less than half of GOO's total debt, down from two-thirds about a decade ago. The Central Government has evidently restricted access to its own loans, but not to market loans and provident funds. More details on these various debt instruments and their evolution are given in Annex C. Table 2.2: Debt Composition, 1986 to 1998: % GSDP (% of total debt) March 1986 March 1996 March 1998 Debt to Central Government 22.1 (65.4) 18.1 (46.3) 21.2 (46.3) Market Debt a/ 7.0 (20.7) 11.4 (29.2) 13.2 (28.8) Provident & Insurance Funds 4.8 (14.2) 9.6 (24.6) 11.4 (24.9) Total Debt 33.8 (100.0) 39.1 (100.0) 45.8 (100.0) a/Also known as internal debt. 2.8 Guarantees. The Government of Orissa, like other state governments, issues guarantees to its public enterprises to enable them to borrow. These contingent liabilities have been receiving increasing attention in recent years on account of their greater use by the states. As Table 2.3 shows, outstanding guarantees of GOO as of March 31, 1998 were Rs. 24.1 billion, or 8.9% of GSDP. Of this total, about Rs 20 billion of guarantees were to public enterprises, and about Rs. 2 billion each to cooperatives and urban bodies. The largest recipient of guarantees was the power sector with Rs 14 billion of guarantees. The Reserve Bank has recently developed guidelines for capping guarantee exposures by state governments. The 1999 "Report of the Technical Committee on State Government Guarantees" recommends that limits be developed in terms, for example, of a percentage of GSDP or revenue receipts. Adoption of some such guarantee cap would help limit Orissa's contingent liabilities. - 13 - 2.9 Debt relief. It might be thought that, as a highly indebted state, Orissa could benefit significantly from the debt-relief schemes offered by the Tenth Finance Commission (TFC). But this is not borne out by analysis (detailed in Annex C). The first of the two TFC schemes provides debt relief in return for an improvement in the revenue balance. But an improvement in this balance of, say, 0.3% of GSDP would be rewarded by debt relief for Orissa of no more than 0.02% of GSDP and that no earlier than three years after the event. The second scheme provides debt relief to states which use privatization proceeds to retire debt. In the case of Orissa, a maximum of Rs. 1.8 billion of debt-relief or 1.2% of GSDP could be given for using Rs. 1.8 billion (or more) of privatization proceeds to retire debt (i.e. retiring Rs. 1.8 billion of debt with privatization proceeds would be rewarded by retirement of an additional Rs 1.8 billion of debt). This second scheme, though still modest, could at least provide some timely relief. But, even though GOO is a leading privatizer (see Chapter 5), it has been unable to avail itself of this relief on account of its immediate cash-flow needs which have prevented it from using any of its privatization proceeds to retire debt. Table 2.3: Outstanding Guarantees, Orissa and Other States Rs. Billion % of GSDP Orissa (March 1998) 24.10 8.9 Uttar Pradesh (March 1997) 47.26 4.0 Andhra Pradesh (September 1998) 115.14 11.4 B. Recent Fiscal Developments 2.10 Despite the reform measures which the Government has implemented since the 1996 Study, and which are described in later chapters of this report, Orissa's overall fiscal situation is deteriorating rather than improving. Box 2.2 presents a comparison of Orissa's actual fiscal performance in 1997/98 - the last "normal" year, i.e., before the imposition of the large public- sector salary increases - and the projections under a "no-reform" scenario presented in the 1996 Study as well as a reform one. The comparison shows that, despite its reform efforts, Orissa has been unable to stabilize its fiscal position, its fiscal and primary deficits for 1997/98 were closer to the no-reform scenario outcomes than the reform ones. 2.11 Previous year (1998/99). With the salary increases now being implemented, a fiscal crisis has developed in Orissa. The revised estimate for the 1998/99 fiscal deficit is 10.3% of GSDP. 1.7% of GSDP was financed by privatization proceeds (sale of OPGC - see Chapter 5), leaving 8.4% to be financed by borrowings, up sharply from 5.4% in 1997/98.2 Revenue fell to 16.3% as compared to 17.1% of GSDP in 1997/98, and expenditure was up sharply by about 2 percentage points. For the first time, salaries, pensions and interest payments more than exhausted revenue. 2.12 Current year (1999/00). With the change in February of the Chief Minister of Orissa, presentation of the budget was delayed, and the Government has so far been operating on a temporary "Vote on Account." Apart from delaying the necessary fiscal adjustment, the absence of a budget to date also makes it difficult to predict fiscal outcomes for the current year. Nevertheless, the scenario analysis carried out in Chapter 6 points to 1999/00 being just as bad as, if not worse than, 1998/99, with another heavy salary bill, including additional arrears to be paid, and a deficit in the range of 7-8% of GSDP. Debt-servicing is forecast to jump from 47% of revenue in 1998/99 to above 50% in 1999/00 - a ten percentage point increase in just three years. An additional 0.2% of GSDP was financed by drawing down non-interest bearing reserves and deposits. 1998/99 figures are official revised estimates, except for some downward adjustments on the revenue side based on more recent information. See the notes to Table 4.1 for further details. Based on past experience, there could be further considerable changes when the revised estimates become actuals. - 14 - Box 2.2 Scenarios v Actuals The World Bank 1996 Study ("India: Strategy and Options for Fiscal Stabilization in Orissa") compared various reform scenarios leading to fiscal sustainability with a base-case scenario assuming no reforms. It is of interest to compare actual outcomes with the different scenarios. For this purpose, we compare 1997/98 actuals with projections under the "no reform" scenario, and under one of the reform scenarios, namely the "minimum stabilization" scenario. 1997/98 is chosen as the most recent year for which actuals are available, as well as the last "normal" year in Orissa (i.e., before the imposition of the large public-sector salary increases). The fiscal deficit in 1997/98 was at the no-reform level (about 6.4% of GSDP) rather than the reform target of 5%. But revenue of 17.1% was well below even the no reform scenario projection of 18.2%, largely because of a shortfall in revenue from GOI, 9.9% compared to 10.6% projected under both scenarios. Given its limited borrowing ability, the Government was forced to slash expenditure: non- interest expenditure was 18.7% of GSDP, below even the 19.4% projected under the reform scenario. The only good news is that capital expenditures were protected at 3.3%, above both scenarios' target of 3%. But non-salary non-interest recurrent spending, which includes non-wage O&M, was slashed to 6.4%, below both scenarios' targets of 7.9%. Salaries were at 9%, in line with the no-reform scenario. The basic message of this comparison is clear: despite its reform efforts, Orissa is yet to achieve a reform outcome, and the fiscal slide is continuing. Orissa will have to speed up and strengthen its reforms if its adjustment efforts are to succeed. Three other points also emerge from this comparison. First, expecting the primary deficit to fall under the reform scenario from its historical level of 2% of GSDP to 0.3% in a single year was ambitious, and in the event not achieved. But now, with a primary deficit of 5%, the extent of adjustment required is even greater, and will only be possible under a comprehensive and intensified reform program. Second, it seems to pay to be cautious about what Orissa can expect from central taxes and grants. And, third, one can never predict shocks. At constant prices, GSDP fell by 8% in 1996/97 and rose by 16% in 1997/98, affecting fiscal ratios for those two years not only directly through the denominator, but also indirectly through revenue collections. Comparison of Fiscal Outcomes, 1997/98 - 1996 Study Projections - Outcome - 1996 Study Projections - Outcome No Reform Reform No Reform Reform ---------------Rs billion---------------- ---------------% GSDP------------------ Revenue 50.97 53.40 46.32 18.2 19.1 17.1 Own Revenue 21.19 23.62 19.63 7.6 8.4 7.3 Central Taxes & Grants 29.78 29.78 26.69 10.6 10.6 9.9 Non-Interest Expenditure 56.06 54.34 50.68 20.0 19.4 18.7 Recurring 47.59 45.87 41.70 17.0 16.4 15.4 of which: salaries 25.35 23.79 24.31 9.0 8.5 9.0 non-salary 22.24 22.08 17.39 7.9 7.9 6.4 Capital & Net Lending 8.47 8.47 8.98 3.0 3.0 3.3 Primary Deficit 5.09 0.94 4.36 1.8 0.3 1.6 Interest Payments 13.34 13.05 12.92 4.8 4.7 4.8 Fiscal Deficit 18.43 13.99 17.28 6.6 5.0 6.4 Outstanding Debt 123.92 119.34 124.03 44.2 42.6 45.8 GSDP 280.13 280.13 270.65 100.0 100.0 100.0 - 15- 2.13 Financial crunch. The seriousness of the financial crunch Orissa has reached can be seen from its difficult cash-flow position. Although salaries are being paid on time, all of the pay increase from January 1996 up to March 1998, and half of the increase for a period of five years thereafter is being paid into the provident fund, i.e., it is being. involuntarily borrowed from employees. Dearness allowances, to compensate for cost-of-living increases, are also being withheld and delayed. Project sanctions and supplier payments are being delayed. Overdraft limits are being stretched and exceeded at the Reserve Bank of India. World Bank staff supervising projects have noted that funds released from the Central Government for project payments are not promptly released by GOO for the relevant project. C. Reform Strategy 2.14 Fiscal crisis. In summary, Orissa is now in the midst of a fiscal crisis of unprecedented proportions, certainly in the history of the state and possibly throughout India. The crisis is already harming the state's growth prospects. If unattended to, it will leave government solely as a bankrupt employment agency, unable to perform any developmental role at all. Although Orissa has a track-record of reform, it needs to enter a new phase of intensified reform if it is to solve its fiscal problems and grow more quickly. The reform path is a difficult one, and first defining and then developing support, internal and external, for the reform program will be key. 2.15 Building consensus. Experience with adjustment programs around the world suggests two key lessons. First, internal support for reform is of an order of magnitude more important than external support. And second, internal support for reforms is strongest at times of crisis. This is now such a time of crisis, and the public should be made fully aware of this. One strategy which has been used elsewhere to develop internal support (e.g. Andhra Pradesh, Rajasthan, Uttar Pradesh) has been the issuance of a White Paper to explain to all stakeholders the severity and causes of the current financial crisis. This could be widely disseminated through public forums and the media. It could legitimately point to the successful pursuit of fiscal policy reforms undertaken over the last few years, the adverse fiscal developments (especially the salary increases), external in origin, and the consequent need for a faster, more comprehensive reform program as a result. 2.16 It will be particularly important to build a consensus on the prime importance of ending the fiscal crisis given the point of "no return" which the state's finances have reached. Without a reduction in the deficit, no attempt to increase growth will succeed or survive. And without a consensus to reduce the deficit, it will be difficult to implement tax reforms and expenditure cuts. However, to succeed in its reform program, the Government will need broader objectives. Fiscal reform will only be of value, and will only win public support, if it can be shown to lead to more effective government, faster growth and quicker poverty reduction. A three-pronged set of goals for the reform program is therefore suggested around the themes of: * ending the fiscal crisis * increasing growth and reducing poverty * improving governance 2.17 Since improving the state's fiscal position is itself a long-term project, it would be useful for the Government to point the way forward by developing a multi-year fiscal framework with medium-term targets (e.g. for the deficit, debt-to-GSDP ratios, and guarantees). In the illustrative scenario analysis presented in Chapter 6, two main fiscal targets are used: * To stop the rise in debt (as a percentage of GSDP) within three years (i.e., by 2001/02): this requires bringing the fiscal deficit back to its pre-crisis level of below 6% of GSDP. - 16 - To bring the fiscal deficit to 4.5% of GSDP in the next three years (i.e. between 2001/02 and 2004/05). This will produce a small primary surplus, and lead to a fall in debt and debt- servicing over time. Successive budgets could be designed to put Orissa on the path to achieving these goals (and, equally importantly, should be based on realistic assessments of revenue availability). 2.18 It will also be important to build a consensus on the longer-term objective ofincreasing growth and reducing poverty. The ultimate rationale for fiscal correction should be the freeing up and more efficient utilization of resources to make the government a more effective agent for poverty reduction. As studies in India and elsewhere have shown repeatedly, the main strategy for poverty reduction must be an increase in the growth rate, especially rural growth. This is particularly important for Orissa given its poor agricultural growth record. The Government will also need to address other issues such as the provision of education and health, access of the poor to land, access of tribal communities to forest produce, and the effectiveness of Orissa's welfare programs (see Chapter 5 for further discussion). 2.19 A third goal alongside ending the fiscal crisis and reducing poverty could be improving governance. The public will not support attempts to raise additional revenue if it believes that the funds raised will be wasted due to corruption or poor management. Civil service and public expenditure management reforms to improve efficiency and transparency need to be a central part of any reform program. These governance reforms, further discussed in Chapter 3, need to be conceived broadly not only as internal reforms within the bureaucracy but also as dealing with issues such as decentralization and privatization. 2.20 One of the very important steps the Government has taken towards developing this three- pronged strategy is to initiate an Orissa Public Sector Reform Project, with support from the Department for International Development (DFID, UK). This project, which is summarized in Box 2.3, includes components to assist with all three of the strategic goals mentioned above. To promote poverty reduction as a central goal, a high-level Poverty Task Force has been established with the goal of developing a poverty reduction strategy for the state. To promote better governance, the project will strengthen expenditure management and planning, including financial control and audit systems, to allow better monitoring of expenditure, and also initiate a comprehensive civil service reform through pilots in two departments. To help reduce the fiscal deficit, the project will support strengthening of tax administration. The Government is to be commended for undertaking such a wide-ranging reform project. 2.21 Attracting private investment. The states of India are increasingly competing with each other for external financing, whether from domestic or foreign investors, public or private. In such competitions, typically based on very imperfect information, reputations matter. Andhra Pradesh has shown how helpful it can be for attracting outside financing to "brand" the state as a reforming state. GOO could find it useful to publicize more its reform program, both as implemented to date and as planned, and to use this as a selling point to attract private investors. 2.22 Financing requirement. Orissa is now in such a difficult fiscal position that even a comprehensive reform program cannot be assured of success. The Government will need to mobilize a large amount of external support in the form of grants and concessional financing to maximize its chances. These resources are needed not only to cover the costs of reform (e.g. voluntary retrenchment payments) but also, more importantly, to allow the state to move away, during this transitional period, from more expensive forms of debt, such as small-savings deposits. 2.23 Reform Cell/Secretariat. Implementing a comprehensive reform program is a major undertaking requiring cooperative and coordinated action across departments. Like any sectoral reform effort (for example in the power sector), it will require dedicated staff and the support of - 17- consultants. Many governments have found it useful to establish a reform cell or secretariat to implement reform, often under the guidance of an inter-departmental committee, and Orissa may wish to consider this model. Box 2.3 Orissa Public Sector Reform Project The project involves a broad package of support for public sector reform in Orissa focused on the following areas: 1. Development of poverty reduction strategy: This will aim at an improvement of the overall framework for poverty reduction through support for the newly created Poverty Task Force (consisting key Departmental Secretaries and headed by the Development Commissioner). The component includes a participatory assessment of public service delivery as it impacts on the poor. 2. Strengthening of expenditure management and planning: The proposed activities under this component are designed to: improve planning and budgeting (e.g., by introducing a medium-term expenditure framework); increase accountability (e.g., by computerizing accounts, using these accounts for budget monitoring and cash-flow management, and by a major upgrade in internal audit capacity); and strengthen performance management (e.g., by strengthening performance and efficiency review functions). 3. Civil service reform: To support the Government's civil service reforms, pilot functional and organizational reviews will be undertaken in two departments (the Departments of Finance and of Women and Child Development) prior to their mainstreaming across all departments. These comprehensive reviews will start by defining what the role of government should be in relation to the areas covered by the two departments concerned. On this basis, they will then compare what the departments should be doing with what they are doing, identify redundant functions, and plans to eliminate these, including a review of the feasibility of introducing VRS, and develop cost-effective staffing and processes for remaining core functions. Improved manpower information systems and procedures will also be introduced. 4. Restructuring and privatizing public enterprises: To take forward public enterprise reform, the project will meet up to 60% of the costs of closure compensation in the case of companies being closed down and voluntary retirement schemes for companies being restructured. The balance will be funded by GOO. The expense incurred on the counseling and retraining of redundant workers will also be included in this programme. There will be a ban on workers receiving compensation being re- employed in the public sector. 5. Strengthening of revenue generation potential: The first phase will help improve sales tax legislation and administration; the second phase will assist in the introduction of VAT. 6. Local government reform: The reform program will assist with the division of functions, authority and resources over the 3 tiers of local government. The objective is to assist local governments to take greater initiative and responsibility in addressing the interests of the poor. 7. Support to departments dealing with the interests of marginal and vulnerable groups: This will provide support to the Women and Child Development Department and probably the Welfare Department, both of which address the interests of marginal and vulnerable interest groups in Orissa. The project is being supported by a Department For International Development (DFID, UK) grant of £19 million over a period of 2 to 3 years starting in early 1999. Of this, £9 million will be provided in the form of technical assistance to defray expenditure incurred on consultants, training, study tours and equipment. Another £10 million will be provided for redundancy payments in connection with public enterprise reform. * Chapter Three: Expenditure A. Introduction 3.1 Expenditure adjustment is needed in Orissa for two reasons: first, to reduce the deficit; and second to make expenditures more productive. Spending on salaries and subsidies largely benefits the better off. Shifting spending towards maintenance, capital outlays and social sectors will lift growth, improve the quality of life, and benefit the poor. 3.2 Recent expenditure performance of the Government, as summarized in Table 3.1, shows some positive features: capital spending and non-wage O&M are both fairly high, and have been relatively protected; subsidies have fallen; and the salary bill was contained for much of the nineties, though obviously not in recent years. Much more is needed, however, in terms of expenditure adjustment. As the previous chapter noted, GOO was not able in the nineties to reduce the primary deficit to a sustainable level, and it is now facing a fiscal crisis. Major expenditure cuts and freezes will be unavoidable. These will have to come first and foremost from the salary bill, which now makes up close to 50% of recurrent expenditure, and which more than exhausts Orissa's own revenues. 3.3 This chapter therefore begins with the salary bill and the broader question of civil service reform (Section B) and then goes on to subsidies (Section C), the second area where cuts are needed. Section D looks at capital spending and non-wage O&M and the need for improved public sector management to improve the productivity of public sector spending. Finally, Section E looks at the sectoral composition of expenditure. Table 3.1 Economic Classification of Expenditure, 1990/91-1998/99 (% GSDP) 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 Expenditure 25.6 24.0 24.1 23.6 23.2 22.0 26.2 23.8 26.6 Recurrent 20.1 18.8 20.1 20.0 19.8 19.5 22.0 20.5 23.2 Interest 3.3 3.4 3.6 3.9 3.9 3.9 4.6 4.8 4.9 Non-interest 16.7 15.4 16.6 16.1 15.9 15.7 17.4 15.7 18.2 Salaries 8.7 8.3 8.5 8.2 8.0 8.0 9.7 9.0 10.1 Pensions 0.7 0.7 0.8 0.8 0.8 0.8 1.1 1.2 1.6 Non-salary Non-interest 7.4 6.4 7.2 7.0 7.1 6.9 6.6 5.5 6.5 Explicit Subsidies 0.9 1.7 1.9 0.8 0.7 Transfers 1.7 2.0 1.7 Non-Wage O&M 3.4 3.8 3.1 Capital & Net Lending 5.5 5.2 4.0 3.6 3.4 2.4 4.2 3.3 3.4 Capital Outlays 5.1 4.7 3.9 3.4 3.1 1.9 3.8 3.2 3.2 Net Lending 0.4 0.5 0.1 0.2 0.4 0.6 0.4 0.2 0.3 Notes: The salary bill includes grants paid to cover salaries of employees in government aided institutions, which are excluded from transfers. Explicit subsidies are taken from Table 3.6 (but grants-in-aid are dropped). Interest, capital outlays and net lending are available from the budget. Salary bill, pensions and explicit subsidies were provided by GOO. Non-wage O&M expenditures are calculated from data on units of appropriation. Transfers are derived as a residual. 1998-99 figures are based on revised estimates, with adjustments on non-salary non-interest recurrent expenditure from r.e. figures to incorporate tax actuals (see notes to Table 4.1). Based on past experience, the revised estimates could change considerably when they become actuals. Units of appropriation data are only available for 1995/96-1997/98;for other years a breakdown of non-salary, non-interest recurrent expenditure into its constituent components is not possible. B. Salaries and Civil Service Reform 3.4 GOO has three kinds of salary bills, the bill for its own civil servants, pensions for retired civil servants and its payments to other non-government bodies (such as schools and - 20 - municipalities) of "grants in aid" of salaries. Table 3.2 shows the size of these three components and their relative contribution to the total salary bill. Table 3.2: Government of Orissa Salary Bill, 1989/90-1998/99 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 Rs billion Civil Service Salary Bill 6.7 8.4 10.0 11.5 12.6 14.2 16.4 21.0 22.8 29.4 Grants in Aid of Salary 1.7 1.1 1.6 1.4 1.8 2.3 2.8 1.5 1.5 1.5 Pensions 0.7 0.8 0.9 1.2 1.5 1.6 1.9 2.5 3.2 4.8 Total Salary Bill 9.1 10.2 12.6 14.1 15.8 18.1 21.1 25.1 27.5 35.7 as a percentage of total salary bill Civil Service Salary Bill 73.7 82.1 79.6 81.5 79.6 78.3 77.6 83.9 83.0 82.3 Grants in Aid of Salary 18.8 10.4 12.9 9.9 11.2 12.6 13.3 6.0 5.6 4.3 Pensions 7.5 7.5 7.5 8.6 9.2 9.1 9.2 10.1 11.5 13.4 Source: The figures in this and subsequent tables in this chapter are based on budgetary and other documents of the Finance Department of the Government of Orissa and Bank staff calculations. 3.5 The Government has tried to limit growth in the salary bill by placing restrictions on civil-service hiring, including a ban on creation of Class IV (unskilled) positions and restrictions on filling vacancies. Prior to implementation of the recent salary increase, annual average growth in the real salary bill was less than 3% in the nineties (1991/2-1997/8) compared to 6-7% in the eighties. Table 3.3 Civil Service Salary Bill Growth, 1979/80-1997/98 Growth (%) in ... 1979-86 1986-91 1991-97 Nominal Salary Bill 16.6 16.3 11.8 CPI (Inflation) 9.0 9.6 8.9 Real Salary Bill 7.0 6.1 2.7 Notes: '1979' refers to 1979/80, and so on. The first two columns are from the 1996 Study. The first and the last periods are either side of a pay award which occurred during the middle period. Growth in real salary bill equals growth in the nominal salary bill minus inflation. Civil service salary bill includes grants-in-aid of salaries; pensions and interim relief are excluded. 3.6 If we compare growth in the number of government employees we also find that this has slowed in the nineties compared to the eighties. Due to data limitations, the best comparison possible is one including all civil servants plus grant-in-aid teachers.' This comparison shows a reduction in annual average civil service size growth from 3.5% over the period 1985/86 to 1991/92 to 2.5% from 1991/92 to 1998/99. Current size of the civil service is 480,000 with an additional 30,000 belonging to non-government bodies but whose salaries are fully paid by GOO grants-in-aid of salary.2 Of this total of 510,000, 183,000 are teachers, of which 16,000 are in the grants-in-aid category. 3.7 Fifth Pay Commission increases. Table 3.3 excludes the impact of the salary increases flowing on from the Fifth Pay Commission. It should be noted that the Fifth Pay Commission was constituted to recommend salary increases for employees of the Union civil service only. However, its recommendations have been more or less adopted across all of India's states. In Orissa, no state level commission was constituted; rather a Fitment Committee was established to adapt the recommendations of the Fifth Pay Commission to Orissa's civil service. Moreover, it was decided, again as in many other states, to postdate the award of the increases to January 1, 1996. The average salary increase awarded works out to about 18%. The impact on the total salary bill is estimated in Table 3.4 below. There is only a small impact in 1995/96 since the new scale was effective only for the last three months of that fiscal year. Since then, however, the cost 1 Looking at either of these categories separately is misleading as a large number of grant-in-aid teachers became regular civil servants; and comparable data over time on grant-in-aided non-teachers is not available. 2 The ratio of civil servants to total population in Orissa is about 1.4%. By comparison, it is about 1.2% in AP. Orissa, being a poorer state, has a much higher salary bill: about 10% of GSDP compared to AP's 5-6%. - 21 - of the pay rise has worked out annually at 1.5% of GSDP in 1996/97 rising to 2.2% in the current year. Table 3.4 Cost of the "Fifth Pay Commission" Salary Increase in Orissa, 1995/96-1999/00 1995/96 1996/97 1997/98 1998/99 1999/00 Rs billion Salary Bill (Basic Pay and DA) under New Pay Scale 15.60 21.91 23.38 25.15 27.80 Salary Bill (Basic Pay and DA) under Old Pay Scale 15.02 18.34 18.70 19.33 20.30 Cost of Salary Increase 0.58 3.57 4.68 5.82 7.50 Cost of Salary Increase as % GSDP 0.2% 1.5% 1.7% 1.9% 2.2% Notes: Salary bill includes civil service salaries only: pensions and grants-in-aid of salaries are excluded, as are civil service salary components other than basic pay and dearness allowances. 1999/00 figures are projections made under the scenarios presented in Chapter 6 Salary bills in this table are the salaries owing; salaries paid are given in Table 3.5. 3.8 GOO clearly cannot afford an increase of this magnitude, and it has taken several measures to dull the impact of the blow. First, actual salary increases were not awarded until 1998/99, resulting in the accumulation of arrears. Although these were partially offset by the award of interim relief, significant net arrears, amounting to some 1.2% of GSDP remained to be paid off at the start of 1998/99, as shown by Table 3.5. Table 3.5 Payment of Interim Relief and Salary Arrears, 1995/96-1999/00 (Rs billion) 1995/96 1996/97 1997/98 1998/99 1999/00 Salary Bill (Basic Pay and DA) under New Pay Scale 15.60 21.91 23.38 25.15 27.80 Salary Bill (Basic Pay and DA) Paid 15.02 18.88 20.20 28.02 28.56 Of which Interim Relief 0.45 1.19 1.55 0.00 0.00 Arrears Paid 0.00 0.00 0.00 2.87 0.75 Arrears (Cumulative) 0.13 1.97 3.61 0.74 -0.01 Notes: Cumulative arrears equal cumulative arrears in the previous year plus the salary bill under the new pay scale minus the salary bill paid. In theory, the salary bill paid up to 1997/98 should equal the salary bill under the old pay scale in Table 3.4. In practice, the approximations required to estimate the bill under the old and new scales introduce some error. However, comparison of Tables 3.4 and 3.5 reveal these to be small. Grants-in-aid of salary and pensions are again excluded, as are civil service salary components other than basic pay and dearness allowances. 1999/00 figures are projections made under the reform scenario presented in Chapter 6, assuming, among other things, that all arrears will be paid by the end of the year 1999/00. 3.9 Another ameliorative measure taken by GOO has been its ruling that all of the pay- increase arrears (from January 1996 to March 1998) and half of the increase from April 1998 to March 2003 will be paid into the employees' provident fund. While this will help Orissa in the short term, it does so by deferring rather than solving the problem of an excessive settlement. 3.10 Dearness allowance (DA) payments, which compensate for cost-of-living adjustments, are also being postponed. The increase in DA of 6% awarded on July 1, 1998 was financed by impounding it in the provident fund. Then the expected award of a 10% increase in DA on January 1, 1999 was delayed, and had not been announced at the time of writing. (DAs are awarded twice yearly, with the next falling due on July 1, 1999.) 3.11 Civil service reform. GOO needs to intensify the hiring restraint it has shown in recent years. However, to achieve the sort of downsizing required to restore fiscal balance while improving the quality of services provided by the civil service, it should be undertaken in a context of comprehensive civil service reform. The reason for its rising is that the award established new basic pay scales based on an increase to the old basic pay scales to which were added cumulative past dearness allowances (DAs). Since DAs are applied to the basic pay only, a larger basic pay implies larger overall salary increases for any given DAs awarded in a given year. - 22 - 3.12 There are four measures which can be taken to restrain salary bill growth in the short term. First, GOO needs to establish control over civil service size via regular monitoring. The data is available to do this, but is not used on a regular basis to review the impact of hiring controls. Second, the Government needs to develop and implement a policy for downsizing the civil service involving abolition of positions, rationalization of functions, freezes on hiring with exceptions for high-priority categories (e.g. teachers, technical staff), and maximum use of redeployment and retraining. Implementation of this policy will require strong political will. GOO had appointed a High Powered Committee on hiring, permission of which had to be sought prior to hiring, but this was abolished for political reasons. Cabinet approval and establishment of some sort of high-level committee will be prerequisites for a successful down-sizing policy. Third, annual targets for civil service down-sizing should be announced as part of the policy and adhered to. Fourth, the impact of unaffordable salary increases needs to be limited, e.g, by reducing or postponing dearness allowance payments. 3.13 There are also four measures which are longer term, but which can be quickly initiated. First, in addition to developing better monitoring for civil service size, better monitoring and forecasts are needed for related variables, such as the salary bill, pensions, and the provident fund. Second, a review of the feasibility of introducing a voluntary retirement scheme for civil servants should be undertaken - this is being planned for as part of Orissa's Public Sector Reform Project (Box 2.3). This would be a continuation of Orissa's pioneering tradition in reform as it would be a first for India. Third, there is a need to prepare for the next pay commission, the sixth. Orissa simply cannot afford another massive pay increase in the coming years, and has to look at pay scales as something under its control, rather than that of Delhi. It needs to announce, and achieve consensus on, targets for the overall salary bill with the implications that generous pay settlements have to be offset by further reductions in staff size. (Similarly, the possibility of basing DA allowances on Orissa rather than all-India inflation rates should be explored.) 3.14 Finally, the Government is initiating a comprehensive manpower planning and administrative reform program involving an overhaul of organizational structure, allocation of functions, staffing levels, and personnel-management systems. This will be essential to improve the quality of government services, as well as to identify further scope for down-sizing. As part of the Orissa Public Sector Reform Project (see Box 2.3), pilot functional and organizational reviews will be undertaken in two departments (Department of Finance, and Department of Women and Child Development), prior to their mainstreaming across the government. These reviews will begin by defining what the role of government in the areas under consideration should be. On this basis, they will compare what the departments should be doing with what they are doing, identify redundant functions, prepare plans to eliminate these, and develop cost- effective staffing and processes for remaining core functions. To support these reforms, manpower information systems and processes will be modernized. 3.15 Pensions. Besides retired civil servants who draw their regular pensions, pensions are also payable to the families of deceased civil servants (at a reduced rate) as well as to teachers and other employees of state-aided educational institutions. Since pensions are paid in proportion to current civil service salaries the recent salary hikes also pushed up the pension bill from 1.2% of GSDP in 1997/98 to 1.6% in 1998/99. Prior to that, over the period 1989/90 to 1996/97, the annual average growth in consolidated pension (without dearness allowance) has been 12.5%. This has been driven by the rapid increase in pensions paid to retired employees of state-aided educational institutions, which has grown at 36%. (Without this component, the growth in pension payments has occurred at a lower rate of 10.1%.) Rapid growth in the pension bill will be unavoidable in the coming years largely because of the expansion in the number of pensioners as civil servants retire. 3.16 Grants in aid to private college teachers. GOO has effectively controlled the explosive growth in the early nineties of private (tertiary) colleges and institutes claiming government - 23 - "grants-in-aid" of teachers' salaries. Grants-in-aid of salaries to non-government college teachers increased from Rs 342 million in 1993/94 to Rs 551 million in 1994/95 to Rs 742 million in 1995/96 (out of a total of about Rs 1.5 billion in grants-in-aid). Since then, however, the government has been able to control this growth and this item has stayed at around Rs 750 million in subsequent years. 3.17 The growth in grants-in-aid to college teachers was due to a basically automatic mechanism whereby anyone was able to establish a college and apply for funding. Often these colleges existed only on paper, but, at least on paper, Orissa now has more colleges than West Bengal, twice its size, and more college seats than secondary-school graduates. There are currently 437 aided colleges, with some 4,700 teaching and 2,500 non-teaching staff whose salaries are covered by grants. In addition, because of the restraints Orissa has put in place, a backlog of eligible teachers and colleges has built up. 3.18 GOO has put in place various pieces of legislation to control its liability in this area, but there has been no clear resolution as yet. The Government is currently considering a more radical approach under which it would admit the backlog but then cap its exposure to private colleges in nominal terms with the provision that grants would end as teachers retired. In addition, private colleges would be given greater autonomy to set tuition fees, and college management would be removed from government control 3.19 Fiscal impact of salary control. Because of the size of the civil service, any restriction on hiring and real wage growth will deliver massive fiscal gains. In the scenarios presented in Chapter 6, we present a reform scenario in which restrictions on hiring, and a freeze on grants-in- aid to college teachers, generate annual savings of Rs 6.4 billion by 2003/04, about 2% of current GSDP. C. Subsidies' 3.20 Total subsidies (explicit and implicit), which rose from 2.4% iti 1992/93 to 3.2% of GSDP in 1995/96, fell back to 2.0% in 1997/98 (Table 3.6). The fall has been entirely due to a fall in explicit subsidies. The power subsidy has been largely eliminated as part of the state's power sector reforms, though small compensatory payments for rural electrification are still made. This has led to savings of about one percentage point of GSDP. The food (rice) subsidy grew rapidly in 1995/96, but has since been controlled. Although the state still supplements the central PDS, the budgetary allocation to the rice subsidy has been frozen in nominal rupee terms, forcing the Civil Supplies Corporation to finance the gap with the surplus generated from its trading activities. The rice subsidy provides cheap rice (Rs 2/kg) in tribal areas. With the recent increase in the central PDS rice issues price, the Government has decided to keep this low price only for families which qualify in the "below poverty line" category. 3.21 One particularly wasteful subsidy is that provided to the Orissa Lift Irrigation Corporation (OLIC). As discussed in Section B of Chapter 5, OLIC is an unviable operation and should be dismantled, a move which would save the Government some Rs 300 million per annum. With savings like this, and from restricting grants-in-aid, it should be possible for at least the next several years to contain, if not reduce, the total explicit subsidy bill in nominal terms, while still protecting the food subsidy or any other subsidies felt to have genuine social value. 3.22 Implicit subsidies represent unrecovered costs.' Three types are shown in Table 3.6: subsidies for higher education, for water supply (irrigation, industrial and household water 4 Transfers are discussed in Chapter 5, Section C under welfare programs. In this exercise, we consider only revenue (current) expenditures. A fuller definition of implicit subsidies would include the cost of capital as well. - 24 - supply), and for urban hospitals and dispensaries. Implicit subsidies often benefit the better off. This is particularly true for the higher and technical education subsidy, the largest single subsidy in Orissa (explicit or implicit). Implicit subsidies together come to about 1.5% of GSDP, an amount which shows no sign of declining. GOO has recently increased irrigation water rates and introduced small user charges in district hospitals. There is a long way to go in this direction and reforms in this area are discussed in Chapter 5, under the relevant sectoral headings. Table 3.6 Implicit and Explicit Subsidies, 1992/93-1997/98 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 (Rs million) Subsidies 4460 4378 6822 8617 6591 7052 Explicit n.a. 1994 3953 5234 2666 2612 Food 120 70 110 802 850 822 Power 365 720 2389 2449 0 0 Industry 87 0 0 80 42 0 Co-operatives 411 91 38 356 0 0 Orissa Lift Irrigation Corporation 235 224 240 257 390 280 Income Generating Scheme for SCs 84 157 133 121 135 259 Grants-in-Aid of Salary n.a. 342 551 742 744 746 Others 429 391 492 425 506 506 Implicit 2730 2384 2870 3383 3925 4440 Higher & Technical Education 1031 730 946 1010 1139 1273 Water Supply 1340 1264 1464 1806 2169 2516 Water Supply & Sanitation 827 641 814 1040 1024 1535 Irrigation & Industrial Water Supply 513 623 650 765 1145 981 Urban Hospitals & Dispensaries 360 390 460 567 618 651 (% GSDP) Subsidies 2.9 2.5 3.3 3.6 2.8 2.6 Explicit n.a. 1.1 1.9 2.2 1.1 1.0 Explicit Excluding Grants-in-aid 1.1 0.9 1.7 1.9 0.8 0.7 Implicit 1.8 1.4 1.4 1.4 1.7 1.6 Cost recovery (revenue receipts as % of revenue expenditure) Higher & Technical Education n.a. 1.8 0.8 1.6 0.6 1.3 Water Supply and Sanitation 6.2 9.5 6.8 5.8 8.6 7.2 Irrigation & Industrial Water Supply 15.2 12.8 12.4 14.6 6.9 11.7 Urban Hospitals & Dispensaries 0.4 0.2 0.2 0.1 0.2 0.1 Notes: Implicit subsidies are calculated by taking the difference between revenue expenditures on a particular sector (e.g. higher education) in a particular year, and revenue receipts which constitute the recovery of user charges from the particular sector in that year. Cost recovery calculations relate to implicit subsidies and indicate the extent to which expenses are being met by user charges. Grants-in-aid to non-government college teachers are included as an explicit subsidy, except in 1992/93 where we do not have the information to separate them from other higher and technical education, in which year they are counted as an implicit subsidy. - 25 - D. Capital Expenditure, Non-wage O&M and Public Expenditure Management 3.23 Orissa has been more successful than other states in protecting its capital expenditure and non-wage O&M. Over the nineties, capital expenditure in Orissa averaged 3.6%, the highest of the 14 major Indian states, and well above the average level of 2.4% for the 14 major states (see Box 2.1). Non-wage O&M has also been kept high, and has averaged about 3.5% of GSDP over the last few years. Comprehensive statewise data on O&M is not available, but this is certainly a high figure. For 1990/91-1993/94 non-wage O&M for the 14 major states has been estimated at 2.9% of GSDP (World Bank, 1997a). How can one reconcile these high levels of capital expenditure and non-wage O&M, and also a reasonable sectoral allocation of capital expenditure (Section E below), with Orissa's low growth performance? Private sector investment data is limited and contradictory (see Chapter 1). One possible explanation is low public-sector capital productivity. Evidence on this issue is anecdotal rather than systematic, but nevertheless persuasive. Box 3.1 attests to the low productivity of Bank-financed and other projects in the irrigation sector, which claim more than 50% of the capital budget. Box 3.1 Investment Inefficiencies in Irrigation One of the puzzles Orissa presents is that while it leads all other states in public investments (as a percentage of GSDP) it has one of the lowest growth rates: the second lowest for the period 1980-96, above only Bihar. Reconciliation of these two facts is not easy. While a full analysis is well beyond the scope of this report, one possibility is that the public investments are not used very efficiently. Illustrative support for this hypothesis comes from examination of a Bank financed irrigation project, the Second Orissa Irrigation Project, which ran from 1983-1988. This project was the sequel to the Orissa Irrigation Project (1977-1983), which was intended to finance a five year construction and development program consisting of about 15 Medium Irrigation Projects (MIPs) containing an irrigated area of 66,000 ha. In the event, 18 MIPs were undertaken by the first project, but none completed. Hence the second project, designed to complete the 18 MIPs. But even by the end of the second project - more than a decade after the start of the first -- only 12 of the 18 MIPs were completed. Total irrigated area was only 47,000 ha (in the kharif season; only 8,000 in rabi) compared to the original target of 66,000. On account mainly of the delays, the final ERR for the MIPs was only 6%, compared to 14% at the time of appraisal for the second project, and 19% for the first project. While the above is only one (or two) projects, irrigation accounts for more than 50% of capital outlays, and the evidence suggests that the experience recounted is indicative of a wider problem. A GOO irrigation status report reveals that, among other instances of delay, three major irrigation projects were incomplete in 1995 after more than 20 years of work, 50% built based on cost incurred, but resulting in the creation of only 10% of their irrigation potential. Source: World Bank (1991). 3.24 Increasing capital expenditure and even maintenance allocations when the efficiency of public spending is low may be a risky strategy, especially at a time of fiscal stress. In the medium-term, Orissa's spending levels on capital and non-wage O&M (about 3.5% of GSDP each) should be maintained or, indeed, increased. For the next few years, however, Orissa will have to keep a tight control on both capital spending and non-wage O&M in order to restore fiscal balance, as well as to bring about efficiency improvements. Obviously, this approach can be taken only as a starting point, and more analysis is needed to see where O&M and capital spending needs to be increased, and where it can be restrained. However, the general point is that, while high priority spending areas should be protected, the Government cannot afford to - 26 - significantly increase capital and non-wage O&M spending at the current time when the fiscal position is very tight and there are question marks concerning the efficiency of public spending6 3.25 Improving the productivity of capital spending and non-wage O&M will require better public expenditure management: better monitoring, more timely provision of data, and greater scrutiny and management of individual projects. The Government is currently initiating a program of public expenditure management reform, as part of the DFID-financed Orissa Public Sector Reform Project. The proposed activities under this component are designed to: improve planning and budgeting (e.g., by introducing a medium-term expenditure framework, and linking expenditures to outcomes); to increase accountability (e.g., by computerizing accounts, using these accounts for budget monitoring and cash-flow management, and by a major upgrade in internal audit capacity); and to strengthen performance management (e.g. by strengthening performance and efficiency review functions). 3.26 Two proposals within this overall reform program are worth highlighting. First, the planning and budgeting reforms have as a central plank the development and implementation of techniques for rationalizing, evaluating and prioritizing functions and expenditure, including for the shedding of functions and the cutting of expenditure. While overview studies such as this can suggest general areas for cuts, the real need is for expenditure management controls to be put in place as only then will more specific possibilities for savings emerge. 3.27 Second, the proposals to improve financial accountability include plans to strengthen the Internal Audit function. The current system suffers from several weaknesses, including a lack of systematic coverage, and an absence of follow-up. To strengthen Internal Audit, a number of measures have been proposed, including the development of effective audit planning, the training of auditors in modern audit techniques, the development of capacity to review financial health rather than just individual transactions, and the introduction of more effective arrangements for follow-up and compliance review. Measures such as this will be essential for reducing abuse and corruption. This will not only improve public sector efficiency, but will also increase support for the entire reform program. Other anti-corruption measures could also be considered, such as the introduction of public surveys, conducted by external agencies, on perceptions of corruption in different areas, and a "freedom of information" campaign. 3.28 Finally, improving public expenditure management is not only a matter of improving internal controls and procedures. Introducing greater beneficiary participation into programs, privatization and contracting-out, decentralization to lower tiers of government - these should all be regarded as potential tools for improving the efficiency of public services. Orissa has made less progress than most states with regards to decentralization to local bodies. However, as in other states, the momentum towards decentralization is increasing. Annex E of this report presents a status report on local government in Orissa today. E. Sectoral Composition ofExpenditure 3.29 Table 3.7 gives the broad sectoral composition of spending for Orissa compared to other states. It shows that the composition of non-interest expenditure in Orissa is generally comparable with or better than state averages. Chapter 5 provides more detail on the specific sectors of irrigation, education and health. 6 In the illustrative reform scenario developed in Chapter 6, this is modeled as keeping the two categories of spending to 3% of GSDP each for the next three years, then raising them to 3.3% and then back to their historical level to 3.5%. 7 These paragraphs draw on the report on expenditure management in Orissa undertaken by Peter Brooke of Bannock Consulting for DFID in January 1999. - 27 - Table 3.7 Sectoral Composition of Expenditure, Orissa and Other States, (Average for 1990/91-1996/97) Orissa 14 major 4 low income states states Total expenditure/GSDP (%) 23.5 17.9 19.6 Composition of noninterest expenditure (%) General Services 16.1 22.2 23.6 Social Services 48.0 45.2 47.5 Education 21.0 20.9 21.6 Health 6.0 6.3 6.8 Welfare Programs 14.5 12.4 14.5 Others 6.5 5.6 4.6 Economic services 35.9 32.6 29.0 Agriculture 9.9 8.3 7.9 Irrigation 9.9 10.3 9.3 Power 6.3 4.7 3.6 Transport 6.1 4.7 4.3 Others 3.8 4.6 3.9 Notes: Welfare programs include programs implemented under the budget heads "welfare of scheduled castes, scheduled tribes, and other backward classes ", "labor and labor welfare", "social welfare and nutrition ", and "rural development" - the latter has been reclassified out of economic services. 3.30 An analysis over time reveals stability in most items of expenditure. The fiscal annex (Annex D) provides details, while Table 3.8 below gives a summary, over time, for major items: education, health, transport, irrigation, and welfare. The share of GSDP spent on education and transport has risen somewhat while that on irrigation has fallen. Table 3.8 Spending on Key Items: Education, Health, Irrigation, Transport and Welfare (1985/86-1996/97, % of GSDP) 1985-87 1988-90 1991-93 1994-96 Education Orrisa 3.5 4.0 4.0 4.2 14 major states 3.2 3.5 3.2 3.2 Health Orrisa 1.2 1.2 1.2 1.2 14 major states 1.2 1.1 1.0 0.9 Transport Orrisa 1.0 1.0 1.2 1.2 14 major states 0.8 0.7 0.7 0.7 Irrigation Orrisa 2.6 2.3 2.0 1.7 14 major states 2.3 1.9 1.8 1.8 Welfare Orrisa 2.6 2.5 3.0 2.7 14 major states 2.2 2.0 2.0 1.8 3.31 The sectoral composition of capital spending seems appropriate. Table 3.9 gives average data for the last three years (95/96-97/98) on capital outlays (excluding net lending). The great bulk of capital spending, some 56%, goes on to irrigation and flood control. Transport is next with 21%. Net lending to public enterprises has been low, less than half a percentage point of GSDP through the nineties, most of it to the power sector PEs. Capital spending on power (7%) - 28 - will fall with privatization, but irrigation and transport are areas where one would expect the state to play a leading role, provided that investments are made efficiently. The general issue of public sector management was discussed in the previous section, while sector-specific issues are discussed in Chapter 5. Table 3.9 Sectoral Composition of Capital Outlays, 1995/96-1997/98 Sector % Irrigation & Flood Control 56.1 Transport 21.3 Water Supply, Sanitation, Housing, Urban 7.1 Development Power 6.6 Agriculture & Allied Activities 4.0 General Services 1.6 Health & Family Welfare 1.5 Education, Sports, Art & Culture 0.9 Welfare of SC, ST, OBC 0.4 Tourism, Investment in General Financial & Trading 0.5 Institutions Industry & Minerals 0.1 Chapter Four: Taxation A. Background 4.1 Table 4.1 shows Orissa's main tax sources. Among own taxes, the sales tax is by far the most important. Revenue from mining is the largest non-tax source of revenue, and growing. As shown earlier in Box 2.1, Orisse is heavily dependent on central revenue, both shared taxes and grants. Table 4.1 Revenue by Source, 1985/86-1998/99 (% of GSDP) 85/6- 87/8- 89/0- 91/2- 93/4- 1995/96 1996/97 1997/98 1998/99 86/7 88/9 90/1 92/3 94/5 Revenue 15.2 16.7 17.8 18.4 17.9 16.2 18.5 17.1 16.3 State's Own Revenue 6.4 6.8 7.3 7.1 7.5 7.3 7.9 7.3 7.4 State's Own Taxes 4.4 4.8 5.4 4.9 4.7 4.7 5.8 5.3 5.3 Sales Tax 2.3 2.6 3.0 2.9 2.9 3.0 3.8 3.4 3.4 Excise (liquor) 0.3 0.3 0.4 0.4 0.4 0.3 0.4 0.4 0.4 Motor Vehicles 0.4 0.4 0.4 0.5 0.5 0.4 0.6 0.5 0.6 Stamp Duties 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Taxes on Electricity 0.8 0.8 0.6 0.7 0.5 0.5 0.5 0.5 0.5 Other 0.4 0.5 0.8 0.2 0.2 0.2 0.2 0.2 0.2 State's Own Non-tax Rev. 2.0 2.0 1.8 2.2 2.8 2.6 2.1 2.0 2.1 Of Which: Mining 0.2 0.2 0.2 0.6 0.8 1.0 1.2 1.2 1.2 Revenue from Centre 8.8 9.9 10.6 11.2 10.4 8.9 10.6 9.9 8.9 Central Tax Devolution 4.8 4.8 5.8 6.3 6.0 5.3 6.7 5.8 5.5 Central Grants 4.0 5.1 4.8 5.0 4.5 3.5 3.9 4.1 3.4 Notes: See Annex Hfor estimation of GSDP in 1998/99. In 1998/99, actual receipts of the state's own tax revenue have fallen short of the revised estimates provided in the latest budget documents. The figures presented here are based on actual revenue receipts from sales tax, excise and stamps and registration fees, but otherwise use revised estimates.. 4.2 Table 4.1 also shows the rise in revenue in the latter half of the eighties through to the early nineties (from 15% to 18% of GSDP) and the subsequent decline to around 16% of GSDP currently. Table 4.2 sheds some light on the reasons for this rise and fall in the tax share using buoyancies: the rates of growth in various revenue categories compared to the growth in Orissa's GSDP. Comparing the second half of the eighties with the nineties (the last two columns), buoyancies have fallen across the board, with the single significant exception of mining (and therefore total) non-tax revenue. Particularly marked is the loss of buoyancy in Orissa's two largest taxes, the sales tax (from 1.4 to 1.2) and excise (1.2 to 0.8). Buoyancy in revenue from the Centre falls from 1.3 to 0.8. 4.3 Although tax performance has clearly deteriorated in the nineties, there are some signs of improvement in the last few y9ars. Whereas the ratio of own tax revenue to GSDP fell from 6% in 1990/91 to 4.5% in 1994/95, it has subsequently increased to about 5.5%. (see Table 4.1 and Annex F for detailed tables). This has been led by a rise in sales tax revenue by about half a percentage point of GSDP between 1994/95 and 1997/98 to 3.4%. Excises, motor vehicle tax and stamp duties also all show some improvement. 4.4 Unfortunately, gains for Orissa through its own revenue efforts continue to be offset by an ongoing reduction ip revenue from the Centre, which rose to as high as 11% of GSDP in the early nineties before falling to 10% in the mid-nineties. (The revised estimate for 1998/99 is only for 9% of GSDP, which reflects only 2% nominal growth in central revenue receipts over the previous year.) This is mainly due to a sharp fall in central grants, but shared tax revenues have also weakened due to poor central tax collection performance. As a result, despite a modest improvement in own-revenue performance, Orissa's total revenue as a percentage of GSDP is still a point or so below the level of the early nineties. - 30 - Table 4.2 Buoyancy of Major Revenue Sources, 1985/86-1997/98 85/6-97/8 85/6-89/90 90/1-97/8 Revenue 1.10 1.22 0.86 State's Own Revenue 1.12 1.12 1.01 State's Own Taxes 1.10 1.24 0.95 Sales Tax 1.29 1.42 1.19 Excise (liquor) 1.10 1.20 0.81 Motor Vehicles 1.21 1.05 1.15 Stamp Duties 1.03 0.98 1.07 Taxes on Electricity 0.67 -0.50 0.32 Other 0.17 2.69 -0.19 State's Own Non-tax Rev. 1.16 0.84 1.15 Of Which: Mining 2.84 2.09 2.95 Revenue from Centre 1.08 1.29 0.76 Central Tax Devolution 1.21 1.25 0.93 Central Grants 0.92 1.33 0.54 Memo: Bouyancy of mining revenue w.r.t. mining output 1.95 1.06 2.41 Notes: We use 1989/90 as the end point for the second column, and 1990/91 as the starting point for the third to avoid bias due to the statistical break in agriculture in 1990/91 (see Chapter 1). Buoyancies are measured as the ratio of the growth rate of the revenue source to the growth rate of nominal GSDP (with growth rates calculated using the log-regression method). 4.5 Orissa's own tax revenue effort has recently been assessed as part of a comparative study among Indian states of tax effort.' Even though Orissa's own-tax take is the lowest of India's 14 major states (as a percentage of GSDP), the study finds that the state's overall tax effort compares favorably with the performance of other states in sales taxes, electricity duties, and land revenue once factors such as income level and the share of agriculture are corrected for. However, the study does find that tax effort is weak for stamp and registration fees and excises on alcoholic beverages. 4.6 Recent reform measures. There have been three main tax reforms undertaken in the last few years. First, with respect to the motor vehicle tax (an annual or lifetime registration tax, distinct from the sales tax charged on vehicles and other goods), there was a 25% increase in commercial vehicle tax rates in 1996 and a 50% increase in non-commercial vehicle rates (for jeeps, two-wheelers and cars) in 1997. Second, the Orissa Luxury Tax Act was introduced in 1995, and through it a 2% luxury tax (subsequently increased to 4%) was imposed primarily on tobacco and related commodities. Third, a number of reforms have taken place with respect to sales tax, including increases in sales tax on sumptuary goods such as kendu leaf (from 16% to 20%), foreign liquor (4% to 20%), and petrol and diesel from 16% to 18%, and evasion-reducing reductions in the tax rates of a few commodities including gold (reduced from 4% to 2%) and motor cars (from 6% to 4%) in 1997. According to government calculations, these and other reform measures have, over the last three'years, led to an average annual "Additional Resource Mobilization" of Rs 0.46 billion. 4.7 These reform measures notwithstanding, there remains considerable scope for additional revenue yield. The next two sections list measures (Section B in relation to the sales tax and Section C on other taxes and non-tax revenue) which, it is conservatively estimated, could raise Rs 3.7 billion or more than an additional percentage point of current GSDP as government revenue. ' Sen (1997). -31 - B. Sales Tax Reform 4.8 Tax on petroleum products. The sales tax raises about Rs 10 billion or two thirds of GOO's own tax revenue. Of this, about 20% comes from diesel and petrol. In the very short run, a higher tax on all petroleum products is the most effective way to reduce Orissa's deficit. The tax is collected effectively, can be easily monitored and a small increase will have little impact on demand. Orissa has already harmonized the diesel and petrol tax rates at 18%. This harmonization should be maintained, but the rates both increased to, say, 20%. This would yield an additional Rs 80 million annually, and could usefully be implemented as part of establishment of a road fund, as an increasing number of states are doing, including UP most recently (see Chapter 5). 4.9 The sales tax on motor vehicles was reduced from 6% to 4% in 1996-97 in response to lower rates in other states and union territories and widespread out-of-state purchase of vehicles by Orissa residents. Revenue doubled as a result of this change,2 So it was no doubt an effective reform. However, the tax rate on vehicles is low by international standards, and the state is missing an opportunity to raise more revenue in a progressive manner. One way to increase the rate without risking trade diversion would be to follow the example of states such as Maharashtra, Gujarat, Kerala and Rajasthan, and increase the sales tax on vehicles but then have an entry tax on cars bought out of state payable at registration equal to the Orissa sales tax rate, but against which sales tax paid out of state could be offset. This would enable greater revenue from the sales tax on motor vehicles without the threat of trade diversion. Alternatively, since Orissa does not in fact produce motor vehicles, they could be included in the proposed general entry tax (para. 4.28), and the sales tax could be kept at its current level. In both cases, the effective tax rate might be increased to say 8% which would immediately double revenue yield from the current level of Rs 90 million to Rs 180 million. If this worked, then additional rate increases could be introduced. 4.10 One-time settlement of sales tax arrears. One problem faced by sales tax administrators in Orissa, as in other states, is the volume of potential revenue tied up in litigation. Arrears at Rs 9 billion are almost equal to annual sales tax revenue. Rs 6 billion of this is tied up in court - the Sales Tax Tribunal is still hearing cases that were appealed in 1989. The Government has passed an amendment to allow a one-time settlement of sales tax arrears, and will allow tax-payers with cases under appeal as of the end of 1998 the opportunity to settle at a 40% discount. A fairly conservative estimate of the revenue potential from this is Rs 500 million.3 This scheme will also have the virtue of clearing the back-log of cases which should enable future cases to be disposed of more quickly, though an overhaul of the appeals' process to speed it up will also be important to preyent another back-log developing. 4.11 Orissa, like other states, offers sales tax holidays and incentives to entice industry to the state. These include 100% sales tax exemptions or deferment for new projects and projects undergoing expansion or diversification for 5, 6 or 7 years, depending on the region in which the project is sited, and 200% sales tax exemption/deferment for priority industries. The benefits of the incentives are generally thought to be few. Most firms which do avail themselves of these incentives last for only as long as the duration of the incentives and so make little contribution to the economic and revenue base of the state. A recent government study of the cost of these incentives based on analysis of firms availing themselves of these incentives estimated their annual cost to be around Rs I billion. Of this total, some 90% arose from firms claiming exemptions under the 1989 Industrial Policy, rather than the current 1996 Industrial Policy. The 2 Sales tax revenue on "motor vehicles including trucks and bus chassis" was Rs 49 million in 1995-96, Rs 97 million in 1997-98 and Rs 95 million in 1998-99. 3 Large tax payers are responsible for Rs 4.5 billion out of the Rs 6 billion under appeal and can be assumed to continue with the appeal process. This leaves Rs 1.5 billion. If we assume two-thirds of dealers will come forward, this gives Rs I billion, of which 60% is Rs 600 million, which is scaled down to Rs 500 million for the sake of conservatism. - 32 - 1989 Industrial Policy lacked limits on exemptions in terms of money or time, and still continues to be in force for firms which can show that investments commenced during 1989-1996. An immediate opportunity to cut the cost of incentives is to amend the 1996 Industrial Policy (a gazetted document) to terminate benefits obtained under the 1989 policy. The estimate for revenue from this is Rs 500 million. 4.12 Beyond this, there is also a window of opportunity presented by the fact that the 1996 Industrial Policy expires in 2001, and a new policy, with a new set of incentives, will have to be produced shortly. This will provide Orissa with an opportunity to produce a more limited and rational incentive scheme. As preparation for this, there is a need to document the impact of the previous and the existing industrial policy. Some work has been undertaken to date, and the NIPFP study commissioned on the rationalization of sales tax (para. 4.14) will also be addressing this area. Regular monitoring of revenue foregone under tax concessions, and of abuses of the system should be undertaken. 4.13 Self-assessment has always been an option under the Orissa Sales Tax Act, but was rarely utilized by administrators. However, in 1998-99 it was introduced on a pilot basis, with success, and this year it is being mainstreamed. Tax officers are now under instruction to accept returns from 85% of taxpayers, checking them only for arithmetic, completeness, and submission of required evidence. For this 85%, only a small sample (of 5-10%) will be selected for further scrutiny partly on a random basis, partly if certain criteria are met (e.g. if the current year's return is way below the previous year's). Assessment is the main task of sales tax officers, and this reform is expected to free up more than half of the time of tax officers to focus on the 5-10% of assessments which generate 90% of sales tax revenue. 4.14 Rationalization. Orissa has eight sales tax rates, but has retained the National Institute for Public Finance and Policy (NIPFP) to advise on simplification to three rates (with the exception of petroleum products, alcoholic beverages and possibly gold). This simplification strategy has recently been adopted in Karnataka without any loss of revenue. It would likely reduce both tax evasion and classification disputes. Beyond this, a recent consultancy has identified several areas in which the sales tax law could be amended to close loopholes and reduce abuse, and these will be tackled under the revenue strengthening component of the DFID- financed Orissa Public Sector Reform Project (Box 2.3). 4.15 VAT introduction should remain the medium-term goal for tax reform in Orissa. This should be expected to be revenue-positive because of the broadening of the tax base, the strengthening of administration, and the overall improvement in tax compliance associated with a VAT. Both the NIPFP study, and the Orissa Public Sector Reform Project will assist in the preparation for VAT introduction. Rationalizing and improving the administration of the sales tax will contribute to the successful introduction of a VAT, and should be regarded as the next steps towards this ultimate goal. 4.16 Sales tax administration. The 1996 Study identified the need for a complete overhaul of tax administration in Orissa. This task has just been commenced, and there are a number of administrative reforms which have or are in the process of being implemented. First, the Government is phasing out internal checkposts used for sales tax enforcement. Second, GOO also has a computerization initiative underway with implementation by National Informatics Center. This is an opportunity not just to capture the information currently being transcribed manually but to introduce simplifications. It will also provide the basis for a management information system for senior officials. Third, the DFID-financed revenue strengthening exercise mentioned earlier 4 The recent abolition by Maharashtra of VAT is no doubt a set back to the introduction of VAT in India but it should be noted that (i) the VAT introduced was an unconventional one and of unusual complexity; (ii) there was probably inadequate preparation for its introduction; and (iii) the abolition of the VAT went against the advice of a technical committee formed to investigate the matter. - 33 - will provide consultants to help improve tax administration through retraining of staff, and simplification of laws, regulations and procedures initially with the goal of strengthening sales tax, but with an ultimate goal of replacing the sales tax by a VAT. Fourth, the NIPFP sales tax rationalization study will also recommend measures to strengthen the autonomy of sales tax administration with a view to increasing professionalism, and limiting the potential for abuse. 4.17 The computerization initiative and DFID-sponsored technical assistance and training programs are key to enhanced revenue performance over medium term. These are two separate initiatives, however, and it will be important for the authorities to devote adequate managerial attention to ensure that progress is made on both initiatives in a speedy and harmonious manner. 4.18 The impact of these last few sales tax reform measures - self-assessment, rationalization of rates, improvement of administration, and VAT introduction - is impossible to quantify with accuracy. A conservative "guesstimate" of the additional revenue Orissa could yield from these measures is Rs 0.5 billion spread out over four years, compared to Rs 10 billion estimated for the sales tax in 1998/99.s C. Other Taxes and Non-tax Revenue 4.19 The excise tax raises only 10% of sales tax revenue. The comparative study referred to earlier (para. 4.5) also found that actual excise revenue yields in the mid-nineties were only about 40% of potential revenue yield (i.e. based on inter-state comparisons). Evasion is the major problem, informally estimated at 50% or more of revenue raised. 4.20 Excise revenue is derived mainly from excise duties on the production of alcohol, and consideration money and/or licensing fees for the wholesale and retail sale of alcohol. In 1994, the Government of Orissa introduced partial prohibition by banning the sale of "country spirits" in certain districts. While the policy of partial prohibition goes considerably beyond the scope of this study, there are a number of other measures which the Government could take to substantially increase excise revenue. 4.21 First, evasion is believed to be particularly high at the wholesale level, and large volumes of liquor are imported from neighboring states and sold without any levy being paid. A range of measures can be considered to combat this evasion, ranging from the introduction of labels on bottles to indicate that excise has been paid to more radical options such as the state taking over wholesaling (as in Tamil Nadu). 4.22 Second, greater attention needs to be paid to the monitoring of enforcement by excise officers, so as to reduce the scope for abuse. No such monitoring is carried out at present: for example, no comparisons are made between the revenue-raising performance of individuals and areas over time. To be effective, such monitoring of enforcement needs to be accompanied by the Excise Commissioner being given the autonomy to rotate and promote staff based on performance. 4.23 Third, lowering excise rates on ordinary brands of Indian Made Foreign Liquor (IMFL) and beer, and encouraging the opening of more wholesale and retail outlets, would encourage substitution away from bootleg liquor and promote production of illegal and locally-brewed country liquor substitutes by the organized sector. Some steps have been taken in this direction such as permitting some distillers to produce liquor with country liquor characteristics, and allowing more outlets to open. However, further lowering of both excise and sales tax rates may The 1996 Study was less conservative and suggested a gain of Rs 1,300 million from introduction of a VAT (in addition to other measures reported above). - 34 - be necessary to allow the low-end IMFL brands to compete effectively with untaxed country liquor. 4.24 The Government brings out an Excise Policy annually. While in fact a more stable tax regime would require less frequent policy revisions, this practice does provide the Government with the opportunity to introduce reforms quickly. A very conservative estimate is that reforming the excise tax could, over the next four years, lead to an additional Rs 400 million, compared to the Rs 1 billion being collected at present. In addition, these reforms should increase the buoyancy of excises from its level in the nineties of 0.8 to at least unity. 4.25 Revenue from stamp duties is also well below potential. There appear to be five main areas where reforms could be made in line with the report of the 1996 Committee of State Finance Ministers on Stamp Duty Reform. First, the rate structure needs to be rationalized, and top rates reduced. The current high rate of taxation on property conveyance, 18%, is substantially above the revenue maximizing tax rate. Second, simple guidelines need to be put in place for valuation verification. For example, cross-checking between registration and land revenue records should be introduced. Third, there are a number of legal loopholes which are currently being exploited to reduce tax obligations. For example, when new apartments are being built, stamp duties end up being paid only on the land, rather than on the apartments themselves. Fourth, the administration of stamp duty needs to be modernized. Computerization of records is underway in Bhubaneswar as a pilot. Upgrading of offices is also required. These are mostly dilapidated, unsuitable for storage, and not amenable to good customer service. Fifth and finally, there is a long backlog of cases, with the valuation of some 22,000 instruments under adjudication. As with sales-tax, there is a strong case for introducing a one-time settlement scheme to clear this back- log. This would be especially appropriate if introduced as part of an overhaul of what is widely perceived to be an archaic system. 4.26 The Government has made some initial moves towards reform of stamps. It has commissioned NIPFP to review stamp duties in the state and to make recommendations for reform, and it has undertaken some public consultations. It has started introducing franking machines to reduce fraud. The Government's estimate is that reform of stamps along the lines indicated could almost double revenue from its current level of Rs 800 million. More conservatively, we assume an increase in revenue of Rs 600 million over three years. 4.27 A professions tax has a similar function to an income tax, but, unlike the latter, can be levied by states though central regulations restrict its coverage to people liable to income tax and impose a maximum rate of Rs 2,500 per annum. The professions tax is used by several states such as Maharashtra, AP, Karnataka and West Bengal, in many cases the result of a state takeover of a previously local tax. Its introduction to Orissa would be both progressive and relatively efficient. A professions tax is under consideration for the forthcoming budget. An earlier proposal was put forward, but rejected by Cabinet in 1997. How much revenue it would raise would depend on the coverage and tax rate, which are still under consideration. A very conservative estimate is Rs 200 million, about equal to the yield in Andhra Pradesh on a per capita basis, half the yield of West Bengal, and one-fifth of that in Maharashtra. Of course, Orissa could do much better than this. For example, a tax which affected only 300,000 tax payers at a rate of only Rs 1,500 per year would raise Rs 450 million. Coverage of only 300,000 is very minimal considering that the size of the civil service itself exceeds half a million. 4.28 Another major reform being planned is the abolition of octroi, and its replacement by an entry tax. There are two main differences between octroi and the entry tax. First, the latter is run by the state government, whereas octroi is run by, and in fact is the main source of revenue for, urban municipalities. Second, whereas octroi is based on physical inspection, the entry tax is based on books of account. Replacing octroi by entry tax thus, while by no means being an ideal - 35 - solution, enhances efficiency, as transporters of goods would no longer be subject to physical checks, with concomitant delays and scope for harassment. 4.29 The Government also expects the entry tax to raise substantially more revenue than the old octroi for several reasons. First, octroi is often avoided by avoiding entry into municipalities, but the entry tax will be levied in both rural and urban areas. Second, capital goods and raw materials largely escape the octroi net but will be included in the entry tax. Third, the entry tax can be used to deter trade diversion and tax goods which largely escape the sales tax net (e.g. goods sold in transit, firms benefiting from sales tax incentives). The Government estimates that, while the yield from octroi is Rs 650 million, the entry tax could raise Rs 1,500 million. If realized, this will deliver a major boost to the state's finances. 4.30 While the entry tax is an improvement over octroi, it is not an ideal solution since, like the octroi, it will act as a barrier to trade. As the sales tax is made more efficient, the entry tax could be reduced and eventually done away with. Orissa has decided to replace the octroi by an entry tax primarily based on protests from traders concerning octroi. Not surprisingly, urban municipalities are opposed. GOO has undertaken to provide the municipalities with the revenue raised by octroi, increased by 10-12% per annum, but municipalities are skeptical given the fiscal constraints the state government faces. (Municipal octroi officers also face loss of employment.) Experience in states in which entry tax has been introduced (Karnataka, MP) suggests that the tax lacks buoyancy. Measures should be taken, such as establishment of an escrow account, to provide assured revenue to municipalities. 4.31 Property tax reform will take on increased importance with the abolition of octroi, as it will become the only major tax collected by local governments (see Annex E). At the moment, the property tax generates only limited revenue. Valuation is based on historical cost, which is rarely updated, and so the tax lacks buoyancy. Reform of property tax is an issue currently receiving attention in several Indian states, and Orissa could benefit from this experience. Better property tax performance is in the interest of the Government of Orissa as it will strengthen local government, while reducing funding pressure on the state. 4.32 Mining revenue is, in a generally adverse fiscal climate, one of Orissa's fiscal strengths. Mining output itself has been growing at about 10% per annum over the eighties and the nineties, and mining revenue is bouyant even with respect to mining output - an average buoyancy of 2.0 from 1985/86 to 1997/98. In 1997/98, mining revenue brought the state about Rs 3.2 billion, about a third of sales-tax, more than a half of total own non-tax revenue (Rs 5.4 billion) and the second largest single source of own revenue after the sales tax. Mining revenue is dependent on two things: royalty rates, determined by the central government; and mining volume, increasingly a function of the state's own efforts in attracting private investment. One reason for the high buoyancy is a large adjustment in royalties in the early nineties to compensate for the removal of a cess on royalties, imposed by some states but subsequently disallowed by the courts. Even so, conservative projections show rapid growth in this revenue source. This study has not been able to investigate specific mining sectoral policies which could further advantage Orissa's revenue position (beyond the need for more infrastructure), but, given the sector's fiscal importance, such a review would certainly be warranted. As well as looking at the revenue potential of the sector, the study could also look at whether the sector's employment potential is being realized, and whether the social and environmental costs of the sector are being taken properly into account, and how these costs could be reduced. 4.33 Summary. The above revenue-enhancing measures, for both sales and other taxes, are summarized below in Table 4.3. Only state-government revenue is considered, not revenues flowing to urban or rural local government, so only the entry tax net of octroi compensation is included. The combined value of the measures is about 1.2% of current GSDP or Rs 3.7 billion. The measures would be stretched out over four years, implying an average annual gain of Rs 0.9 - 36 - billion, compared to the annual average "Additional Resource Mobilization" of Rs 0.46 billion achieved through reform measures over the last three years (para. 4.6). Achieving this higher rate of additional resource mobilization is feasible, and is exactly the sort of intensification of reform which Orissa will need if it is to regain fiscal stability. Table 4.3: Revenue Yield from Proposed Tax Reform Measures Measure Estimated Years taken to Revenue (Rs. realize revenue Million) Sales Tax Increase motor vehicle tax rate to 8% and introduce corresponding entry tax 90 2 Increase petrol and diesel rates from 18% to 20% 80 1 Reduce industrial incentives 500 3 Other reforms (improve administration, rationalize rates, introduce VAT) 500 4 One-time settlement for sales tax arrears 500 2 Improve excise administration 400 4 Revamp stamp duties 600 3 Introduce profession tax 200 2 Replace octrol by entry tax 850 2 Total 3720 Total as % current GSDP 1.2% Chapter Five: Sectoral Reforms 5.1 Orissa now has a track record of reform which extends well beyond the fiscal domain into key sectoral policies. Orissa is a leader in public enterprise reform, and is well-known as India's leader in power sector reform. And the state is moving to bring the private sector in to develop desperately needed infrastructure, including ports, to enable Orissa to at last exploit its coastal position. While it is too early to see these sectoral reforms already translating into a higher growth rate, their continuation should support an acceleration of growth in the coming years. There are also areas where the reform process itself needs to be accelerated, and we begin the chapter with these. 5.2 Agricultural performance has been abysmal in Orissa, and policies in this area need to be revamped (Section A), especially in relation to irrigation (Section B). Social sector reforms - education, health and welfare programs - also need to be strengthened (Section C). PE reform is dealt with in Section D, power reform in Section E, and transport in Section F. A. Agriculture 5.3 Chapter 1 found that, correcting for statistical bias, agricultural growth in Orissa averaged just over 1% per annum on average over the last two decades, about the lowest among the Indian states. On account of the strong relationship between rural growth and poverty reduction, low growth in agriculture is the main factor behind not only the low growth of Orissa's economy but also the persistence of high poverty in the state. Addressing the various problems in the agricultural and allied sectors will be crucial to reducing rural poverty in Orissa. Some of the most urgent and important reforms in the agricultural sector pertain to irrigation, and these are addressed separately in Section B below. This section deals with other rural policy issues. 5.4 While the section puts forward some initial recommendations, clearly much more analysis is needed of the constraints on agricultural growth in Orissa and how these might be lifted. In particular, a consensus needs to be established as to whether the low agricultural growth found in Orissa is primarily due to inadequate irrigation, or whether there are other, equally important constraints, such as lack of rural credit, poor marketing arrangements, or inadequate supply of inputs. To resolve some of these issues the Government is currently launching a study on constraints to agricultural growth, the conclusions of which are expected to provide the basis for new policies to boost growth in the rural economy. 5.5 The Government adopted a new Agriculture Policy in 1996, which included a number of useful initiatives. Among them were plans, now under implementation, to increase private participation in provision of agricultural inputs, especially fertilizer and seeds, since low purchase rates were seen to reflect supply- as well as demand-side constraints. Cost recovery for agricultural services provided by the Government (e.g., veterinary services) also needs to be introduced to create a level playing field between public and private providers. 5.6 Rural infrastructure is also weak in Orissa, and lack of good quality roads, especially village-to-market roads a particular constraint. Farmers in Orissa concentrate overwhelmingly on growing rice. Improving the road network would encourage farmers to diversify away from subsistence towards commercial crops. 5.7 Land leasing (tenancy)'. Orissa is one of a few states in India that has attempted legally to abolish tenancy, except in the case of persons of disability (the definition of which includes widows, divorcees, and other unmarried women). The Orissa Land Reforms Act prohibits sub- letting of land, regulates rents (to a maximum of one quarter of gross produce), and grants ' This section draws on Mearns and Sinha (1999). See also TARU Leading Edge (1998). - 38 - occupancy rights to long-standing tenants. In spite of these restrictions, tenancy remains widely prevalent, under illegal contracts which landlords and tenants have a common interest in concealing. This accounts for widespread under-reporting of the area leased-out (and, to a lesser extent, leased-in). The best available estimates suggest that around 20% of farm households participate in the land-lease market, and that over 80% of leasing activity (both in and out) is by small and marginal farmers. 5.8 The land-lease market is clearly an important means by which the rural poor gain access to land. The Government of Orissa has recently prepared a draft Revenue Administration Bill, intended to simplify, consolidate and replace the separate laws governing land administration. The legalization of tenancy, as proposed in the draft, and supported by Government of India policy under the Ninth Plan, is to be welcomed, provided that the right balance can be struck between assuring landlords of their long-term ownership rights, and assuring tenants of their security of tenure and protection under the law for the duration of fixed-term tenancy contracts. Only with documentary evidence of such rights are tenants likely to face the possibility of access to institutional credit. 5.9 Other land access issues. Leasing is the most important but not the only issue of land access for the poor. The recent study by Mearns and Sinha (1999), on which the above is drawn, covers a number of other issues concerning access of the poor to land, such as gender, land distribution, land administration, and encroachment on common lands. Their findings and recommendations on these issues are summarized in Box 5.1. 5.10 Forestry is also a sector with a large poverty impact. Many tribal communities in particular receive substantial amounts from the sale of non-timber forest produce. Reforming Orissa's policies in this area has been described by one review as "the one intervention that can dramatically impact the income levels of the poor." Current policies - which rely heavily on state and private monopoly buyers -- are widely perceived to have failed, and to be working against the interests of the tribal pickers, and are currently under review by the Government. Specific proposals for reform are beyond the scope of this study, but there is an urgent need to develop and implement a new pro-poor Forestry Policy, based on principles of Joint Forestry Management, under which local communities are engaged to help protect forest in exchange for increased access to both timber and non-timber forest products, and liberalization and rationalization of current marketing arrangements. B. Irrigation 5.11 Expanding Orissa's irrigation coverage is widely recognized to be the most important action the Government can take to lift the growth of agriculture and reduce its volatility. However, to date Orissa has invested heavily in irrigation without satisfactory results. Box 5.2 contrasts the high levels of spending on irrigation in Orissa with the absence of growth in agriculture over the nineties. 5.12 Expenditure efficiency. The suggestion from Box 5.2 that spending on irrigation has purchased relatively little agricultural growth is consistent with the evidence presented in Box 3.1 of an overall ex post economic rate of return for two World-Bank-financed irrigation projects of only 6%. To improve returns, the Government has already decided not to take up any new irrigation projects; resources are rather all being spent on completing projects already underway. But this is only a start. Expenditure efficiency needs to be improved by better internal monitoring and planning. The Department of Water Resources has agreed as part of the World-Bank- financed Orissa Water Resources Consolidation Project to conduct annually an Annual Review, Action Plan, and Budget (ARAPB), which is basically a public expenditure review for the sector. 2 Vasundhara (-) . - 39 - Box 5.1 Social Exclusion And Land Administration In Orissa In addition to its findings concerning land leasing reported in the text, the recent study by Mearns and Sinha (1999) also covered a number of other important issues concerning access of the poor to land. Land distribution: While land reforms legislation has reduced the share of operational area held under large holdings (> 6 ha) in Orissa since the 1950s, the major gains have been in the share of total area accounted for by medium-sized farms. Over half of all households operate small, marginal or sub-marginal land holdings (< 2 ha). The proportion of total agricultural land they operate has remained substantially unchanged since the 1950s, although substantial gains in area accrued to the largest among them during the 1960s, thereby swelling the ranks of farm households with medium-sized holdings by the 1970s. The proportion of households operating no land, whose livelihoods are based principally on agricultural labor, increased substantially following the widespread eviction of tenants from erstwhile landlord estates, and by the early 1960s accounted for a third of all households. Since the 1960s, some have gained access to land, but around a quarter of all households in Orissa still operate no land. Gender and land rights: While the principle of joint titling is readily accepted at the level of the Government of India, it has yet to be realized in practice in Orissa. In focus group discussions, village women assert that their bargaining power vis a vis their husbands and in-laws would be enhanced considerably by joint title over land. That this may make it more difficult for women to escape from abusive marriages was a second-order consideration. Land sale-purchase transactions: The share of total agricultural land changing hands is typically as low as 5-7% per year. Land markets are thin for various reasons. In large part, there are few willing sellers of land, as the price of land does not reflect its full social value. Most sales are therefore distress sales by smaller farmers, and most purchases by larger farmers. High transaction costs in land markets are also a significant obstacle to land purchases. Uncertainty regarding the true ownership of the land is rarely a serious concern in the case of intra-village transactions. However, many sale-purchase transactions go unrecorded in land records, since the process of mutation (voluntary registration of a sale deed and acquisition of title) is complex, lengthy and expensive. Officially sanctioned transaction costs amount to at least 17% of the value of the land transacted, and the 'informal' transaction costs required to expedite the process may amount to as much again, even discounting the opportunity costs of repeated visits to registrar and tehsildar's offices over a period of several years. Land administration in Orissa is carried out by two, parallel government agencies: the Department of Revenue and Excise, responsible for policy formulation and revenue collection; and the Board of Revenue, responsible for the implementation of land policy and judicial matters. Land revenue has declined as a share of state revenue from over 30% to less than 2% over the last forty years. As a result, land administration is perceived as a burden on the state, rather than a service which, if made more efficient, could help raise agricultural productivity. Stamp duties and other fees payable upon the registration of land sales, on the other hand, account for up to 6% of state revenue. There is little or no coordination between the maintenance of land records, which is the responsibility of revenue inspectors and tehsildars, and land registration, which is the responsibility of sub-registrars. Measures to coordinate these two services and enhance their efficiency through computerization would reduce transaction costs and go a long way towards stimulating the land market. Encroachment on commons: Commons account for an estimated 20% of the total land area of Orissa, including "wastelands", grazing lands, and certain types of forest land. Over recent decades, the best common land has been encroached upon by both resource-poor and resource-rich farmers, and what remains is frequently too degraded to be of significant value. Legislation exists to prevent encroachment on government-owned wastelands, and to transfer a up to an acre of "unobjectionable" public land to landless families, but is largely ineffective on both counts. There are powerful incentives for revenue inspectors to take bribes from encroachers to permit continued cultivation, rather than to initiate eviction proceedings. More powerful individuals may thereby acquire permanent occupancy rights through "adverse possession." While the rural poor also acquire defacto but insecure rights over revenue wastelands through encroachment, they are often unable to convert them to the dejure rights to which they are legally entitled, since the act of encroachment is regarded as illegal in the first instance. The most promising avenues for protecting rights of access to common land for the rural poor are increasing public awareness and access to information. The computerization of land records at tehsil level would also contribute towards making information on the extent of encroachment more publicly accessible. - 40 - It is important that the Department carry out this exercise annually and that it be used as a basis for improving efficiency. Improving operational efficiency is also important; at the current time the Department is unable to accurately monitor the salary and non-salary components of O&M. Looking further into the future, major institutional changes to give the Water Resources Department more autonomy, more of a commercial orientation, and to hold it more accountable should be considered. Box 5.2 The Disconnect: irrigation investments and agricultural growth in Orissa in the nineties Despite heavy investments in irrigation in the eighties and nineties... Rs rrillion (1998199 prices) % 1600 80 1400 E---Investment in irrigation 70 1200 % of totaI investment 60 1000 50 800 40 600 30 400 20 200 10 0 n ...agricultural growth has been conspicuous by its absence in the nineties... Annual Average Growth Rates (1990/91 - Foodgrain Production 1997/98) 8000 0.0% 7000 0.1% - n - -0.2% T 6000 -0.3% u5000 -0.4% 24000 .2-0.5% -- 13000 E -0.6% 2000 -0.7% 1000 -0.8% 0 -0.9% ---- civ Si-1.0% J 4 5't\:,4 c A -41- 5.13 Increasing cost recovery in irrigation has long been recognized as a priority for the water sector in general and irrigation in particular. Given that irrigation costs have been estimated at less than 1% of the cost of paddy production, and that only 33% of net sown area is irrigated, the minority of farmers who do receive irrigation services can certainly afford to pay for the cost of water. In its Letter of Development Policy of July 1995, issued in relation to the Orissa Water Resources Consolidation Project, the Government stated its intent to reach 50% cost recovery of revenue expenditure by March 31, 1997, 80% a year later, and 100% two years later (March 2000). The main action taken in this regard has been a substantial increase in rates charged to both industrial and agricultural users, the latter by 150%. However, the Government is still a long way from its target. Table 3.6 showed cost-recovery in 1997/98 for irrigation and industrial water supply, based on Department of Water Resources current expenditure and revenue receipts, to be just 12%. With the increase in irrigation rates, cost recovery should have improved in 1998-99, though final figures are not available. However, there is still expected to be a huge shortfall. Even a doubling of the 11% cost-recovery rate in 1997-98 levels would only lead to cost recovery of 22%, well below the target of 80% now applicable. A number of additional measures will be required to lift cost-recovery. 5.14 First, the collection rate (ratio of collections to billings) is poor, at about 50% for farmers, but less than 10% for industries. In the industrial sector, progress has been made with installation of metering devices, but cost recovery has been hindered by litigation. One measure to improve cost recovery would be to transfer responsibility for collection of water dues from the Revenue Department to the Department of Water Resources. Another would be to place more reliance on Water User Associations (see 5.15). Second, expenditures are inefficient. In particular, the water sector is burdened by the cost of the Orissa Lift Irrigation Corporation, which is largely non- functional and which makes a loss of some Rs 400 million per annum. Covering these costs is next to impossible, and OLIC will have to be privatized via transfer of its assets to groups of farmers and/or rural poor. Third, it will likely be necessary, even if all these steps are taken, to further increase water rates. Industrial rates appear to be reasonable, but irrigation rates are still low, not necessarily by all-Indian standards, but by the standards required to meet cost recovery. (AP, India's leader in irrigation sector reform, has recently tripled rates to a basic rate of Rs 500/hectare. Orissa's basic rate is Rs 100/hectare.) As with the power sector, the irrigation sector would benefit from an independent regulator with the authority to set rates. 5.15 Finally, with regard to cost recovery in the water sector while we have focused on irrigation, the implicit subsidy for household water supply and sanitation is actually larger: Rs 1.5 billion in 1997/98 compared to Rs 1.0 billion for irrigation and industrial supply (see Table 3.6). Household water supply is the responsibility of the Department of Housing and Urban Development for urban areas and the Department of Rural Development in rural areas. Total revenue expenditure in this sub-sector comes to Rs 1.6 billion against receipts of only Rs 150 million, giving a cost-recovery ratio of about 10%. Water charges to households were increased by 50% in August 1996, and will be raised each year by 10% for the coming five years. While welcome, these increases will leave cost-recovery below 20%, and more radical increases, as well as the introduction of metering, will need to be considered. 5.16 Water User Associations (WUAs). If canal water charges are to rise, the change should go hand in hand with policy and institutional reforms to raise the quality and reliability of canal water supplies so that users can save on water delivery costs and O&M. To the degree that 3 Eliminating the OLIC burden would save about Rs 300 million of explicit subsidy, and another Rs 200 in capital grants, bringing expenditures down to Rs 900 million from their current level of Rs 1.4 billion. Improving the collection rate, even to 100%, would raise an additional Rs 400 million (Rs 100 million in agriculture and Rs 300 million in industry) giving total revenue receipts of Rs 530 million, which would bring cost-recovery up to 60%. (An alternative way to calculate cost-recovery is to consolidate government with OLIC accounts, since OLIC is a fully- owned GOO PE. However, this method gives similar results as OLIC's losses are about Rs 400 million.) - 42 - participatory management produces reliable water supplies at lower costs, it will help overcome farmers' resistance to higher canal water charges, not to mention making water rates easier to collect. 5.17 A small number of WUAs have been created in Orissa, and more are envisaged, but the actual turn-over of subprojects to the new WUAs has not yet occurred due to delays in the rehabilitation works. GOO is planning to introduce legislation to give Water Users Associations a statutory basis, as in Andhra Pradesh. Acceleration of the creation of WUAs and hand-over of assets to them could then follow. Orissa's pilot efforts seem slow compared to the neighbouring state of Andhra Pradesh, which has now created some 10,000 WUAs covering the state's entire surface irrigation area. Box 5.3 summarizes the experience of AP in the area of irrigation reform, a process which began with the issuance of a new policy paper for irrigation. Orissa could do well by following suit. Box 5.3 The Andhra Pradesh Irrigation Sector Reform Program Faced with declining irrigation area due to cumulative under-funding and neglect of maintenance and lack of farmer involvement, Andhra Pradesh initiated since 1997 a major irrigation sector reform program. The reforms centered on irrigation management transfer (IMT) to farmers' Water User Associations (WUAs), supported by policy, pricing, legislative, public expenditure and institutional reforms. Actions to date include: * Policy: issuance of a policy document articulating the reform agenda. * Community outreach: a continuous and interactive process including workshops with NGOs and politicians and rural rallies. * Tripling of water charges: done in 1997, and now followed by a campaign to raise collection. A Water Charges Review Committee has also been established. * Legislation: issuance of the Farmers Management of Irrigation Systems Act (1997) establishing the legal basis and modalities for IMT. * Creation of WUAs across the State: 10,292 WUAs elected in June 1997 covering all major, medium and minor surface irrigation schemes (4.9 million ha); 197 Distributory Committees (federation of WUAs) created in November 1997. * Training: major training of WUAs, irrigation department staff and NGOs. * Joint walkthrough of all systems: by WUAs and irrigation department to jointly identify operations improvement needs. * Launching the operations improvement program: undertaken during the May-June 1998 canal closure period. About Rs. 1,600 million of operations improvement works were implemented, 70% of which by WUAs and Distributory Committees, and 30% by the irrigation department on the main canals and drains. Source: World Bank (1999). 5.18 Ground-water irrigation. To date, Orissa has given primary weight to surface-water irrigation (canals) rather than ground-water irrigation (wells). Table 5.1 shows that while the percentage of net irrigated area to net sown area in Orissa is similar to the all-India average, the proportion of this irrigation provided by canals is relatively high, and the proportion provided by wells relatively low. This is consistent with the very low power consumption in agriculture in Orissa: one-tenth of the national average (Table 1.7). There is a growing realization that Orissa also has a large ground-water potential. Shifting expenditure from surface-water to ground-water irrigation may have considerable payoffs (including a shorter gestation period, a lower fiscal burden and fewer maintenance problems, since groundwater facilities are typically owned by farmers). The Government is already starting to give more emphasis to groundwater irrigation, but a review is needed to determine whether a shift in spending priorities is warranted. -43 - Table 5.1 Irrigation Coverage in Orissa, All India and Selected States by Type of Coverage, 1992/93 All Orissa Bihar Madhya Rajasthan Uttar Andhra India Pradesh Pradesh Pradesh Net Irrigated Area as % of net sown area 35.1 32.8 46.7 24.4 26.4 65.6 38.5 Of which.... % irrigated by canals 34.1 45.3 27.9 35.3 31.9 28.6 42.9 % irrigated by tanks 6.5 14.4 3.8 3.7 4.6 0.7 18.1 % irrigated by wells 53.0 40.3 50.9 48.6 62.7 67.5 35.0 % irrigated by others 6.5 0.0 17.4 12.4 0.7 3.2 4.0 Source: CMIE (1997). C. Social Sectors 5.19 Health. GOO's expenditure on health is about 1.2% of GSDP, about equal to the 1.1% of GSDP spent on average by the 4 low-income states and somewhat above the 0.9% of GSDP spent by the 14 major states (Table 3.8). Per capita health expenditure is, however, low. Health also suffers from a misallocation within the overall budget. As Table 5.2 shows, almost 60% of the health budget goes to tertiary health, i.e., urban hospitals. This is much higher than for other states where data is available (AP, Karnataka, West Bengal, Maharashtra and Punjab). Orissa would gain from spending more on primary and secondary health. A recent "burden of disease" study showed that 62% of the burden is due to communicable diseases and pregnancy related conditions (about 10 percentage points higher than the rest of India). The excessive allocation to the tertiary sector is also costly as analysis shows that for many diseases 25-40% of costs could be saved by treating patients at secondary rather than tertiary hospitals. 5.20 The recently launched Orissa Health Systems Development Project aims to strengthen the primary and, especially, secondary health levels. The Government of Orissa has committed under this project to increase the primary and secondary shares annually throughout the life of the project. It also plans to improve cost-recovery at district and area hospitals, and increased user- charges for district hospitals in July 1997. Table 5.2 Composition of Health and Education Budget Expenditure: Primary, Secondary and Tertiary Levels (Percentage of State Health and Education Budget, 1995/96) Year Primary Secondary Tertiary Education 54 24 22 Health 22 19 59 Note: Expenditure on education represents only revenue expenditure which amounted to 99% of the State Education Budget in 1995/96. Expenditure on tertiary education consists of university and higher education, technical education and other miscellaneous expenditures. Source: World Bank (1998a), GOO Budget Documents 5.21 Education. As a percentage of GSDP, education spending in Orissa is relatively high and rising. As Table 3.8 showed, spending on education has increased from 3.5% of GSDP in the mid-eighties to 4.2% a decade later, representing a increase in the share of education in total spending by almost four percentage points. The gap between education spending in Orissa and the average for the 14 major states is now about a full percentage point of GSDP in favour of Orissa. However, per capita spending is low, and, with literacy at only 51%, and 39% for females, education, like health, should be spared from expenditure cuts, and spending increased over time as the fiscal position stabilizes. Teachers should be excluded from any freeze on civil service hiring, though expansion may need to be slowed initially in order to stabilize the state's fiscal position. 4 World Bank (1998). - 44 - 5.22 Orissa's allocation of education spending to the primary, secondary and tertiary levels is similar to that found in other states. Given its fiscal difficulties, however, Orissa will need to focus spending in the future on the primary sector, and will not be in a position to expand the tertiary sector, for example, by the opening of new universities. 5.23 Moreover, there is still a very large implicit subsidy provided to higher education - Rs 1.3 billion in 1997/98, more than the subsidy on irrigation (Rs 1.0 billion - see Table 3.6). Cost recovery in higher education is virtually zero, in fact just over 1% of revenues. And this excludes the subsidy to private colleges through grants-in-aid of salaries (see Section B of Chapter 3), which costs another Rs 700 million. Increasing user-charges in education is politically very difficult, but the education sector might take a leaf out of the health sector, and increase user charges, but allow the collecting educational establishment to retain at least some part of the additional revenue to improve its facilities. Improving cost recovery in higher and technical education would not only help Orissa's fiscal position, but would also lead to better targeting of government expenditures as tertiary students tend to come from the better-off sections of society. 5.24 Both education and health are under threat in Orissa at the moment from the salary increase. Both sectors are labour-intensive - about 80% of the education budget goes on salaries - and the natural response in both will be to accommodate the salary increases by cutting back on non-wage items. But the wage/non-wage split in education and health is already skewed too far to wages, resulting in drug and other shortages in the health sector, and equipment shortages in the education sector. One study by the World Bank (1996a) found, for example, that the cost effectiveness of spending on instructional inputs is between 4 and 14 times higher than that of increasing teacher salaries. 5.25 Welfare spending is a significant component of total spending in Orissa - more is spent under this head than any other except education. Table 5.3 shows welfare spending in Orissa in comparison to other states. Orissa is not an outlier with respect to other states, though it does spend on the high side as a proportion of state output. Table 5.3 Expenditure on Welfare in Orissa and Other States, 1985-96 1985-87 1988-90 1991-93 1994-96 Expenditure on Welfare (billion Rs) 1.91 2.63 4.69 6.32 Welfare exp. as % of total exp. 13.9 12.9 15.0 14.3 Welfare as % of total GSDP 2.6 2.5 3.0 2.7 Welfare exp. as % of total exp. 4 low income states 13.7 13.1 15.2 14.1 14 major states 13.4 12.4 12.8 11.8 Welfare exp. as % of total GSDP 4 low income states 2.3 2.2 2.5 2.3 14 major states 2.2 2.0 2.0 1.8 Note: See Table 3.7for the definition of welfare expenditures. Note that they include spending on rural development. 5.26 Table 5.4 details welfare spending under three heads: welfare programs, rural development programs, and nutrition programs. The fastest growing is nutrition, which reflects the introduction of a mid-day meals scheme. Evaluating productivity of the various welfare programs is not easy. Many are centrally-sponsored schemes, which have been evaluated nationwide, and generally shown to have had disappointing results. By the same token, the central guidelines for these programs make it difficult to introduce reforms at the state level. Moreover, most of the centrally-sponsored programs are funded on the basis of a cost-sharing arrangement. If states cut back on spending, the central government will as well, often by a multiple of two, three or four. Hence, even if programs are ineffective, it may not be in the state's interest to reduce spending. Detailed review and recommendations concerning welfare spending are - 45 - therefore left for a future date. As a poor state, Orissa will likely have to continue investing in anti-poverty programs, but could do so more effectively by more effective management and better targeting. For example, Orissa cannot afford welfare programs for the educated unemployed when its rural poverty and illiteracy rates are so high. DFID is currently assisting the Government with development of a poverty reduction strategy, including an evaluation of the effectiveness of local government involvement in anti-poverty programs. 5.27 Monitoring. The summary analysis provided above of education, health and welfare programs has focused on inputs (budgetary allocations) rather than outputs (children educated, lives saved, people brought out of poverty). This was a necessity given the limits of the exercise, but also reflects the absence of data and the need to introduce better monitoring of outputs, especially in the social sectors. Such an undertaking would be an integral part of the program of public sector management outlined in Chapter 3. One immediate need is to improve the transparency in the operations of the Government's anti-poverty and welfare programs. If programs are rationalized and simplified, and their rules publicized, they will become more effective and less subject to abuse. Table 5.4 Spending on Selected Welfare, Rural Development and Nutrition Programs, 1990/91-1997/98. Average annual growth, 90-97 1990/92 1992/94 1994/96 1996/97 1997/98 (%) Rs million % s million % Rs million % Rs million % Rs million % Welfare 1,307 41 2,034 42 2,598 50 3,061 48 3,128 53 16.2 SC, ST and OBC 806 25 1,091 22 1,482 28 1,622 26 1,665 28 12.0 Social Security 500 16 943 19 1,116 21 1,439 23 1,463 25 22.9 Rural Development 1,772 55 2,616 54 2,041 39 2,354 37 2,083 35 2.0 Rural Employment 1,179 37 1,861 38 978 19 909 14 911 15 -4.7 Special Programs 346 11 443 9 674 13 512 8 467 8 5.3 Other Programs 248 8 312 6 389 7 933 15 704 12 18.7 Nutrition 137 4 220 5 568 11 941 15 688 12 27.3 Total 3,216 100 4,870 100 5,206 100 6,355 100 5,899 100 10.0 As % GSDP 2.6% 3.0% 2.3% 2.7% 2.2% D. Public Enterprise (PE) Reform 5.28 Orissa is a leader among Indian states in the field of PE reform. Prior to commencement of its public enterprise reform program, Orissa had 36 public enterprises, several of which are themselves holding companies. As detailed in Annex G, which gives a status report of Orissa's PEs and their reform, at the end of fiscal 1997/98 combined employment of the PEs reached 76,800, and government equity Rs 16.1 billion. In the same year, 17 of the firms were profit- making, 11 loss-making, 2 broke even, and 6 firms were closed. Average return on government equity was -13%. 5.29 In August 1996, the Cabinet accepted the report of the Cabinet Sub-Committee on PE and Co-operative Enterprise Reform,5 which put forward 21 firms (excluding PEs in the power sector, the privatization of which is being handled as part of the power sector reform program) for privatization (partial or full) or closure. The PE reform program is being implemented by the Department for Public Enterprises, which has an experienced and competent staff. Investment bankers are recruited for specific transactions. Advisory services for privatization will be provided under the DFID Public Sector Reform Project (Box 2.3). s "Functioning of Public Sector Undertakings and Enterprises Under Co-operative Sector and Suggested Measures for the Reforms/Restructurisation" - 46 - 5.30 Outside of the power sector, there are 33 PEs (excluding subsidiaries) with combined staff of about 41,600, and equity of about Rs 4.6 billion. Of these companies, there are seven large ones, which together employ 85% of the PE work force outside of the power sector. Box 5.4 describes these seven, and the strategies employed by the Government in relation to them. Progress to date includes closure of a growing number of smaller enterprises,6 with total staff size of around 1,200. There are several privatization transactions underway, including that of IDCOL, one of the larger companies. At the time of writing, two had been brought to conclusion: sale of the Orissa State Cashew Development Corporation on a 35-year lease; and 100% privatization of a subsidiary of the Orissa Small Industries Corporation. And the Orissa State Transport Corporation, a large passenger bus company, which the Government has decided to retain for social reasons, is being successfully restructured through out-sourcing. 5.31 Co-operatives. As in most states, there are a large number of co-operatives in Orissa such as the sugar mills (4 with capacity of 2,500 MTs) and spinning mills (7 mills each with 2,500 employees). Nearly all are loss-making, and very few are co-operatives in the true sense; rather, most are nearly fully owned by the Government. The 1996 Cabinet report announced the intention of the government to transfer these co-operatives to the private sector. In July 1997, the Orissa Co-operative Societies Act was amended to facilitate transfer of assets and liabilities of sick co-operative societies to private parties. Tenders have been advertised for both the spinning and the sugar mills, but buyers are not easy to find. 5.32 The largest PEs are in the power sector. The three PEs (OPGC for thermal generation, OHPC for hydro generation, and GRIDCO for transmission and distribution) have combined staff of 35,000 - so about half of the total PE staff size -- and equity of Rs 11.5 billion, about two- thirds of total PE equity. Privatization is already well advanced in the power sector. OPGC represents the Government's largest equity investment, with Rs 4.5 billion of government equity, prior to sale. 49% of OPGC has now been sold (to a strategic investor) with another 25% scheduled for sale in the coming year. GRIDCO is the largest PE in terms of staff size with 30,000 staff, and is a loss-maker. 51% of the four GRIDCO distribution subsidiaries are being sold to strategic investors (with an additional 10% for employees), despite the fact that GRIDCO itself is loss-making. At the time of writing, sale of three of the four subsidiaries was complete, while negotiations were still continuing for the fourth. OHPC is Orissa's most profitable PE with profits of Rs 770 million in 1997/98, though it has very high receivables on account of GRIDCO's poor financial health. 5.33 The two privatization transactions undertaken in the power sector are generally regarded as very successful and precedent-setting for the rest of India. The privatization of Orissa Power Generation Company (OPGC) was the largest state-level privatization transaction in India. Sale of just 49% of the company realized Rs 6 billion for the Government, as against book value for the entire company of Rs 4.5 billion. The sale of GRIDCO's distribution subsidiaries represents India's first comprehensive distribution privatization. While several states have now embarked on power sector reform with the objective of privatizing distribution, Orissa is the first state to be carrying its objectives into fruition. 5.34 Outside the power sector, Orissa has, in general, not found it easy to sell enterprises, and several which it originally planned to sell it has had to close down. But closure itself is not easy. Loss-making entities are typically unable to clear their past debts and other dues. This is causing banks to prevent the sale of assets, whether as part of a going concern or after closure, by 6 At latest counting, eleven firms had been shut down, including three subsidiaries: Orissa State Leather Corporation, Orissa State Commercial Transport Corporation, Orissa Instruments Company, Konark Television Limited, all three subsidiaries of Orissa State Electronics Development Corporation, New Mayurbhanj Textiles Limited, Orissa State Handloom Development Corporation, Orissa State Export Development Corporation, and a subsidiary of Orissa Small Industries Corporation. This list includes some firms whose workers have all been retrenched, but which had not, at the time of writing, been formally closed. - 47 - invoking their government guarantee, and demanding that it be honored prior to sale. This in turn requires a negotiated settlement with the bank which takes time and delays any sale. To counter this problem, the Government has established a One-time Settlement Committee to authorize settlements with financial institutions, and has created a budgetary allocation to fund these. Box 5.4 The Big Seven: Orissa's large non-power public enterprises There are seven large PEs outside of the power sector with staff size of 2,000 and above; together these account for 25,900 staff or 85% of non-power-sector PE staff. Five are loss-making. The seven are all included in the PE program, but with varying degrees of success. They range from highly profitable to hugely loss-making. Two are being reformed - the Mining Corporation and the Road Transport Corporation - one is being sold off - the Industrial Development Corporation. Difficult decisions for closure or radical restructuring and downsizing will be required for the other four if Orissa's PE reform program is to be brought to a successful conclusion. Industrial Development Corporation Of Orissa (IDCOL) (2,450 staff) IDCOL is a loss-making conglomerate with nine subsidiaries. Government is actively working towards closure of one subsidiary (SN Corporation) and privatization of the other eight. Orissa Lift Irrigation Corporation (10,200 staff) This corporation is the largest PE in terms of staff size outside of the power sector. It is responsible for minor irrigation projects. It is hopelessly loss-making and has costs of about Rs 450 million (most of which go to pay salaries of idle staff) and revenue of about Rs 50 million per year, resulting in a requirement of government subsidy of about Rs 400 million annually. OLIC is in fact, on account of its supposedly "social" function, one of the few PEs to receive an explicit government subsidy. The Government has started a process of downsizing and handing its assets over to Water User/Sellers Groups, A GOO delegation recently returned from Bangladesh to see how this form of privatization has worked there. The hand-over process should be greatly accelerated, with a view to quick completion. OLIC itself should be closed down, or turned into a construction and service agency, with its establishment size reduced to a few hundred staff. Orissa Forestry Development Corporation (5,550 staff) This corporation is profitable on account of its monopsony position as the sole marketer of kendu leaf and other non-timber forest products. However, the rationale for its existence is unclear and the efficiency of its operations has been questioned. (It seems unclear, for example, why the Forestry Department should buy kendu leaves from the pickers, and then sell this same produce to the Corporation.) The Forestry Development Corporation will need to have its role redefined as part of a new pro-poor forestry policy (see Section A of this chapter). State Road Transport Corporation (5,050 staff) This is the passenger bus company of Orissa. It performs a social function by plying remote and unprofitable routes. For these reasons, the Government has decided to retain it as a PE, but is successfully restructuring it. Staff size have been reduced from 5,000 in 1998 to 3,000 currently. The bus fleet has been downsized, and ticket selling privatized (Now the job of the conductor is to check tickets, not to sell them.) Costs have gone down, and revenue has gone up five- fold, the combination of which has enabled the SRTC to turn around from being a loss-maker to actually showing a profit. Orissa Textiles Mills (3,660 staff) This is a chronic loss maker, which has referred to BIFR in February 1993. BIFR approval was given in August 1995, and the Government is seeking a buyer. Finding a buyer will require significant prior retrenchment, and closure may be inevitable. Orissa State Textiles Corporation (1,950 staff) Another chronic loss-maker, the Government initially sought to find a buyer for this firm, but is now seeking its closure. Orissa Mining Corporation (3,350 staff) This is a highly profitable company, already used by the Government as a vehicle for joint ventures and other forms of private-sector participation, such as sale of its mining rights to private companies. It is a very strategic company, but options for privatization and greater private sector participation could be considered as part of the mining revenue review (see Chapter 4). - 48 - 5.35 Cost of retrenchments. The other barrier to both closure and privatization is the cost of retrenchment. For companies being closed, workers are entitled to 15 days salary per year worked, plus the encashment of leave and a gratuity. For workers volunteering for VRS in other companies, an additional 6 days of salary per year worked is added as an incentive. The estimated retrenchment cost per worker is Rs 310,000. This is not easy to find for a cash-strapped government, though the Government has started allocating money for it, Rs 500 million in 1998/99, and DFID is also providing some funds for voluntary retrenchment. However, much more will be needed. If, ultimately, the PE workforce is to be downsized by about one-third, say 24,000, then this will cost Rs 7.2 billion or 2% of GSDP. 5.36 The issue of use of privatization proceeds has arisen since GOO is not using proceeds to retire debt, but to finance its large fiscal deficit. Since the salary increase appears unavoidable, if GOO were to retire debt with its privatization proceeds it would have to cut non-wage spending. It is unfortunate, however, that, by not using the proceeds to retire debt, Orissa has been unable to qualify for debt relief under the Tenth Finance Commission's privatization-based scheme, under which the Government of India will match every rupee of privatization proceeds used to retire debt with an additional rupee of debt forgiveness (Chapter 2 and Annex C). With more proceeds planned for 1999/00, the Government would be well advised to use its TFC allocation, since it would be impossible to find another use of proceeds with such a high rate of return - we estimate the internal rate of return to be 31% (see Annex C). From 2000/01 onwards, if the fiscal situation stabilizes, GOO could use all its privatization proceeds to retire debt. This would not only reduce the debt burden, but also send a very positive signal to prospective investors in Orissa. 5.37 The remaining challenges. Orissa has made large strides in the area of PE reform, where it is a clear leader among the states. It now provides very little budgetary support to public enterprises, and has shown itself willing to close unviable units when efforts to sell them fail, as they.frequently have. Orissa's privatization goals have also become more ambitious over time. Whereas the initial 1996 Cabinet report committed the Government only to minority divestment of profitable companies, it is planning in the current year to sell an additional 26% of OPGC to private investors, which would reduce the Government's share to just 25%. Four main challenges now remain to complete the PE reform process. First, for those companies where firm privatization and closure decisions have already been made, the process of implementation needs to continue, e.g. sale in the current year of the additional stake of OPGC. Second, outside of the power sector, transactions to date have been limited to smaller companies. There are three large loss-making PEs - Orissa Lift Irrigation Corporation, Orissa Textile Mills, Orissa State Textiles Corporation - which should be quickly privatized or closed (see Box 5.4). More generally, based on its successful experience with the PE reform program to date, GOO could increase its coverage. Several PEs not originally included in the reform program seem to be essentially commercial in nature (e.g. Orissa Industrial Infrastructure Development Corporation, Orissa Bridge and Construction Company - see Annex G for a listing), and so should be transferred to the private sector or closed. The transfer of co-operatives to the private sector should also be accelerated. 5.38 Third, GOO needs to ensure that funds are available for meeting stranded liabilities and labour retrenchment costs. Given the budgetary difficulties in finding these funds, it is unlikely that the Government can also afford to engage in any physical restructuring prior to sale, as has been proposed. In any case, this is best left to the prospective buyer. And, fourth, privatization proceeds should be used wherever possible for debt retirement. - 49 - E. Power 5.39 Orissa has been a pioneer in power sector reform, and it has made significant progress in the reform process since the writing of the 1996 Study. Milestones to date include: * Passage of legislation to enable comprehensive sector restructuring, the Orissa Electricity Reform Act, which became effective in April, 1996. * Establishment of the Orissa Electricity Regulatory Commission * Conversion of the old OSEB into the Orissa Hydro Power Corporation (OHPC) and the Grid Corporation of Orissa (GRIDCO) * 49% sale of the Orissa Power Generation Corporation, the first sale of its kind in India, and the largest state-level privatization (see para 5.32 above). * The privatization of GRIDCO's recently created distribution subsidiaries (para. 5.32) by sale of majority shares to private investors. 5.40 Growth impact of power sector reform. Orissa's power supply situation is better than most states. However, local bottlenecks remain on account of inadequate transmission and distribution facilities. If Orissa can strengthen its transmission and distribution network through completing the reform process, it will be able to use its electricity infrastructure to attract increased investment 5.41 Financial position of GRIDCO. Transmission and distribution losses have come down from 51% in 1995/96 to 41% in 1998/99. Tariffs have also been increased, by 15% in successive years from 1993-96. A tariff increase of 10% was decided on December 1, 1998 (effective January, 1999) by the Regulatory Commission. However, GRIDCO's collections remain poor and its financial position is unsatisfactory. In 1998/99 GRIDCO suffered a loss of about Rs 2 billion mainly due to poor billing and collection performance: it is estimated that in 1998/99 GRIDCO billed only 59% of purchased energy and collected only 85% of total billings. Receivables are about 6 months of annual sales. Overdue liabilities to lenders and suppliers are at Rs 7.4 billion, also about one-half of annual revenue. On these outstanding dues, GRIDCO has to pay a penal interest of 18 to 24% per annum which further compounds its difficulties. In 1998/99, GRIDCO restructured overdues to the extent of Rs 5.9 billion through the issue of bonds and re-scheduling. 5.42 Fiscal impact of power sector. With the passage of reform legislation in 1996, GOO's obligation to subsidize its power utility ended. So power sector subsidies, which were Rs 1-2 billion per year, have not been paid since 1995/96. GOO continues to support the power sector by the provision of loans, chiefly the World Bank loan for GRIDCO (under the Power Sector Restructuring Project), by some small payments for rural electrification and through the provision of guarantees. (GOO has agreed to guarantee GRIDCO up to Rs 8 billion of bonds, of which GRIDCO has so far utilized Rs 4 billion, as indicated above.) 5.43 The difficult financial positions of both GRIDCO and GOO have led to a messy financial relationship between the two parties. On the one hand, the Government is finding that it is losing funds to the Central Government which is confiscating a portion of its shared revenue to pay central utilities (such as NTPC) for amounts owing by GRIDCO to these utilities. On the other, the Government is itself contributing to GRIDCO's precarious financial position by not paying its own electricity bills. Government departments owe some Rs 860 million to GRIDCO for overdue electricity bills, while the various PEs owe another Rs 1 billion. 5.44 Financial restructuring for the power sector. GRIDCO has a very important position in Orissa's power sector as the single buyer of power from generators and seller of that power to the four new distribution companies. While its financial health will improve over time as the privatized distribution companies improve collections and thus increase the cash coming into the sector, its current financial position is a cause for concern, and especially could lead to adverse - 50 - actions by suppliers. GRIDCO has engaged consultants to assist it in the development of a financial restructuring plan. This will need to be negotiated, agreed with and supported by the Government of Orissa. 5.45 Generation expansion. Part of GOO's plans for meeting generation expansion requirements include the use of joint ventures. In hydropower, the Government has advertised for joint venture partners to develop three hydro sites with OHPC. And, as part of its sale agreement, OPGC will develop an additional two units on an existing plant site. The Government is meeting its equity contribution from the sale proceeds of OPGC at the cost of some Rs 2 billion. Given the fiscal crisis, GOO would be well-advised to accelerate its proposed sale of an additional 26% of OPGC as well as the sale of OHPC so as to reduce the need for it to invest in the power sector where private funds are available. F. Transport 5.46 Transport is the second largest area of capital expenditure after irrigation (Table 3.9). Orissa has a road network system with density of 1350 km per 1000 square km., which is substantially higher than the national average of 731 km. (Table 1.3). However, only 20% of these roads are surfaced compared to 56% for all India. Improving the state's road network will be important both for industrial growth and for encouraging diversification in the rural economy. The Government is currently preparing a roads upgrading and maintenance project for World Bank assistance. Securing counterpart funding is a growing challenge, and may be best done by creation of a road fund, possibly associated with an increase in diesel and petrol sales taxes (Chapter 4), as has recently been done by Uttar Pradesh and other states. But reducing expenditure will be as important as increasing revenue. The Public Works Department (PWD) is already over-staffed. If it were converted into an autonomous state highway authority with a lean and business-like organizational structure, and greater reliance was made on contracting out, then attrition would not be sufficient to reduce staff to the required level. Hence PWD could be a good area to begin a voluntary retirement program (see para. 3.13) The Government is currently finalizing a Roads Policy, an ideal opportunity to announce some of these initiatives. Some of the details can be fleshed out through the Institutional Development Study for the roads sector being launched in preparation for the proposed roads project. 5.47 Rail is another critical infrastructure bottleneck. While Bhubaneswar has direct rail connections to Delhi, Mumbai, Calcutta, and Madras, the rail connections across the state are rather weak. Major links are needed to connect the industrial growth centers with mines and ports, and additional tracks have to be laid on some of the busy routes. Lack of rail is particularly a problem for the northern Orissa mineral belt, less than 2% of which has been exploited. 5.48 Indian Railways has started to develop a key railroad link (Daiteri-Banspani) to connect the iron ore mining area to steel industry, which is expected to be completed in 2002. But this project has been subject to chronic delays. Without the rail, the iron ore is unable either to be exported or taken to markets in western and northern India. GOO has also identified several "branch" lines (Haridapur-Pradeep, Angul-Sukinda, Khurda-Bolangir, and Lanjigarh-Junagarh) for critical commercial connections. GOO is trying to obtain the necessary approval from Indian Railways to implement these projects in collaboration with private investors. 5.49 Ports. To date, Orissa has been unable to exploit its coastal position on account of inadequate port facilities. The Government plans to rectify this by allowing the private sector to develop ports in Orissa. Two port projects are at an advanced stage of planning. Both are to be undertaken by the private sector under long-term concession agreements, with the private sector taking all commercial risks, and with international performance built into the agreements. If these projects come to fruition, they will give a major boost to economic development in Orissa, not only by promoting trade, but also providing additional economic centers. -51 - 5.50 The first project is the Dhamra Port project, for a new minor port in the north of Orissa. The Government has signed an agreement with International Seaport, an American-Indian-Thai consortium, to construct a port in two phases costing respectively Rs 15 and Rs 25 billion. The consortium will also construct a 65 km railway line and two-lane highway from Bhadrak to Dhamra to connect the port with the national rail and road network. The agreement has been signed with GOO, and is currently with GOI awaiting environmental clearance. The first phase is expected to be completed by 2001. The Government has also held an international tender for the development and modernization of a minor port at Gopalpur, currently managed by GOO, in the southern part of Orissa, into a major all-weather port (the deepest in India). The total investment cost over two phases is Rs 32 billion. Finally, Paradeep, a major GOI port east of Bhubaneswar, is being expanded to include container terminals. Other potential areas have been identified (Pallur, Nuanai, Inchuri, etc.) but specific projects have not yet been developed. Chapter Six: Scenarios and Sustainability 6.1 Typically, fiscal studies of this nature conclude with a comparison between two scenarios, a "no refqjm" and a "reform" scenario. These are used to illustrate, respectively, the dangers, indeed the unsustainability, of current trends and the benefits of reform. Such an exercise would not be appropriate for Orissa, as it has already embarked on a reform path. The reforms have not yet overcome Orissa's fiscal difficulties, and so, in that sense, have not yet worked. Orissa thus faces a choice: it can give up reform or it can intensify the reform process. To detail these two options, we develop two illustrative scenarios: a "no more reform" scenario and an "intensified reform" scenario. * The no-more-reform scenario characterizes a future without further reform. Reforms completed to date are assumed not to be over-turned, so power distribution stays privatized, for example, but no further privatizations are undertaken, expenditure restraints are not tightened, and no further tax reforms are initiated. * The intensified-reform scenario, on the other hand, assumes the continuation plus intensification (i.e. broadening, deepening and speeding up) of the Government's reform agenda. Thus privatization continues and is accelerated, expenditure controls are tightened, and revenue raising strengthened. First priority goes to reducing the deficit to end the fiscal crisis; within this constraint, productive expenditures are protected to promote growth. 6.2 A detailed description of the two scenarios, their common and separate assumptions, and their results are given in Annex H. It is important to stress at the outset that these two scenarios are no more than illustrative. Many approximate assumptions are made, and the reform measures utilized consider only one, and by no means the only, set of reforms and targets which the Government may wish to consider. 6.3 A key assumption underlying the no-more-reform scenario is that civil service staff numbers continue to grow at the historical rate of 2.5% per year (see Section A of Chapter 3). In addition, subsidies and transfers are maintained at 2.2% of GSDP. Tax and non-tax revenues grow at their historical rates. Non-wage maintenance and capital outlays are then derived residually based on the maximum the Government is assumed to be able to borrow (i.e., a hard budget constraint is imposed).' The various borrowing sources are loans from GOI, small-savings loans, market borrowings, and the provident fund. Assumptions on the availability of each of these are given in Annex H. Given that there is no more policy reform and that public capital outlays and non-wage O&M are squeezed, growth of GSDP under the no-more-reform scenario is assumed to drift down from the average of 3.7% a year in the nineties to 3.4% in 1999/00, and to 3.0% thereafter. 6.4 By contrast to the no-more-reform scenario, which extrapolates revenue and expenditure trends from the nineties, the intensified-reform scenario is based on medium-term fiscal targets to first stabilize and then improve Orissa's fiscal position: * To stop the rise in debt (as a percentage of GSDP) within three years (i.e., by 2001/02): this requires bringing the fiscal deficit back to its pre-crisis level of below 6% of GSDP. * To bring the fiscal deficit down to 4.5% of GSDP in the following three years (i.e. between 2001/2 and 2004/05) to cause a fall in debt stock and debt servicing from their current high levels. (A fiscal deficit of 4.5% will produce a small primary surplus, and therefore a fall in debt over time.) 1 For convenience, non-wage O&M and capital spending are forecast to be equal to be each other. - 54 - 6.5 The intensified-reform scenario attempts to meet these targets while at the same time reorienting expenditure to maximize the impact of spending on growth. The scenario assumes, on the tax side, that the reforms recommended in Chapter 4 are implemented in a sequenced manner between 1999/00 and 2002/03 (as set out in Table 4.3; see also Annex H). Non-tax revenue is augmented by moving in a phased manner to full cost-recovery in irrigation and household water supply. On the expenditure side, the reforms recommended in Chapter 3 are implemented, namely a nominal cap on grants-in-aid to college teachers and on other explicit subsidies, and a crack- down on hiring into the civil service. The latter is modelled as a reduction in civil service size of 2.7% a year, based on an assumed attrition rate of 3%, and a "replacement ratio" of 10%, i.e., for every ten positions cancelled, one new one is created. Primary school teachers are exempted from this virtual ban on hiring, and the number of teachers is first held constant and then increased over time as the fiscal situation improves. The costs of voluntary retrenchment for public enterprises are also included in the analysis. Transfers, mainly welfare programs, are kept at 1.5% of GSDP to provide a safety net.2 6.6 Capital spending and non-wage O&M are protected wherever possible under the intensified-reform scenario, but, for the first three years, at a lower level than the historical average. For the next three years (1999/00 to 2001/02), capital and non-wage O&M spending are targeted, subject to availability of funds, at 3% of GSDP (each) compared to the historical average of about 3.5% of GSDP. These targets are achieved in all three years except for 1999/00, where, due to the resource crunch currently under way, funds available for non-wage O&M only reach 2.8% of GSDP. This restriction on spending in the initial years of the intensified reform program is to ensure that fiscal stability is regained, but will also promote a serious review and prioritization of capital and maintenance spending (see Chapter 3, Section D).3 Non-wage O&M and capital spending is then increased after 2001/02 in a phased manner to 3.5% (each) of GSDP on the assumption that the reforms undertaken in public sector management will have increased the productivity of these expenditures. Once the fiscal targets given in para. 6.6 are achieved (i.e. a fiscal deficit of 4.5% in 2004/05), spending on non-wage O&M is further increased to promote growth. 6.7 On the financing side, it is assumed that, as a reforming government, GOO is able to mobilize additional financing - over and above what would be available given past trends - for a transitional period of five years starting in the current year of about Rs 4 billion a year (this is modeled as Additional Central Assistance). This financing is available to protect productive spending, to finance the costs of reform and to substitute for more expensive debt (see para. 6.16). In addition, to tackle its debt problem, GOO is assumed to avail itself in 1999/00 of the Tenth Finance Commission scheme enabling additional debt write-off in return for using privatization proceeds to pay off debt. Although GOO is anticipated to realize some Rs 3 billion from privatization proceeds in 1999/00, the TFC scheme will match only Rs 1.8 billion of this for debt-retirement, and it is assumed that only this much is used. Privatization proceeds in subsequent years are also assumed to be used to retire debt, though without the benefits of the TFC incentive scheme. 6.8 If it continues to seek private investment, implements productivity-enhancing sectoral and fiscal reforms, improves public sector management, and prevents compression in public 2 This excludes VRS payments and compensation to municipalities which are also counted as transfers. 1.5% is slightly below the historical level of 1.7% of GSDP. In real (constant price) terms, non-wage O&M and capital spending in 1999/00 are assumed to roughly equal their 1997/98 levels. This is below their 1998/99 r.e. levels, but, based on past experience, there could be considerable change between revised estimates and actuals. 4 Details of the TFC scheme are given in Annex C. As noted therein, although the scheme is a uscful one, it is modest in size, with a cap that limits the additional debt forgiveness to 3% of total debt stock, no matter the size of the privatization proceeds raised or used to retire debt. - 55 - sector investment, Orissa should be able to increase its growth rates Indeed, given the huge gap between actual and potential agricultural growth, and the state's good resource base and coastal location, the potential for higher growth is enormous. However, it is also important to be realistic. The benefits of reform take time to accrue, and the initial years may be difficult with tax rises and expenditure constraints. Therefore, the intensified-reform scenario slowly increases the growth from its assumed 1998/99 level of 3.4% up to 4.5% in 2002/03 and then up to the assumed all- India growth rate of 5.8% by 2007/08. Figure 6.1 compares per capita growth under the two 6 scenarios. Figure 6.1 : Real Growth in GSDP Per Capita Under the Two Scenarios 4.5% 4.0% 3.5% Intensified Reform Scenario 3 .0 % - - - - - - - - - - - - - - 2.5% 2.0% .00 No More Reform Scenar(o 0.5% - 0.0% 6.9 Table 6.1 compares key indicators under the two scenarios. The no-more-reform scenario is, not surprisingly, an unsustainable one. Debt as a percentage of GSDP continues to rise over the forecast period reaching 60% by 2004/05. Capital outlays and non-wage O&M are squeezed to 4% of GSDP (compared to the 7% achieved in the nineties). 6.10 The intensified-reform scenario, by contrast, succeeds in stabilizing the state's fiscal position. Within three years (i.e., by 2001/02), the debt stock has stopped rising, and thereafter it starts to decline, as do the other key fiscal variables, the interest-to-revenue and debt-service-to- revenue ratios. By 2004/05 the fiscal deficit has achieved the target of 4.5%, and the primary balance is in a slight surplus. 6.11 Deficit reduction. The intensified reform scenario achieves its success by aggressively targeting the deficit in the coming years. The various deficits (fiscal, revenue and primary) are all lower under the intensified-reform scenario than under the no-more-reform scenario from the second year of reform (2000/01) onwards (see Figure 6.2) Only for the first year of reform (1999/00) are the fiscal and primary deficits though not the revenue deficit, higher. This is because the adjustment under the no-more-reform scenario is a completely forced one, relying completely on slashing capital spending and non-wage O&M to 4.6% of GSDP from 7% in earlier years - a strategy of low-quality adjustment, likely to do more harm than good. The 5 Ideally, these scenario growth rates should be derived endogenously (based on public and private capital spending and policy reforms). Although this is unlikely to change the results greatly, and any modeling would also only be illustrative due to data limitations, work is ongoing in this direction, and could be incorporated into the fiscal model in due course. 6 Mining growth is also assumed to be slightly higher under the intensified reform scenario (see Annex H). - 56 - intensified-reform scenario prevents this crash in 1999/00 by putting the state on a sustainable adjustment path. Table 6.1 Summary Comparison of the "No More Reform" and "Intensified Reform" Scenarios 95/6- Scenario 97/8 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2009/10 No More Reform Scenario Real GSDP Growth 3.3 3.4 3.4 3.0 3.0 3.0 3.0 3.0 3.0 Per-Capita Income Growth 1.4 1.6 1.6 1.2 1.2 1.2 1.2 1.2 1.2 Revenue Deficit /GSDP 3.4 6.9 5.4 4.3 4.2 4.1 3.9 3.9 3.0 Primary Deficit /GSDP 2.3 5.4 2.5 1.2 0.9 0.8 0.2 0.1 -1.1 Fiscal Deficit / GSDP 6.7 10.3 7.5 6.4 6.2 6.1 5.7 5.6 4.5 Capital and O&M / GSDP 6.7 7.1 4.6 4.8 4.5 4.5 4.1 4.0 3.6 Interest / Revenue 25.7 30.4 31.1 31.5 31.3 31.2 31.3 31.1 28.5 Debt Servicing / Revenue 42.2 47.4 48.0 49.7 51.5 51.8 54.4 54.7 56.6 Debt Stock / GSDP 44.0 49.1 45.4 47.6 49.6 51.3 52.7 53.6 54.8 Intensified Reform Scenario Real GSDP Growth 3.3 3.4 3.4 3.7 4.3 4.5 4.8 5.0 5.8 Per-Capita Income Growth 1.4 1.6 1.6 1.9 2.5 2.7 3.0 3.2 4.0 Revenue Deficit / GSDP 3.4 6.9 5.3 2.8 1.9 1.2 0.4 0.2 0.4 Primary Deficit / GSDP 2.3 5.4 3.4 0.7 0.0 -0.3 -0.8 -0.8 -0.1 Fiscal Deficit / GSDP 6.7 10.3 8.3 5.8 4.9 4.4 3.9 3.7 3.9 Capital and O&M / GSDP 6.7 7.1 6.5 6.0 6.0 6.4 7.0 7.3 10.5 Interest / Revenue 25.7 30.4 28.1 28.0 26.4 25.0 24.2 23.6 19.6 Debt Servicing / Revenue 42.2 47.4 49.2 43.5 51.9 40.8 41.5 40.7 37.0 Debt Stock / GSDP 44.0 49.1 51.2 51.9 50.0 49.3 48.2 46.8 41.5 Notes: A negative sign on any of the deficit figures denotes a surplus; O&M includes non-wage O&M only. Figure 6.2: Fiscal, Revenue and Primary Balances Under the Two Scenarios (% of GSDP) Intensified Reform Scenario No More Reform Scenario 2.0 2.0 rimary Balanc Primary Balance 0.0 0.0 Revenue Bal nce -2.0 -2.0 -4.0 - - --- -4.0 Te l ** Fiscal Balanc 'k einue Balance -.- -6.0 -6.0- -6.0 -6.0 - -Fiscal[Balance -8.0 -8.0 - -10.0 -10.0 -12.0 -12.0 T 1P At the end of the scenario period, around 2007/8, the primary surplus becomes larger under the no-more-reform scenario than under the intensified-reform scenario. But this is again a completely forced adjustment, reflecting the impact of high interest payments, and limited borrowing sources, rather than a desirable outcome. - 57 - 6.12 Debt servicing. As a result of the reforms undertaken, the debt stock and debt servicing fall quickly under the intensified-reform scenario, as shown by Figure 6.3. There is a spike in 2001/02 under this scenario, but this is due to retirement of debt with privatization proceeds, which reduces debt servicing obligations in subsequent years. Figure 6.3 Debt Servicing (including Provident Fund Repayment) as 0% Percentage of Revenue Receipts 60 55 No Mbre Reform Scenario 45 40 35 Intensifi d eformScen flo 30 M-c~ U) rl- 0) C0 Ln) r) - 0) ) 0) 0) 0D 00 0 N 0 0;0 6 a) a) a) a) 0) 0 0 0 0) 0 0) 0 ) 0 ) 0 0 0 0 0 '-~04-- ~ C14 CN 04. (.i 6.13 Table 6.2 provides more insight into the fiscal correction under the intensified-reform scenario. Between 1998/99, the base year, and 2004/05, this scenario transforms a primary deficit of 5.4% of GSDP into a primary surplus of 0.8% - a fiscal correction of 6.2%. Revenue increases and expenditure cuts play roughly equal roles in achieving this correction, 49 and 51% respectively. The bulk of the contribution from the revenue increase (38 out of 49%) comes from an increase in own-revenue, while the bulk of the contribution from expenditure containment comes from the salary bill (41 out of 51%), with the remainder of the fiscal correction coming from a reduction in subsidies.8 Table 6.2 Contributions to Fiscal Correction Under the Intensified Reform Scenario, 1998/99 - 2004/05 Contribution to change in primary Change from 98/99 to 04/05 % of GSDP % of 98/99 deficit (%) Primary deficit 6.2 -115 100.0 Revenue 3.1 19 48.9 Own Revenue 2.4 32 38.4 Revenue from Centre 0.7 7 10.6 Non-Interest Expenditure -3.2 -15 51.1 Salary & Pensions -2.6 -22 41.0 Capital and non-wage O&M 0.0 0 0.2 Subsidies & Transfers -0.6 -24 9.9 Notes: The column titled "% of 98/99" gives the percentage of the change in the variable concerned (as a % of GSDP) relative to its value in 1998/99 (as a % of GSDP). There is a small increase in revenue from GOI, but only relative to 1998/99 not earlier years - 1998/99 saw exceptionally low transfers from the central government. -58- 6.14 Expenditure composition. The reform program involves much more than deficit reduction. Significant changes are also brought about in the composition of expenditure, as Figure 6.3 shows. In the no-more-reform scenario salaries squeeze out capital expenditure and non-wage O&M. Under the intensified-reform scenario, because of a reduction in salary payments, capital outlays and non-wage O&M increase significantly. Most of the increase is in the latter category - the substantial increase forecast in non-wage O&M will allow the Government not just to meet deferred maintenance needs, but also to improve the availability of, for example, medical drugs, and school equipment, thereby greatly improving the quality of service delivery. Figure 6.4 Expenditure Composition Under the Two Scenarios (% of total expenditure) No More Reform Scenario Intensified Reform Scenario 100% 100% 80% 80% 60% 60% 40% 40% 0% 0% 0% 0% oo CD N ( 0 00 C 4 ( 0 r- o) M t' n r. ~r- o) M 10 -l M~ 0) 0) o o o 0 (3~ ) 0 0 0 0D 0 ) 0) o 0 0 0 0) 0) 0 0 0 0D 0 R C14 04J ( N c lJ(i - - (N CN4 0NJ (N4 C\J j Interest Payments [ Explicit Subsidies & Transfers E Salaries, Grants in Aid of Salary& Pensions E Capital & Net Lending and Non-Wage O&M 6.15 Figure 6.5 looks at this change in expenditure composition from the perspective of salaries, pensions and interest payments. In 1998/99, these components for the first time exceeded 100% of revenue. In such a situation, any payments for inputs other than labour have to be financed by borrowing, whether for capital outlays, or for subsidies, drugs, text books or even phone calls. Under the no-more-reform scenario, salaries, pensions and interest still make up more than 95% of revenue even by 2004/05.9 Under the intensified-reform scenario, by contrast, the components fall sharply and steadily and by 2004/05 are down to 71% of revenue, a large and much needed adjustment. The Government thus faces a clear choice between intensifying reform and regaining its role as an agent of development, and not reforming and having its role reduced to that of an employment agency only. 9 The reason for the fall is the rise in GOI revenue as a percentage of GSDP under the no-more-reform scenario (not the intensified-reform scenario) on account of lower Orissa growth relative to India. - 59 - FigLre 6.5: Agent of Development or Employment Agency? Salaries, Pensions & Interest Payments as a percentage of Revenue Receipts 110 100 Nor tvbre Reform Scenario - 80 intesified Reform Scenario 60 50 6.16 Borrowing. One of the findings from the intensified-reform scenario is that funding the deficit should not be a problem for a reforming government. In the current year, GOO will need all the borrowings it can obtain (para. 6.18 below). But, from 2000/01 onwards, Orissa should not have to fully utilize all potential borrowing sources. Put differently, if it does utilize all borrowing sources, it will be on an unsustainable path, and the debt burden will continue to mount. However, this is not to say that GOO does not need additional concessional financing during the reform period. Without such financing, adjustment will be both slower and more expensive. The Government should see this situation as an opportunity to maximize its access to concessional and grant sources of funds, and to reduce its reliance on expensive, commercial forms of debt. Debt targets should be established and adhered to; if not, the deficit will stay too high, and fiscal sustainability illusive. 6.17 Provident fund. One of the most important assumptions in this analysis concerns the evolution of the provident fund. While other sources of debt - central government and market borrowings - are likely to grow in a relatively stable manner, the evolution of the provident fund will be determined by change in the size and demography of the civil service in Orissa. Under the very simple assumptions used for this exercise, net inflows from the provident fund fall over the forecast period, but remain positive, but alternative assumptions lead to net inflows from the provident fund turning negative over the forecast period. Given that the provident fund now provides net debt flows of about 2% of GSDP a year, there is a clear need for further analysis of the provident fund and a better understanding of likely trends. 6.18 Summary. While the scenario analysis confirms that there is a way out for Orissa provided that the reform process is intensified, it is also sobering in two respects. First, the analysis shows that, even under a reform scenario, things will get worse before they get better. Though there was no budget, and therefore no budget estimates, at the time of writing (para. 2.12), the scenario results for 1999/00 are a cause for concern. Because of the high deficit run in 1998/99, debt-servicing is expected to rise sharply from 47% of revenue in 1998/99 to 53% in 1999/00. As a result, even under the intensified-reform scenario, capital spending and non-wage O&M is cut to just over 5.8% of GSDP in 1999/00 compared to a historical average of 7%. 6.19 Second, and relatedly, the scenario analysis shows that adjustment is a long-term project. Recovering from the current, and worsening, fiscal crisis will take some time. For example, under the intensified-reform scenario, the debt stock stabilizes as a percentage of GSDP by 2001/02, but even by 2009/10, it is still 46%, its level of 1997/98. Moreover, it may take several years before economic growth accelerates in response to the reforms. 6.20 These two features - the worsening of the fiscal crisis in the short run and the potential longer-term benefits of a reform program - drive home the need for the Government to consult - 60 - with the public on the reform program. Regardless of the reform measures adopted today, it will take some time before their benefits appear. A consensus needs to be developed with regards to both the necessity and benefits of reform. The current fiscal crisis demands immediate action, but fully achieving adjustment with growth will require a decade of reform. - 61 - Annexes Annex A Orissa : Gross State Dom estic Product & Population................................................. 62 Annex B Rainfall in Orissa ........................................................................................................ 63 Annex C Debt Profile of Orissa ................................................................................................. 64 Annex D Orissa Fiscal Sum m ary ............................................................................................... 70 Annex E Local Governm ent in Orissa ....................................................................................... 74 Annex F Orissa Revenue D ata................................................................................................... 77 Annex G Public Enterprise Data and Reform Status.................................................................. 79 Annex H Scenario Analysis....................................................................................................... 82 Annex A Orissa: Gross State Domestic Product & Population 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 Provnl Quick Population (million) 26.21 26.65 27.13 27.62 28.11 28.62 29.15 29.69 30.24 30.82 31.41 32.01 32.61 33.21 33.82 34.42 35.02 35.63 (At current prices, Rs billion) Gross State Domestic Product 37.08 41.62 44.48 57.08 56.94 68.23 74.27 76.14 96.13 110.25 109.04 140.12 151.38 174.26 204.16 240.38 232.18 270.65 Agriculture and Allied Services 18.61 21.69 21.87 30.18 26.81 33.58 34.27 32.55 38.61 45.64 39.87 53.85 53.18 65.02 73.82 84.95 69.38 86.32 Agriculture 16.39 19.11 19.02 26.97 23.69 29.67 29.08 27.22 32.79 38.88 32.42 45.76 43.80 54.52 62.34 73.33 55.46 71.88 Forestry & logging 1.76 2.01 2.07 2.25 2.13 2.82 3.88 4.06 4.45 4.75 5.41 5.60 6.12 6.31 6.52 6.52 7.42 7.43 Fishing 0.46 0.56 0.78 0.96 0.99 1.08 1.32 1.26 1.36 2.00 2.03 2.49 3.26 4.19 4.97 5.10 6.49 7.01 industry 8.12 8.10 9.55 11.62 13.41 15.20 17.86 19.56 2,9.20 32.66 35.61 40.96 48.56 53.60 64.62 67.77 69.46 79.15 Mining & quarrying 0.88 1.00 1.14 1.38 1.44 1.75 2.16 2.58 3.60 4.23 4.78 5.26 7.17 8.78 9.14 11.49 12.00 13.07 Manufacturing 4.28 3.95 4.20 5.05 6.82 7.06 7.91 8.89 14.79 15.82 14.15 18.04 20.42 19.84 24.80 32.63 30.92 35.52 Construction 1.47 1.48 2.29 2.82 2.78 3.50 4.24 4.23 5.66 5.94 9.11 9.09 10.32 11.22 13.36 15.82 18.50 21.74 Electricity, gas and water supply 0.61 0.66 0.80 0.99 0.93 1.14 1.39 1.27 1.55 2.44 2.79 3.32 3.49 4.97 8.18 7.83 8.03 8.82 Services 11.23 12.83 14.20 16.66 18.16 21.20 24.30 26.62 31.92 36.19 38.34 50.57 56.81 64.42 74.86 87.65 93.35 105.18 Transport, storage & 1.10 1.43 1.63 1.82 205 2.56 3.06 3.55 4.31 5.25 6.07 7.17 8.35 9.98 12.43 14.72 16.04 17.77 communication Trade, hotels and restaurants 4.82 5.47 5.69 7.20 7.45 8,56 9.24 9.73 13.01 14.16 13.54 21.21 23.31 26.62 30.10 34.65 33.34 38.15 Banking & insurance 0.47 0.60 0.81 0.90 1.16 1.35 1.76 1.76 1.74 2.26 2.87 3.43 3.91 4.58 5.82 7.73 8.90 10.26 Other services 4.84 5.33 6.07 6.74 7.49 8.73 10.24 11.58 12.85 14.52 15.86 18.77 21.23 23.25 26.52 30.56 35.07 39.00 (At 80/81 prices, Rs billion) Gross State Domestic Product 37.08 37.17 35.35 42.12 40.54 45.04 45.86 44.79 53.76 57.46 48.84 54.57 54.06 57.66 60.37 63.53 58.25 67.74 Agriculture and Allied Services 18.61 19.08 16.85 21.82 18.91 22.07 21.12 19.14 22.41 25.16 17.48 20.14 18.39 21.21 21.22 20.58 15.63 20.53 Agriculture 16.39 16.82 14.60 19.49 16.78 19.83 18.91 17.01 20.15 22.66 15.22 17.90 15.94 18.64 18.48 17.90 12.79 17.37 Forestry & logging 1 76 1.78 1.76 1.74 1.52 1.57 1.52 1.37 1.45 1.53 1.25 1.12 1.16 1.11 1.08 0.97 0.96 0.98 Fishing 0.46 0.49 0.49 0.59 0.60 0.67 0.70 0.76 0.80 0.97 1.01 1.11 1.30 1.46 1.66 1.71 1.89 2.17 Industry 8.12 7.40 7.71 8.80 9.50 9.66 10.46 11.07 14.80 14.90 15.29 15.83 16.93 17.37 18.61 17.77 17.18 19.37 Mining & quarrying 0.88 0.88 0.87 0.98 0.99 1.09 1.23 1.39 1.76 1.99 2.26 2.16 2.68 3.08 2.96 3.63 3.85 4.20 Manufacturing 4.28 3.62 3.59 4.24 5.18 4.91 5.31 5.53 8.11 7.80 6.55 7.67 7.71 7.08 8.11 9.81 9.01 10.13 Construction 1.47 1.34 1.73 1.85 1.50 1.78 1.78 1.73 2.15 2.05 3.03 2.49 2.54 2.68 3.03 3.03 3.08 3.63 Electricity, gas and water supply 0.61 0.68 0.64 0.76 0.83 0.79 0.91 1.02 1.02 1.07 1.20 1.35 1.32 1.44 1.55 1.30 1.25 1.41 Services 11.23 11.57 11.67 12.48 13.12 14.40 15.51 15.97 18.31 19.39 18.32 20.76 21.41 22.16 23.50 25.18 25.44 27.84 Transport, storage & 1.10 1.17 1.13 1.13 1.26 1.48 1.69 1.77 1.96 2.08 2.16 2.26 2.42 2.51 2.80 3.19 3.35 3.60 communication Trade, hotels and restaurants 4.82 4.99 4.74 5.43 5.55 5.96 6.12 6.03 7.78 7.83 6.57 8.54 8.53 9.05 9.44 9.76 9.10 10.42 Banking & insurance 0.47 0.52 0.60 0.60 0.71 0.83 1.02 1.16 1.27 1.62 1.67 1.66 1.85 1.75 2.06 2.57 2.87 3.21 Other services 4.84 4.89 5.20 5.31 5.61 6.13 6.67 7.01 7.31 7.86 7.91 8.29 8.60 8.85 9.20 9.66 10.11 10.60 -63- Annex B Rainfall in Orissa Year Actual Deviation from normal rainfall in m.m. in m.m. in % Natural Calamities 1961 1262.8 -75.95 -5.7% 1962 1169.9 -168.85 -12.6% 1963 1467.0 128.25 9.6% 1964 1414.1 75.35 5.6% 1965 997.1 -341.65 -25.5% Severe Drought 1966 1134.9 -203.85 -15.2% Drought 1967 1326.7 -12.05 -0.9% Cyclone, Flood 1968 1296.1 -42.65 -3.2% Cyclone, Flood 1969 1802.1 463.35 34.6% Flood 1970 1660.2 321.45 24.0% Flood 1971 1791.5 452.75 33.8% Severe Cyclone, Flood 1972 1177.1 -161.65 -12.1% Flood, Drought 1973 1360.1 21.35 1.6% Flood 1974 951.2 -387.55 -28.9% Severe Drought, Flood 1975 1325.6 -13.15 -1.0% Flood 1976 1012.5 -326.25 -24.4% Severe Drought 1977 1326.9 -11.85 -0.9% Flood 1978 1261.3 -77.45 -5.8% Hailstorm, Whirlwind, Tornado 1979 950.7 -388.05 -29.0% Severe Drought 1980 1321.7 -17.05 -1.3% Flood, Drought 1981 1187.4 -151.35 -11.3% Whirlwind, Tornado, Flood, Drought 1982 1179.9 -158.85 -11.9% Severe Flood & Drought, Cyclone 1983 1374.1 35.35 2.6% 1984 1302.8 -35.95 -2.7% Drought 1985 1606.8 268.05 20.0% Flood 1986 1566.1 227.35 17.0% 1987 1040.8 -297.95 -22.3% Severe Drought 1988 1270.5 -68.25 -5.1% 1989 1283.9 -54.85 -4.1% 1990 1865.8 527.05 39.4% Flood 1991 1465.7 126.95 9.5% 1992 1344.1 5.35 0.4% Flood & Drought 1993 1421.6 82.85 6.2% 1994 1700.0 361.25 27.0% Flood 1995 1588.0 249.25 18.6% Flood 1996 988.0 -350.75 -26.2% Drought Average 1338.75 Average Deviation 13.9% Source: Board of Revenue, Orissa, Cuttack -64- Annex C Debt Profile of Orissa 1. Orissa is the most highly-indebted state in India, and its indebtedness is growing. Interest payments now comprise 30% of revenue receipts, up from 17% in 1990/91, and debt-service (including principal repayments on the provident fund) more than 47%. About 94% of GOO's own tax revenue is now spent on interest payments. The aim of this annex is to analyze Orissa's debt profile, including contingent liabilities, and its prospects for debt relief under the schemes of the Tenth Finance Commission. 2. Debt burden. Orissa's debt burden is high and rising. The debt-to-GSDP ratio has risen from 34% in 1986 to 46% in 1998, and to 49% in 1999, according to revised estimates (see Table 2.2). The composition of debt has also changed greatly over the past decade. While outstanding liabilities to the Central Government have remained around 20% of GSDP, liabilities to financial institutions and to its own employees (provident and insurance funds) have both risen sharply. As a result, debt to the Centre is now less than half of GOO's total debt, down from two-thirds about a decade ago. Table Al provides more details on Orissa's debt composition for the nineties. Table Al: Debt-Stock, Total and by Type of Debt, 1990/91 to 1997/98 Orissa : Debt Stock 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 r.e. Rs. billion at current prices Total Debt Stock 45.31 52.69 61.29 70.13 79.60 93.85 109.34 124.03 149.78 Market Debt 10.22 13.51 16.37 19.33 21.52 27.28 34.39 35.78 41.98 Loans and Advances from the CG 26.53 28.69 31.48 34.34 38.46 43.52 48.67 57.38 70.42 Provident& Insurance Funds, etc. 8.56 10.49 13.44 16.46 19.62 23.06 26.28 30.88 37.38 As % of GSDP Total Debt Stock 41.55 37.60 40.49 40.24 38.99 39.04 47.09 45.83 49.10 Market Debt 9.37 9.64 10.81 11.09 10.54 11.35 14.81 13.22 13.76 Loans and Advances from the CG 24.33 20.47 20.80 19.71 18.84 18.10 20.96 21.20 23.09 Provident & Insurance Funds, etc. 7.85 7.49 8.88 9.45 9.61 9.59 11.32 11.41 12.25 3. Table A2 provides information about net inflows taking into account principal repayments, and interest payments. It shows that, despite the rising debt burden, there has been little increase in net inflows from debt sources over the nineties up to 1997/98; rising levels of gross disbursements have been matched by rising levels of principal repayments and interest payments. Net inflows have risen over the last couple of years, however, as borrowing sources have been stretched to the limit to accommodate Orissa's fiscal problems. 4. Debt to Central Government is mainly of two types, block plan loans and small savings loans. In the case of Orissa, block plan loans are over two-thirds of the total debt to central government, and small- savings loans about 30%. Most of the block plan loans from the Centre are available in a fixed ratio with grants, as part of Central Assistance to the State Plan. Such assistance, which includes both the formula- driven untied assistance to the states and the Additional Central Assistance associated with externally aided projects, flows to all the major states as 70% loans and 30% grants. Block plan loans are of 20 years maturity including 5 years grace (or 15 years with no grace; currently both terms apply on equal halves of the block plan loans advanced each year). Interest is payable annually. More recently contracted loans carry a higher rate of interest (about 13%) than before. 5. Small savings loans flow to the states on an entitlement basis: each state is basically entitled to 75% of the net collections in its territory through Post Office Small Savings Accounts (SSAs). Small savings loans currently carry an interest rate of about 14% and have a maturity of 25 years, including 5 years of grace. Plan loans are available at softer than market terms, while the terms on small saving loans are a little harder than market terms. Under the current terms, a block plan loan of Rs. 100 would lead to future debt servicing liabilities whose present accumulated value is Rs. 85, using a discount rate equal to the rate of interest on state government securities. In contrast, a small saving loan of Rs. 100 would lead to future -65- Annex C debt servicing liabilities of Rs. 109 at present value terms. In other words, plan loans carry an implicit grant element of 15% while there is no grant element in small savings loans. Table A.2: Gross and Net Debt Flows (Rs. billion) 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 r.e. Internal Debt Gross Disbursement 2.8 3.2 3.2 4.8 4.5 5.8 7.5 Principal Repayment 0.2 0.4 0.1 0.7 0.1 0.2 1.2 Net Disbursement 2.6 2.8 3.1 4.1 4.4 5.6 6.2 Interest Payment 1.2 2.0 2.4 2.6 3.4 4.1 4.9 Net Inflow 1.4 0.7 0.8 1.5 0.9 1.5 1.3 Central Loans Gross Disbursement 4.4 5.4 6.1 6.6 7.0 11.5 15.5 Principal Repayment 1.7 2.5 1.9 1.6 1.9 2.8 2.4 Net Disbursement 2.8 2.9 4.1 5.1 5.2 8.7 13.0 Interest Payment 2.6 3.0 3.5 4.1 4.8 5.6 6.8 Net Inflow 0.2 -0.2 0.7 1.0 0.3 3.2 6.2 Provident and Insurance Funds Receipts 5.2 5.6 6.0 7.5 7.8 9.9 11.2 Disbursements 2.3 2.6 2.9 4.1 4.6 5.3 4.7 Inflow 2.9 3.0 3.2 3.4 3.2 4.6 6.5 Interest Payments 1.5 1.8 2.1 2.6 2.5 3.2 3.3 Net Inflow 1.4 1.3 1.1 0.8 0.7 1.4 3.2 Net Inflows 2.9 1.8 2.6 3.3 1.9 6.0 10.7 Market Loans 47% 40% 31% 45% 47% 25% 12% Central Loans 5% -10% 26% 30% 17% 52% 58% Provident Funds 47% 70% 43% 25% 35% 23% 30% Net/Gross Disbursements 74% 65% 78% 80% 83% 83% 77% Net Inflow/Net Disbursments 35% 21% 24% 26% 15% 32% 41% Memo : Central Grants 7.7 8.6 8.3 8.5 9.0 7.3 10.5 Share of Central Taxes 9.9 10.7 11.9 12.8 15.7 19.4 16.7 Source: RBI Bulletin various issues, State Budget Documents Note: Net/Gross Disbursement ratio calculated for market and GOI debt only. Net flows here do not include flows from short term debt (see para 9) 6. Market debt. Market debt -- also known as internal debt - consists mainly (about 90%) of open market borrowing through state government paper. Open market borrowing by Indian states is arranged by the Reserve Bank of India (RBI). After consultations between the Planning Commission and the states on their investment and borrowing requirements, the Ministry of Finance issues guidelines to the RBI for the state-wise allocation of open market borrowing. Money is then raised, mainly from the public sector banking system, by the RBI on behalf of the states. The RBI decides the timing of various tranches depending on the market conditions, liquidity conditions and the prevailing interest rates. Interest rates for this category of borrowing have increased from their levels in early 1980s and currently stand at just over 12%. Maturity rose in the early nineties to twenty years but have now fallen to ten, the shortest for the last two decades. 7. Other loans from financial institutions (10% of market debt) are arranged by the states themselves from LIC, UTI etc, but again require central government permission. Based on aggregate data, the average effective interest rate is a little over 10% and maturity about 10 years. -66- Annex C 8. Provident and insurance funds. The steepest increase in outstanding debt has been to the states' own provident and insurance funds. Inflows into the provident fund consist of annual contributions deducted from the salaries and grants-in-aid of salaries paid to the employees, as well,as repayments made by provident fund members on temporary borrowings, allowed under certain circumstances, plus annual interest payments based on the outstanding stock of provident fund debt (though these are accrued rather than paid in cash). Outflows consist of final and pre-final withdrawals, by retiring staff and those who have completed 20 years in service, respectively (the latter are allowed to withdraw up to a maximum of 75% of their outstanding balances (including interest) for specified purposes), as well as temporary withdrawals. As long as these funds are receiving more than they are paying out, they are generating a surplus which automatically becomes a budgetary resource. Contributions to the provident fund earn a compound interest rate of 12%. This is accrued annually, though no cash transaction takes place until the time of the final and pre-final withdrawals. Net inflows are therefore taken as inflows (contributions, repayments, plus accrued interest payments) minus outflows (withdrawals) minus accrued interest payments. As with overall debt, net inflows have been growing only in the last couple of years, especially with salary increases being paid into the provident fund (see Chapter 3). This will continue for several years, but then inflows may slow as a result of lower recruitment. Forward-looking, actuarial analysis of GOO's provident fund obligations is needed to forecast net inflows over the longer term. 9. Short-term debt. Like other states, the Government of Orissa takes recourse to short-term loans (Ways and Means Advances or WMA) from both the Central Government and RBI to tide over mismatches in its cash flow. Every state has a Normal Cash Balance (NCB) which it has to maintain with RBI. Once cash balances fall short of the NCB, it implies that the state has availed of Ways and Means Advances. If the outstanding balances exceed the WMA limit imposed by RBI for the state, it means that the state is in overdraft. Overdrafts have to be cleared within 10 working days, or RBI will automatically stop all payments on behalf of the state. The WMA from RBI does not necessarily have to be repaid by the end of the fiscal year. Besides the WMA which can be availed from RBI, GOI also extends liquidity support in the form of WMA, which, however, has to be repaid in full by the end of the fiscal year. When calculating debt flows and debt servicing, this short-term debt, which is repeatedly borrowed and repaid through the course of the year, is not taken into consideration. However, the outstanding short-term debt at the end of the year is included in the stock of outstanding debt. 9. Interest rate. The interest rate on Orissa's debt continues to rise. Taking interest payments to the end-of-period debt stock, the effective average interest rate on GOO's debt has risen from 8.0% in 1990/91 to 9.9% in 1994/95 to 10.4% in 1997/98. Given that inflation rates have fallen over the nineties, it is evident that the real cost of borrowing has risen sharply as older cheaper debt has been retired and newer more expensive debt taken on. 10. Debt service ratio. As Table A3 shows, the debt service ratio has risen from 35% of revenue in 1990/91 to 46% in 1997/98, with the steepest increase being in the case of open market borrowing. Sometimes debt servicing is calculated without provident funds. In this analysis, we include provident funds. since withdrawals for the provident funds are equal to principal repayments. The only difference between the provident fund and other sources of debt is that in the case of the provident fund, the interest is capitalized. -67- Annex C Table A3: Debt-Service, 1990/1998 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998-99 rX. Rs billion at current prices Principal Repayment (P) Total Debt 3.89 4.20 4.14 5.58 4.90 6.37 6.60 8.26 8.39 Internal Debt 0.09 0.12 0.21 0.43 0.09 0.67 0.14 0.17 1.23 Open Market Loans 0.01 0.03 0.12 0.26 0.00 0.57 0.01 0.04 0.94 Other Loans from Financial Institutions 0.09 0.09 0.09 0.17 0.09 0.10 0.13 0.13 0.31 Loans and Advances from the CG 2.22 2.21 1.65 2.55 1.93 1.58 1.86 2.79 2.45 Provident & Insurance Funds, etc. I 58 1.87 2.28 2.59 2.88 4.09 4.60 5.30 4.71 Interest Payment (1) Total Debt 3.65 4.81 5.42 6.83 7.87 927 10.80 12.88 15.08 Internal Debt 0.96 1.16 1.23 2.04 2.35 2.61 3.45 4.16 4.90 Open Market Loans 0.86 1.03 1.07 1.88 2.19 2.48 3.04 3.65 4.29 Other Loans from Financial Institutions 0.11 0.13 0.16 0.17 0.17 0.14 0.41 0.51 0.61 Loans and Advances from the CG 1.82 2.40 2.64 3.03 3.45 405 4.82 5.52 6.85 Provident & Insurance Funds, etc. 0.86 1.25 1.55 1.75 2.06 261 2.53 3.20 3.33 Debt Servicing (P+1) Total Debt 7.54 9.01 9.56 12.40 12.76 15.64 17.40 21.14 23.47 Internal Debt 1.05 1.28 1.44 2.48 2.44 3.28 3.59 4.33 6.13 Open Market Loans 0.86 1.06 1.19 2.14 2.19 3.04 3.05 3.68 5.23 Other Loans from Financial Institutions 0.19 0.22 0.25 0.34 0.25 0.24 0.54 0.64 0.92 Loans and Advances from the CG 4.04 4.61 4.29 5.58 5.38 5.63 6.68 8.31 9.30 Provident & Insurance Funds, etc. 2.44 3.13 3.83 4.35 4.94 6.70 7.13 8.50 8.04 as % ofrevenue receipts Principal Repayment (P) Total Debt 17.92 17.18 14.21 17.38 13.69 16.38 15.40 17.83 16.92 Internal Debt 0.44 0.49 0.73 1.35 0.25 1.72 0.33 0.36 2.48 Open Market Loans 0.03 0.13 0.42 0.82 0.01 1.45 0.03 0.08 1.89 Other Loans from Financial Institutions 0.41 0.35 0.31 0.53 0.24 0.27 0.30 0.28 0.62 Loans and Advances from the CG 10.21 9.04 5.67 7.94 5.40 4.07 4.33 6.03 4.93 Provident & Insurance Funds, etc. 7.28 7.65 7.81 8.09 8.04 10.52 10.72 11.44 9.50 Interest Payment (1) Total Debt 16.80 19.65 18.61 21.28 22.00 23.82 25.19 27.80 30.42 Internal Debt 4.42 4.74 4.22 6.37 6.58 6.72 8.04 8.98 9.89 Open Market Loans 3.94 4.21 3.68 5.85 6.12 6.37 7.09 7.88 8.65 Other Loans from Financial Institutions 0.48 0.53 0.54 0.53 0.47 0.35 0.95 1.10 1.24 Loans and Advances from the CG 8.39 9.79 9.07 9.45 9.65 10.41 11.25 11.92 13.82 Provident & Insurance Funds, etc. 3.98 5.12 5.32 5.47 5.76 6.70 5.90 6.90 6.71 Debt Servicing (P+I) Total Debt 34.72 36.83 32.82 38.66 35.69 40.20 40.59 45.63 47.34 Internal Debt 4.86 5.22 4.95 7.73 6.83 8.44 8.38 9.34 12.37 Open Market Loans 3.97 4.34 4.10 6.66 6.12 7.82 7.12 7.95 10.55 Other Loans from Financial Institutions 0.89 0.88 0.84 1.06 0.71 0.62 1.26 1.38 1.85 Loans and Advances from the CG 18.60 18.84 14.74 17.39 15.05 14.47 15.58 17.95 18.75 Provident & Insurance Funds. etc. 11.26 12.77 13.13 13.55 13.81 17.21 16.62 18.35 16.22 11. Guarantees. The Government of Orissa, like other state governments, issues guarantees to its public enterprises to enable them to borrow. These contingent liabilities were not examined in the 1996 Bank report, but have been receiving increasing attention in recent years on account of their greater use by the states. As Table 2.3 shows, outstanding guarantees of GOO as of March 31, 1998 were Rs 24.1 billion, or 8.9% of GSDP. Of this total, about Rs 20 billion of guarantees were to public enterprises, and about Rs 2 billion each to cooperatives and urban bodies (see Figure 1). The largest recipient of guarantees was the power sector (OSEB/GRIDCO and OPGC) with Rs 14 billion of guarantees. -68- Annex C Table A4: Recipients of Guarantees Guarantee value (Rs % of total Recipient of Guarantee billion) guarantees OSEB / GRIDCO 9.48 39.3 Orissa Power Generating Company 4.32 17.9 Orissa State Finance Corporation 3.35 13-9 Other (PSUs) 2.74 11.4 Co-operatives 2.27 9.4 Urban Local Bodies 1.93 8.0 Total 24.10 100.0 12. Options for Debt Reduction. The Tenth Finance Commission (TFC) recommended, and the Central Government accepted, the offer of two conditional debt relief schemes to the states: (i) debt relief linked to improvements in the revenue account balance of any state government; and (ii) debt relief linked to the use of privatization proceeds to retire debt to the centre. Neither of these schemes has since been utilized by GOO. This note updates the analysis of the 1996 report to examine why the schemes have not been used and to look for ways in which they might be improved by the recently-constituted Eleventh Finance Commission. 13. Debt-relief based on improvement in revenue balance. In order to benefit from this scheme, the ratio of revenue receipts to revenue expenses in any year needs to be higher than the average of the ratios in the three previous years. Due to deteriorating fiscal circumstances, this has not yet happened in Orissa, as Table A6 shows. However, even if it were to happen, debt relief would be given only some three years after the event according to the TFC guidelines (Appendix 6, p.179 of the Report of the TFC, December 1994)' More generally, it can be shown that in Orissa a reduction in the revenue deficit by 0.8% of GSDP - - which is certainly at the upper-end of any conceivable single-year adjustment -- will reduce the debt stock by 0.3% or only 0.06% of GSDP. Table A5: Revenue Balance Deterioration Revenue Recur. Exp. Ratio Average of (Rs billion) (Rs billion) (%) previous three years 1990/91 21.71 21.91 99.1 1991/92 24.47 26.34 92.9 1992/93 29.13 30.49 95.6 1993/94 32.08 34.82 92.1 95.9 1994/95 35.76 40.35 88.6 93.5 1995/96 38.91 46.98 82.8 92.1 1996/97 42.87 51.17 83.8 87.9 1997/98 46.32 55.36 83.7 85.1 1998/99 (r.e.) 52.14 73.18 71.3 83.4 14. Privatization-based debt-relief. Under this second scheme, debt relief is linked to the use of privatization or divestment proceeds to retire central debt. Every rupee that a state uses in this manner will be matched by an additional rupee of debt written off. In the case of Orissa, we estimate the Internal Rate of Return from using this scheme to be 31%. However, the maximum possible additional debt relief that any state can earn in this manner is limited to 20 percent of equity held by the state in public enterprises as on March 31, 1995. In the case of Orissa, the ceiling works out to Rs 1.8 billion. GOO has already raised in 1998/99 Rs 6 billion from sale of 49% of the Orissa Power Generation Corporation. However, the I TFC does not give a reason for this long delay; it may be related to the time required to produce audited reports. Introducing a system of ex post corrections bctween estimated and audited figures would presumably allow this delay to be removed. -69- Annex C Government is so strapped for cash that it is using all of these proceeds for financing high priority plan expenditures rather than retiring any debt (it could retire Rs 3.6 billion or 6% of debt to the center (1.2% of GSDP) with Rs 1.8 billion of proceeds). The Government plans further privatization but is again likely to use these to meet expenditure requirements: there are also questions over how much the Government will be able to raise from divestment on account of the low profitability of many of its enterprises. 15. This analysis shows several problems with the schemes identified by the TFC. Regarding the revenue balance scheme the main problem is that the reward is too little and too late: if an improvement in the revenue balance by 1.6% of revenue or about 0.3% of GSDP is rewarded by debt relief of no more than 0.02% of GSDP and no earlier than three years after the event, this cannot be expected to provide state governments with an incentive to improve their fiscal position. An additional problem is that the scheme should be defined with respect to the primary or non-interest balance rather than the revenue balance including interest, so that those states with rising debt burdens (for historical reasons) but improving underlying fiscal positions are not at a disadvantage. 16. With respect to the second scheme, the incentive for the state to use its divestment proceeds to retire debt may be stronger if the benefit included some immediate cash-flow relief in the form of debt-service waivers instead of or in addition to future saving in debt servicing. The scheme could also be more attractive if the state government could choose which portion of central debt will be written off (i.e., plan or small savings loans), rather than being restricted to only plan debt. An additional problem with the divestment linked scheme is the 20% upper-bound, although it is evident that this constraint is not binding in the case of Orissa because of the state's cash-flow imperatives. 17. Of course, it is recognized that these debt-forgiveness schemes are, zero sum between the centre and states, and GOI's finances are hardly in better shape than Orissa's. Nevertheless, if incentives are to be given to the states, and if these are to attract heavily-indebted, cash-strapped states, they will have to be stronger than those offered by the TFC. -70- Annex D Orissa Fiscal Summary Expenditure and Revenue 1985/86 to 1991/92 (Rs billion) 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 Revenue Receipts 9.41 12.28 13.33 15.51 17.41 21.71 24.47 A. Tax Revenue 5.61 7.52 7.89 8.71 10.97 13.63 15.04 States' own Tax Revenue 2.86 3.38 3.87 4.43 5.25 6.69 6.74 Share of Central Taxes 2.76 4.14 4.02 4.29 5.73 6.94 8.31 B. Non-Tax Revenue 3.79 4.76 5.44 6.79 6.43 8.08 9.43 Interest Receipts, Dividends 0.11 0.12 0.09 0.15 0.06 0.08 0.34 Grants from Centre 2.49 3.18 3.88 4.86 4.45 6.07 6.83 Other 1.19 1.46 1.48 1.78 1.93 1.93 2.26 Revenue Expenditure 10.01 12.48 14.08 16.59 18.46 21.91 26.34 A. Social Services 4.31 5.16 5.88 6.46 7.74 8.42 10.39 Education 2.01 2.53 2.89 3.39 4.15 4.52 5.48 Health and Family Welfare 0.74 0.90 1.00 1.10 1.20 1.35 1.57 Food and Nutrition 0.03 0.09 0.12 0.10 0.12 0.13 0.15 Welfare of SCs, STs and BCs 0.38 0.44 0.50 0.57 0.63 0.75 0.85 Others 1.16 1.19 1.37 1.30 1.63 1.68 2.34 B. Economic Services 2.80 3.41 3.76 4.38 4.35 6.48 6.98 Agriculture and Allied Services 0.93 1.15 1.40 1.55 1.70 2.72 2.49 Rural Development 0.92 1.02 1.11 1.45 1.04 1.95 1.87 Irrigation and Flood Control 0.29 0.35 0.43 0.45 0.50 0.61 0.79 Energy 0.03 0.10 0.04 0.05 0.05 0.07 0.34 Other 0.63 0.79 0.78 0.87 1.05 1.12 1.49 C. General Services 2.83 3.84 4.39 5.67 6.30 6.82 8.82 Interest Payments 1.26 1.72 2.07 3.04 3.10 3.65 4.81 Administrative Services 0.95 1.33 1.39 1.47 1.65 1.69 2.07 Pensions 0.21 0.30 0.37 0.56 0.69 0.75 0.95 Other 0.41 0.49 0.56 0.60 0.86 0.74 0.98 D. Other Revenue Expenditure 0.07 0.06 0.06 0.08 0.08 0.18 0.15 Revenue Surplus (+) or Deficit (-) -0.60 -0.20 -0.75 -1.08 -1.05 -0.20 -1.87 Capital Expenditure (net) 2.67 3.52 4.31 4.50 4.68 5.97 7.25 Irrigation and Flood Control 1.29 1.49 1.89 1.83 1.71 2.08 2.40 Power 0.28 051 0.73 0.89 0.89 1.51 1.80 Transport 0.34 0.40 0.41 0.46 0.59 0.82 1.00 Other Capital Expenditure 0.67 0.82 0.87 0.99 1.08 1.10 1.36 Loans and Advances (net) 0.09 0.29 0.41 0.33 0.42 0.46 0.70 Gross Loans 0.79 1.16 Recovery 0.33 0.47 Total Expenditure 12.68 16.00 18.39 21.08 23.15 27.87 33.59 Fiscal Surplus (+) or Deficit(-) .-3.27 -3.72 -5.06 -5.57 -5.74 -6.16 -9.12 Deficit Financing Internal Debt (net) 0.83 0.77 1.71 1.15 1.58 1.46 2.67 Loans From Centre (net) 1.44 1.25 1.97 2.18 2.23 3.86 2.15 Provident and Insurance Funds (net) 0.56 0.69 0.86 1.28 1.13 1.36 1.93 Divestment / Privatisation Non Debt Reserves & Deposits 0.44 1.01 0.51 0.97 0.80 -0.52 2.37 Outstanding Debt 23.09 25.8 29.73 33.73 39.21 45.31 52.69 Internal Debt (net) 4.76 5.53 6.63 7.66 9.76 10.22 13.51 Loans From Centre (net) 15.08 16.33 18.31 20 22.24 26.53 28.69 Small Savings and PFs. (net) 3.25 3.94 4.79 6.07 7.21 8.56 10.49 GSDP 68.23 74.27 76.14 96.13 110.25 109.04 140.12 Source: RBI State Finances, State Budget Documents, CSO, RCF and World Bank Staff Estimates -71- Annex D Orissa Fiscal Summary Cont. Expenditure and Revenue 1992/93 to 1998/99 (Rs billion) 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 re. Revenue Receipts 29.13 32.08 35.76 38.91 42.87 46.32 52.14 A. Tax Revenue 17.57 19.28 21.17 24.12 29.08 33.57 35.24 States' own Tax Revenue 7.62 8.60 9.23 11.27 13.42 14.22 18.59 Share of Central Taxes 9.95 10.68 11.94 12.85 15.66 19.35 16.65 B. Non-Tax Revenue 11.56 12.80 14.59 14.79 13.79 12.75 16.90 Interest Receipts, Dividends 0.58 0.88 0.54 1.41 0.14 0.22 0.24 Grants from Centre 7.68 8.65 8.25 8.50 8.97 7.34 10.47 Other 3.30 3.28 5.81 4.87 4.68 5.19 6.20 Revenue Expenditure 30.49 34.82 40.35 46.98 51.17 55.36 73.18 A. Social Services 11.95 13.25 14.90 18.35 20.15 22.13 28.47 Education 6.20 6.88 8.15 9.43 10.66 12.08 16.09 Health and Family Welfare 1.72 1.87 2.16 2.55 2.74 2.97 3.43 Food and Nutrition 0.19 0.25 0.23 0.91 0.94 0.69 0.88 Welfare of SCs, STs and BCs 1.02 1.16 1.33 1.63 1.62 1.66 2.29 Others 2.82 3.08 3.03 3.83 4.19 4.72 5.79 B. Economic Services 8.27 9.59 11.17 12.47 11.33 10.56 16.07 Agriculture and Allied Services 2.90 2.62 2.78 4.26 4.43 4.31 6.32 Rural Development 2.18 3.37 2.53 1.95 2.59 2.33 3.97 Irrigation and Flood Control 0.97 1.07 1.12 1.31 1.79 1.47 1.67 Energy 0.46 0.79 2.54 2.73 0.11 0.08 0.56 Other 1.75 1.73 2.19 2.22 2.41 2.36 3.56 C. General Services 10.13 11.79 14.24 16.03 19.53 22.40 28.45 Interest Payments 5.42 6.83 7.87 9.29 10.79 12.92 15.08 Administrative Services 2.51 2.46 2.97 3.39 4.30 4.45 5.85 Pensions 1.22 1.48 1.66 1.95 2.53 3.17 4.81 Other 0.98 1.02 1.74 1.40 1.91 1.87 2.71 D. Other Revenue Expenditure 0.13 0.20 0.05 0.13 0.16 0.28 0.19 Revenue Surplus (+) or Deficit (-) -1.36 -2.74 -4.60 -8.07 -8.30 -9.04 -21.04 Capital Expenditure (net) 6.04 6.27 6.99 5.89 9.65 8.98 10.51 Irrigation and Flood Control 2.25 1.96 1.85 2.41 3.92 5.91 6.02 Power 1.63 1.60 0.84 -0.44 1.97 0.00 0.75 Transport 1.06 1.20 1.57 1.49 1.65 1.50 1.53 Other Capital Expenditure 0.94 1.09 2.01 1.00 2.11 1.15 1.45 Loans and Advances (net) 0.17 0.42 0.73 1.42 0.86 0.41 0.77 Gross Loans 0.92 090 1.18 1.93 1.14 1.66 2.48 Recovery 0.75 0.48 0.46 0.51 0.28 1.24 1.72 Total Expenditure 36.53 41.09 47.35 52.87 60.82 -5.11 -16.47 Fiscal Surplus (+) or Deficit(-) -7.40 -902 -11.59 -13.96 -17.95 -18.03 -31.56 Deficit Financing Internal Debt (net) 2.62 2.77 3.15 5.76 7.12 1.38 6.21 Loans From Centre (net) 2.80 2.85 4.12 5.06 5.15 8.71 13.04 Provident and Insurance Funds (net) 2.95 3.02 3.15 3.44 3.22 4.60 6.50 Divestment / Privatisation 1.93 0.00 5.03 Non Debt Reserves & Deposits -0.97 0.38 1.17 -0.30 0.53 3.34 0.78 Outstanding Debt 61.29 70 13 79.60 93.85 109.34 124.03 149.78 Internal Debt (net) 16.37 19.33 21.52 27.28 34.39 35.78 41.98 Loans From Centre (net) 31.48 34.34 38.46 43.52 48.67 57.38 70.42 Small Savings and PFs. (net) 13.44 16.46 19.62 23.06 26.28 30.88 37.38 GSDP 151.38 174.26 204.16 240.38 232.18 270.65 305.04 Note: There will be discrepancies for 1998/99 between this table and other tables, since 1998-99 figures in this table are based purely on revised estimates and do not incotporate adjustments made elsewhere to incorporate known actual tax collections. -72- Annex D Orissa Fiscal Summary Cont. Expenditure and Revenue 1985/86 to 1991/92 (% of GSDP) 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 Revenue Receipts 13.79 16.54 17.51 16.13 15.79 19.91 17.47 A. Tax Revenue 8.23 10.13 10.36 9.07 9.95 12.50 10.73 States' own Tax Revenue 4.19 4.55 5.08 4.61 4.76 6.13 4.81 Share of Central Taxes 4.04 5.58 5.28 4.46 5.19 6.37 5.93 B. Non-Tax Revenue 5.56 6.41 7.15 7.07 5.83 7.41 6.73 Interest Receipts, Dividends 0.16 0.17 0.11 0.16 0.05 0.08 0.24 Grants from Centre 3.65 4.28 5.10 5.06 4.03 5.57 4.88 Other 1.75 1.96 1.94 1.85 1.75 1.77 1.61 Revenue Expenditure 14.67 16.80 18.49 17.26 16.74 20.09 18.80 A. Social Services 6.32 6.95 7.72 6.72 7.02 7.72 7.42 Education 2.94 3.41 3.79 3.53 3.76 4.14 3.91 Health and Family Welfare 1.08 1.22 1.32 1.14 1.09 1.24 1.12 Food and Nutrition 0.05 0 12 0.16 0.11 0.11 0.12 0.11 Welfare of SCs, STs and BCs 0.55 0.59 0.65 0.59 0.57 0.69 0.61 Others 1.70 1.61 1.79 1.35 1.48 1.54 1.67 B. Economic Services 4.11 4.60 4.93 4.55 3.94 5.94 4.98 Agriculture and Allied Services 1.37 1.55 1.84 1.61 1.54 2.50 1.78 Rural Development 1.35 1.37 1.45 1.51 0.94 1.79 1.34 Irrigation and Flood Control 0.42 0.48 0.56 0.47 0.46 0.56 0.56 Energy 0.05 0.13 0.05 0.05 0.05 0.06 0.24 Other 0.92 1.06 1.03 0.91 0.96 1.03 1.06 C. General Services 4.14 5.17 5.76 5.90 5.72 6.25 6.29 Interest Payments 1.85 2.32 2.72 3.16 2.81 3.34 3.43 Administrative Services 1.40 1.79 1.83 1.53 1.49 1.55 1.48 Pensions 0.30 0.40 0.49 0.59 0.63 0.68 0.68 Other 0.60 0.66 0.73 0.63 0.78 0.68 0.70 D. Other Revenue Expenditure 0.10 0.08 0.07 0.08 0.07 0.17 0.11 Revenue Surplus (+) or Deficit (-) -0.88 -0.27 -0.98 -1.12 -0.96 -0.18 -1.33 Capital Expenditure (net) 3.91 4.74 5.66 4.68 4.25 5.47 5.18 Irrigation and Flood Control 1.89 2.01 2.48 1.90 1.55 1.90 1.71 Power 0.40 0.69 0.96 0.92 0.80 1.39 1.28 Transport 0.50 0.54 0.54 0.48 0.54 0.75 0.72 Other Capital Expenditure 0.98 1.10 1.14 1.03 0.98 1.01 0.97 Loans and Advances (net) 0.14 0.40 0.54 0.34 0.38 0.42 0.50 Gross Loans 0.72 0.83 Recovery 0.30 0.33 Total Expenditure 18.58 21.55 24.15 21.93 20.99 25.56 23.97 Fiscal Surplus (+) or Deficit (-) -4.79 -5.01 -6.64 -5.80 -5.20 -5.65 -6.51 Deficit Financing Internal Debt (net) 1.21 1.04 2.25 1.19 1.43 1.34 1.90 Loans From Centre (net) 2.11 1.68 2.59 2.26 2.03 3.54 1.54 Provident and Insurance Funds (net) 0.82 0.93 1.13 1.33 1.03 1.24 1.38 Divestment / Privatisation 0.00 0.00 Non Debt Reserves & Deposits 0.65 1.36 0.67 1.01 0.72 -0.47 1.69 Outstanding Debt 33.84 34.74 39.05 35.09 35.56 41.55 37.60 Internal Debt (net) 6.98 7.45 8.71 7.97 8.85 9.37 9.64 Loans From Centre (net) 22.10 21.99 24.05 20.81 20.17 24.33 20.47 Small Savings and PFs. (net) 4.76 5.30 6.29 6.31 6.54 7.85 7.49 Source: RBI State Finances, State Budget Documents, CSO, RCF and World Bank Staff Estimates -73- Annex D Orissa Fiscal Summary Cont. Expenditure and Revenue 1992/93 to 1998/99 (% of GSDP) 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 r.e. Revenue Receipts 19.24 18.41 17.52 16.19 18.46 17.11 17.09 A. Tax Revenue 11.61 11.06 10.37 10.03 12.52 12.40 11.55 States' own Tax Revenue 5.03 4.93 4.52 4.69 5.78 5.25 6.09 Share of Central Taxes 6.57 6.13 5.85 5.35 6.74 7.15 5.46 B. Non-Tax Revenue 7.64 7.35 7.15 6.15 5.94 4.71 5.54 Interest Receipts, Dividends 0.38 0.50 0.26 0.59 0.06 0.08 0.08 Grants from Centre 5.08 4.96 4.04 3.54 3.86 2.71 3.43 Other 2.18 1.88 2.84 2.03 2.02 1.92 2.03 Revenue Expenditure 20.14 19.98 19.77 19.54 22.04 20.46 23.99 A. Social Services 7.90 7.60 7.30 7.63 8.68 8.18 9.33 Education 4.10 3.95 3.99 3.92 4.59 4.46 5.27 Health and Family Welfare 1.13 1.08 1.06 1.06 1.18 1.10 1.12 Food and Nutrition 0.13 0.14 0.11 0.38 0.40 0.25 0.29 Welfare of SCs, STs and BCs 0.68 0.67 0.65 0.68 0.70 0.62 0.75 Others 1.86 1.77 1.48 1.60 1.80 1.74 1.90 B. Economic Services 5.46 5.50 5.47 5.19 4.88 3.90 5.27 Agriculture and Allied Services 1.92 1.50 1.36 1.77 1.91 1.59 2.07 Rural Development 1.44 1.93 1.24 0.81 1.12 0.86 1.30 Irrigation and Flood Control 0.64 0.62 0.55 0.55 0.77 0.54 0.55 Energy 0.30 0.46 1.25 1.14 0.05 0.03 0.18 Other 1.16 0.99 1.07 0.92 1.04 0.87 1.17 C. General Services 6.69 6.76 6.97 6.67 8.41 8.28 9.33 Interest Payments 3.58 3.92 3.85 3.87 4.65 4.77 4.94 Administrative Services 1.66 1.41 1.46 1.41 1.85 1.64 1.92 Pensions 0.81 0.85 0.81 0.81 1.09 1.17 1.58 Other 0.65 0.59 0.85 0.58 0.82 0.69 0.89 D. Other Revenue Expenditure 0.09 0.11 0.02 0.05 0.07 0.10 0.06 Revenue Surplus (+) or Deficit (-) -0.90 -1.57 -2.25 -3.36 -3.58 -3.34 -6.90 Capital Expenditure (net) 3.99 3.60 3.43 2.45 4.16 3.32 3.45 Irrigation and Flood Control 1.48 1.12 0.91 1.00 1.69 2.18 1.97 Power 1.08 0.92 0.41 -0.18 0.85 0.00 0.25 Transport 0.70 0.69 0.77 0.62 0.71 0.56 0.50 Other Capital Expenditure 0.62 0.63 0.98 0.42 0.53 0.43 0.47 Loans and Advances (net) 0.11 0.24 0.36 0.59 0.37 0.15 0.25 Gross Loans 0.61 0.52 0.58 0.80 0.49 0.61 0.81 Recovery 0.50 0.28 0.22 0.21 0.12 0.46 0.56 Total Expenditure 24.13 23.58 23.19 21.99 26.20 23.77 27.44 Fiscal Surplus (+.) or Deficit (-) -4.89 -5.17 -5.68 -5.81 -7.73 -6.66 -10.35 Deficit Financing Internal Debt (net) 1.73 1.59 1.54 2.39 3.07 0.51 2.03 Loans From Centre (net) 1.85 1.64 2.02 2.10 2.22 3.22 4.28 Provident and Insurance Funds (net) 1.95 1.73 1.54 1.43 1.39 1.70 2.13 Divestment / Privatisation 0.00 0.00 0.00 0.00 0.83 0.00 1.65 Non Debt Reserves & Deposits -0.64 0.22 0.57 -0.14 0.22 1.23 0.26 Outstanding Debt 40.49 40.24 38.99 39.04 47.09 45.83 49.10 Internal Debt (net) 10.81 11.09 10.54 11.35 14.81 13.22 13.76 Loans From Centre (net) 20.80 19.71 18.84 18.10 20.96 21.20 23.09 Small Savings and PFs. (net) 8.88 9.45 9.61 9.59 11.32 11.41 12.25 Note: For GSDP assumptions for 1998/99 see Annex H.; see also note on p.67. -74- Annex E Local Government in Orissa I. Overview. India's third tier of government is its weakest throughout the country, but especially in Orissa. The low priority given by the Government to issues of decentralization can be seen in the delay in its establishing a State Finance Commission (SFC) to advise on local finance issues. Though their establishment is mandatory under the 73rd and 74th amendments to the constitution on rural and urban decentralization, Orissa was one of the last states to establish a SFC. Recently, however, the Commission did come down with a report, which the Cabinet has now accepted, and decentralization appears to be gaining some momentum in the state with recent announcements of increased powers to be given to the rural Panchayati Raj Institutions (PRIs) 2. Orissa's limited progress with decentralization is understandable given the state's fiscal stress. There is no intrinsic reason for decentralization to be fiscally expensive, but it is not difficult to think of reasons why it could be, especially given the difficulties of moving staff from the state government to the local level. However, it is also the case that decentralization is now underway in India, not only in traditionally-progressive states like Kerala and West Bengal, but also, more recently, in the northern states of Madhya Pradesh, Rajasthan and Uttar Pradesh. Increasingly, states are trying to transfer responsibilities as well as revenues to local bodies to improve service delivery while reducing fiscal stress. It may, therefore, be appropriate for Orissa to review the functioning of local government. This annex provides some background on local government in Orissa, based largely on the SFC report. 3. Structures. Local government in Orissa consists of both rural as well as urban local bodies. In rural areas, local self government consists of three tiers, the Gram Panchayat (GP) at the village level, the Panchayat Samiti (PS) at the block level and the Zilla Parishad (ZP) at the district level. Zilla Parishads are new entrants to the system of local government. They came into existence since February, 1997, as a result of the 73rd Constitutional Amendment. There are 30 ZPs, 314 PSs and 5255 GPs: thus, on average, there are 10 PSs in each ZP and 17 GPs in each PS. 4. Urban local bodies are of three types: Municipalities, Municipal Corporations, and Notified Area Councils. There are 30 Municipalities, 2 Municipal Corporations (for Bhubaneswar and Cuttack) and 70 Notified Area Councils (for smaller towns) in Orissa. Table E.1: Rural Local Government (Rs million) Rural Local Bodies Number Average Average Average Own Average Population Revenue Revenue Expenditure '000 Gram Panchayats 5255 6.0 1106 72 1107 Panchayat Samities 314 100.7 2554 0 2554 Zilla Parishad 30 1054.4 267 0 267 Aote Average revenue, own revenue and expenditure have been calculated for the period 1990/91 to 1997/98, exceptfor Zilla Parishads where the figures are for the period 1996/97 to 1997/98. Table E.2: Urban Local Government (Rs Million) Urban Local Bodies Number Average Average Average Own Average Population Revenue Revenue Expenditure '000 Notified Area Councils 70 17,400 259 151 259 Municipalities 30 /a 79,800 524 341 521 Municipal Corporations 2 378 294 384 Note: Average revenue, own revenue and expenditure have been calculated for the period 1990/91 to 1997/98. /a Figures for average population are for Municipalities and Municipal Corporations put together. 5. After the 73rd and 74h Constitutional Amendments, local bodies have acquired a new status which has enlarged their functions. The functional domain of local bodies consists of exclusive functions (those which they undertake independent of any outside authority) and agency functions (one which they perform as an agent of the central / state government). GPs have largely exclusive functions and not many agency -75- Annex E functions, whereas PSs and ZPs have largely agency functions where the financial needs are met largely by the central / state government. Urban local bodies only have exclusive functions. 6. Rural revenue. The major source of income for rural local governments is in the form of grants. Grants from Centrally Sponsored Schemes and lately from the Tenth Finance Commission make up at least 80% of total revenue for each of the three rural tiers. GPs and PSs are also assigned a share of revenue from cess on land and from the net profits on the kendu leaf trade. For ZPs, grants have been their only source of income since inception (1996/97). Only the GP's raise their own revenue, from taxes on vehicles, latrines, lights and drainage and from non-tax revenue in the form of fees from fishery rental, cart stands, property and entertainment, and this makes up only 6.5% of their total revenue over the period 1990/91 to 1997/98. 7. Rural expenditure. Most expenditure taken up by the local bodies is in the form of development expenditure (minor irrigation, roads, education, rural housing), maintenance expenditure (roads, street lights, water supply) and expenditure on establishment. Overall, the share of development expenditure made by rural local bodies has been increasing whereas that of establishment and maintenance has been declining. The trend is however reversed in the case of the GPs where historically, the major share of maintenance expenditure has been towards roads. The high level of development expenditure reflects the tied nature of the funds made available to the local government bodies through the central and TFC schemes. The three tiers do not in general have distinct responsibilities, and are all engaged in similar rural infrastructure projects, such as roads and minor irrigation. 8. Urban revenue. Local bodies present quite a different case to rural, as their main source of revenue is from own sources, 60% for notified area councils and municipalities and 85% for municipal corporations. Tax is the major source of own revenue and octroi is the predominant source of tax revenue. Tax on holdings is the second most important source of revenue for ULBs in Orissa. This tax as well as service taxes such as water, lighting and drainage tax, are determined by the annual rental value of the building. The growth of transfers from the government has been low compared to the growth in their own revenue. 9. Urban expenditure. Establishment expenditure accounts for the largest share of expenditure of urban local bodies, maintenance expenditure is next (largely roads and sanitation) with development expenditure (largely on roads, health and education) being the lowest of the three. 10. Additional revenue requirements. The envisaged increase in the functions of Local Bodies as a result of the recent Constitutional Amendments, as well as the required upgradation in the level of basic services provided by them, will cause a substantial increase in the expenditure to be incurred by them in the future. With the presently available sources of own income (including assigned revenue) available to the local bodies, their revenue is expected to fall far short of the projected levels of expenditure. According to the State Finance Commission, the projected expenditure of rural local bodies is largely to be on account of the construction and maintenance of roads and on account of a proposed increase in staff and on the building of quarters for the new staff. The projected expenditure of the urban local bodies accounts for the normal operations and maintenance of core services without accounting for an improvement in the services. According to these financial projections, on average for the period 2000/01 to 2004/05, all rural local bodies will require Rs 13.79 billion and all urban local bodies will require Rs 2.69 billion in the form of grants over and above their own sources of revenue. 11. Revenue-sharing reforms. The State Finance Commission suggested changes in assignment of revenue from the prevailing sources of local bodies. In the case of urban local bodies, it recommended the imposition of a professions tax with 50% of the gross collections accruing to the bodies. The SFC also recommended the abolition of octroi only if the state government can assure timely release of the compensation to be made to urban local bodies, with an automatic increase of 10% in subsequent years. Moreover, the SFC recommended 10% of collections of the motor vehicle tax should be given to ULBs. -76- Annex E 12. Loeal tax reforms were also suggested to augment the sources of revenue available to local bodies. For example, the SFC recommended the imposition of a house tax on buildings both residential and commercial by GPs. For the holdings (property) tax, the SFC recommended that periodical (five-yearly) revaluation be made mandatory - if this was not possible, there should be a 3 to 5% hike in the existing holding tax as an interim measure. 13. The SFC did not quantify the additional income to be generated from these sources, but expected the additional resource generation from all these measures to be marginal. In addition, the finances of the state government would not allow it to contribute much to the local bodies either by way of grants or through the devolution and assignment of shared revenue. In the absence of available resources with both the local bodies as well as the state government, the Finance Commission concluded that without massive external assistance, of which the largest portion will have to come from the Central Government, local government in Orissa would be unable to upgrade their basic services or discharge their assigned functions. An alternative conclusion is that local government can only be upgraded by the transfer of functions as well as revenue from the state government. Such a "fiscally neutral" or "fiscally positive" decentralization can improve service delivery while at the same time preventing any worsening in the state's fiscal problems, or, indeed, perhaps contribute to the resolution. -77- Annex F Orissa Revenue Data, 1985/86 to 1991/92 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 Rs Billion at Current Prices Revenue 9.41 12.28 13.33 15.51 17.41 21.71 24.47 State's Own Revenue 4.17 4.96 5.43 6.36 7.23 8.70 9.34 State's Own Taxes 2.86 3.38 3.87 4.43 5.25 6.69 6.74 Sales Tax 1.48 1.76 2.06 2.38 2.97 3.55 3.94 Excise (liquor) 0.22 0.23 0.27 0.31 0.38 0.46 0.55 Motor Vehicles 0.25 0.32 0.35 0.38 0.44 0.52 0.60 Stamp Duties 0.17 0.20 0.22 0.26 0.28 0.31 0.35 Taxes on Electricity 0.50 0.60 0.61 0.68 0.33 0.99 0.99 Other 0.24 0.27 0.36 0.41 0.84 0.86 0.31 State's Own Non-tax Rev. 1.31 1.58 1.56 1.93 1.99 2.01 2.60 Of Which: Mining 0.10 0.14 0.21 0.21 0.26 0.23 0.68 Revenue from Centre 5.24 7.32 7.90 9.15 10.17 13.01 15.14 Central Tax Devolution 2.76 4.14 4.02 4.29 5.73 6.94 8.31 Central Grants 2.49 3.18 3.88 4.86 4.45 6.07 6.83 GSDP 68.23 74.27 76.14 96.13 110.25 109.04 140.12 as % of GSDP Revenue 13.8 16.5 17.5 16.1 15.8 19.9 17.5 State's Own Revenue 6.1 6.7 7.1 6.6 6.6 8.0 6.7 State's Own Taxes 4.2 4.5 5.1 4.6 4.8 6.1 4.8 Sales Tax 2.2 2.4 2.7 2.5 2.7 3.3 2.8 Excise (liquor) 0.3 0.3 0.3 0.3 0.3 0.4 0.4 Motor Vehicles 0.4 0.4 0.5 0.4 0.4 0.5 0.4 Stamp Duties 0.3 0.3 0.3 0.3 0.3 0.3 0.2 Taxes on Electricity 0.7 0.8 0.8 0.7 0.3 0.9 0.7 Other 0.3 0.4 0.5 0.4 0.8 0.8 0.2 State's Own Non-tax Rev. 1.9 2.1 2.1 2.0 1.8 1.8 1.9 Of Which: Mining 0.1 0.2 0.3 0.2 0.2 0.2 0.5 Revenue from Centre 7.7 9.9 10.4 9.5 9.2 11.9 10.8 Central Tax Devolution 4.0 5.6 5.3 4.5 5.2 6.4 5.9 Central Grants 3.6 4.3 5.1 5.1 4.0 5.6 4.9 as % ofRevenue Revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 State's Own Revenue 44.3 40.4 40.7 41.0 41.6 40.1 38.2 State's Own Taxes 30.4 27.5 29.0 28.5 30.2 30.8 27.5 Sales Tax 15.8 14.3 15.5 15.4 17.1 16.4 16.1 Excise (liquor) 2.3 1.9 2.0 2.0 2.2 2.1 2.2 Motor Vehicles 2.7 2.6 2.6 2.5 2.5 2.4 2.5 Stamp Duties 1.8 1.7 1.7 1.7 1.6 1.4 1.4 Taxes on Electricity 5.3 4.9 4.6 4.4 1.9 4.6 4.0 Other 2.5 2.2 2.7 2.7 4.8 4.0 1.3 State's Own Non-tax Rev. 13.9 12.9 11.7 12.5 11.4 9.3 10.6 Of Which: Mining 1.0 1.1 1.5 1.3 1.5 1.1 2.8 Revenue from Centre 55.7 59.6 59.3 59.0 58.4 59.9 61.9 Central Tax Devolution 29.3 33.7 30.2 27.6 32.9 32.0 34.0 Central Grants 26.4 25.9 29.1 31.4 25.5 28.0 27.9 -78- Annex F Orissa Revenue Data, 1992/93 to 1998/99 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 r.e. Rs Billion at Current Prices Revenue 29.13 32.08 35.76 38.90 42.87 46.32 49.58 State's Own Revenue 11.50 12.75 15.57 17.55 18.24 19.63 22.47 State's Own Taxes 7.62 8.60 9.23 11.27 13.42 14.22 16.03 Sales Tax 4.52 5.14 5.78 7.16 8.94 9.25 10.35 Excise (liquor) 0.63 0.76 0.59 0.73 0.91 1.06 1.07 Motor Vehicles 0.77 0.86 0.95 1.08 1.28 1.42 1.75 Stamp Duties 0.41 0.48 0.53 0.63 0.69 0.77 0.80 Taxes on Electricity 0.97 0.98 1.01 1.21 1.20 1.28 1.40 Other 0.32 0.37 0.36 0.46 0.41 0.45 0.66 State's Own Non-tax Rev. 3.88 4.15 6.34 6.28 4.82 5.41 6.44 Of Which: Mining 1.18 1.31 1.72 2.43 2.70 3.17 3.79 Revenue from Centre 17.63 19.33 20.19 21.35 24.63 26.69 27.11 Central Tax Devolution 9.95 10.68 11.94 12.85 15.66 15.64 16.65 Central Grants 7.68 8.65 8.25 8.50 8.97 11.06 10.47 GSDP 151.38 174.26 204.16 240.38 232.18 270.65 305.04 as % of GSDP Revenue 19.2 18.4 17.5 16.2 18.5 17.1 16.3 State's Own Revenue 7.6 7.3 7.6 7.3 7.9 7.3 7.4 State's Own Taxes 5.0 4.9 4.5 4.7 5.8 5.3 5.3 Sales Tax 3.0 3.0 2.8 3.0 3.8 3.4 3.4 Excise (liquor) 0.4 0.4 0.3 0.3 0.4 0.4 0.4 Motor Vehicles 0.5 0.5 0.5 0.4 0.6 0.5 0.6 Stamp Duties 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Taxes on Electricity 0.6 0.6 0.5 0.5 0.5 0.5 0.5 Other 0.2 0.2 0.2 0.2 0.2 0.2 0.2 State's Own Non-tax Rev. 2.6 2.4 3.1 2.6 2.1 2.0 2.1 Of Which: Mining 0.8 0.8 0.8 1.0 1.2 1.2 1.2 Revenue from Centre 11.6 11.1 9.9 8.9 10.6 9.9 8.9 Central Tax Devolution 6.6 6.1 5.8 5.4 6.7 5.8 5.5 Central Grants 5.1 5.0 4.0 3.5 3.9 4.1 3.4 as % ofRevenue Revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 State's Own Revenue 39.5 39.8 43.5 45.1 42.5 42.4 45.3 State's Own Taxes 26.2 26.8 25.8 29.0 31.3 30.7 32.3 Sales Tax 15.5 16.0 16.2 18.4 20.8 20.0 20.9 Excise (liquor) 2.2 2.4 1.7 1.9 2.1 2.3 2.2 Motor Vehicles 2.6 2.7 2.7 2.8 3.0 3.1 3.5 Stamp Duties 1.4 1.5 1.5 1.6 1.6 1.7 1.6 Taxes on Electricity 3.3 3.1 2.8 3.1 2.8 2.8 2.8 Other 1.1 1.1 1.0 1.2 1.0 1.0 1.3 State's Own Non-tax Rev. 13.3 13.0 17.7 16.1 11.2 11.7 13.0 Of Which: Mining 4.0 4.1 4.8 6.2 6.3 6.8 7.6 Revenue from Centre 60.5 60.2 56.5 54.9 57.5 57.6 54.7 Central Tax Devolution 34.2 33.3 33.4 33.0 36.5 33.8 33.6 Central Grants 26.4 27.0 23.1 21.9 20.9 23.9 21.1 Note: In the fiscal year 1998/99, actual receipts of the state 's own tax revenue have fallen short of the revised estimates provided in the latest budget documents. The figures presented here are based on actual revenue receipts from sales tax, excise and stamps and registration fees. Annex G Public Enterprise Data and Reform Status The table below provides details on GOO's public enterprises, as follows: (i) Name - subsidiaries are in italics (ii) Loans availed against GOO Guarantees as on 31.3.98 (ii) Total Regular Staff, as on 04.12.98 (iii) Government Equity as on 31.03.98 (iv) Profit / (Loss) for FY 1997-98 (v) Recommendations of the 1996 Cabinet Sub-Committee on PE Reform (vi) Present status of implementation of recommendations. The table is divided into three parts: (a) covering those PEs for which the Sub-Committee recommended closure or some form of privatization; (b) covering other PEs, excluding the power sector; (c) power sector PEs. Name Guarantees Staff GOO Equity Profit (Loss) Recommendations Present Status Rs Million Rs Million Rs Million (a) Identified for Privatisation / Joint Venture / Closure 1 Orissa State Electronics Development 0.0 97 181.4 1.5 Corporation IPITRON Times Privatisation Closed (25.05.98.) ELCOSMOS Electronics Privatisation Closed (20.02.98.) ELCO Communications Privatisation Closed (01.08.98.) 2 Konark Television Limited 69.0 576 58.1 -51.6 Partial privatisation (Government) Workers have been retrenched shareholding reduced to 49%) 3 Industrial Development Corporation of 1349.6 2453 565.2 -244.7 Continuing Orissa Re-rolling Mill Privatisation Assets to be given on lease-cum-rent basis to JV (51% OSIL, 49% ICCL) Hira Cables Privatisation IDCOL Piping & Engineering Works Privatisation Application filed with BIFR ABS Spinning Mills Joint Venture Proposal sent to IDBI for consideration ORICHEM Joint Venture BIFR package approved and being implemented S N Corporation Privatisation Clearance for closure received from Labour & Employment Department under ID Act IDCOL Cement Joint Venture. IDCOL shareholding Application filed with BIFR for revival to be limited to 49% Konark Jute Mill Privatisation BIFR package approved, being Annex G Name Guarantees Staff GOO Equity Profit (Loss) Recommendations Present Status Rs Million Rs Million Rs Million implemented Ferro Chrome / KIW Partial Privatisation Offers invited (a) Identified for Privatisation / Joint Venture / Closure cont 4 Orissa Small Industries Corporation n.a. 263 96.6 2.0 Orissa Pump & Engineering Works. Privatisation 100% privatised K S Refractories Privatisation Closed (04.12.98.) 5 Orissa State Financial Corporation 3160.7 873 485.3 2.3 Phased partial divestment through Continuing public issue 6 Orissa Film Development Corporation 0.0 28 54.0 0.2 Kalinga Studios Limited Privatisation To be converted to joint venture 7 Orissa Lift Irrigation Corporation n.a. 10197 727.3 -7.2 Efforts to be made to transfer LI 270 projects have been handed over to Points to Community Ownership Water User Associations 8 Orissa Forest Development Corporation 199.1 5553 12.8 5.4 Privatise kendu leaf. JV for plantation Continuing programs in degraded forest area by offering >=5 1% equity to entrepreneurs 9 Orissa Textile Mills n.a. 3655 7.0 -88.4 Privatisation Under BIFR package 10 Orissa State Textile Corporation 0.0 1933 55.3 -32.1 JV with Govt shareholding at 49%. To be closed Else total privatisation 11 Orissa Agro Industries Corporation 15.0 890 60.9 -174 Units in farm implements / cattle feed Continuing for privatisation / joint venture 12 Orissa State Cashew Development 0.0 217 15.5 7.0 Joint venture 35 yr lease Corporation 13 Orissa Tourism Development Corporation 0.0 482 92.2 1.0 Privatise non-viable activities of Continuing Panthanivases 14 Orissa Mining Corporation 10.0 3346 314.6 291.8 Existing chrome-ore benefaction Continuing plant & china clay washery will be considered for JV 15 Orissa State Leather Corporation n.a. 128 39.7 0.0 Closure Closed (18.06.98) 16 Orissa State Commercial Transport n.a. 358 61.0 0.0 Closure Closed (30.05.98) Corporation 17 Orissa State Handloom Development n.a. 557 41.8 0.0 Closure To be closed Corporation 18 Orissa Instruments Company n.a. 42 8.4 0.0 Closure Closed (20.03.98) 19 New Mayurbhanj Textiles Limited n.a. 0 1.4 0.0 Closure To be closed 20 Orissa State Seeds Corporation 0.40 216 18.6 5.0 Privatisation of distribution network Under way TOTAL (a) 4,803.8 31,864 2,888.6 -125.0 Annex G Name Guarantees Staff GOO Equity Profit (Loss) Recommendations Present Status Rs Million Rs Million Rs Million (b) Other PEs (Non-power) 21 Orissa State Warehousing Corporation 23.3 492 16.0 19.4 22 Orissa State Road Transport Corporation n.a. 5652 1099.0 -137.6 Restructuring measures Continuing restructuring measures 23 Orissa Industrial Infrastructure Development 0.0 720 0.0 18.6 Corporation 24 Orissa Construction Corporation 10.0 323 105.0 6.0 25 Industrial Promotion & Investment 0.0 159 96.6 -36.2 Corporation of Orissa Limited 26 Orissa Maritime & Chilika Area Development 0.0 126 62.4 0.9 Corporation 27 Orissa Fish Seeds Development Corporation 32.0 116 50.2 -12.4 Merged with newly formed Orissa Pisciculture Development Corporation 28 Orissa State Civil Supplies Corporation 0.0 1303 97.8 0.0 29 Orissa State Police Housing & Welfare 0.0 213 83.1 2.6 Corporation 00 30 Orissa Bridge & Construction Corporation 0.0 628 50.0 -11.8 31 Orissa State Export Development Corporation 0.0 0 1.4 0.0 32 Orissa Rural Housing & Development n.a. 24 50.0 7.7 Corporation 33 Agriculture Promotion and Investment 0.0 6.0 0.0 Corporation of Orissa TOTAL (b) 65.3 9756 1717.5 -142.93 (c) Others PEs (Power) 34 i) OSEB (1960-61) -4 6796.9 30476 3840.0 -2480.0 51% of 4 distribution subsidiaries being ii) GRIDCO sold off to private parties, with another 10% for sale to employees 35 Orissa Power Generation Corporation 45.0 688 4500.0 687.0 49% divestment effected. Another 25% to be divested 36 Orissa Hydro Power Corporation 2094.8 3994 3200.0 777.9 Financial advisors being selected TOTAL (c) 8,936.7 35,158 11,540.0 1,793.0 GRAND TOTAL (a+b+c) 13,805.8 76,778 16,146.0 2,061.9 -82- Annex H Scenario Analysis This annex sets out in five tables the detailed assumptions (common and separate) and then results from the two scenarios of Chapter Six. Unless indicated otherwise, assumptions are kept unchanged after 2004/05. Table Hi: Common Assumptions (for No More Reform and Intensified Reform scenarios) 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Inflation 8.0% 7.0% 6.5% 6.0% 6.0% 6.0% Population 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% Growth rate of India real GDP /a 5.2% 5.2% 5.2% 5.8% 5.8% 5 8% Growth of real wages in GOO /b 1.5% 1.5% 1.5% 1.5% 1.5% Base year 1998/99, except for loans for which base year is 1997/98 due to unusually heavy borrowing in 1998/99. Interest rate on new borrowings Small savings Inflation + 4% Market loans Inflation + 4.5% Plan loans Inflation + 4.5% Provident funds 12% ACA Inflation + 4.5% Share of central taxes Grows with a buoyancy of 1.10 to nominal India GDP Central grants For Central & Centrally Growth equal to nominal India GDP growth Sponsored Schemes For State Plan schemes Grows at the rate of nominal Orissa GSDP (excluding ACA /c) Statutory grants 0.8% of GSDP -- the estimated average level in the period 1995/96 to 1999/00 Availablity of credit sources Small savings Grows at the rate of nominal Orissa GSDP Market loans Grows at the rate of nominal Orissa GSDP Plan loans Grows at the rate of nominal Orissa GSDP Revenue buoyancies/d Taxes on vehicles 1.12 Stamps and registration fees 1.07 Mining revenue I (with respect to mining GSDP) Non-tax revenue Interest, dividends and Increase at the rate of nominal GSDP. profits User charges Education and health increase at rate of population; forestry and wildlife at the rate of growth of nominal GSDP; misc. increase at rate of inflation. Assumptions for other categories vary over scenarios Provident Funds Receipts consist of subscriptions and interest. Subscriptions are set at 25% of the nominal salary bill, based on the average over the last four years and grow at the rate of the nominal salary bill, with allowance for payment of salary arrears and increases into the provident fund as described in Chapter 3. Interest is 12% of the previous end-of-year's debt stock. Disbursements are fixed at 15% of the salary bill for 1999/00; the level for 1998/99; however, this is low by historical standards and the rate increases to 20% in 2000/01. It increases by one percentage point a year thereafter, in line with historical trends. Pensions The base pension grows at the rate of 12% based on historical trends. On top of this dearness allowances are paid twice yearly at the rate of inflation. Arrears for the flow through from the salary increase have been accumulating since January 1996. These are assumed to be fully settled in 1999-00 and come to Rs 2.5 billion. GSDP growth for 1998/99 Real GSDP growth of 3.4% and inflation of 9% la All India GDP projections taken from Bank estimates. /b 1999-00 salary bill based on the projections presented in Chapter 3. /c See note to reform scenario table. /d Tax buoyancies calculated from Table 4.2. - 83 - Annex H Table H2: Assumptions Specific to the "No More Reform" Scenario 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Staff growth /a All staff excluding... 2.5% 2.5% 2.5% 2.5% 2.5% Aided (non-government) college 10.0% 10.0% 10.0% 0% 0% 0% teachers/b Revenue buoyancies /c Sales tax 1.01 Excises 0.81 Electricity revenue 0,32 User charges Water Supply, Irrigation Recovery occurs at historical rate of 10% of revenue spending in these sectors: revenue spending grows at rate of nominal GSDP Subsidies and trahsfers Explicit subsidies stay at their historical level of 0.7% of GSDP (see Table 3.6); transfers stay at 1.5% of GSDP, close to the historical level of 1.7%. Grants in aid of salaries are counted not under this category, but under salaries. Non wage O&M Derived as a residual. Set equal to capital expenditure. Capital expenditure Derived as residual. Set equal to non-wage O&M. Real GSDP growth 3.4% 3.0% 3.0% 3.0% 3.0% 3.0% Real mining GSDP growth 10.0% 9.0% 9.0% 9.0% 9.0% 9.0% /a In 1999-00, civil service salary bill excluding grants in aid to college teachers is based on the projections given in Table 3.5, which assume that all arrears are paid by the end of the year and that there is zero civil service growth. Growth rate for staff in subsequent years is based on trend for the nineties presented in Chapter 3. lb It is assumed that an additional 33% of aided (non-government) college teachers is added to the number currently receiving grants-in-aid over a three year period, at which time saturation point is reached. Ic Buoyancies taken from Table 4.2 except for sales tax which is the estimated buoyancy for 90/1-9 7/8 without the Additional Resource Mobilization measures taken in recent years (1995/96-1997/98). Buoyancy for electricity revenue not expected to increase under no-more-reform scenario on account offailure to complete power sector reform (e.g. financial restructuring of GRIDCO). Table 113: Assumptions Specific to the "Intensified Reform" Scenario 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Staff growth /a All staff excluding... -2.7% -2.7% -2.7% -2.7% -2.7% Primary school teachers 0.0% 1.0% 1.0% 2.0% 2.0% Aided (non-government) college -3.0% -3.0% -3.0% -3.0% -3.0% teachers Annual incremental tax revenue from tax reform (Rs million) Sales tax (a) motor vehicle reform 45 45 (b) increase diesel and petrol 40 40 rates from 18 to 20% to establish Road Fund (c) Reduce industrial incentives 166 167 167 (d) rationalization of rates, 125 125 125 125 improvement in administration, introduction of VAT (e) One time settlement of sales 250 250 tax arrears Excise reform 100 100 100 100 Revamp stamp duties 200 200 200 Introduce profession tax 100 100 Profession tax assumed to have a buoyancy of one after its introduction. Replace octroi by entry 750 750 (This replaces octroi, a municipality source of revenue. It Tax is assumed that GOO compensates the municipalities for this by a new grant-in-aid, taking 1998/99 estimated revenue of Rs 650 million as the base and escalating this by 10% per annum. The entry tax is assumed to have a buoyancy of one after its introduction) Tax buoyancies /b Sales tax 1.01 1.01 1.01 1.01 1.19 1.19 - 84 - Annex H 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Excises 0.81 0.81 0.81 0.81 1.00 1,00 Electricity revenue 0.32 0.5 0.75 1.00 1.00 1.00 User charges /c Irrigation 50% 100% Household water supply 15% 30% 50% 70% 90% 100% Additional Central Assistance 4 4 4 4 4 0 (ACA): Rs billion above no- more-reform Schenario/d VRS (Voluntary Retirement It is assumed 24,000 (about 1/3 of PE workforce) take VRS at cost of Rs 310,000 per Schemes) worker spread out evenly over four years starting in 99/00. Privatization receipts In 1999/00, privatization proceeds of Rs 3 billion are assumed . Of this, Rs 1.8 billion are used to retire central debt under the TFC scheme (see Annex A), which provides an additional rupee of debt relief for each rupee of debt retired using privatization proceeds. In 2001/02, a further Rs 7 billion of privatization proceeds (e.g. from OHPC) is used entirely to retire debt (small savings loans, the most expensive), but without the benefits of any incentive scheme. Subsidies and transfers Explicit subsidies are held constant in nominal terms at their 1997/98 level; transfers (excluding grants-in-aid of salaries) stay at 1.5% of GSDP, close to the historical level of 1.7% Grants in aid of salaries are counted not under this category, but under salaries. Non wage O&M (% GSDP) Determined 3.0% 3.0% 3.3% Determined residually with residually minimum limit of 3.5%, subject to subject to borrowing borrowing constraints and cap on constraints fiscal deficit of 4.5% of GSDP Capital expenditure (% GSDP) 3.0% 3.0% 3.0% 3.3% 3.5% 3.5% Real GSDP growth 3.4% 3.7% 4.3% 4.5% 4.8% 5.0%; then 5.5% for 05/6-06/7; then 5.8 for 07/8 onwards Real mining GSDP growth 10.0% 10.0% 10.0% 10.0% 12.0% 12.0% /a See corresponding note for Table H2. For aided college teachers, there is an assumed additional liability of Rs 0.14 billion in 1999/00 to absorb the backlog of eligible teachers. After this date, the number of aided college teachers declines at the retirement rate of 3%. In addition, the nominal salary of each active teacher is fixed. The share of the elementary education salaries in the overall salary budget is estimated from information on education salaries and spending; it comes out to about 25% of the salary bill in the base year. lb See corresponding note for Table H2. For sales tax, up to 2003/4, the underlying buoyancy is the no reform buoyancy of 1.01 - revenue gains from reform measures are added discretely on top of this; after 2003/4, no further discrete revenue gains are modelled. Instead, the underlying buoyancy is taken at its historical level of 1.19. Ic Revenue spending grows at the rate of nominal GSDP as in the no more reform scenario. Id In the Base Case, ACA grows at the rate of India s nominal GDP taking 1997-98 as the base case. This row shows the amount over this level which A CA grows at in the Reform scenario. Note that A CA is distributed as with plan resources from GOI as 70% loan and 30% grant Annex H Table H4 No More Reform Scenario Results Rs billion at Current Prices Actual r.e. Projected 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Revenue 3208 35.76 3891 4287 46.32 49.58 54.33 6259 6963 77.35 8595 95.56 106.29 118.28 131.69 146.67 16344 State's Own Revenue 1275 15.57 17.55 18.24 19.63 22.47 25.30 28.07 31.03 34.16 3764 41.49 45.78 50.54 55.85 61.76 68.34 Tax 855 9.23 11.27 1342 14.22 16.03 17.84 19.61 21.45 23.36 25.44 27.71 30.19 32.88 35 82 39.02 42.52 Non-Tax 420 6.34 6.28 4.82 5.41 6.44 7.46 8.46 9.58 10.80 12.19 13.78 15.59 17.66 20.03 22.73 25.82 Central Resources 1932 20.19 21.35 24.63 26.69 27.11 29.04 34.52 38.60 43.18 48.32 54.07 60.51 67.74 75.84 84.92 95.10 Sharedtaxes 1068 11.94 12.85 15.66 19.35 16.65 1901 21 50 24.21 27.30 3078 34.71 39.14 44.13 4976 56.11 63.28 Grants 865 8.25 8.50 8.97 7.34 10.47 10.03 13.02 14.40 15.89 17.54 19.36 21.38 23.61 26.07 28.80 31.82 Expenditure 41 09 47.35 52.86 60.82 64.35 81.14 79.87 86.76 95.00 104.85 113.85 125.59 138.11 152.58 165.25 181.22 200.74 Salaries 1433 16.43 19.20 22.56 24.31 30.94 31.27 34.05 37.81 41.66 45.91 50.59 55.75 61.43 6770 74.61 82.22 Pensions 1.46 1.65 1.94 2.53 3.15 4.80 8.51 6.91 7.89 9.01 10.31 11.80 13.51 15.47 17.73 20.32 23.30 Non-wage O&M 8.07 8.71 8.48 11.20 8.65 9 83 10.25 11.23 11.25 12.27 13.32 14.71 14.70 15.78 17.73 Explicit Subsidies & Transfers 8.47 6.58 6.50 8.59 7.49 8.26 9.06 9.89 10.80 11.79 12.87 14.06 15.35 16.75 18.29 Interest Payments 683 7.87 9.29 10.79 12.92 15.08 16.91 19.71 21.78 24.11 26.90 29.76 32.56 35.81 39.14 42.53 46.58 Capital & Net Lending 627 7.00 5.89 9.65 8.98 10.51 7.03 8.01 8.21 8.94 8.69 9.39 10.10 11.10 10.64 11.23 12.62 1 Primary Surplus(+) / Deficit (-) -2.18 -3.72 -4.66 -7.16 -5.11 -16.47 -8.63 -4.47 -3.58 -3.39 -1.00 -027 0.74 1.51 5.57 7.98 9.29 RevenueSurplus(+)/Deficit(-) -274 -4.59 -8.07 -8.31 -9.04 -21.04 -18.50 -16.16 -17.16 -18.56 -19.21 -20.64 -21.72 -23.21 -22.93 -23.32 -24.67 Gross FiscalSurplus(+)/Deficit(-) -901 -11.59 -13.96 -17.96 -18.03 -31.56 -25.53 -24.17 -25.36 -27.50 -27.90 -30.03 -31.82 -34.30 -33.57 -34.55 -37.29 Financed by: Debt (net disbursement) 12.60 12.74 18.93 25.75 25.53 24.17 25.36 27.50 27.90 30.03 31.82 34.30 33.57 34.55 37.29 Divestment/Privatization 0.00 1.93 0.00 5.03 0.00 0.00 0.00 0.00 000 0.00 0.00 0.00 0.00 0.00 0.00 Reserves, Deposits etc. (net) 1.35 3.28 -0.91 0.78 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Debt Flows 12.60 12.74 18.93 25.75 25.53 24.17 25.36 27.50 27.90 30.03 31.82 34.30 33.57 34.55 37.29 Central Government 506 515 8.71 1304 11.47 1228 13.12 13.98 14.78 15.66 17.22 18.35 19.58 20.93 22.40 Market 4.11 4.37 5.63 621 5.90 7.19 7.17 8.11 7.39 8.37 8.38 9.60 7.61 7.37 8.94 Provident Fund 3.44 3.22 4.60 6.50 8.16 4.69 5.07 5.41 5.73 6.00 6.22 6.35 6.37 6.25 5.95 Debt Stock 70.13 79.60 93.85 109.34 124.03 149.78 15467 178.85 204.21 230.71 258.52 287.46 319.13 352.27 385.63 418.94 455.94 Central Government 34.34 38.46 43.52 48.67 57.38 70.42 82.31 94.60 107.72 120.70 135.39 149.95 167.03 184.22 203.59 223.28 245.39 Market 1933 21.52 2728 34.39 3578 41 98 4744 5463 61 81 69.92 7731 85.68 94.05 103.65 111 26 I18.63 127.56 Provident Fund 16.46 19.62 23.06 26.28 30.88 37.38 24.92 29.62 34.68 40.10 45.82 51.83 58.05 64.40 70.77 77.03 82.98 Salary & Pension/Revenue (%) 49.2 50.5 54.3 58.5 59.3 72.1 73.2 65.4 65.6 65.5 65.4 65.3 65.2 65.0 64.9 64.7 64.6 Interest/Revenue (%) 21.3 22.0 23.9 25.2 27.9 30.4 31.1 31.5 31.3 31.2 31.3 31.1 30.6 30.3 29.7 29.0 28.5 Debt Service/Revenue (%) 38.7 35.7 40.2 40.6 45.7 47.4 48.0 49.7 51.5 51 8 54.4 54.7 55.0 548 570 57.3 56.6 GSDP 174 204 240 232 271 305 341 375 412 450 491 536 585 639 698 762 831 Annex H Table H4 No More Reform Scenario Results As % of GSDP Actual r.e. Projected 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Revenue 18.4 17.5 16.2 18.5 17.1 16.3 16.0 16.7 16.9 17.2 17.5 17.8 18.2 18.5 18.9 19.3 19.7 State's Own Revenue 7.3 7.6 7.3 7.9 7.3 7.4 7.4 7.5 7.5 7.6 7.7 7.7 7.8 7.9 8.0 8.1 8.2 Tax 4.9 4.5 4.7 5.8 5.3 5.3 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5,1 5.1 5.1 5.1 Non-Tax 2.4 3.1 2.6 2.1 2.0 2.1 2.2 2.3 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 Central Resources 11.1 9.9 8.9 10.6 9 9 8.9 8.5 9.2 9.4 9.6 9.8 101 103 106 10.9 11.2 11.4 Shared taxes 6.1 5.8 5.3 6.7 7.1 5.5 5.6 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.4 7.6 Grants 5.0 4.0 3.5 3.9 2.7 3.4 2.9 3.5 3.5 3.5 3.6 3.6 3.7 3.7 3.7 3.8 3.8 Expenditure 23.6 23.2 22.0 26.2 23.8 26.6 23.4 23.1 23.1 23.3 23.2 23.4 23.6 23.9 23.7 23.8 24.1 I Salaries 8.2 8.0 8.0 9.7 9.0 10.1 9.2 9.1 9.2 9.3 9.4 9.4 9.5 9.6 9.7 9.8 9.9 co Pensions 0.8 0.8 0.8 1.1 1.2 1.6 2.5 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 2.7 2.8 Non-wage O&M 3.4 3.8 31 3.7 2.5 2.6 2.5 2.5 2.3 2.3 2.3 2.3 2.1 2.1 2.1 Explicit Subsidies & Transfers 3.5 2.8 2.4 2.8 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 Interest Payments 3 9 3.9 3.9 4.6 4.8 4.9 5.0 5.2 5.3 5.4 5.5 5.6 5.6 56 5.6 5.6 5.6 Capital & Net Lending 3.6 3.4 2.4 4.2 3.3 3.4 2.1 2.1 2.0 2 0 1.8 1.8 1.7 1.7 1.5 1.5 1.5 PrimarySurplus(+)/Deficit(-) -1.3 -1.8 -1.9 -3.1 -1 9 -5.4 -2.5 -1.2 -0.9 -0.8 -0.2 -0.1 0.1 0.2 0.8 1.0 1.1 Revenue Surplus(+) / Deficit(-) -1.6 -2.2 -3.4 -3.6 -3.3 -6.9 -5.4 -4.3 -4.2 -4.1 -3.9 -3.9 -3.7 -36 -3.3 -3.1 -3.0 Gross Fiscal Surplus (+) / Deficit(-) -5.2 -5.7 -5.8 -7.7 -6.7 -10.3 -7.5 -6.4 -6.2 -6.1 -5.7 -5.6 -5.4 -5.4 -4.8 -4.5 -4.5 Financed by: Debt (net disbursement) 5.2 5.5 7.0 8.4 7.5 6.4 6.2 6.1 5.7 5.6 5.4 54 4.8 4.5 4.5 Divestment/Privatization 0.0 0.8 0.0 1.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Reserves & Deposits (net) 0.6 1.4 -0.3 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Debt Flows 5.2 5.5 7.0 8.4 7.5 6.4 6.2 6.1 5.7 5.6 5.4 5.4 4.8 4.5 4.5 Central Government 2.1 2.2 3.2 4.3 3.4 3.3 3.2 3.1 3.0 2.9 2.9 2.9 2.8 2.7 2.7 Market 1.7 1.9 2.1 2.0 1.7 1.9 1.7 1.8 1.5 1.6 1.4 1.5 1.1 1.0 1.1 Provident Fund 1.4 1.4 1.7 2.1 2.4 1.3 1.2 1.2 1.2 1.1 1.1 1.0 0.9 0.8 0.7 Debt Stock 40.2 39.0 39.0 47.1 45.8 49.1 45.4 47.6 49.6 51.3 52.7 53.6 54.5 55 1 55.3 55.0 54.8 Central Government 19.7 18.8 18.1 21.0 21.2 23.1 24.2 25.2 26.2 26.8 276 28.0 28.5 28.8 29.2 29.3 29.5 Market 11.1 10.5 11.3 14.8 13.2 13.8 13.9 14.6 15.0 15.6 15.7 16.0 161 16.2 16.0 15.6 15.3 Provident Fund 9.4 9.6 9.6 11.3 11.4 12.3 7.3 7.9 8.4 8.9 9.3 9.7 9.9 10.1 10.1 10.1 10.0 Annex H Table H5 Intensified Reform Scenario Results Rupees Billion at Current Prices Actual r.e. Projected 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Revenue 32.08 35.76 38.91 42.87 46.32 49.58 59.87 69.66 78.32 88.20 99.54 111.00 12531 141.52 160.12 181.24 205.21 State'sOwnRevenue 12.75 15.57 17.55 18.24 19.63 22.47 27.53 33.59 38.35 43.49 49.48 56.11 63.57 72.08 81.98 93.30 106.25 Tax 8.55 9.23 11.27 13.42 14.22 16.03 19.37 23.03 2591 28.93 32.27 3609 40.57 45.61 51.45 58.04 65.48 Non-Tax 4.20 6.34 6.28 4.82 5.41 6.44 8.16 10.56 1244 14.56 17.21 20.02 23.00 26.47 30.54 35.26 40.77 Central Resources 19.32 20.19 21.35 24.63 26.69 27.11 32.34 36.07 39.97 44.71 50.06 54.89 61.74 69.43 78.14 87.94 98.96 Sharedtaxes 10.68 11.94 12.85 1566 19.35 16.65 19.01 21.50 24.21 27.30 30.78 34.71 39,14 44.13 49.76 56.11 63.28 Grants 8.65 8.25 8.50 8.97 7.34 10.47 13.33 14.57 15.77 17.42 19.28 20.19 22.60 25.30 28.37 31.82 35.69 Expenditure 41.09 47.35 52.87 60.82 64.35 81.14 88.22 91.63 99.03 108.73 119.72 132.37 149,76 168.93 190.98 215.76 244.31 Salaries 14.33 16.43 19.20 22.56 24.31 30.94 31.27 32.45 34.42 36.37 38.56 40.91 43.50 46.28 49.29 52.52 56.02 Pensions 1.46 1.65 1.94 2.53 3.15 4.80 8.51 6.91 7.89 9.01 10.31 11.80 13.51 15.47 17.73 20.32 23.30 Non-wage O&M 8.07 8.71 8.48 11.20 11.88 11.34 12.60 14.88 18.08 21.85 29.59 37.66 47.16 58.07 70.54 Explicit Subsidies & Transfers 8.47 6.58 6.50 8.59 9.49 10.11 10.81 11.57 10.57 11.54 12.66 13.92 15.36 16.97 18.77 Interest payments 6.83 7.87 9.29 10.79 12.92 15.08 16.85 19.48 2071 22.02 24.13 26.15 28.00 30.42 33.22 36.22 40.19 1 Capital & Net Lending 6.27 7.00 5.89 9.65 8.98 10.51 10.22 11.34 12.60 14.88 18.08 20.13 22.51 25.17 28.23 31.66 35.50 0 Primary Surplus(+) / Deficit(-) -2.18 -3.72 -4.67 -7 16 -5.11 -16.47 -11.50 -249 001 1.49 3.94 4.78 3.55 3.01 2.36 1.70 1.09 Revenue Surplus(+) / Deficit (-) -2.74 -4.59 -8.07 -8.30 -9.04 -21.04 -18.13 -10.63 -8.11 -5.65 -2.10 -1.24 -1 95 -2.24 -2.63 -2.86 -3.59 GrossFiscalSurplus(+)/Deficit(-) -9.01 -11.59 -13.96 -17.95 -18.03 -31.56 -28.35 -21.97 -20.70 -20.53 -20.18 -21.37 -24.46 -27.41 -30.86 -34.52 -39.09 Financed by: Debt (net disbursement) 12.60 12.74 18.93 25.75 25.35 21.94 13.63 20.47 20.19 21.33 24.46 27.41 30.86 34.52 39.09 Divestment/Privatization 0.00 1.93 0.00 5.03 3.00 0.00 7.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Reserves, Deposits etc (net) 1.35 3.28 -0.91 0.78 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Debt Flows 12.60 12.74 18.93 25.75 25.35 21.94 13.63 20.47 20.19 21.33 24.46 27.41 30.86 34.52 39.09 Central Government 5.06 5.15 8.70 13.04 10.88 11.82 5 59 13.69 14.70 1282 14.86 16.35 18.28 20.34 22.66 Market 4.11 4.37 5.63 6.21 5.90 5.46 306 1.49 -0.11 2.60 3.38 4.57 5.82 7.21 9.29 Provident Fund 3.44 322 4.60 6.50 8.57 4.66 4.98 5.29 5.60 5.91 6.21 6.50 6.75 6.97 7.15 DebtStock 70.13 79.60 93.85 109.34 124.03 149.78 174.48 196.34 209.89 229.20 249.09 269.20 293.31 319.34 349.77 382.59 421.02 CentralGovernment 34.34 38.46 43.52 48.67 57.38 70.42 81.18 92.88 98.35 110.90 125.37 136.92 151.47 166.45 184.29 202.94 224.93 Market 19.33 21.52 27.28 34.39 35,78 41.98 47.35 52.80 55.87 57.36 57.24 59.84 63.22 67.78 73.61 80.82 90.10 Provident Fund 16.46 19.62 23.06 26.28 30.88 37.38 45.96 50.62 55.60 60.89 66.49 72.40 78.62 85.11 91.87 98.84 105.99 Salary & Pension /Revenue (%) 49.2 50.5 54.3 58.5 59.3 72.1 66.5 56.5 54.0 51.5 49.1 47.5 45.5 43.6 41.9 40.2 38.6 Interest/Revenue (%) 21.3 22.0 23.9 25.2 27.9 30.4 28.1 28.0 26.4 25.0 24.2 23.6 22.3 21.5 20.7 20.0 19.6 Debt Service/Revenue (%) 38.7 35.7 40.2 40.6 45.7 47.4 49.2 43.5 51.9 40.8 41.5 40.7 39.8 38.0 38.8 38.2 37.0 GSDP 174 204 240 232 271 305 341 378 420 465 517 575 643 719 806 904 1014 Annex H Table H5 Intensified Reform Scenario Results As % of GSDP Actual r e. Projected 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Revenue 18.4 17.5 16.2 18.5 17.1 16.3 17.6 18.4 18.7 19.0 19.3 19.3 19.5 19.7 19.9 20.0 20.2 State's Own Revenue 7.3 7.6 7.3 7.9 7.3 7.4 8.1 8.9 9.1 9.4 9.6 9.8 9.9 10.0 10.2 10.3 10.5 Tax 4.9 4.5 4.7 5.8 5.3 5.3 5.7 6.1 6.2 6.2 6.2 6.3 6.3 6.3 6,4 6.4 6.5 Non-Tax 2.4 3.1 2.6 2.1 2.0 2.1 2.4 2.8 3.0 31 3.3 3 5 3.6 3.7 3.8 3.9 4,0 Central Resources 11.1 9.9 8.9 10.6 9.9 8.9 9.5 9.5 9.5 9.6 9.7 9.5 9.6 9.7 9.7 9.7 9.8 Shared taxes 6.1 5.8 5.3 6.7 7.1 5.5 5.6 5.7 5.8 5.9 6.0 6.0 6.1 6.1 6.2 6.2 6.2 Grants 5.0 4.0 3.5 3.9 2.7 3.4 3.9 3.9 3.8 37 3.7 3.5 3.5 3.5 3.5 3.5 3.5 Expenditure 23.6 23.2 220 26.2 23.8 26.6 25.9 24.2 23.6 23.4 23.2 23.0 23.3 23.5 23,7 23.9 24.1 1 Salaries 8.2 8.0 8.0 9.7 9.0 10.1 9.2 8.6 8.2 7.8 7.5 7.1 6.8 64 6.1 5.8 5.5 o Pensions 0.8 0.8 0.8 1.1 1.2 1.6 2.5 1.8 1.9 1.9 20 2.1 2.1 2.2 2.2 2.2 2.3 Non-wage O&M 3.4 3.8 3.1 3.7 3.5 3.0 3.0 3.2 3.5 3.8 4.6 52 5.8 6.4 7.0 Explicit Subsidies & Transfers 3.5 2.8 2.4 2.8 2.8 2.7 2.6 25 2.0 2.0 2.0 1.9 1.9 1.9 1.9 Interest Payments 3.9 3.9 3.9 4.6 4.8 4.9 4.9 5.2 4.9 4.7 4.7 4.5 4.4 4.2 4.A 4.0 4.0 Capital & Net Lending 3.6 3.4 2.4 4.2 3.3 3.4 3.0 3.0 3.0 3.2 3.5 3.5 3.5 3.5 3.5 3.5 3.5 Primary Surplus(+) / Deficit(-) -1.3 -1.8 -1.9 -3.1 -1.9 -5.4 -3.4 -0.7 0.0 0.3 0.8 0.8 0.6 0.4 0.3 0.2 0.1 Revenue Surplus(+) / Deficit (-) -1.6 -2.3 -3.4 -3.6 -3.3 -6.9 -5.3 -2.8 -1.9 -1.2 -0.4 -0.2 -0.3 -0.3 -0.3 -03 -0.4 Gross Fiscal Surplus (+) /Deficit(-) -5.2 -5.7 -5.8 -7.7 -6.7 -103 -8.3 -5.8 -4.9 -4.4 -39 -3.7 -3.8 -3.8 -3.8 -3.8 -3.9 Financed by: Debt (net disbursement) 5.2 5.5 7.0 8.4 74 5.8 3.2 4.4 3.9 3.7 3.8 3.8 3.8 3.8 3.9 Divestment/Privatization 0.0 0.8 0.0 1 6 09 0.0 1.7 0.0 0.0 0.0 00 0.0 0.0 0.0 0.0 Reserves & Deposits (net) 0.6 1.4 -0.3 0.3 0.0 0.0 0.0 00 0.0 0.0 0.0 0.0 0.0 00 0.0 Debt Flows 5.2 5.5 7.0 8.4 7.4 5.8 3.2 4.4 3.9 3.7 3.8 3 8 3.8 3.8 3.9 Central Government 2.1 2.2 3.2 4.3 3.2 3.1 1 3 2.9 2.8 2.2 23 2.3 2.3 2.2 2.2 Market 1.7 1.9 2.1 2.0 1.7 1.4 0.7 0.3 0.0 0.5 0.5 0.6 0.7 0.8 09 Provident Fund 1.4 1.4 1.7 2.1 2.5 1.2 1.2 1 I 1.1 1.0 1 0 0.9 0.8 0.8 0.7 Debt Stock 40.2 39.0 39.0 47.1 45.8 49.1 51.2 51 9 50.0 49.3 48.2 46.8 45.6 44.4 43.4 42.3 41.5 Central Government 19.7 18.8 18 1 21.0 21 2 23.1 23 8 24.6 234 23.8 24.3 23.8 23.6 23.1 22.9 22.4 22.2 Market 11.1 10.5 11.3 14.8 13.2 13.8 13.9 14.0 13.3 12.3 11.1 10.4 9.8 9.4 9.1 8.9 8.9 Provident Fund 9.4 9.6 9.6 11.3 11.4 12.3 13.5 13.4 13.2 13 1 12.9 12.6 12.2 11.8 11.4 109 10.4 References Bannock Consulting (1999) Government of Orissa Expenditure Management, report on visit, produced for DFID British Council Division OHFWP Management Office (1992) Status of Health in Orissa, Bhubaneswar. 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