The Hindu Business Line : World Bank changes strategy for lending to States

THE World Bank has signalled its intention to open up new opportunity for engagement with India's largest and poorest States, undeterred by the controversy that led to the dropping of foreign experts including the bank's representatives from the consultative groups of the Planning Commission.

The Bank group's strategy will retain an essentially reform and performance-based approach to the States. It will also change to enable opening up of new opportunities, the Bank said in its latest `Country Strategy for India' report published recently.

Major policy and governance reforms are needed in the poor States to accelerate towards an 8 per cent a year growth, the report said, adding, "The role of the Centre in both catalysing and setting the pace for reforms at the State level will be critical."

The Bank, in consultation with the Union Government, is seeking to ensure that the largest and poorest States are engaged in a dialogue on cross-cutting reforms such as fiscal management, governance, service delivery, the power sector and the investment climate that are the focus of adjustment lending, regardless of their eligibility for adjustment lending. Either the Bank or the Asian Development Bank will take the lead in offering support through dialogue on cross-cutting reforms in each of the major States, the Bank said.

Twelve of the 28 States — Andhra Pradesh, Assam, Bihar, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal — account for over 90 per cent of the country's poor, it said adding that the bank is currently engaged in dialogue with Karnataka, Orissa (in collaboration with UK Government DFID), Andhra Pradesh (with DFID), Uttar Pradesh and Tamil Nadu. It will seek a similar dialogue with Bihar, Maharashtra, Rajasthan and Jharkhand.

The Bank said ADB is engaged in dialogue with Madhya Pradesh (in collaboration with DFID) and Assam. ADB also had a long-standing engagement with West Bengal.

The Bank said it would work "proactively" to build a productive development relationship with Bihar, Jharkand, Orissa and UP, where poverty is increasingly concentrated and where public institutions are considered to be at their weakest.

While GoI's guidelines for State adjustment lending will be the subject of the ongoing discussion between GoI and World Bank, the Bank said the most recent guidelines, however, emphasise that external support be designed so that any State that is considered to be implementing a comprehensive reform effort would be eligible for adjustment lending.

Similarly, any State that discontinues comprehensive reform implementation will no longer be eligible for adjustment lending for as long as it remains off track.

Secondly, adjustment lending to the States will be set for a medium-term about five years, consisting of a medium-term reform programme and associated external financing.

Third, progressive deficit reduction, power sector reform, improved governance, investment climate and improved service delivery will be the elements of all programmes. The basic design principle will be to focus on key actions within the State's control that will promote poverty reduction effectively.

Finally, the Bank made it clear that external financing would not be an addition to overall financing for a State (since it would be in the context of declining State budget deficits) and is, therefore, to be seen as refinancing or substituting for higher-cost debt. In this context, States with both serious debt sustainability issues and solid reform programmes will be the best candidates for adjustment lending.

The Bank noted there is no longer an upfront decision to concentrate substantial State-level investment lending on `Focus States' that also receive adjustment lending in support of cross-cutting reforms. Instead, investment lending will be channelled more broadly to States that are able to comply with the new guidelines for engagement for the relevant sector, which experience has shown to be necessary for project success. Investment lending will only take place within the context of a Medium-Term Fiscal Reform Programme agreed between the State and GoI.