The Hindu Business Line : Financing CMP: Banking on World Bank

INDIA is desperately short of investment resources. Public investment on a massive scale is needed in key areas of economic and social development if India is to get rid of poverty in two decades while achieving higher growth rates, which would help place ourselves closer to the category of developed nations. At current levels of revenue and fiscal deficits, even if these are gradually scaled down with determination over the medium-term, the government at the Centre would hardly be in a position to step up investments on any significant scale in all priority areas for years to come. It is in this context that India needs to tap all resources — internal and external — required to strengthen economic and social infrastructure and improve the quality of life for the poor. This is not to belittle the importance of raising domestic resources to the maximum extent possible. The UPA Government's Common Minimum Programme lays down the priorities: Agriculture, water, education, healthcare, employment, urban renewal and infrastructure.

A `New Deal' for Rural India is promised, but the major challenge for the Government is to ensure effective delivery of services to the people, an area which has received little attention in all the decades of development. Civil service reforms to make government accountable is also high on the government agenda, judging by the Prime Minister, Dr Manmohan Singh's recent statements. Also, public-private partnership is emphasised in the CMP, especially for infrastructure building and transforming the rural economy.

It is in this context that the Government may also look at the prospects of seeking larger multilateral assistance from abroad, both ordinary and concessional, which could be utilised for projects and programmes most relevant to the priority areas in CMP. Both the World Bank (almost since its inception) and the Asian development Bank (from the l980s) have been participating in India's development through country-focussed strategies providing loans for structural adjustment, sectoral reform and projects — roads, irrigation, health and education — in various States.

India has achieved a considerable degree of economic self-reliance and there is no longer any dependency syndrome as in the decades immediately after Independence. It is largely through domestic resource mobilisation on a massive scale that India financed its development plans though critical support was provided by external assistance — bilateral and multilateral.

Pursuit of a higher growth strategy, coupled with widening of the tax base, should enable the Government improve its resource base significantly, ending its dis-savings and increasing developmental outlays but its full realisation cannot be had in the short term. It is, therefore, appropriate that India supplements domestic resources from other sources — public and private — to raise the current levels of public investment.

The World Bank, which had published a draft of its country assistance strategy for India to elicit public comments, proposes a scaling up of the Bank Group's (IBRD/IDA/IFC) financing effort in the four-year period 2005-08, thereby helping the country meet some of the Millenium Development Goals, such as halving of poverty by 2015. With over one quarter of the world's poor (260-290 million people) in India, the Bank's paper says that India's performance is central to achieving MDGs globally. It is also crucial for the Bank's declared goal of elimination of global poverty. The Bank has projected an upper limit of $2.15 billion per year for its own lending, while soft IDA credits, which India desires for projects directly focussed on poverty and human development, would flow within ceilings imposed by donors to IDA's 14th replenishment, which takes effect from fiscal 2005. A part of the IDA money is given as grant while the credits are of 35-year duration with only a small service charge.

India has been receiving in recent years a total of around $2 billion, of which roughly half is in IDA credits. In addition, the IFC, which lends to private sector, expects to make annual commitments of $300-350 million in the four-year period.

A large part of the World Bank's draft strategy paper, yet to be approved by its board, can be related to the priorities in the CMP, though the Bank has been stipulating reforms — fiscal, trade, investment, agriculture and labour — side by side not only to accelerate growth but also to rapidly improve social indicators. It calls for further effort to address fiscal imbalances at the Centre and in the States (which account for 40 per cent of general government deficit), faster tariff reduction, implementation of VAT, phasing out of remaining restrictions on FDI, easing of labour laws for hiring and firing of workers, rationalisation of power tariff, a market-based foodgrains policy, reducing unsustainable subsidies and regulations on domestic trading, and improvement of performance of civil service and of quality of service delivery to all of India's citizens.

The Left which, by virtue of its critical support for the sustenance of the UPA Government, is going hammer and tongs at some of the Manmohan Singh Government's policies and measures (such as in relation to FDI limits and EPF rate reduction) will be openly resisting any reform prescriptions from the World Bank, which is already blamed for the privatisation and other policies pursued by India as part of economic liberalisation. But Government itself will be wary of accepting any conditional assistance. Normally, the Bank attaches conditionality mainly to structural adjustment loans.

The World Bank itself is moving away from its earlier rigid norms of conditionality-linked adjustment loans. It is now adopting a development policy lending in which governments take ownership of reforms and develop programmes that meet their country needs.

While lauding India's growth record over the past decade as also the economic and social progress, the Bank sees little movement on some critical social indicators. The dichotomy in India's development — the rise of urban elite with spending power, the IT boom and strong external position, induced by wide-ranging reforms, on the one hand, and the vast segment of citizens marginalised in economic progress and deprived of basic services and employment opportunities, on the other — are too glaring to be ignored by the Bank or other international agencies.

Although medium-term growth prospects have definitely improved (with 8 per cent following a good monsoon last year), the Bank thinks currently India is on an underlying growth path of around 6 per cent. Since policy and governance reforms in the poorest States, mainly in the North, are critical for India's all-round progress, the Bank is preparing to seek a dialogue with Bihar, Maharashtra, Rajasthan and Jharkhand, similar to its engagement of Andhra Pradesh, Karnataka, Tamil Nadu, UP and Orissa. But, it says, States will have to take "frontal decisions" on rationalising power and water subsidies, partnering with private sector to deliver basic services and giving further impetus to decentralisation. Outlining its lending strategy focussed on outcomes, the Bank says it would substantially increase its volume of commitments to India for infrastructure, human development and rural livelihoods. It would seek to provide for innovative public-private partnerships, especially in power and transport.

In its investment lending, the Bank would take into account the medium-term fiscal reform programme of the Centre and States and such lending to public sector undertakings would be based on their creditworthiness. The Bank makes a plea for easing constraints faced by private sector such as "market distortions" from policies on tariffs and domestic taxes and limits on FDI and labour market rigidities.

The Bank Group's support would be extended for investments in power transmission network, hydro-electric generation and highways. It is also willing to finance Railways for safety-related works and capacity expansion if this investment is economic and within the context of a reform agenda to make the Indian Railways a commercially viable entity.

(The author, the former Chief Editor of PTI, is a New Delhi-based freelance writer.)