The Hindu Business Line : ADB's Country Strategy and Programme 2005-07

The 2005-07 India lending programme of the Asian Development Bank is focussed on building infrastructure, the lack of which has hobbled the various sectors and is responsible for the high inter-regional disparities. Multilateral institutions have a key role to play in influencing policy to ensure that critical investment is efficiently utilised to create permanent assets for the long-term benefit of the people, says G. Srinivasan.

THE UNITED Progressive Alliance (UPA) Government with all its touted reform credentials represented by the Prime Minister, the Finance Minister, and the Deputy Chairman of the Planning Commission — the triumvirate who fashioned the country's original reforms in the early 1990s — looks increasingly on a weak wicket on the issue in the absence of any policy action other than statements of best intentions.

The Left parties, supporting from outside, appear to be casting a shadow on the reforms credentials of the Government. Yet, the Finance Minister, Mr P. Chidambaram, during his recent visit to Washington, was at pains to explain that India's reforms remain on course when he contended, "please believe me, there were no questions about the alleged inability of the Government of India to get on with the process of governance and reforms."

He pitched for an annual investment support of $4 billion from the World Bank and its soft lending window, the International Development Association (IDA).

Even as the controversy over the inclusion of foreign experts, in general, and that of the World Bank and the Manila-based Asian Development Bank (ADB), in particular, in the Planning Commission consultative bodies raged last month, the two multilateral funding agencies released their Country Strategy Programmes for India, unequivocally expressing commitment to financing development projects.

In its updated Country Strategy and Programme (2005-07), the ADB announced total loan assistance of $6.47 billion for the period amounting to an average annual lending of $2.1 billion. .

Even at the outset, the ADB makes it amply clear that this scale of assistance is justified by India's strong economic and reforms performance. With a current account surplus of 1.4 per cent of GDP, foreign exchange reserves of more than $107 billion, a prudent debt-GDP ratio of 17.8 per cent, and a debt service ratio of only 10.4 per cent, the ADB contends that India's capacity to absorb external assistance is not an issue.

India's outstanding debt to the ADB (including public and private sector loans) was $2.3 billion as on May 31, 2004, which is 10 per cent of ADB's total debt outstanding. As per current projections, the programmed level of assistance will raise ADB's India exposure to about 18 per cent by 2007.

But there are, according to the ADB, imponderables and risks. It cites the Tenth Plan document, which states that poor infrastructure, dysfunctional bureaucratic controls, inertia and corruption remain important impediments to growth.

The ADB singled out for praise the progress on policy reform in the 2003 country strategy programme such as the Fiscal Responsibility and Budget Management Act, the Electricity Act, and the Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act as also the Union Budget 2004-05 which translated the National Common Minimum Programme (NCMP) vision into specific fiscal measures to address the challenges of poverty and unemployment by stepping up outlays on primary education, basic health-care, agriculture, irrigation and rural infrastructure.

However, the ADB notes with dismay the mixed performance in accomplishing the Millennium Development Goals (MDGs) in the context of "India's dualism, a modern and fast growing 21st century economy alongside the `other India' still engulfed by poverty and under-development".

There are also open concerns about large inter-regional disparities in growth and persisting inter-State variations in per capita income. As the UPA Government has given agriculture and rural development sector the highest priority, the ADB is stepping up and consolidating its assistance for this sector.

The Centre had sought assistance to help contain the inter-regional disparities by diversifying ADB's operations to poor States, including those in the North-East. The ADB has responded by enhancing this component of its assistance.

On the issue of the Government's poverty reduction strategy, the ADB said that while the latest available data suggest significant improvements in several education and health indicators, India still lags behind in other indicators, especially gender-sensitive ones such as maternal mortality or the gender gap in secondary education and the high incidence of Human Immuno-deficiency Virus/Acquired Immune-Deficiency Syndrome (HIV/AIDS) and other infectious diseases.

Hence, the ADB contends that strong governance and introduction of international best practices across all sectors are crucial to leveraging and maximising the development impact of ADB's financial assistance. As the private sector in India accounts for three-fourths of both GDP and investment, development of this sector is critical for growth and poverty reduction.

Though the private sector had grown rapidly over the past two decades, underpinned by wide-ranging reforms since 1991, it still remains hobbled by poor infrastructure, policy distortions in many markets, bureaucratic controls and corruption.

The ADB strategy to support private sector development is to selectively address these constraints, seamlessly blending direct investment in the private sector with assistance for the public sector to promote a market-friendly milieu. In implementing this strategy, the ADB would continue to invest heavily in infrastructure, provide assistance for infrastructure-related policy reforms, and promote innovative approaches to public-private partnerships.

It has also provided significant assistance for capacity building and reforms in the financial sector. Besides continuing focus on rationalising capital regulations and deepening the securities market, the private sector development programme would include interventions for poverty reduction. These include pension reforms for the informal sector, rural finance, finance for small and medium enterprises (SMEs), and agribusiness development.

India is also now "a priority destination" for ADB's private sector operations, with direct investments increasing significantly since 2003; after five years, it has invested $177 million in four projects. Going forward, the ADB said private sector investments and public-private partnerships would continue to focus on infrastructure and the financial sector.

The financial sector would include investments in asset reconstruction companies and financing or guarantees for municipalities and infrastructure funds. Its 2005-07 loan programme is focussed on infrastructure investments, including roads, railways, waterways, power, urban infrastructure and rural water management systems.

Though policy-based lending has been the forte of the multilateral institutions, they have shifted their focus subtly to emphasise governance and fiscal consolidation issues as part of their country assistance programme to ensure value for the money they provide.

While the ADB's assistance is modest for India's size and relative to its own development effort, the Bank nevertheless states that assistance for good governance has a key role in maximising the development impact of ADB's assistance.

Good governance operates at four levels, the ADB says adding that foremost is India's low tax-GDP ratio, which is a major challenge for macroeconomic management and fiscal consolidation. Modernisation and improvement of tax administration is critical for enhancing tax buoyancy.

Second, the ADB is providing technical assistance for comprehensive fiscal reforms in several States. Third, physical investments are being combined with sector reforms to optimise the impact of investments.

Finally, as a core governance intervention, technical assistance is being provided to help strengthen the justice administration system, to be followed by further interventions in the 2005-07 programme.

In essence, the multilateral institutions have begun to recognise the multi-party coalition governments that are in the saddle in developing member-countries such as India and accordingly tailor their assistance programmes to suit the needs of the vocal constituencies and also to address concerns about their alleged efforts to grab policy space from their clients.

As long as there is need for mammoth investment to meet both physical and social infrastructure, these multilateral institutions have a key role to play in influencing policy to ensure that critical investment is efficiently utilised to create permanent assets for the long-term benefit of the people.