Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 33767-IN

INTERNATIONAL DEVELOPMENT ASSOCIATION

AND

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT FOR

A PROPOSED LOAN IN THE AMOUNT OF US$150 MILLION

AND

A PROPOSED CREDIT IN THE AMOUNT OF SDR 50.5 MILLION

(US$75 MILLION EQUIVALENT)

TO THE REPUBLIC OF INDIA

FOR THE

ORISSA SOCIO-ECONOMIC DEVELOPMENT PROGRAM I1

June 28,2006

Poverty Reduction and Economic Management South Asia Region

This document has a restricted distribution and may b e used by recipients only in the performance o f their off icial duties. I t s contents may not otherwise be disclosed without W o r l d Bank authorization.

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INDIA - GOVERNMENT FISCAL YEAR April 1 - March 31

CURRENCY EQUIVALENTS (Exchange Rate Effective)

Currency Unit : Rupees (Rs.) as o f June 22,2006

Rs. 1 US$0.024 US$1 .oo Rs. 46.01

Vice President: Country Director:

Sector Director: Sadiq Ahmed, SASPR Sector Manager: Kapi l Kapoor, SASPR Task Managers: V.J. Ravishankar, SASPR

Praful C. Patel, SARVP Michael F. Carter, SACIN

Marina Wes. SASPR

APM ATMA BST CAF CAS CFAA DAP DDO DES DFID DOH DP DPE DPS DRDA DCRF EBID EMCP ERAS

FDI

ABBREVIATION AND ACRONYMS

Agricultural Produce Markets LDP Agricultural Technology Management Agencies MDGs Bulk Supply Tariff MOE Combined Application Form MOF Country Assistance Strategy MOHFW Country Financial Accountability Assessment MTEF Development Action Plan MTFP Drawing and Disbursement Officer NTFP Department o f Economics and Statistics NTPC UK Department for International Development OED Department o f Health OERC Development Policy OHSP Department o f Public Enterprises OPCB Delayed Payment Surcharge OSEDL Distr ict Rural Development Agencies PAC Debt Consolidation and Relief Facility PER Earnings Before Interest and Depreciation PESA Expanded Malaria Control Program PFM Establishment o f an Agency for Reporting Agricultural PHDMS Statistics Foreign Direct Investment PHRD

FRBMl Fiscal Responsibility and Budget Management Act PP FRF GSDP GNP GO1 Go0

GP HIPC IBRD

ICA ICR IDA IFC IMF I T JSAN

Fiscal Reform Facility Gross State Domestic Product Gross National Product Government of India Government of Orissa

Gram Panchayats Heavily Indebted Poor Countries International Bank for Reconstruction and Development Investment Climate Assessment Implementation Completion Report International Development Association International Finance Corporation International Monetary Fund Information Technology Joint Staff Advisory Note

PPP PS PSIA PTF ROSC

SDR SFAA sws

TA TFC ULB UNDP VAT VICS

Letter o f Development Policy Millennium Development Goals Ministry of Education Ministry o f Finance Ministry of Health and Family Welfare Medium-Term Expenditure Framework Medium Term Fiscal Plan Non-timber Forest Produce National Thermal Power Corporation Operations Evaluation Department Orissa Electricity Regulatory Commission Orissa Health Sector Plan Orissa Pollution Control Board Orissa Socio-Economic Development Loan Public Accounts Committee Public Expenditure Review Panchayat Extension to Scheduled Areas Public Financial Management Poverty Human Development Monitoring System

Japan Policy and Human Resources Development Trust Fund Pani Pabcg Public Private Partnerships Panchayat Samitis Poverty and Social Impact Analysis Poverty Task Force Report on the Observance of Standards and Codes Special Drawing Rights State Financial Accountability Assessment Single Window System

Technical Assistance Twelfth Finance Commission Urban Local Bodies United Nations Development Program Value Added Tax Village Index Card Scheme

India ORISSA SOCIO-ECONOMIC DE vELOPMENT LOAN AND CREDIT I1

TABLE OF CONTENTS

... PROGRAM SUMMARY ................................................................................................................................ 111

I. INTRODUCTION ...................................................................................................................................... 1 11. COUNTRY AND STATE CONTEXT ..................................................................................................... 2

....... 2 ................................................... 4

111. THE GOVERNMENT’S PROGRAM: STATUS OF IMPLEMENTATION ..................................... 6

A. RECENT NATIONAL DEVELOPMENTS AND THEIR IMPLICATIONS ......... B. DEVELOPMENT OUTCOMES IN O M

A. ECONOMIC REFORMS FOR INCLUSIVE GROWTH ..................... B. FISCAL REFORMS AND PUBLIC FIN C. PUBLIC SERVICE DELIVERY AND HUMAN DEVELOPMENT ...................................................... 18

........................................ 13

IV. BANK SUPPORT TO THE GOVERNMENT’S STRATEGY ............................................................ 24 A. LINK TO COUNTRY ASSISTANCE STRATEGY ....................... B. COLLABORATION WITH 0 ........ C. RELATIONSHIP TO OTHER D. LESSONS LEARNED .......................................................................................

A. OPERATION DESCRIPTION ....................................................................................

...................................................................... .25

V. THE PROPOSED ORISSA SOCIO-ECONOMIC DEVELOPMENT LOAN AND CREDIT I1 ...... 27

A. POVERTY AND SOCIAL IMPACT ............................................................

............................... 32 ............................................................... .32

F. R ISKS AND RISK MITIGATION ........................................................................................................... 33

ANNEXES

ANNEX 1: LETTER OF DEVELOPMENT POLICY (LDP) LDP attachment A: Go0 program matrix LDP attachment B: monitorable indicators

ANNEX 2: OPERATION POLICY MATRIX ANNEX 3: ENVIRONMENTAL & SOCIAL SCREENING MATRIX ANNEX 4: FUND RELATIONS NOTE ANNEX 5: ORISSA MEDIUM-TERM FISCAL PLAN (2005-10) ANNEX 6: DEBT SUSTAINABILITY NOTE ANNEX 7: STATEMENT OF LOAN AND CREDITS ANNEX 8: COUNTRY AT A GLANCE ANNEX 9: COUNTRY MAP (IBRD 33341)

The Orissa Socio-Economic Development Loan and Credit I1 was prepared by an IBRD and IDA team consisting o f V.J. Ravishankar and Marina Wes (SASPR - Co-Task Leaders), Asya Akhlaque, Varsha Marathe (SASFP), Ivor Beazley, Manvinder Mamak (SARFM), Jiro Tominaga (ISGIA), Kseniya Lvovsky, Lant Pritchett, Sanjay Srivastava, Richard Damania, Maitreyi Das (SASES), Martien van Nieuwkoop (SASAR); Manmohan Singh Bajaj (SARPS), Mohini Malhotra (WBIND), Elena Glinskaya, Vikram Menon, Dipak Dasgupta, Paramita Dasgupta, Pooja Churamani, Shiny Jaison, Rita Soni (SASPR), Phlip 0 Keefe, Peter A. Berman, Christine Allison, Na l i n Jena, Sangeeta Goyal (SASHD), Syed I Ahmed (LEGMS), Shellka Arora (SARIM), Salman Zaheer, Rohit Mittal (SASEI), Yee Mun Sin (HDNSP), Sumir La1 (SAREX), Robert J. Saum (SARFM), Thao L e Nguyen (LOAG2) and consultants Priti Dave Sen and Sam Thangaraj.

1 Peer reviewers are Mark Sundberg (DECVP) and Mark Roland Thomas (PRMED).

.. 11

PROGRAM SUMMARY

India ORISSA SOCIO-ECONOMIC DEVELOPMENT LOAN AND CREDIT II

Bii-rower

Implementing Agency

Amount

Terms

Tranching

DTscription

~

Benefi ts

Government Of India (GoI)

Government Of Onssa (GOO)

US$225 mi l l ion (US$75 mi l l ion IDA and US$150 mi l l ion IBRD)

IDA: Standard with 35 years maturity and 10 years grace period IBRD: Payable in 20 years including 5 years o f grace period; standard variable interest rates for LIBOR-based USD single currency loans. The loan and credit would be disbursed in two tranches, o f U S $ 150 and US$ 75 mi l l ion respectively. The operation i s designed so that a l l key actions for the first tranche have been taken prior to Board Presentation. Disbursement o f the second tranche i s expected in the final quarter o f FY 2006-07, contingent on fulf i l lment o f the pr ior actions for the second tranche. Orissa, with a population o f 38 million, i s one o f India’s poorer states. The objective o f the proposed second Orissa Socio-Economic Development Loan and Credit (OSEDL 11) i s to support the continued implementation o f structural, fiscal and administrative reforms needed to boost inclusive economic growth and achieve rapid poverty reduction over the medium term. The multi-pronged approach o f Goo’s reform program includes: (i) reforms focusing o n enhancing agricultural productivity, security o f land rights and market access for poor farmers and forest dwellers, improving the business environment for private investors including strengthening regulatory framework for managing environmental and social impacts o f resource-intensive investment; and reform o f public enterprises; (ii) fiscal, financial management and public accountability reforms, including anti-corruption measures and public procurement reforms, aimed at achieving creditworthiness while creating additional fiscal space for high priority developmental spending, and promoting more efficient and transparent management o f the government’s financial resources; and (iii) cross-cutting and sector specific reforms in public administration and service delivery, including and especially for human development - i.e., education, health and social protectiodanti-poverty programs. The proposed operation, consistent with C A S objectives, supports measures to boost rapid, and shared economic growth in one o f the under-developed states o f India, to expand income earning opportunities and access to improved basic services for the poor. The program will also improve the efficiency o f spending and reduce the state’s dependence on debt financing, whi le increasing fiscal space for development expenditures along with a rise in theii

... 111

t isks and their d i t igat ion

output and outcome orientation. Bank support i s complemented by reform-linked assistance from GoI. The Government o f Orissa’s overall reform program faces three kinds o f risks. First, possible adverse environmental or social impacts could result in resistance that could stall some o f the reforms and block private investments. The necessity and urgency o f mitigating such risks has been highlighted by recent controversies and conflict over land acquisition for mineral based industries. Second, exogenous shocks could slow down fiscal adjustment and growth. Third, implementation may be slower than planned because o f institutional capacity constraints.

To ensure high economic and social benefits to the state’s population, G o 0 i s taking a number o f steps, including: (a) empowering thousands o f tribal and other women centering on Self Help Groups; (b) enhancing agricultural productivity and market access for small farmers, (c) enhanced allocation o f funds for health, education and social protection especially in the most under- developed regions, (d) accelerating broad-based economic growth by reforming the regulatory framework for private enterprise, and (e) paying increasing attention to managing the risk o f negative impacts o f extractive industries o n the natural environment and on people residing in mineral r ich forests.

A new state-wide Rehabilitation & Resettlement Policy has been adopted and notif ied in M a y 2006. G o 0 i s also working on policy initiatives for broader sharing o f the benefits o f natural resource based growth, tahng into account international good practices.

Several factors further contribute to a mitigation o f political r isks. Elections for the Onssa Legislature in 2004 have returned the same alliance and Chief Minister to power. Fair ly broad ownership o f key program objectives has been built among senior political leaders. bureaucrats and c iv i l society, through extensive consultations thar are ongoing. The Government o f India i s also strongly supportive o? Orissa’s reform program.

Enactment o f the Orissa Fiscal Responsibility & Budge Management Act, 2005, and adoption o f an updated Medium-Tern Fiscal Plan (MTFP) consistent with it, reduces the risk o f deviating f rom the fiscal correction path approved by the State Legislature Sensitivity analysis conducted by the Bank team shows that i temporary growth shock in one year will only postpone tht achievement o f fiscal correction targets by about one year.

To help alleviate capacity constraints, and in close cooperation with other donors, particularly the UK Department o f International Development (DFID), the Bank i s making sure that significant technical assistance i s available to fo l low through on the reform measures supported by the proposed operation.

~~

Operation ID Number IN-PO97036

iv

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT FOR A PROPOSED LOAN AND CREDIT

TO THE REPUBLIC OF INDIA FOR THE ORISSA SOCIO-ECONOMIC DEVELOPMENT PROGRAM 11

I. INTRODUCTION

1. Located o n India’s east coast, between West Bengal and Andhra Pradesh, Onssa comprises 4.7% o f India’s land mass, 3.7% o f the population (some 38 mi l l ion people) and over 5% o f India’s poor. Despite i t s r i ch endowment of mineral wealth, forests,’ lakes, rivers and a long coastline facing South-East Asia, Onssa remains among the poorest o f India’s major states. Annual per capita income in the state (about US$250) i s not much more than it was twenty years ago; whereas other Indian states that were equally poor in the early 1980s have marched ahead. Orissa’s economic growth lagged behind the all-India average throughout the 1990s, with the interior lagging further behind the coastal districts. The State has a large population o f scheduled tribes (STs) and Scheduled Castes (SCs), mostly living in the interior, who are among the poorest. Orissa has also been highly fiscally stressed, with the fiscal defici t peaking at nearly 10% o f Gross State Domestic Product (GSDP) in 1999100; and with interest spending, pensions and wages consuming a l l o f the state’s revenues.

2. The present government, led by the Biju Janata Dal, a regional party and an al ly o f the Bhartiya Janata Party, was elected in early 2000 for a five year term. Unl ike in many other Indian states, elections held in Spring 2004 returned the incumbent Chief Minister and coalition in Onssa, for a second term that extends until 2008-09. The renewed mandate strengthened the commitment o f the Chief Minister and h is team to press ahead in implementing the reform program and to widen i t s scope. Subsequently, the Bank Board approved the f irst o f a proposed series o f development policy loansicredits in November 2004l, to support the state’s Socio-Economic Development Program, a cross-cutting program o f institutional and pol icy reforms. This Program Document seeks approval for a second such operation.

3. In light o f Orissa’s fiscal crisis, the early phase o f the reform program focused o n the immediate necessity o f fiscal correction. Onssa has achieved remarkable progress in i t s fiscal correction objectives, and has over fuIfiIIed the targets set in i t s medium-term fiscal p lan (2003-08). The focus o f the reform effort has n o w shifted to support more rapid, broad based and inclusive economic growth. Substantial progress has already been made in the implementation o f reforms in the regulatory environment for private investment. Economic growth has picked up, reaching an average o f 8.4% over the past years; ahead o f the all-India average, and nearly double the growth rate o f the 1990s. Moving forward, the program wil l progressively address the huge challenges the state continues to face in achieving sustainable, shared economic growth and accelerating human development. In this context, increased emphasis is being placed in this operation on measures to further improve the performance o f agriculture and all ied activities in which the majority of the poor are engaged, alongside continuing measures to improve the business climate, including measures to strengthen a regulatory fi-amework for managing environmental and social impacts o f resource-intensive investment. Go0 has also initiated new actions to improve the performance o f social protection, tribal development and women’s empowerment. These include much greater attention to the impact o f mining and allied private sector development o n tribal communities and a better framework for greater sharing o f benefits.

4. This Program Document begins by setting the context, with an analysis o f recent developments in India and their implications for Orissa (Section 11). Section I1 also discusses developmental outcomes in Orissa and highlights remaining challenges. Section 111 summarizes the Orissa Socio-Economic Development Program and the current status o f implementation; while Section I V discusses the Bank’s

’ R2004-0192/2(IDNR2004-0243/2)

1

Program in Orissa. Section V outlines the proposed Operation while the final Section covers project implementation and monitoring issues.

11. COUNTRY AND STATE CONTEXT

A. RECENT NATIONAL DEVELOPMENTS AND THEIR IMPLICATIONS

5. India’s economic growth over the past quarter century has been one o f the world’s fastest. I t jumped f rom an entrenched 3.5% in the 1970s, to close to 6% during the 1980s and 1990s, leading to substantial reduction in poverty. In recent years real GDP growth has been particularly impressive, peaking at 8.5% in 2003/04; i t i s estimated at 7.5% in 2004/05 and 8.4% in 2005106, enabled by rising investment and saving levels, reasonable external demand conditions (merchandise exports have been growing at more than 20% for three consecutive years), adequate monsoons, and accommodative pol icy settings. Inflation has come down to about 4%, f rom 6% a year ago.

6. The principal macroeconomic risk facing India i s the fiscal deficit, even though the consolidated (combined center and state) fiscal deficit i s estimated to have fallen f rom 10 percent o f GDP in 2001/02 to less than 8% in 2005/06.2 General government debt has risen from 60% o f GDP in the mid-1980s to 86% in recent years and debt servicing preempts a large share o f public resources. Reducing the current deficit over the next three years, a key target set by central and state fiscal responsibility laws, i s an essential prerequisite for creating the fiscal space for additional public investment spending. The latest 2006/07 Budget continues the trend towards fiscal consolidation by reducing the expected central government current deficit to 2.1% o f GDP and the overall central government fiscal deficit to 3.8% o f GDP while supporting a corresponding reduction in the states’ deficits (see below).

7. India’s vulnerability to an external crisis i s l imited by i t s record level o f reserves, in excess o f US$ 160 billion, far exceeding India’s gross external debt. In spite o f an increasing trade deficit, the balance o f payment situation remains fairly comfortable and the current account deficit i s estimated at about 3% o f GDP for 2005/06. Significant deficits on the trade account (over 5% o f GDP) are balanced by large inflows in the invisibles account, including remittances from abroad - invisibles are estimated at nearly 5% o f GDP for 2005/06, malung India the largest recipient in the world. Capital inflows remain buoyant with a sizeable surplus on the capital account, o f US$ 32 b i l l ion in 2004/05, with higher inflows expected this year. The fastest increase has been in foreign portfolio investment, with Foreign Direct Investment (FDI) picking up relatively slowly. The key downside risk facing India in the short term are high o i l prices. Although they are impacting India’s economy (growth, quasi-fiscal deficit, inflation and external accounts), they are unlikely to derail the overall trajectory o f the economy.

8. Whi le India’s economic and social performance has been impressive o n many accounts, it has also been uneven; and the performance o f India’s states and regions has become increasingly divergent. More than ha l f o f India’s poor (some 150 m i l l i on people) now l ive in four states alone: Bihar, Madhya Pradesh, Orissa and Uttar Pradesh. Fol lowing the liberalization o f 1991, most o f the middle and high-income states were able to take greater advantage o f the new conditions, because o f better in i t ia l conditions, better infrastructure and human resources than the poorer states. B o t h in the eighties and nineties, average real GDP per capita in the poorer states grew at around 2.5% annually; average real GDP growth per capita in the other states increased from 3.1% in the 1980s to 4.8% in the 1990s. The per capita income in Orissa decreased from 74% o f the national average in 1989/90 to just over ha l f in 2004/05.

Incentives for state-level reforms

9. Many o f the structural and fiscal reforms required to accelerate India’s growth and reduce poverty are in the domain o f the states. Improvements in the composition o f public expenditures, improvements in

* Indian Economic Survey 2005-06.

2

the investment climate (through the removal o f bottlenecks in product and factor markets), as wel l as more effective delivery of education, health, and safety-net services, all require significant policy and institutional reforms at the state level. In addition, almost hal f o f the consolidated fiscal deficit i s made up o f the state- level deficits. State-level reforms are thus key to India’s development.

10. The Government o f India has in the past few years put in place a range o f schemes to support reform at the state level. I t s Fiscal Reform Facility (FRF) provided additional funding to states during 2000- 05 on the basis o f improved fiscal performance, and Orissa was one o f the beneficiaries. Fol lowing the recommendations o f the Twelf th Finance Commission (TFC) for the period 2005-10, which have been fully accepted by the Government o f India, reform incentives facing states have been strengthened. State and central finances wil l be impacted in a number o f ways:

0

e

0

0

11.

The TFC has recommended an increase in tax devolution to states f rom the existing 29.5% to 30.5% o f the net proceeds o f a l l shareable central taxes and duties. Revenue transfers from the center t o the states have been budgeted to increase by one percentage point o f GDP in 2005/06 alone. The TFC has set up a Debt Consolidation and Rel ief Facil ity ( D C W ) to replace the FRF. Enacting fiscal responsibility legislation qualifies states for restructuring o f o ld central debt for a fresh term o f twenty years at significantly lower interest; and the states are also offered a waiver o f repayment as a reward for meeting prescribed annual targets for reducing the revenue deficit and containing the fiscal deficit. The terms o f support f rom the center to the states have changed. Central support to state development plans will n o w be only in the form o f grants (and not the grant loan mix that has been the practice so far). Consequently, the states are required to increasingly access the domestic financial market and/or external donors in support o f their state plans. On-lending o f external loans wil l be at back-to-back terms, instead of the practice o f the center intermediating and passing o n al l external loan funds at the standard terms o f central support to state plans. The TFC has also recommended a range o f special purpose grants, including grants earmarked for road maintenance, education and health, conditional on states maintaining the base spending level in real terms. Total central grants to states, including for developmental purposes, are budgeted to increase by 50% in 2005106 alone. The 2006107 Budget enhances these transfers, with a roughly 50% increase in flagship programs for rural developments. Orissa’s KBK districts, in the hinterland, are among India’s poorest districts, and are the beneficiary o f special programs supported by central government grant^.^

, Implications o f the TFC award for Onssa include: (i) a larger share in central revenue sharing (for a l l states and for poorer states including Orissa), (ii) reduced debt servicing contingent o n continued improvements in fiscal performance; (iii) a harder ceiling o n overall borrowing; and (iv) a large increase in central grants for special programs such as the Rural Employment Guarantee Scheme, the Backward Districts Program, the National Rural Health Program, and Education for All. Given the new back-to-back lending arrangements that are in place, India’s states will n o w carry any exchange rate r isks associated with foreign currency lending.

12. GoI guidelines for external assistance. T o ensure that a l l states have common criteria and equal access to development pol icy loans from multilateral agencies, Go1 f i rs t issued a set o f Guidelines in 2002. In light o f the recent changes in state-center fiscal relations fo l lowing the TFC recommendations, revised guidelines have been issued in 2005. The revised guidelines which, inter alia, stipulate that the states need to (i) demonstrate commitment to a fiscal correction path that i s approved by the Department o f Expenditure (DOE), Ministry o f Finance, Government o f India, and i s consistent with targets in the state’s fiscal responsibility law; and (ii) ensure that additional debt contracted as a result o f the Development Policy Loan i s within the aggregate borrowing ceiling o f that state, as approved by Go1 and uti l ize the loan primarily to retire high-cost debt. The Government o f Orissa has obtained DOE approval for i t s updated Medium-Term Fiscal Plan, 2005-10. The revised guidelines also stipulate that every DPL will be disbursed

T h i s area comprises the old Kalahandi, Bolangir and Koraput districts, which were reorganized into eight districts in 1992-93, namely, Kalahandi, Nuapada, Bolangir, Sonepur, Koraput, Nabaragpur, Malkangiri and Rayagada.

3

in more than one tranche, with the second tranche release being conditional on satisfactory fiscal performance.

13. Debt sustainability. With average real economic growth expected to be around 6% and average real interest rate on outstanding debt at around 5%, the state could run a small primary deficit and s t i l l stabilize i ts debt ratio. However, given the high level o f inherited debt, Goo’s aim i s to f irst reduce the debt ratio before stabilizing it. The Medium-Term Fiscal Plan (MTFP) for the period 2005-10, tabled in the Orissa Legislature along with the 2006-07 annual budget on February 14, 2006, projects a primary fiscal surplus o f around 2% o f GSDP on average during 2005-10. The ratio o f outstanding debt to revenue, which was above 330% during 2001-04, has fallen below 300% in 2004-05 and i s projected to decline below 275% by 2009-10. The projected decline i s sharper in the ratio o f interest payments to total revenue, f rom 40.2% in 2001-02 to less than 20% by 2009-10. This i s because o f the lowering o f the average effective interest rate through (i) debt swaps with the Government o f India during 2002-05, (ii) use o f DPL financing in place o f more expensive new debt, and (iii) pre-payment o f o ld expensive debt using part o f DPL funds. Achievement o f these targets would mean that Orissa would n o longer be a ‘debt stressed state’ in 2009-10, according to the criteria used by the Government o f India. The Note on Debt Sustainability (Annex 6) compares two alternative scenarios, with and without Bank financing, and also analyzes the sensitivity o f the outcomes to exogenous shocks, such as growth, interest rate and exchange rate shocks. It shows that even significant exchange rate shocks (related to Bank financing) are unlikely to derail Onssa’s adjustment effort.

B. DEVELOPMENT OUTCOMES IN ORISSA4

14. Substantial progress has been made in fiscal adjustment. The state has achieved remarkable progress in i t s fiscal correction objectives, and has over fulfilled the targets set in i t s medium-term fiscal p lan (2003-08). According to the latest figures provided by the Accountant General, the primary fiscal balance has been converted from a deficit o f 6.5% o f GSDP in 1999/00 to a surplus o f 2.7% in 2004/055 - a correction o f 9.2 percentage points in f ive years. As discussed in Section I11 B below, expenditure composition has begun to improve and the allocation o f state counterpart funding to fully utilize increased resources f rom Go1 and external donors has been strongly enhanced.

15. Orissa remains one o f India’s poorest states. In spite o f rich natural resources, the rest o f India outgrew Orissa throughout the nineties: GDP grew at an average 4% during the nineties versus an India- wide average o f 6%. Nearly ha l f o f Orissa’s population l ived below the poverty l ine in 1999/00, the latest year for which data are available. W h i l e poverty in Onssa declined significantly during the 1980s, progress stalled during the 1990s when poverty levels in some interior regions actually increased. As a result, the already marked regional disparities within Orissa have increased further. Orissa’s ‘KBK districts’, located in the southern and western part o f the state, are not only the poorest part o f Orissa, but also one o f the poorest and most depressed parts o f India.

16. High proportion of tribal population. Onssa has the third highest concentration (after Madhya Pradesh and Maharashtra) o f scheduled tribes (ST) population. The STs account for 22.2 percent o f the total population and more than 40 percent o f the total number o f poor. The relative disadvantage o f the scheduled tribe population i s a remarkably robust feature o f the profi le o f poverty in Orissa: many social indicators for this group are considerably lower than for the majority population, as w e l l as compared to the ST population in other parts o f India. Forests cover 30 percent o f a l l geographical area in Onssa, and are an important source o f l ivelihood for the tribal population, which collect non-timber forest produce (e.g. nuts, sal and kendu leaf used in making beedis, Indian version o f cigarette) for subsistence and sale.

17. Faster economic growth i s essential for poverty reduction. Analytical work carried out by the Bank in 2005 o n poverty and vulnerability in Orissa has reinforced the conclusion that the most essential and urgent condition required for reducing poverty in the state more quickly i s a period o f rapid, broad-based ~~

Early outcomes are summarized in the ICR for this Operation [no. 327651. Primary surplus in 2004-05 adjusted to exclude one-time factors affecting that year’s outcome.

4

and sustained economic growth. Greater sharing o f the benefits o f mining development wi th affected communities i s also essential.

I 1994195-2000101 1 2001102-2002103 I 2003104-2004105 Agriculture -0.5% -1.9% 12.8% -

18. Private investment has begun to pick up. A major factor in explaining the poor growth performance in Orissa has been the l o w levels o f investment and productivity (see Investment Climate Assessment). It i s therefore encouraging that private investor interest in Onssa has been o n the increase in the past 12 months, especially in steel and other mineral based manufacturing with which Onssa i s r ichly endowed. Recent expressions o f interest include investments in tourism and IT services. During 2004-05, investment rose to US$32 mill ion, up from US$0.7 mi l l ion in 2003104. Estimates o f proposed investment suggest a further increase wil l take place in 2005/06. Onssa rose to f irst rank among Indian states, according to data compiled by the Center for Monitoring the Indian Economy, o n “investment projects under implementation” (see Figure 1). T h i s does not include the largest ever foreign direct investment in India so far (US$ 12 billion), by the South Korean steel company POSCO.

Min ing and quarrying Manufacturing Services

Figure 1:

8.6% 11.8% 7.6% 3.7% 4.5% 5.1% 6.8% 6.0% 7.8%

Private Investment Under Implementation

RS Crores (Annual Average, 2002-2005)

1000 1 Gujarat KarnatakaMaharashtra Orissa

Source: Center for Monitoring the Indian Economy

19. Growth in Onssa has accelerated in 2003-05. Economic growth has accelerated in recent years, including faster growth in mining, agnculture and service sectors; real growth i s estimated at 8.4% on average over the past two years (2003/04 and 2004/05), compared to less than 4% during the 1990s, and ahead o f the All-India average. The high agncultural growth rate i s particularly welcome, as this sector continues to provide employment to over 80% o f al l workers, and the high poverty in Orissa i s closely tied to l o w productivity in agriculture, which i s in turn linked to the prevalence of small and marginal holdings. Manufacturing growth, which has been l o w so far, i s expected to p i c k up soon as a result o f the recent acceleration in private investment.

Table 1: Orissa’s economic growth

Note: Real average annual growth rates. Source: Central Statistical Organization, with figures for 2004105 being ‘advance estimates’.

5

Table 2: Comparative Development Indicators - Orissa & Selected States

Per capita Female Infant Population income literacy Mortal i ty (in millions) (Rs) rate (YO) (per 1000 live births)

2002-03 2002-03 2001 2003 Medium-high-income states

Andhra Pradesh 77.2 12206.7 51.2 59 Maharashtra 99.2 17856 67.5 42

Punjab 24.6 17595 63.6 49 Low-income states

Biha r (divided) 85.6 4309 33.6 60 Jharkhand 27.7 8566 39.4 51

Orissa 37.5 6693 51.0 83 Uttar Pradesh (divided) 171.7 6777 43 .O 76

Notes: Per Capita income i s at constant 1993194 prices. Jharkhand data relate to 1999100. Sources; (i) Economic Survey o f India, 2005-06; and (ii) Central Statistical Organization.

20. Human development i s improving, with a long way s t i l l t o go. The nineties saw a 14 percentage point improvement in literacy rates, a slowdown in population growth, and a significant improvement in infant mortality. More recently, output indicators suggest that the number o f out-of-school children has fallen f rom 1.27 m i l l i on in 2001/02 to 0.2 mi l l ion in 2004/05. Yet, human development indicators remain below the All-India average and Onssa has a long way to go to catch up with comparator states. Orissa ranked 11 out o f 15 major states on the aggregate Human Development Index (2001), the same ranking that i t had in 1981.

21. The socio-economic development o f Orissa requires a rise in both the quantity and quality o f public investment. Effective public investment has been constrained by the fiscal crisis and cash crunch in the past. The fiscal situation has improved significantly in recent years: the overall deficit has been reduced f rom 10% o f GSDP in 1999/00 to less than 3% in 2005/06; with the primary fiscal balance converted f rom a deficit o f 6.5% to a surplus o f over 3 % in the same period; and the debt stock has peaked. N o w that some fiscal space i s being created, the attention o f fiscal pol icy and financial management i s appropriately beginning to shift to the sector level, to maximize impact o n outputs and outcomes. Converting outlays into outcomes was the central theme o f the Finance Minister’s speech as he presented the Orissa Budget 2006- 07 on February 14,2006.

111. THE GOVERNMENT’S PROGRAM: STATUS OF IMPLEMENTATION

22. GOO’S strategy to accelerate growth and poverty reduction i s articulated in i t s Tenth Five-Year plan and long-term strategy called “Vision 2020”, which i s expected to be released as a draft for public discussion during 2006. From a strategy of relying on the public sector for j ob creation and for poverty reduction in the past, the state now regards the private sector and community groups as the major engines for accelerating economic growth and creating j o b opportunities. At the core o f this strategy i s the agenda for responsible and accountable fiscal and public financial management, which would enable Go0 to enhance the quantity and quality o f public investment in human and physical capital so that the benefits o f income growth are more equitably distributed than in the past.

23. Go0 has realized that poverty reducing economic growth would need acceleration in both agriculture and non-agricultural sectors. As was noted in the Program Document for the first operation6, the principal factors for Onssa’s slow growth in the 1990s include: (i) l o w productivity o f agriculture, due to primitive technology, tiny scale o f operation, weak enforcement o f property rights and inefficient public investment and management o f irrigation in the past; (ii) poor road connectivity and l imi ted market access

Report No. 32765, September 28,2004; pages 4 and 5 .

6

for farmers, along with food insecurity restncting their willingness to diversify f rom paddy; (iii) low level and inequitable utilization o f mineral resources, with l i t t l e or n o forward linkage in the past, due to the national freight equalization policy that annulled the advantage o f locating industry close to the source o f raw materials; (iv) an oversized public administration; and (v) the fiscal crisis, which constrained GOO’S abil ity for complementary public investments to enhance the returns to private investment.

24. Go0 recognizes the necessity for accelerated growth in manufacturing industries to lead the leap forward in the state’s economy. Comparison o f economic growth rates in the 1990s across the major Indian states show that the states that had a higher share o f value added from manufacturing tended to grow faster. Orissa has the lowest share o f the secondary sector at 12% o f net value added in the economy; the primary sector, i.e., agnculture and allied activities plus mining, accounts for 41% and services for 47%. Onssa i s the least urbanized among the major states, with only 15% share o f urban population. Urban unemployment i s high, especially among the educated (20% in 1999/00). If the yield gap in agriculture i s successfully narrowed and market access for farmers improves, excess labor that i s currently part o f the invisible underemployment in agnculture wi l l be released from the land. Industry and services have to grow rapidly enough to absorb this expected shift in the labor force.

25. With the goals o f accelerating economic growth to 6-6.5% per year and reducing poverty by 7 percentage points during 2002-07, and by 15 percentage points during 2008-12, the State’s development strategy focuses o n three cross-sectoral components:

The private and group enterprise development component focuses o n (economic reforms for inclusive growth) - on improving agncultural productivity and market access for small farmers, non-farm income earning opportunities for women, improving the business environment for small and medium-scale enterprises, and o n privatization, closure and restructuring o f public enterprises. The fiscal, financial management and public accountability component includes a multi-year framework for correcting fiscal imbalances, to improve fiscal transparency, public expenditure management and financial accountability, with the objectives o f restoring the state’s financial health, creating additional fiscal space for high priority development expenditures, and promoting more efficient and transparent management o f the government’s financial resources. The public service delivery and human development component focuses o n improvements in the effectiveness o f education, health and social protectiodanti-poverty programs through institutional reforms, better use o f modem information technology and o f poverty data for policy making, with increased emphasis o n outcome monitoring and program evaluation.

26. Analytical work undertaken by the Bank and others7 suggests that this i s a viable strategy, focusing appropriately on the critical reforms needed for India’s poorer states to make progress o n the diff icult path of catching up and reducing poverty.

27. Overall assessment of reform program so far. Implementation o f the reform program supported by OSEDL I and progress towards OSEDL I1 triggers has been satisfactory (a simplif ied ICR for OSEDL I was completed in December 2005*, with OED rating institutional development substantial). A long with stronger than expected fiscal correction, the Government o f Orissa has moved steadily with the implementation o f reforms in irrigation management, public enterprises and in the regulatory environment for private investment. Significant progress has also been made in enhancing public financial management and accountability (see paras 58-64). There have been mixed results f rom Orissa’s power sector reforms. On the positive side, service quality has improved and the sector’s finances have stabilized. On the negative side, progress has been slower than expected in reducing system losses, extending service into rural areas and restructuring the stock o f accumulated liabilities (see paras 41-46). Service delivery reforms have been significant in some respects such as participatory irrigation management involving water user groups,

’ India DPR (2006), Kochhar et a]. (2006). Report number 32765.

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empowerment o f rura l women through self-help groups and the finalization o f a government approved Anti- Corruption Act ion Plan in December 2005.

A. ECONOMIC REFORMS FOR INCLUSIVE GROWTH

28. GOO’S growth strategy aims at (i) raising agricultural productivity through land titling, participatory irrigation management and the formation o f farmer groups; (ii) improving market access to small farmers through public investment in road connectivity and lifting o f state monopoly on agricultural marketing; (iii) encouraging small farmers to diversify to higher value added crops through improved extension and strengthened public food distribution, (iv) encouraging non-farm business opportunities to be tapped by women’s self-help groups supported by micro-credit, and (v) enabling broad-based industrial growth covering mineral-based manufacturing, food processing including fish and h i t s , tourism and handicraft exports, through simplifying entry regulations, improving infrastructure and facilitating environmental compliance. As highlighted in the Bank’s Investment Climate Assessment’ (ICA) completed for Orissa, the key concern o f the business community in Orissa is the regulatory environment, with more than h a l f o f respondents raising this as a major or severe bottleneck in the investment climate; whereas 37% o f respondents identified infrastructure as a major or severe bottleneck.

Agriculture, Land Administration, Forestry and Fisheries

29. Agriculture. Without improving the productivity and market orientation o f agnculture in Orissa, i t would be impossible to achieve a visible reduction in poverty. Legislation to amend the Agricultural Produce Markets (APM) Ac t was approved by the State Legislature in April 2006. This legislation permits private investment in marketing yards and storage facilities for agricultural products; it also enables contract farming, t o help farmers diversify out o f low-value paddy to higher value horticulture and other crops. Fol lowing the amendment o f the APM Act, the immediate challenge during 2006-07 would be to adopt a set o f rules that would allow for widespread application o f the agreed agricultural marketing reforms. T o better facilitate knowledge and technology transfer, as reflected in i t s renewed Agricultural Policy Framework (currently in draft), Go0 i s moving forward in rolling-out Agncultural Technology Management Agencies (ATMAs) in al l districts under a National Program supported by the Union Ministry of Agnculture. In order to do so effectively, there i s a need to: (i) formulate district-wise production diversification and marketing strategies; (ii) elaborate ATMA annual work plans; and (iii) incorporate agricultural marketing and production economics capacity and expertise in the relevant l ine departments.

30. Irrigation. To facilitate empowerment o f farmers in water resources management, good progress has been made in putting irrigation schemes under the control o f Pani Panchayats (PPs) covering an area o f about 0.75 mi l l ion hectares as o f to date. With the new Onssa Pani Panchayat Ac t and corresponding Rules now operationally in place, the formation time o f PPs has been significantly shortened as the time consuming process o f registration under the Societies A c t i s n o longer necessary. A number o f challenges need to be addressed in order to sustain the envisaged hand-over o f imgat ion management to PPs o f up to a total o f 1.1 mi l l ion hectares by the end o f 2006-07, and a further 0.3 mi l l ion in 2007-08. These include the need to: (i) complete required rehabilitation o f canal system as a precondition for PPs to accept O&M responsibilities; (ii) step-up awareness campaigns and training programs to adequately prepare members o f PPs in taking on new responsibilities that come with increased empowerment; (iii) prepare and test O&M plans for those schemes that are scheduled to be handed over to PPs; and (iv) strengthen the eroded institutional capacity of the Department o f Water Resources to provide adequate support to PPs.

3 1. Land Administration. In order to improve access to land for the poor through better secured land property rights, Go0 i s moving forward to establish a modernized land administration system, including

The demand for the Orissa Investment Climate Assessment (ICA) - thefirst full-fledged state level ICA report undertaken by the World Bank - emerged out o f the private sector development dialogue being carried out under the programmatic Orissa Socio- Economic Development Program loanicredit. The report i s based on the Orissa IC survey, undertaken jointly by Confederation o f Indian Industry (CII), the Utkal Chamber o f Commerce and the World Bank Group, with the overall support o f the Department of Industries, Government o f Orissa.

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actions aimed at regularizing land property rights for tribal populations. For this purpose, a system for updating o f Records of Rights has been put in place, and there i s continued, albeit slow, progress towards the digitization o f cadastral maps. During 2006-07, the focus wil l be on measures to harmonize the existing regulatory framework and streamline the existing institutional structure in a manner that reflects the requirements o f an effective, efficient, equitable and transparent land administration system. Go0 also plans to initiate discussion on reform o f land legislation to enhance productivity and access o f tenant farmers to bank credit, with adequate protection o f all stakeholder interests.

32. Forestry. GOO, with support f rom DFID, has elaborated a comprehensive forest sector vision and strategy with broad stakeholder inputs. By doing so, the importance o f the forestry sub-sector as a potentially important source of income generation for the poor i s recognized, particularly for Orissa's large tribal population. In line with the prepared vision and strategy for the forestry sub-sector, there i s a need to initiate a change management process that would enable the Forest Department to better focus itself o n core business functions such as community-based forestry and i t s regulatory functions. Building on this renewed focus, and in l ine with revised guidelines for Joint Forest Management to be issued in 2006-07, new approaches for non-timber forest produce (NTFP), bamboo, medicinal plants, and timber production aimed at increased value-addition can be tested through pi lot projects and subsequently scaled-up. In support o f this renewed focus, the Department wi l l also move forward to strengthen i t s f ield presence by filling-up critical vacancies and delegation of decision-making powers to field-based officers.

33. Watershed and fisheries. The recent strengthening o f Onssa's watershed mission along with the adoption o f a sector-wide, livelihoods-based watershed management approach in four districts has created a good starting point for scaling-up participatory approaches to watershed management in the state. The Fisheries Department has been engaged for some time now in discussions with key stakeholders to gauge support for pol icy reforms, capacity building and investments aimed at improving revenue generating capacity o f community-based inland and marine fisheries. UNDP with support f rom DFID i s supporting the Fisheries Department in this endeavor.

Regulatory framework for private enterprise

34. Progress to date. Go0 has made important progress in improving the regulatory framework for business over the past year. Key provisions of the new legislation include: (i) introduction o f a Combined Application Form (CAF), reducing the number o f application clearance forms for establishment o f industries required from 18 to one; (ii) introduction o f a time bound clearance system; and (iii) self- certification for compliance with provisions o f applicable industry and labor related Acts & Rules. Fol lowing the enactment o f the legislation to establish a Single Window system (SWS), Go0 has also notif ied the Industries Facilitation Rules in March, 2005, laying down the operational details. Recognizing the importance o f strong and effective environmental regulation to manage the impacts of growing mineral- based industry, an institutional needs assessment o f the Orissa Pollution Control Board to ensure environmental due diligence and improve compliance has been undertaken with support f rom the Bank. Go0 has also completed the State o f Environment Report, which summarizes the environmental situation in the state and outlines areas for priority action.

35. Future challenges. The Labor Department and Factories Department are currently undertaking a review o f their respective regulatory requirements with a view to further streamlining requirements/combining inspections to facilitate the provisions o f the Industries Facilitation Act. In i t s efforts to broaden the growth-enhancing reforms, the issue o f poor access and quality o f infrastructure provision remains a major constraint. Encouraging public private partnerships (PPP), through the introduction o f a PPP pol icy for Infrastructure Development, i s an important element o f this reform strategy." The PPP framework lays down the institutional arrangements and the modalities for coordinating the appraisal and approval process between the various l ine departments and the finance department, for each PPP transaction. With respect to improving an environmental regulatory framework, Go0 intends to

lo The draft PPP Policy on Infrastructure was approved on August 25, 2005 by an Apex Committee headed by the Ch ie f Secretary of Orissa. The final draft policy will be sent to the State Cabinet for approval.

9

initiate the implementation o f the OPCB efficiency enhancing and capacity building action plan, with a particular focus on building capacity o f regional offices in areas o f concentrated new investment, rationalizing consent management and inspection procedures, piloting innovative incentives for compliance and approving a staffing plan. Similarly, Go0 is planning to initiate a program for strengthening capacity o f the Forest Department to improve effectiveness o f forest conservation measures and forest clearance process for industrial projects.

36. Measurable outcome indicators have been developed to track further progress and include a reduction in regulatory delays associated with setting up and operating a business in Onssa, and a reduction in the number o f labor and factory related inspections and filing returns, as wel l as specific indicators to measure performance o f OPCB (such as reduction in the percentage o f complete applications carried forward each year). Building on the support provided by WBI, an effective monitoring and coordinating mechanism- including a standardized format for quarterly monitoring review o f a l l the agencies involved in the SWS, would be put in place to track the progress o f the indicators.” Technical Assistance to OPCB to implement the plan and track progress in outcomes indicators will be provided.

Mining and Peripheral Development

37. Progress to date. A new state-level Resettlement and Rehabilitation (R&R) policy, adopted after broad stakeholder consultations and notif ied in M a y 2006, contains several measures for the benefit o f the affected population. The Orissa Rural Infrastructure and Socio-Economic Development Act, 2004, proposes to levy a tax varying f rom 5% to 20% o f value o f land allocated for mineral extraction and use the revenue for developing rural and mine-affected areas. The government has also issued an ordinance that requires the mining companies in tribal areas to: (a) allot 2 % o f equity to oustees and (b) allocate 5% o f net post-tax profits on peripheral development (radius o f 15 km around mining area). These provisions have been included in M O U s with several investors, and a Committee headed by the District Collector and including c i v i l society activists has been established in the Keonjhar district to oversee the implementation. With Bank support, review of international and local experience with benefit sharing approaches in the extractive sector has been completed, complemented by a socio-economic survey to assess the impact o f mining on the l ivelihood o f tribal communities in the Keonjhar district.

38. Future challenges. The major challenge i s for Go0 to manage the environmental and social issues arising out o f mineral based industrial growth. In addition to the adoption o f the new R&R policy, Go0 i s planning, with Bank technical assistance, to undertake a strategic environmental and social assessment o f the mineral sector and develop an action plan for environmental and social r i s k mitigation and management, including detailed procedures for: (i) the environmental compliance for different categories o f mines, (ii) mine closure; and (iii) addressing mining legacy issues. This will provide major inputs to a sustainable mining sector development strategy for the state and a new mining policy, under preparation.

Public Enterprise Reform

39. Progress to date. Go0 has maintained i t s pol icy o f exiting commercial businesses and promoting private sector development. Orissa continues to make steady progress in closing down loss malung enterprises and privatizing viable units. Since the previous Operation, assets (land, plant and machinery) have been sold in 6 closed enterprises and bidders have been selected for asset sales in another 2 enterprises. Orissa Timber & Engineering Works i s a closed unit where the former employees have taken over the management of the company under an employee buy-out scheme. During 2005-06, two enterprises have been privatized ( IDCOL Re-Roll ing M i l l s and Orissa Co-operative Spinning Mill Tora Bargarh). Since the inception of the Public Enterprise reform program in 1999, 30,341 employees have been paid VRS, at a cost o f about US$70 mill ion; under the state’s Social Safety Ne t Program (SSNP), more than

”In May 2005, in collaboration with the Dept. of Industries, Orissa, WE31 held a workshop on “Implementation Support: Applyng the Rapid Results Approach,” with the objective of building capacity in multiple government departments associated with the effective operationalization o f the Single Window facility.

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10,000 voluntarily separated workers have been counseled, o f which more than a third have been redeployed.

40. In the next phase o f the public enterprise reform program, in addition to continuing the privatization and restructuring processes, the Onssa Pollution Control Board (OPCB) plans to work closely with the Department o f Public Enterprises (DPE) to develop the transaction guidelines on environmental matters. Environmental issues in the PE reform program are particularly important as: (i) several public enterprises may possess significant environmental problems or liabilities; (ii) potential buyer may wish to see environmental issues tackled during the sale o f assetdentities to be privatized; and (iii) GOO’S policy document mentions that i t i s advisable to have an environmental audit done prior to disinvestment, privatization or closure, to benchmark the extent o f such liabilities.

Future challenges.

Power sector reforms

41. Progress to date. Reforms initiated in the mid and late 1990s have improved service quality within the state, facilitated lucrative power export, and stabilized sector finances. Reforms included the unbundling o f the vertically-integrated power utility, establishment o f the autonomous Orissa Electricity Regulatory Commission (OERC), privatization o f distribution (in 1999), and minority (49%) private participation (with management control) in the major state-owned thermal generation plant. Consumers have reported improvements in the quality o f service (per 2005 surveys linked to the Investment Climate Assessment), collections have improved, n o budget funds have been provided to the sector since distribution was privatized in 1999, and revenues are able to cover operating costs. Improvements in collections and customer mix, and cheaper bulk power supply due to good monsoons and a higher proportion o f hydropower, have enabled the four distribution companies to pay fully for their bulk electricity supply and also service some past debts. Furthermore, consistent with structural changes mandated under the Electricity A c t 2003, G o 0 has notif ied (in June 2005) the separation o f bulk supply and trading function f rom the transmission activities o f GRIDCO; and the OERC has issued ru les for a l lowing open access to transmission and distribution networks by eligible consumers and suppliers.

42. Moving forward, the main challenge for power sector authorities and enterprises wil l be to consolidate the above-mentioned achievements and to ramp up efforts to advance sector reforms, particularly in the areas o f reducing distribution system losses and expanding rural access. This will require a more permanent resolution o f the “caretaker” management arrangements imposed o n the four distribution companies (see below), including through concerted efforts by the companies and the Orissa Government. CESCO, the largest distribution company, had i t s operating license revoked by OERC in early 2005 because o f the failure o f company owners/management to commit to an acceptable performance improvement plan. The company has since been managed by an OERC-appointed administrator whi le OERC undertakes necessary actions for i t s re-privatization. In a separate development, in early 2006 OERC issued license suspension notices to the other three private distribution companies o n account o f their violating license conditions. The distribution companies contested the OERC order in the National Appellate Tribunal, which has stayed the suspension notice but has appointed special officers that will manage the day-to-day affairs o f the companies with the support o f an advisory committee. The appointed special officers are to submit their report t o the tribunal in three months (by September 2006).

Table 3: K e y Indicators o f Power Sector Performance

I 2002103 I 2003104 I 2004105 1

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43. The financial performance o f the power sector i s improving, wi th al l distribution companies paying 100% o f their bulk supply tar i f f (BST) bills, the 3 privately-owned companies for more than a year, and also servicing a part o f their pre-privatization debts. The sector's finances have also benefited f rom a revival o f industrial demand and the trading o f surplus hydropower as a result o f good rainfall in 2003/04 and 2004105. Technical and commercial losses, although they are declining, s t i l l remain very high. The business plans approved by OERC are going to be a critical instrument to facilitate reduction o f these high losses (see Tables 3 and 4).

NESCO WESCO SOUTHCO CESCO

Table 4: Targets for Aggregate Tech & Commercial Losses - OERC approved Business Plan

2002103 2003104 2004105 200516 2006107 2007108 52.2% 50.4% 43.0% 39.6% 36.1% 33.3% 47.3% 46.2% 40.6% 36.5% 32.3% 28.0% 49.8% 5 1.6% 45.7% 41.8% 37.7% 34.2% 55.0% 51.1% 49.4% 45.0% 40.4% 35.6%

44. Payment of electricity bills by Government departments were 89% for the f i rs t 11 months o f 2005- 06, compared with 81% average for full FY2004-05. Payments to CESCO for the full FY2005-06 are estimated at 85% in line with the agreed target. Payments are expected to exceed 90% during M a r c h with arrears being cleared prior to the end o f the fiscal year (as was the case in previous years), raising the overall average for the year above the target o f 90% by March 2006. Furthermore, to improve payments f rom municipalities, CESCO has negotiated and concluded electricity supply agreements (MoUs) with i t s 5 largest municipal customers which specify service and payment obligations o f the parties, and the remedies available to CESCO to ensure timely payment. These agreements - for the municipalities o f Bhubaneswar, Cuttack, Puri, Kendrapara and Anugul - were signed in April, 2006.

45. Business Plans, primarily aimed at defining the obligations and rights o f the four distribution companies with regard to achieving loss reduction targets and servicing accumulated debts, were approved by OERC in February 2005 after reviewing submissions by stakeholders. Recourse to the OERC was necessitated fol lowing unsuccessful attempts by GRIDCO and G o 0 to reach a negotiated agreement with the distribution companies in June, 2004. The implementation o f the business plan had been held up for a variety o f reasons including review petitions f i led by state government and the licensees, and ongoing arbitration between A E S (the erstwhile owner/operator o f CESCO) and GRIDCO. Ini t ia l steps towards implementation o f the OERC Order on the Business Plan have recently been taken with Go0 reconcil ing and clearing the accumulated dues towards CESCO o f the largest consuming government department (PHD)12. G o 0 has also committed to (1) reconcile and clear the remaining balance by June 30, 2006, (ii) securitize CESCO's dues to GRIDCO at zero percent interest (as per OERC order) within one month o f OERC announcing the amortization schedule and after talang into account the imminent conclusion o f the on-going arbitration proceedings between A E S and GRIDCO; and (iii) amend the subsidiary loan agreement between CESCO and GRIDCO (for loans taken for asset creation in CESCO) within one month o f OERC announcing the loan amortization schedule. A s mentioned above, going forward, i t i s going to be important that key stakeholders (the four distribution companies and state government) w o r k together towards facilitating the implementation o f the business plans (including any revisions which may become necessary f rom time to time) and reduce the high system losses. Th is will include the government maintaining payment discipline by government-dependent consumers and necessary l aw & order support t o distribution companies to reduce power theft; the companies making necessary investments in assets and manpower and improving their management, especially the private distribution companies; and OERC providing regulatory oversight and guidance

l2 T h e reconciliation exercise has revealed serious flaws in billing practiced systems in that the significant outstanding arrears being shown b y CESCO were reduced to almost zero when scrutinized in the reconciliation process. These practices wi l l need to be better understood and resolved by CESCO, OERC and GOO.

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46. Go0 i s also taking actions to strengthen the law and order mechanisms for reducing electricity theft (as required under the Electncity Ac t 2003): Five police stations have been notif ied to specially prosecute perpetrators o f electricity theft. The High Court has agreed to the government’s proposal to designate existing courts as Special Courts to try electricity theft cases. Go0 wil l take necessary steps to begin operationalizing these theft reduction measures by September 2006. As also required under the Electricity Act, in March 2006 Go0 approved funding ru les for OERC, thereby enhancing i t s financial autonomy.

47. Future challenges. While the financial performance has stabilized and OERC has gained valuable regulatory experience, critical challenges remain. The dominant challenges are associated with (i) reducing the very high level o f system losses, (ii) monitoring the effectiveness and sustainability o f the centrally supported rural electrification program (70% o f the population, mainly in rural areas do not currently has access to electricity), and (iii) corporate strengthening o f the state-owned power utilities (that have seen a serious erosion in their management and human resources as a result o f better opportunities elsewhere, inadequate incentives to attract and retain skilled staff and retirement o f experienced staff. K e y steps to be taken over the coming year include: (a) ensuring timely implementation o f approved Business Plans o f the discoms including invoking remedies, conducting independent energy audits, ensuring at least 95% payment by state government departments, implementing MoUs with urban local bodies, benchmarking and publ ic ly disseminating key performance data, (b) monitoring effectiveness o f the theft reduction programme, including the special police stations and the designation o f existing courts to try cases involv ing electricity theft, (c) establishing a monitoring system to track expansion in rural connectivity and quality of service, impact on economic growth, cost o f supply (incl. technical and commercial losses), revenues and ‘last mi le ’ arrangements, and (d) strengthening the corporate structures o f state-owned power companies, including the filling up o f vacant management positions and ensuring autonomy o f the company’s board as defined in the corporatization agreement. Over the medium term, there i s need to prepare and implement a management strengthening, HR and training plan to meet the emerging demands and challenges in the sector.

B. FISCAL REFORMS AND PUBLIC FINANCIAL ACCOUNTABILITY

48. The starting point o f the Orissa Socio-Economic Development Program was the fiscal crisis in Orissa in the late 199Os, and a fundamental a im o f the program i s to regain fiscal sustainability. The fiscal reforms component o f the program contains four sub-components: (i) correction o f fiscal imbalance; (ii) tax reforms; (iii) expenditure restructuring; and (iv) financial management and accountability.

Fiscal Correction

49. Progress to date. Orissa has institutionalized i t s fiscal correction effort by adopting the Fiscal Responsibility & Budget Management Act, 2005 (FRBMA), which came into effect in June 2005. The act stipulates that Go0 shall eliminate i t s deficit o n current account (‘revenue account’ in the Indian terminology) and turn it into a surplus and reduce the overall fiscal deficit to less than 3 percent o f GSDP by 2008/09. I t also mandates several measures for fiscal transparency. Orissa produces an annual Medium- Term Fiscal Plan (MTFP) which shows h o w i t s FRBMA targets wil l be achieved.

50. The overall fiscal health o f the Government o f Onssa has experienced a marked improvement during the period 2000-2005, due to both improved revenue collection and expenditure contraction. During these f ive years, the primary fiscal balance has been converted f rom a deficit o f 6.5% o f GSDP into a surplus o f 2.7%. The targets set by the Medium-Term Fiscal Plan approved in August 2004 have a l l been met or over-fulfilled. Orissa has managed to raise i t s own revenue to GDP ratio f rom 6.3% in 1999/00 to 9.2% in 2004/05. Revenue enhancement has been largely the result o f strengthening o f rationalization o f tax rates, tax administration and improved tax compliance, aided by strong anti-corruption actions. Expenditure contraction over the past f ive years has been achieved mainly through wage bill restraint and closure/reform of loss making public enterprises. As a result o f consistent and sustained fiscal correction, the state n o longer faces liquidity constraints as i t did until 2003. There was no t a single day in 2004105 when Go0 was in overdraft with the Reserve Bank of India, in striking contrast t o the pre-2004 period. As a

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result o f the reforms implemented, fiscal space i s begmning to be created for the state to strengthen i t s developmental efforts, both in terms o f increasing allocations in the state budget for high priority investments and in terms o f more fully uti l izing central and external resources available for ongoing programs.

51. After increasing since the mid-l990s, the debt stock to GSDP ratio has now begun to decline although it remains high. The ratio o f interest payments to total revenue has declined even more rapidly (Figure 2), as a result o f debt swaps arranged with the Government o f India during 2002-05, and additional debt pre-payment by G o 0 during 2004-05, using OSEDL-I financing. G o 0 has pre-paid high cost loans o f about US$ 250 m i l l i o n in 2004/05, and interest re l ief f rom debt swapping i s estimated at US$ 25 mi l l ion in 2004/05 alone.

Table 5: Fiscal Summary, 1999/00 to 2006/07

Per cent GSDP

Revenue State's own revenue Central resources

Non-interest expenditure Current Exp.excl interest

01w salary bill 01w pension

olw capital outlay 01w net lending

Primary Balance Interest Payments Overall balance (Fiscal Deficit) Memo items: Salary1 Own revenue lnteresff Revenue

Salary1 Rev. Exp (net of interest & pension) Current (Revenue) BalanceiGSDP Current balance1Revenue Receipts Outstanding Debt/ Revenue Receipts Outstanding DebffGSDP

Fiscal Summary: 199912000-2006107 I999100 2000101 2001102 2002103 2003104 2004105 2005106 2006107 Actuals Actuals Actuals Actuals Actualsia Actualsla RE BE

15.2% 17.8% 16.3% 18.7% 17.5% 20.2% 22.3% 22.2% 6.3% 7.4% 7.3% 8.8% 8.2% 9.2% 9.3% 9.3% 9.0% 10.4% 9.0% 9.9% 9.4% 11.0% 13.0% 12.9%

21.7% 20.5% 18.9% 20.2% 16.8% 17.5% 18.9% 19.1% 18.7% 16.9% 16.3% 17.3% 14.9% 15.7% 17.5% 17.4% 10.1% 9.8% 8.4% 9.4% 7.3% 7.3% 7.1% 6.4%

1.8% 2.1% 2.3% 2.8% 2.2% 2.2% 2.5% 2.8% 2.1% 2.2% 2.0% 2.4% 1.6% 1.8% 1.7% 1.9% 1.0% 1.4% 0.6% 0.4% 0.4% 0.0% -0.3% -0.2%

3.2% 5.9% 6.5% 6.6% 5.3% 5.8% 5.6% 5.5% -9.7% -8.6% -9.2% -8.0% -4.6% -3.1% -2.2% -2.4%

-6.5% -2.7% -2.6% -1.5% 0.7% 2.7% 3.4% 3.0%

161% 133% 115% 106% 89% 79% 76% 69% 21.0% 33.1% 40.2% 35.1% 30.3% 28.6% 25.2% 24.6%

59.5% 66.6% 60.1% 64.3% 57.0% 53.8% 47.3% 43.7% -6.7% -5.0% -6.5% -5.2% -2.6% -1.3% -0.8% -0.7%

-43.7% -27.9% -40.1% -28.0% -15.1% -6.4% -3.7% -3.1% 311% 307% 343% 338% 336% 293.3% 253.8% 246.0% 47% 55% 56% 63% 58.9% 59.2% 56.5% 54.5%

es in 386.29 387.28 432.93 439.74 538.30 576.38 634.02 697.4:

to exclude impact o f one-time shocks, including securitization o f power sector liabil I GSDP

a/ Actual figures have been adjust

was 2.4% o f GSDP in 2004-05. /b includes o f f budget borrowing and securitization o f power sector dues.

14

Figure 2: Debt and Interest Burden

Fiscal Deficit (% GSDP)

DebffGSDP (Yd 80% 7 72% MTFP'04 70%

MTFP '05

30%

Salary /States own revenue (%)

lnterest/F&venue (YO)

MTFP '04 33.3%

MTFP '05

4 5% 40% 35% 3 0 % 2 5% 2 0 % 15% x) % 50/. 0 %

52. Future prospects. The challenge now i s t o sustain the fiscal stabilization achieved so far. G o 0 aims to strengthen the quality o f fiscal adjustment by stepping up capital investments more rapidly than had been envisaged one year ago, so as to achieve i t s growth objectives. The updated M T F P (2005-10) targets a consistent improvement in the current balance, along with accelerated recovery and growth o f public investment, f rom 1.8% of GSDP in 2004-05 towards 3% by 2008/09. Figure 3 presents a comparison o f key indicators between the original MTFP (2003-08) projections and the actual outcome until 2004105, along with the correction path that i s projected in the updated MTFP.

53. Budget 2006-07. The Budget 2006-07, which was presented to the Onssa Legislature o n February 14, 2006, targets an even lower fiscal deficit than projected in the MTFP, reflecting Goo's a im to achieve the revenue projections o f the Twelf th Finance Commission, which were incorporated in the MTFP. Presenting the budget, the Finance Minister noted that having successfully addressed the macro fiscal imbalance in the state, the main focus moving forward would be on "translating outlays into outcomes", through increasing emphasis on results orientation o f public expenditures.

Figure 3: K e y Indicators o f Fiscal Correction

rZ.O%, 13.0% 1 8.0% - 6.0% - 4.0% - 2.0% -

I 180.0%- 160.0% - 140.0%- P O . O % - X)O.O% - 80.0%- 60 .O% - I MTFP'05 1

I O.O%.i , I 1 , , !, , , I I I I

Tax reforms

54. Progress to date Orissa's own taxes provide 70% o f i t s own revenues, and increasing the own revenue/GSDP ratio has been an important part o f the reform program. Orissa has been successful in this regard, with an increase in the rate f rom 6.3% in 1999100 to 9.2% in 2004105, on the back o f a series o f tax reforms. The year 2004-05 witnessed a record 20% rate o f real growth in the state's own tax revenues, while non-tax revenue grew by about 10% in real terms. This was largely the result o f tightening and strengthening o f tax administration and enforcement, including computerization o f sales tax administration and strengthening deterrence against evasion through strong anti-corruption initiatives. Go0 introduced the Value Added Tax (VAT) on April 1,2005.

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55. Future challenges. Over the next two years, G o 0 plans to further advance i t s revenue agenda, through the fo l lowing moves. In 2005106, the focus i s on establishing standard land valuation reports as the basis for valuation in determination o f stamp duty and registration fees, simplifying procedures for the conversion o f agricultural land for other use, and amending relevant provisions o f Registration Act to disallow registration o f transactions where land has been under-valued. In 2006107, Go0 plans to focus on the enactment o f the Orissa Excise Act, 2006, a comprehensive law relating to alcoholic liquor and other intoxicants, replacing the Bihar and Orissa Excise Act, 1915; and it will rationalize and revise the cess on agncultural land.

Expenditure restructuring

56. Progress to date. From a situation in which developmental expenditures had been squeezed to a minimum as a result o f the large and growing salary bill and interest burden, expenditure composition has begun to improve. The ratio o f the salary bill to the state’s own revenues - selected by G o 0 as a key indicator o f its own efforts to address the structural imbalance - has been reduced from over 150% in 1999/00 to below 80% in 2004105. Capital outlays, after having declined over the previous two years, increased by 18% in real terms in 2004105, equivalent to 0.2 percentage point o f GSDP. The economic composition o f recurring expenditures, net o f interest and pension payments, improved in 2004/05 as compared to the previous year, with the share o f salaries going down fiom 57% to 54%. The sectoral composition o f government expenditure (net o f interest and pension) shifted slightly in favor o f human development, including education, health, drinking water supply, social protection and anti-poverty programs; the combined share o f these sectors increased from 42.1% in 2003104 to 44.1% in 2004105. Pension reforms are on the agenda, beginning with the compilation o f data and projection o f pension liabilities under alternative scenarios, an exercise that has begun in earnest in M a y 2005.

57. Future challenges. G o 0 wil l continue to face important expenditure challenges in the coming years as it tries to promote high-priority development spending while managing the large debt overhang. The MTFP envisages a slow but steady shift in the economic composition o f public expenditure in Orissa, away from interest payments, salaries, subsidies, and loans and guarantees to unviable public enterprises; towards capital outlays and non-wage operations and maintenance in infrastructure, education and health. Specific challenges include: (i) managing the salary bill so that priority areas o f development are not affected by staff shortages (including teachers, health workers, environmental specialists); (ii) solving the problem o f chronic under-funding o f maintenance; (iii) identifying and addressing the growing pension burden; and (iv) raising the share o f elementary education spending within total education spending by rationalizing higher education subsidies

Financial Management and Accountability

58. Improving public financial accountability i s a central part o f the reform program in Orissa. Based o n the findings and recommendations o f the State Financial Accountability Assessment, 200413, Go0 prepared and approved a detailed Development Action Plan (DAP) in August, 2004. Since then, several measures have been initiated which, along with fiscal reform measures, have begun to bear fruit, as evidenced for instance by the fact that the State did not resort to overdraft or advances f i o m RBI during 2004/05, for the first time in 22 years.

59. Budget formulation and transparency. Go0 has issued clear guidance while formulating the annual budgets for 2005/06 and 2006/07, aligned to the MTFP and focusing on curtailment o f unproductive expenditures, enhancing revenues and speedy completion o f priority investment schemes. Identification o f priority investment projects for completion which was carried out as part o f a Zero-Based Investment Review exercise during 2002-03 and 2003-04, has since become a legal requirement under the FRBM Act; o f the identified projects, 19 were completed in 2004-05 and 66 in 2005-06. The MTFP, the annual budget and updated summarized accounting information have been published o n Go0 Website. Budget at a

l3 The SFAA was conducted by the World Bank and DFID in collaboration with GOO.

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Glance, 2005/06, provided enhanced levels o f information on the state o f Onssa’s finances, including the size and costs o f establishment, details o f debt and contingent liabilities; pension reform work underway will allow G o 0 to also disclose actuarial value o f pension obligations in future years. Multi-year medium term expenditure plans incorporating performance targets are being developed in key social sectors. Going forward, these wil l form the basis for budget formulation, providing closer linkages between the annual budget and the desired development outcomes. Actual spending was more than 95% o f the targeted outlay under the Annual Plan in 2004-05 and in 2005-06, compared with only 82% during 1997-2002, indicating more realistic planning consistent with available resources and approved annual borrowing ceiling. Fiscal marksmanship and transparency requirements o f the Fiscal Responsibility & Budget Management Act, 2005, have further institutionalized the reform process.

60. Budget execution and monitoring. Go0 has taken several steps to improve budget execution and monitoring. The need for maintaining good financial discipline has been recognized and detailed circulars have been issued, assuring incentives o f increased allocations for better financial management at the Departmental level. Uti l ization o f central assistance has improved significantly, as shown by the fact that utilization certificates submitted during the year, as a ratio o f the amount pending at the beginning o f the year, has risen from 68% in 2004-05 to 73% in 2005-06. Going forward, the focus will be on (a) setting up a tax research unit in the Department o f Finance; and (b) better monitoring o f budget performance by preparation o f variance analysis.

61. Financial accounting. Computerization o f the State’s accounting function has been taken up on priority basis. W o r k on computerization and networking the state’s 30 District Treasuries, 6 Special Treasuries and 125 Sub Treasuries has commenced and wil l be rolled out in a phased manner over the next two years. The process o f reconciliation o f departmental accounts with the Accountant General’s Office has been made more frequent and i s being monitored jo int ly by the AG’s Office and the Finance Department.

62. Cash management. Revised instructions have been issued by the Finance Department o n approval and release o f funds, ensuring more predictability in the f l ow o f funds to spending departments. Tighter controls have been put in place on withdrawals f rom ‘c iv i l deposits’ and transfer o f funds out o f the Treasury into temporary accounts. Close monitoring o f the submission o f Util ization Certificates for central p lan and centrally sponsored programs has resulted in a doubling o f the utilization o f such central funds. However, there s t i l l remain substantial Go1 funds for which U C s are s t i l l pending and this will be an area where continued and sustained efforts will be required. Revision o f the Budget Manual, and o f Orissa General Financial Rules, are underway.

63. G o 0 has taken several steps, including the formation o f departmental committees and an apex committee at the Chief Secretary level to monitor progress in responding to the statutory external audit. Joint meetings o f representatives o f the Auditor General’s Office, the concerned departments and the Finance Department have proved to be fruitful and will be continued. Progress in disposal o f pending audit paragraphs, inspection reports and recommendations o f the Public Accounts Committee (PAC) will be closely monitored and considered as a key indicator o f improvement.

Audit responsiveness.

64. Accounts of Local Bodies and Public Enterprises. With the increasing responsibilities and roles o f urban local bodies (ULBs), attention i s being focused o n their financial management systems and capacities that would enable them to enhance own revenues and leverage funds from the market t o meet the infrastructure financing gaps. G o 0 has agreed to pi lot in selected two ULBs, improved modem financial management systems as demonstration models o f excellence. A s part o f the wider reforms in public enterprises, G o 0 has focused on ensuring that accounts and audits o f a l l operating enterprises are brought up to date. Reduction in the backlog o f the audits will be a key indicator o f progress and monitored closely. Orissa i s probably the first Indian state to publish selected updated month-end summarized financial statements on the Web.

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Reducing Corruption

65. Progress to Date. As part o f i t s effort to strengthen public accountability, G o 0 i s supportive o f anti-corruption initiatives. The Vigilance Department o f h s s a has a wel l established reputation for competence in enforcement: Orissa has one o f the highest levels o f registered cases on corruption in India with 1659 cases being registered between 1997 and 2002. This compares to 2722 cases in Maharashtra, 1238 in Karnataka and 167 in Bihar. A further indicator o f anti-corruption enforcement i s the high number o f anti-corruption cases (39) fi led against high-ranking officials. Strengthened anti-corruption initiatives are boosting government revenues as a result o f improved compliance with tax laws and reduced degree o f tax evasion.

66. Recognizing that prevention and public awareness are key areas that need to be strengthened in order to institutionalize accountability, G o 0 has developed an anti-corruption action plan covering measures to strengthen prevention, enforcement and public awareness; this plan has been finalized and approved in December, 2005. The Anti-Corruption Act ion Plan includes important actions to reform the procurement system to enhance transparency and competition, including through the implementation of e- procurement.

67. Future Challenges. Improving the enforcement function needs to be accompanied by improvements in transparency and accountability o f decision making. In 2005106 Go0 intends to focus on supporting initiatives to increase public scrutiny o f Government decisions. G o 0 has recently enacted a new Right to Information Act which provides an overarching legal framework for ensuring transparency and accountability in the workmg o f every public institution and authority. The A c t demands that public authorities including Government departments maintain easily accessible information o n officials, budgets, expenditures, disbursements and decision making processes. The challenge remains to develop effective institutions to implement the Act. In this context, G o 0 has initiated a pi lot project that aims t o develop suitable information databases; under this project, nine departments will p i lo t designing monitoring and evaluation systems in specific districts based around indicators that are easily understood by citizens. The implementation o f the Act wil l also provide a good opportunity to reform the relationship between service providers and clients and support better monitoring systems. G o 0 further intends to develop citizens’ feedback systems through the use o f extensive surveys and the development o f cit izen report cards on specific public services. Strengthening the judic ia l system through the establishment o f Special Courts to be able to adequately process corruption cases i s also an imperative. There are nearly 2000 cases currently pending with the courts and G o 0 intends to both strengthen Courts and establish a better case load management system in the coming year.

68. Public Procurement. More transparent procurement processes will also help reduce corruption. The Government o f Orissa, with technical support f rom W o r l d Bank procurement specialists, conducted an assessment o f the strengths and weaknesses in the system and practices o f public procurement in Orissa in 2004. On the basis o f this assessment, a draft medium term action plan i s under consideration. G o 0 i s seeking to move rapidly towards implementing e-procurement to achieve transparency and fair competition. I t has appointed a consultant (NISG) to conduct a study to clarify the current Information Technology (IT) status o f G o 0 and to assess various business models o f e-procurement. The fol lowing steps will take the procurement reforms agenda forward: (i) Government approval o f Procurement Reform Act ion Plan; and (ii) completion o f N I S G study, including workshops to identify specific demand o f the suppliers, and preparation o f Request for Proposal for technical assistance to implement e-procurement.

C. PUBLIC SERVICE DELIVERY AND HUMAN DEVELOPMENT

69. Strengthening service delivery i s a key factor for improving development outcomes in the State, as also reflected in GOO’S Vision 2020. The public service delivery and human development component focuses o n improvements in the effectiveness o f education, health and social protectiodanti-poverty programs through institutional reforms, better use o f modem information technology and o f poverty data for

18

pol icy making, with increased emphasis on outcome monitoring and program evaluation.

Cross-cutting reforms to improve service delivery

70. Progress to date. There has been considerable progress in taking forward service delivery reforms using e-governance and Information Technology applications. An IT pol icy has been set out in 2004 and the Orissa Computer Application Centre has been designated as the Directorate for Information Technology and i s developing a vision for e-governance in the state. The Transport Department i s talung forward the computerization o f dnving licenses, modernization o f border check posts and motor vehicle registration, as part o f a wider action plan for e-governance in the transport sector. G o 0 also has an ambitious plan to restructure municipal service delivery, involving computerization o f property taxes, GIS mapping, and registration o f births and deaths. This i s being piloted in the capital city o f Bhubaneswar. E-governance i s also being used to monitor progress, both physical and financial, o f poverty alleviation schemes by the Department o f Panchayati Raj. More l imited progress has been made in strengthening the local bodies; there remains a need to have a comprehensive strategy to strengthen local bodies, including stronger incentives for performance and a capacity building strategy for local body officials. Computerization o f land records has been completed in 15 1 out o f 172 tehsils, with Records o f Rights being made available to a l l land owners. Digitization o f cadastral maps has begun and a process for updating these records wi l l need to be designed.

71. An extremely important initiative to strengthen service delivery through the devolution o f responsibilities to the local community i s the recent decision o f Go0 t o empower Village Education Committees to certify teacher attendance in elementary schools. Go0 i s also pi lot ing the devolution o f running the mid-day meal scheme in schools to women's self-help groups. Whi le progress i s being made in strengthening the elected rural local bodies (panchayati raj institutions), there remains a need to have a comprehensive capacity building strategy for rural local body officials.

72. Future challenges. There i s a clear need to establish appropriate institutional mechanisms to vision, co-ordinate, manage and monitor existing and new administrative reform initiatives. There has been considerable progress in this area in the last few months as the General Administration Department (GAD) has been empowered to take the lead, and a senior c iv i l servant has been appointed to exclusively manage this process. G o 0 i s in the process o f designing a comprehensive and overarching Orissa Modernizing Government Initiative (see Box 1 below), which aims to strengthen the capacity o f the GAD, key l ine departments and district administration, t o assess and implement reforms related to improving public sector capacity and service delivery.

- .. _.. - . _ _ - Box 1 : Orissa Modernizing Government Initiative

The Orissa Modernizing Government Init iative (OMGI) i s a Program whose objective i s t o support a series o f cross cutting and department specific re form processes aimed at improving the efficiency, transparency and accountability of government in delivering better publ ic services, particularly for the poor. The program wil l comprise o f a p o o l o f Technical Assistance that can be ut i l ized by Departments and training institutions to develop methodologies and tools, to implement reforms and to strengthen monitoring and evaluation systems.

Selected areas o f reform envisaged under the OMGI include: improved service delivery and grievance redressal; Human Resource Management and the roll out o f HRMIS; cit izen centric processes in a l l departments; business process re-engineering including records management, review o f rules o f executive business and secretariat manual; web based information management systems and results based M&E; repository o f good practices in development schemes and programs; and perfonnance appraisal and monitoring for individuals, organizations and districts.

Orissa i s the f i r s t state in Ind ia to articulate a comprehensive medium anti-corruption action p lan The Act ion Plan i s divided along three broad categories; i.e. reforms that support better institutional transparency and accountability particularly by developing better systems and procedures that prevent corruption; reforms that support better enforcement and that serve as a deterrent t o corruption; and processes that can generate better publ ic awareness necessary to underpin both prevention and enforcement and make changes sustainable.

. . .. . . . . . . . . . -. ... . . .. . . . .. .... ~. .... . . ... .. . ... .. - . . .-" . . . .. ... . .. ... .~

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Reforms in public administration

73. Progress tu date. For years, the public sector in Onssa acted as an employer o f f i rs t resort, leading to a government w o r k force proportionately much larger than in other Indian states. G o 0 has already taken a number o f key steps to rightsize the government work force. With respect to regular employees, 75% o f vacant regular posts have been identified and a Government Order issued for their elimination. More than 15,000 such posts have been abolished during 2004-06. A recruitment freeze has also been in place since mid-2001, with exemptions in case o f demonstrated need for doctors, nurses, primary teachers, and police. The salary bill o f temporary workers has been reduced significantly during the past two years, f rom Rs. 0.32 b i l l ion in 2003-04 to an estimated Rs. 0.15 b i l l ion in 2005-06. More than 1800 regular staff have been redeployed f rom unnecessary posts to fill critical vacancies.

74. Although the imperative to provide more space for developmental spending makes i t essential t o reduce the share o f the salary bill in total spending, i t i s important that the reduction in the number o f employees does no t occur in an arbitrary manner. Accordingly, G o 0 undertook a series o f organizational reviews and zero-based functional audits o f l ine departments over the past few years; and follow-up i s t ahng place. For instance, in the health sector (see para 78) Go0 has taken a number o f steps identified by the Organizational Review conducted in 2003-04, including the abolition o f some departmental posts, conversion o f paramedical staff to district cadres, and posting o f Indian Systems doctors to single doctor primary health care centers on a pi lot basis, in order to mitigate the short supply o f doctors in rural areas.

75. Future Challenges. The establishment o f a comprehensive c iv i l service data base l inked with the pay r o l l i s an extremely important step towards better control and management o f human resources. G o 0 has begun the process o f establishing such a system and hopes to have a fully functioning data base within two years. There i s currently a freeze on recruiting new staff although an agreement exists that staffing shortages in key priority areas (Health, Education and the Police) can be met; and this i s occurring mainly through contractual appointments. A balance needs to be struck between banning recruitment o f new staff and protecting and expanding staff in priority areas o f development including traditionally ignored areas such as environmental protection. Further, the Government intends to develop an equitable staffing pol icy that will be support better staffing o f underserved departments and districts as well as develop a pol icy o f staff redeployment and mechanisms to identify and deploy surplus labor through the establishment o f a central database o f surplus employees. These actions will promote better cadre and human resource management and improve service delivery by providing underserved units and areas with more service providers. These actions will require considerable administrative and polit ical commitment.

Health

76. Progress to date. Onssa has experienced a significant decline in the infant mortality rate over the past five years, but it i s s t i l l somewhat worse than the all-India average. The state continues to lag behind significantly in terms o f malnutrition among children and proportion o f births attended by trained persons. Orissa also continues to have one o f the highest burdens o f disease in India, mainly due to infectious disease and malnutrition. Malaria remains a major problem although the number o f deaths f rom malaria has fallen from 350 in 1997 to 234 in 2003. Just over ha l f the districts in Orissa are covered by EMCP (Expanded Malaria Control Program).

77. The strategy o f G o 0 to accelerate improvements in health outcomes consists o f actions that have been initiated along a number o f dimensions including: (i) reorganization o f the Health Department to better align the supply o f health personnel with the demand for health care; (ii) rationalization o f drug management to ensure adequate supply o f essential medicines in rural areas; and (iii) priorit izing o f budgetary resources to maximize the cost-effectiveness o f public health interventions. Currently, the largest category o f expenditure across all levels o f public health care i s for salaries - more than 85%. A comprehensive Onssa Health Sector Plan (OHSP), aligned closely with the National Rural Heal th Mission

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strategy, i s finalized and i t wi l l form the basis for multi-year DFID grant support for the sector.

78. Departmental Reorganization. G o 0 has implemented a number o f short-term recommendations identified by the Organizational Review conducted in 2002, including: the abolition o f some departmental posts and conversion o f paramedical staff to district cadres. Additional actions expected to be taken over the next 12 months include: handing over o f some PHCs to NGOs to manage, introduction o f user satisfaction surveys, establishment o f advisory bodies at health facilities with community representation, introduction o f district level planning processes, and posting o f Indian Systems doctors to single doctor primary health care centers on a pi lot basis, in order to mitigate the short supply o f doctors in rural areas.

79. A centralized drug procurement system i s in place and operational, an essential drug l ist has been compiled, standard treatment guidelines have been developed and are being uti l ized by health facilities, and a computerized drug inventory management system i s functional. Although the drug budget remains substantially underfunded, these actions collectively have resulted in cost savings, and improved availability and quality o f essential drugs within the available budget. Standard treatment protocols are under preparation and will soon be made available to health facilities. Starting in 2006-07, the drug budget i s expected to be significantly enhanced, with the help o f earmarked additional central grants awarded by the Twelfth Finance Commission.

Drug Management.

80. Future Challenge. Go0 has increased the pace o f h igh level attention to MDG-related health outcomes and health sector performance in the state. The Departments o f Finance and Health are worlung together more closely on several fronts to strengthen accountability and produce results. T h i s includes three immediate approaches. First, the two departments will agree on a framework for assessing effectiveness, equity, and efficiency o f government health expenditures (including both o n and o f f budget elements) and initiate i ts implementation. Second, the Department o f Health (DOH) will develop specific action plans for system strengthening investments and innovative approaches to improving health service delivery performance in the context o f the sector support program being developed with DflD support. Third, a multi-sectoral strategy for accelerating reductions in infant, young child, and maternal mortality i s being developed under the auspices o f the multi-department committee now chaired by the Finance Secretary and coordinated by the Health Secretary. An in i t ia l Bank mission to explore options for multisectoral investments to reduce child and maternal Mortal i ty visited Orissa in February 2006 and positively assessed the scope for such investments.

Education

81. Progress to date. Orissa has been malung significant progress in expanding educational access at a l l levels over the past few years. More than 80% o f children in the age group 6-14 are n o w attending school, and adult literacy has increased by some 14 percentage points over the past decade (Figure 4). Drop out rates have also started declining, which i s probably a combined result o f mid-day meals provision and inputs to improve teaching quality and supervision under the centrally sponsored program for universalization o f elementary education (called SSA). Yet, the state needs to make more efforts to achieve further learning achievements gains. In fact, aggregate state-level figures, including quality indicators such as teacher-pupil ratios, hide considerable differences; females and scheduled castedtribes seem to be particularly disadvantaged when it comes to educational attainments and significant regional disparities exist.

82. Composition and Efficiency of Education Spending. The current state public budget for education amounts to just over 3% o f GSDP. Over h a l f the education budget i s spent o n elementary education and another quarter on secondary education (nearly ha l f o f high schools are in the private sector). At al l levels over 90 percent o f public expenditures goes to teacher and staff salaries. To try to mobil ize additional resources Go0 has enhanced the allocation o f state counterpart finding to fully ut i l ize available resources from Go1 and external donors. Given the l imi ted success o f ‘grants-in-aid’ in enhancing equity and quality, Go0 has taken a number o f further steps t o limit aid to private institutions, and censure them for non- performance. There has been a complete fkeeze o n the number o f educational institutions receiving such

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grants, while aid has been discontinued in the case o f 21 high schools where not a single student has passed the final examination in the last three years. Moreover, for all institutions that became eligible for grants, post-1994 salary-based grants have been replaced by block grants, which are 40 percent o f the pre-revised 1994 salary scales. Go0 has taken two other measures to utilize the available resources more efficiently. First, the reorganization action plan o f the Department o f School and Mass Education has been finalized. This plan includes abolishing non-essential posts, and redeploying staff to those areas where more support i s required. Vacant non-teaching positions have already been abolished. A second measure that Go0 has taken to reduce cost i s recruitment o f para-teachers, who now constitute one-third o f the total elementary education teachers in the state.

83. Accountability and Teacher Management. In recognition o f the fact that developing methods to deliver education services to remote and less populated areas will go a long way to improving education outcomes, G o 0 i s implementing a number o f institutional reforms aimed at enhancing accountability. These include the involvement o f user groups (village education committees) in school infrastructure development, enrolment drives, awareness generation on education, and preparation o f village educational development plans. To strengthen teacher management, village education committees have recently been empowered to certify teacher attendance in elementary schools. A District Information System on Education and an Education Management Information System have been established, which generate data o n almost a l l key educational indicators on an annual basis, providing a rational basis for outcome and demand oriented deployment o f teachers. Go0 has framed a policy to (i) devolve recruitment o f teachers on contractual appointment to the Panchayati Raj Institutions (PRIs), and (ii) strengthen performance incentives for such teachers through a performance-linked system o f upgradation o f para-teachers to ‘junior teachers’ and o f the latter to regular teachers. I t i s committed to ensure, during 2006-07, that every rural school and Gram Panchayat (village level elected local body) would display information o n resources allocated for that school, and would also display names and pictures o f the teachers posted in that particular school, and the names o f the VEC members responsible for that school. An independent evaluation o f the impact o f these measures would be conducted in 2007-08.

Figure 4: Education Enrollment Educationalenrollments have 6een improving in Orissa in , , . , . . . . . . . . . . .6ut the state continues to Lzg 6ehind

recent years. . . . . . . . . . . . . . . . . . . . . . . . nationalaverages.

100, 70

1981 1992 2003 1991 2001 All data from Census of India, except 2003 enrollment rates whlch are from the Onssa Pnmary Education Programme Authonty (OPEPA)

84. Future Challenges. Go0 recognizes that among the key challenges facing the education sector in Ollssa are ensuring quality at a l l levels o f education, enhancing the employability o f those who complete 10 years of schooling, and improving service delivery in education. In order to achieve these objectives, Go0 plans to: (a) introduce a new pol icy for teacher management, including performance based promotion o f para-teachers to ‘junior teachers’ and the latter to regular teachers; (b) implement the departmental reorganization plan at the state and district levels with clearly defined roles and clear lines o f coordination and accountability; (c) conduct an achievement survey in Grades 4 and 5 to establish benchmarks for teacher and student performance; (d) conduct a public expenditure survey in elementary education to assess

22

the quality o f expenditure and cost-effectiveness o f different interventions and inputs; (e) conduct a third party survey to evaluate the effectiveness o f VEC certification o f teacher attendance; and (0 ensure that every primary and middle school displays information on funds allocated to elementary education, and also displays names and photographs o f teachers and names o f VEC members. Improving governance and accountability in the education sector will also require strengthening the school inspection system, especially ensuring that the district inspectors visit each school the mandated number o f times. Also, VECs and GPs wil l need to be supported with training and assistance so that they have the capacity to effectively fulfill their roles in educational governance.

Poverty monitoring and evaluation

85. A multi-sectoral Poverty Task Force (PTF) led by the Onssa Development Commissioner, i s mandated to develop a comprehensive anti-poverty strategy to promote pro-poor growth, rationalize the main anti-poverty programs, monitor implementation o f policies, and communicate to a broad range o f stakeholders within as wel l as outside o f the government the content and impact o f programs and policies. The PTF has also been entrusted by G o 0 with the responsibility for poverty monitoring and evaluation o f anti-poverty programs. T o accomplish monitoring and evaluation tasks more effectively, a comprehensive poverty and human development monitoring system (PHDMS) has been set-up by the PTF. One o f the main objectives o f this system i s to track the impact o f reforms o n the public, and strengthen GOO’S capacity to design pro-poor policies by more clearly linlung expenditures with outcome measures. The framework for P H M D S includes three sub-components: (i) strengthening capacity in the Directorate o f Economics and Statistics, including the devolution o f data entry to the district offices; (ii) improving institutional capacity for poverty analysis and developing a comprehensive baseline of poverty and development indicators; and (iii) expenditure tracking o f selected anti-poverty schemes. Recently, in June 2005, the activities o f PHDMS have been consolidated through the establishment o f a registered society under the PTF, called the Poverty and Human Development Monitoring Agency.

86. Statistical strengthening. The capacity o f the Directorate o f Economics and Statistics (DES) to collect and process socio-economic data has been appreciably strengthened. Large scale surveys implemented by the DES - “Establishment o f an Agency for Reporting Agricultural Statistics”, “Fruits and Vegetables” survey, “Village Index Card Scheme” survey, “Annual Survey o f Industry” which were previous processed in the UNIX environment have n o w been transferred into Windows environment and processed. Data entry, verification and validation are n o w done using CSPRO software, and tables generated using S T A T A software. These actions have substantially decreased the time needed for data processing (in some instances from several years to only a few months). Until 2003, the estimation o f Gross/Net State Domestic Product and EconomicRurpose Classification o f Onssa Government Budget were being done manually. From 2003-04 onwards, processing was computerized using MS E X C E L software. Based o n these, several publications “Orissa Budget in Brief’, “Report o n Estimates o f SDP from 1950-51 to 2002-03 at 1993-94 base” have been prepared ahead o f schedule.

87. Computerization o f district DES offices and development o f appropriate data-entry software i s in progress. In particular, starting in June 2005, with the financial support f rom DFID, computers are being placed in the DES Headquarters and district offices (district DES offices did not have computers to date). With the help o f the W o r l d Bank and DFID, extensive training i s being conducted for the statistical officers from DES headquarters district offices. I t i s envisaged that init ial data entry will be devolved to the district offices, once the capacity o f these offices to handle computerized data processing has been sufficiently strengthened.

8 8. Improving institutional capacity for poverty analysis and developing a comprehensive baseline of poverty and development indicators. Go0 has published the Orissa Human Development Report 2004, which presents detailed analysis o f determinants and correlates o f poverty and key human development indicators often disaggregated at the district level. This provides a baseline o f poverty and human development indicators. Going forward, and fol lowing improvements in data collection processes, f ie ld work for the State sample o f the 61” quinquennial N S S survey has been completed in July, 2005 and data

23

entry and verification completed in November 2005. The Central sample o f these data will be the basis for estimating progress in poverty reduction across India in the last decade and the State sample will provide the cross-check and wil l allow for developing a more disaggregated picture o f poverty. This i s a very important round, as the previous quinquennial round (Round 55) on which the most recent estimates o f poverty are based had been plagued by issues o f incomparability and hence there has been lack o f consensus on the degree o f progress in poverty reduction in India in 1990s.

89. Tracking Expenditure on Social Protection Programs. An Expenditure Traclung Study, focusing on rural employment programs and chi ld feeding programs, was launched by Go0 with Bank support in early 2005. This study combines; (i) a tracking exercise to identify any leakages and delays in fund flows; and (ii) facil ity and beneficiary surveys to examine other inefficiencies in implementation. The purpose i s to go beyond simple tracking o f expenditures, and identify issues that hamper the delivery o f services under the two programs.

IV. BANK SUPPORT TO THE GOVERNMENT’S STRATEGY

A. LINK TO COUNTRY ASSISTANCE STRATEGY

90. The India CAS, approved by the Board on August 26, 200414, highlights support for poor and reforming states as one o f the major thrusts o f the Bank’s assistance strategy in India. Ollssa i s one o f India’s poorest states and also one o f the most consistent reformers in recent years, thus making i t an ideal candidate for continued Bank support. The design o f this Operation i s also mapped closely to the India CAS and i t supports key CAS-period outcomes identified, including:

Fiscal policy, financial management and public accountability: improved fiscal position and public expenditure management in at least 4 states; improved composition o f public expenditure in support o f growth and poverty reduction in at least 4 states; Economic growth-enhancing reforms: improved commercial operation and financial viabil ity o f the energy sector in Bank-assisted states; increased productivity o f irrigation water in at least 3 states; reduction in the cost o f doing business in at least 4 states; Public administration and service delivery: improved accountability, efficiency and transparency o f government operations in at least 4 states; Poverty and human development: improved accountability to the rural poor, women and other vulnerable groups in at least 4 states; improved quality o f elementary education and the health sector in states receiving Bank support.

0

B. COLLABORATION WITH OTHER DONORS

9 1. The Bank’s pol icy dialogue and technical work have been carried out in close collaboration with the UK Department o f International Development (DFID), for which Orissa i s a focus state. The DFID program includes TA for improving business regulation, technical and financial support to the Public Enterprise reform program, TA for strengthening the work o f the Ollssa Electricity Regulatory Commission, and significant technical grant support for public administration reform and good governance. DFID i s also preparing a large policy-based Operation in the health sector. Recognizing the need to be fully informed and coordinated in our approach, the Bank and DFID teams worlung on Orissa have streamlined a system o f regular consultation and information sharing between the two organizations, as wel l as jo in t initiatives to coordinate knowledge and experience sharing among a l l donors active or interested in Orissa.

l4 R2004-170.

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C. RELATIONSHIP TO OTHER BANK ENGAGEMENTS

92. Analytical work. The programmatic development policy lending program in Orissa i s grounded in a range o f analytical work. The Bank’s diagnostic work on the economic and fiscal problems o f Orissa began with a f i r s t state economic report in August 1996,15 and was followed by an updated economic report in 1999.16 A targeted dialogue on major fiscal and administrative reforms began after the state government exhibited firm resolve in March 2001 to face up to the fiscal crisis. Policy notes were prepared in 2002-03, mainly to support fiscal reforms. More recent analytical work i s summarized in Table 6 below.

Table 6: Analytical Work

Analytical work Primary link to DPL area

93. Lending and TA. Programmatic development pol icy lending plays a critical ro le in enhancing the effectiveness o f other forms o f Bank support, by (i) enhancing space in the state budget for high pr ior i ty development initiatives; (ii) strengthening overall public financial management and effectiveness o f public spending; and (iii) catalyzing institutional development, including enabling mechanisms for improving government efficiency and for innovations in service delivery. In addition to OSEDL-11, the program currently includes:

A State Roads Project under preparation, focusing on investments o f high priority for economic growth and poverty reduction in the state; A Rural Poverty Reduction Project under preparation, focusing o n enhancing income earning opportunities for the rural poor, through investments in social capital including women’s self-help groups; A follow-on Water Resources project (expected but yet to be formally requested) that builds o n the success achieved with participatory irrigation management under the recently completed water resources consolidation project; A second health project (expected but yet to be formally requested), innovatively designed using recent analytical work, with multi-sector implementation arrangement, focused on reducing infant, chi ld and maternal mortality t o accelerate achievement o f these key Mi l lennium Development Goals in the state;

l5 INDIA: Strategy and Options for Fiscal Stabilization in Orissa (Report No. 15809-IN) l6 INDIA: Fiscal Reform and Economic Growth in Orissa (Report No. 19234-IN)

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9

9

9

94.

Technical assistance for implementation o f second generation reforms in the power sector, whose success i s an essential component o f improving the investment climate; A pi lot project to promote tourism, focusing o n developing a cultural heritage site around ancient temples in the capital city, using a participatory approach involving the local community; and. A pi lo t program to expand rural income earning opportunities from handlooms and medicinal plants.

Building o n previous work on benefit sharing and poverty analysis, a programmatic Poverty and Social Impact Analysis i s being initiated to better understand the types o f vulnerability that may arise f rom the reform program and associated policy actions. The PSIA process i s expected to provide opportunities for analysis o f local institutions and interface with key stakeholders.

95. The World Bank Institute’s proposed program for Onssa supports the strategic framework o f the Bank‘s program o f assistance outlined above. The proposed capacity building program addresses four areas; (i) an enabling investment climate that leads to broad-based and inclusive growth; (ii) further strengthening o f poverty monitoring and evaluation techniques; (iii) strengthening Panchayati Raj (rural local body) institutions for improved service delivery; and (iv) fiscal decentralization and public expenditure management.

D. LESSONS LEARNED

96. Programmatic development policy lending occupies a crucial place in the Bank’s program o f assistance to Orissa, as it constitutes a unique form o f support that none o f the other donors in Orissa are in a position to provide. Experience to date has confirmed the usefulness o f this instrument to support fiscal, economic and governance reforms at the state level in India. Similar operations have been undertaken in Uttar Pradesh, Andhra Pradesh and Karnataka. All operations have so far been rated moderately successful or better by Operations Evaluation Department (OED). Relevant lessons from state-level operations in India include”: (i) the need for a well-identified multi-year reform framework, initiated preferably early in the electoral cycle; (ii) the need for institutionalizing the fiscal framework; and (iii) the inadequacy o f fiscal adjustment o f i t s own, and the need for a complementary focus o n growth and human development. These lessons have been incorporated into the design o f the Orissa program. With many o f the reforms for fiscal adjustment n o w in place, i t i s now appropriate for the program to focus more on structural reforms required for sustained and broad-based private investment l ed growth, and o n institutional re form in key sectors relevant for the Mi l lennium Development Goals.

97. A s discussed earlier, the mining sector has the potential t o be a major source o f future economic growth, but there are also r isks associated with mining exploration (see below). Relevant lessons that have been learned from global initiatives, ongoing capacity building operations for the sustainable management o f the mineral sector being implemented in other countries including in Africa, La t i n America and Central Asia, as well as the Bank’s experience with mining projects in the ECA Region include:

mining sector exploration and investment i s most effectively carried out by the private sector with the government acting as regulator; a high level o f commitment i s required over many years to achieve sustained growth in an industry such as mining; implementing mining sector reform and development i s highly dependent o n (a) a sound mining regulatory and licensing system; and (b) overall institutional capabilities; initiatives are also needed to make sure that revenues generated by the sector are used well; participatory development and community ownership are essential to achieving sustainability through the actualization o f “solid minerals” community associations and the build-up o f ownership

For a more detailed discussion on the progress and remaining challenges facing states’ fiscal reforms in Ind ia see INDIA: States Fiscal Reforms in India - Progress and Prospects (Report No. 28849-IN), June 17,2004.

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at the State and Local Government levels, given the potential for economic diversification and revenue mobilization;

9 o n the pol icy level, involving Government counterparts at an early stage o f project preparation i s an important factor in future project success.

V. THE PROPOSED ORISSA SOCIO-ECONOMIC DEVELOPMENT PROJECT

A. OPERATION DESCRIPTION

98, The objective o f the proposed second Onssa Socio-Economic Development Loadc red i t (OSEDL) i s t o support the continued implementation o f critical structural, fiscal and administrative reforms needed to boost economic growth and achieve rapid poverty reduction over the medium term. The easing o f fiscal constraints and improvements in systems o f service delivery will, among other things, enable Orissa to effectively utilize additional project assistance in key sectors in future years. In the absence o f adjustment support, G o 0 wil l resort to more expensive sources o f borrowing, undermining progress towards the development goals.

99. Commensurate with Orissa’s strong fiscal correction program and financing needs, and consistent with the extant guidelines o f GoI, adjustment support f rom the Bank i s in the form o f a programmatic series o f operations during 2004-09. The individual size o f each operation i s t o be determined at the time o f negotiations depending on progress with reforms, and consistent with a pol icy o f back loading. The amount of the f i rs t Operation was equivalent to US$ 125 mi l l ion ( U S 4 0 mi l l ion IDA and U S $ 85 mi l l ion IJ3I2D). On the basis o f the strength o f the program and the legitimate financing needs o f the Government o f Orissa, the amount o f the second Operation i s proposed to be US$ 225 mi l l ion (US$ 75 m i l l i o n IDA and US$ 150 m i l l i on IBRD). T o be consistent with the revised guidelines for sub-national pol icy based lending issued by the Government o f India in October 2005,OSEDL-I1 would be disbursed in two tranches.

B. POLICYAREAS

100. Under the Orissa Socio-Economic Development Program, indicative milestones are agreed upon at the time o f negotiating each operation, for a potential subsequent operation. Ten indicative pr ior actions for OSEDL I1 were identified during OSEDL I preparation, agreed upon at negotiations, and endorsed by the Bank’s Senior Management and Board o f Executive Directors. These actions have a l l been taken, as explained in Section I11 above. The key measures highlighted as pr ior actions for the release o f the f i r s t tranche o f OSEDL-I1 are the following:

Economic Reforms for Inclusive Growth

9

9

h

Enact legislation to amend the Orissa Agricultural Produce Markets Act, 1956, to lift state monopoly, enable private investment in marketing yards and storage facilities, and to regulate sale o f agricultural produce through contract farming. (para 29)

Enact the Onssa Industries Facilitation Act, 2004 and not i fy the Orissa Industries Facilitation Rules, 2005, for streamlining the approval o f projects sponsored by private enterprises, including a Combined Application Form that reduces the number o f forms required to be submitted for establishment o f industries from 18 to one. (para 34)

Continued progress in implementing the Public Enterprises Reform and Privatization Pol icy (2002), including selling the assets o f two closed enterprises, initiating the environment audit o f twenty enterprises and privatizing two enterprises. (para 39)

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9 Initiate implementation o f OERC order on the business plan o f distribution companies, including: (i) reconciliation and settlement o f past dues between the largest consuming government department and CESCO; (ii) payment o f current bi l ls by state government departments to the distnbution companies on an average o f at least 90% o f billing in 2005-2006; (iii) execution o f agreements between CESCO and at least two municipal authorities for ensuring discipline in the supply o f and payments for electricity; and (iv) init iation o f steps to designate existing courts to try electricity theft cases. (paras 41-46)

Fiscal Reforms, Financial Management & Accountability

9 Orissa Fiscal Responsibility & Budget Management Act enacted; primary surplus achieved in 2004/05 with overall deficit less than 3.5% o f GSDP; execution o f the 2005/06 budget and targets for 2006/07 consistent with the FRBM Act. (paras 49-5 1)

9 Reduce the share o f salaries in current expenditure( net o f interest and pension) f rom 57% in 2003-04 to below 54% in 2004-05, and estimated less than 50% in 2005-06. (para 56)

9 Improved ratio o f actual spending to target in the Annual Plan 2004/05; improved utilization o f centrally sponsored schemes in 2005/06. (para 59-60)

9 Begin implementation o f Act ion Plan to strengthen financial accountability, including enhanced level o f disclosure o f financial information in budget documents, and updated month-end accounts o f rural local bodies posted o n G o 0 website. (paras 58-64)

9 Government approval o f Anti-Corruption Action Plan, covering measures to strengthen prevention, enforcement and public awareness, and reforms in the system o f public procurement. (para 66)

Public Service Delivery & H u m a n Development

9 Continue implementation o f c iv i l service reforms, including (i) identification o f vacant regular posts for abolition, o f which over 15,000 abolished during April 2004 - April 2006; and (ii) continued staff redeployment. (para 73)

9 Initiate implementation o f short-term recommendations o f the organizational review o f the Department of Health (2002), including abolition o f some posts and conversion o f paramedics to district cadre. (para 78)

101. The requirements for the release o f the second tranche o f OSEDL I1 wil l b e the following:

9 Satisfactory progress achieved by Orissa in carrying out the Socio-Economic Development Program (as set out in Orissa's letter o f Development Policy)

9 The macro-economic pol icy framework o f the Government o f Orissa i s appropriate, including further strengthening o f the fiscal position beyond 2005-06 towards achieving the targets and objectives o f the Med ium Term Fiscal Plan (2005-10).

The fiscal position would be considered to have been further strengthened if the estimated outcome in 2006- 07, as set out in the Revised Estimates published by GOO, i s in conformity with the targets o f the Medium- Term Fiscal Plan (MTFP), including outstanding debt being less than 280 percent o f revenue receipts, and interest payments being less than 25 percent o f revenue receipts. If Orissa fails t o achieve such progress in 2006-07, the Bank wil l assess if the estimated outcome in 2007-08 i s in conformity with the MTFP targets for that year. In malung this assessment for any given year, the previous year's actual outcomes based on the audited accounts will be taken into consideration. Any unforeseen or extraordinary circumstances beyond Goo's control will also be taken into account. If the requirement relating to the macroeconomic policy framework, as described above, i s not met before the closing date o f June 30, 2008, the second tranche o f OSEDL-I1 will be cancelled and G o 0 would lose i t s potential eligibil i ty for any subsequent

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operation under the Orissa Socio-Economic Development Program.

102. Indicative triggers for a potential third Operation have been selected from among the key policy actions that Go0 i s committed to take over the next 12 months, as part o f i t s reform program (Go0 Program Matr ix i s Attachment A in Annex 1 and the Operation Policy Matr ix i s attached as Annex 2). The selection of tnggers i s based on the criterion that such an Operation could be linked to those actions that are especially important for enhancing the positive impact on the poor and disadvantaged sections o f the population, and fo r reducing the r isk o f negative impacts. Indicative triggers for a potential OSEDL 111, whose preparation will be initiated subsequent to a request received from GoI, are listed below:

Economic Reforms for Inclusive Growth

9 Ensure better coordination and rationalization o f Land Registry Office with the Tehsil Administration, towards an integrated and user friendly land administration; delegate decision-making authority, particularly t o frontline officers; initiate steps for e-governance o f land records; and launch survey and digitization work for transparent settlement o f un-demarcated lands (including > 10% slope).

P Filling o f crit ical vacancies in the Forest Department through re-deployment and contractual appointments, and abolition o f redundant positions; delegation o f decision making power to field based forest officers; and revised guidelines for Joint Forest Management - to support a change management process oriented towards effective community based forestry.

9 Adoption o f Policy on Public Private Partnership in Infrastructure.

9 Initiate implementation by Orissa Pollution Control Board o f capacity strengthening plan, including (i) government approval o f staffing plan, and (ii) rationalization o f consent (CTO) duration based on environment and social r isks.

Fiscal reforms, Financial Management & Accountability

9 Begin implementation o f procurement reforms component o f the Anti-Corruption Action Plan, including (i) posting o f tenders and contracts awarded by the participating departments (Works, Rural Development, Water Resources; Housing and Urban Development) o n the of f ic ia l website; and (ii) e- procurement for a l l procurement above Rupees 10 mi l l ion in at least one o f the participating departments.

Public Service Delivery & H u m a n Development

9 Implement measures to enhance teacher accountability, including certification o f attendance by Vil lage Education Committees and public display o f information outside each school and Gram Panchayat o f its resources allocations, names and photographs o f teachers and names o f V E C members.

k Develop and initiate implementation o f an action plan to strengthen efficiency, accountability and delivery o f food distribution programs (to be specified further during preparation o f OSEDL 111).

VI. OPERATION IMPLEMENTATION

A. POVERTY AND SOCIAL IMPACT

103. Measures to accelerate poverty reduction are at the heart o f this operation. Extensive analytical work on the multidimensional nature o f poverty, vulnerability and exclusion undertaken by GOO, the Bank, and DFID highlights that accelerating economic growth and increasing and improving investments in health, education and social protection with increased emphasis o n monitoring and program evaluation are

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the key for faster poverty reduction.’8 The analysis also shows that private investments necessary to fuel an acceleration o f growth and employment are likely to include a significant share o f investment in mineral based industries. In this context, managing the potential environmental and social issues related to this sector, especially resettlement and rehabilitation issues would remain a key challenge. Cognizant o f these issues G o 0 has in M a y 2006 framed a resettlement and rehabilitation policy which wil l guide Goo’s po l icy approach. G o 0 will also be supporting a programmatic Poverty and Social Impact Analysis (PSIA) described in para 108 to analyse how growth can be distributed more inclusively and to identify the nature o f vulnerabilities o f communities.

104. On balance, there i s a consensus among the leadership o f the state and the development partners that acceleration o f growth and industrialization are vital for economic growth and poverty reduction in Orissa. In this regard, the poverty and social impact o f this operation should be seen in light o f the alternative status quo. H o w will the pace o f growth and poverty reduction change if a comprehensive set o f reforms i s not implemented? Onssa has the highest level o f rural poverty o f a l l Indian states and poverty reduction during the 1990s has been limited - in stark contrast to the rest o f India. This trend was driven by the increasing poverty rates in the Southern and the Northern regions o f Onssa, while poverty in the coastal Orissa had declined. Tribal groups which dwell in the forests over the mineral deposits are overrepresented in the Southern and Northern regions in Orissa. “Business as usual” for this group wil l imply a perpetuation of l ivelihood with reliance o n subsistence agriculture, gathering o f forest products, sub-standard service delivery and exclusion. T o make growth more inclusive, while addressing the legitimate concerns o f the stakeholders, the government i s implementing the following measures.

105. First, to encourage income gains for all, G o 0 has taken a number o f initiatives. GOO’S program o f “Mission Shakti” that i s empowering thousands o f tribal and other women centering on Self Help Groups. The provision o f focused connectivity t o tribal areas and enhanced allocation o f funds for health, education and social protection are expected to result in enhanced social development opportunities and outcome which would also contribute to GOO’S efforts to bring about inclusive economic growth to improve the impact of i t s interventions, G o 0 i s experimenting with innovative approaches to improving incomes o f the informal sector workers through strengthening the traditional l ivelihood systems in which Orissa has a comparative advantage. The Orissa Fund for Development Initiatives (OFFDI) launched in March 2006 wil l be implemented through cooperative, NGOs, CBOs, selected government departments (the Directorate o f Textiles) and private sector and will focus o n medicinal plants service programs, handloom and sericulture development program, building brands, e-market expansion program as wel l as community livelihoods action program. The geographic focus o f the OFFDI i s in the disadvantaged Northern and Eastern areas o f Onssa.

106. Second, G o 0 i s complementing these efforts with a wide consultative process centering o n i t s Vis ion document and improving civic engagement based on partnership between the Government, the NGOs, and the other stakeholders. Whi le the Vis ion document i s being discussed at district and state levels by different stakeholders, G o 0 i s putting in place a “task force” that would facilitate continuous dialogue focusing on Government-NGO partnership for development, displacement, loss o f livelihood, tribal rights, PESA and social conflict management. In case o f the R&R, for example, an elaborate process o f consultation involving NGOs, academic and social research institutions, private sector, and multilateral institutions as wel l as the affected and displaced persons o f development projects were already organized in the state.

107. Third, the establishment o f the Poverty Task Force and subsequent strengthening o f the statistical system in the State coupled with the improved analytical capacity for poverty analysis are important actions for improving pro-poor planning and policymaking. Timely availability o f data o n poverty-related characteristics at a disaggregated level (i.e., at a district level, and for the ST groups separately) enables G o 0 to evaluate the effect o f policies and programs o f o n the welfare of the poor and vulnerable population

” Orissa Development Report, Planning Comission, Government o f India, 2002, and Orissa Human Development Report Government o f Orissa 2004. See A. de Haan, and A. Dubey Poverty, Disparities, o r the Development of Underdevelopment in Orissa,Economic and Political Weekly May 28-June 4, 2005, India, New Delhi, for an example o f DFID work.

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as wel l as to fine-tune their implementation. Significant progress has been made in the area o f assessing the effectiveness o f the employment and nutrition programs in Orissa (see para 89).

108. Fourth, for the focused monitoring o f the impact o f increased investments in the extractive industries on the l ivelihood o f the population, the Bank wil l continue providing technical assistance to the G o 0 for the series of focused household-level data collection initiatives in the mining areas as well as for the in-depth analytical work to analyze them. This continuous data collection and analysis wil l form the basis of a programmatic PSIA to be carried out during the next 2 years. The analysis wi l l build on existing work and include a diagnostic o f the sources o f vulnerability associated with exposure to mineral based industries. The analysis will address the ways in which interests o f affected population can be addressed so that growth can b e more equitable and what local institutions need to be strengthened in this process.

B. IMPLEMENTATION, MONITORING AND EVALUATION

109. Implementation arrangements. Different components o f the program are implemented by the respective departments o f the state government, with the Finance Department designated as the nodal agency for this operation. Overall coordination and oversight i s provided by a highly motivated team o f senior c iv i l servants headed by the Chief Secretary. Technical support i s provided by (i) the Poverty & Human Development Monitoring Agency, which reports to the Poverty Task Force headed by the Development Commissioner, (ii) the Onssa Computer Applications Center, and through (iii) Orissa Modernizing Government Initiative, which i s supported by the UK DFID. Leadership for strategic communication to the public about the reform program i s vested with the Principal Secretary to the Chief Minister.

110. G o 0 supports the strengthening o f monitoring and public reporting. The Government has held workshops on i ts reform strategy and plans to finalize i t s key strategy papers fo l lowing stakeholder consultation. The medium term fiscal framework has been made publicly available as will the Vision 2020. The establishment o f a Poverty Task Force, and more recently a poverty and human development monitoring agency under the PTF, i s appreciably improving the availability o f poverty data, and the impact of Go0 policies on the poor (see paras 85-89).

C. FIDUCIARY ASPECTS

111. Improving public financial accountability i s a central part o f the reform program in Orissa. Based on the findings and recommendations o f the State Financial Accountability Assessment, 2004, Go0 approved a detailed Development Act ion Plan in August 2004. Since then, several financial management improvements have been initiated, the details o f which are outlined in paragraphs 58-64 o f this Document. M a n y o f the steps taken in the areas o f budget execution, monitoring and cash management have produced visible positive results, and provide a strong trajectory for PFM improvement. G o 0 has demonstrated i t s will to continue the PFM reforms, evidenced by the scale and variety o f actions underway. These positive strides taken by GOO, i t s demonstrated results and the strong commitment for continued PFM reforms provide a satisfactory basis for the purposes o f the Development Policy (DP) operation.

112. The Bank has reasonable assurance that the control environment for foreign exchange in the Reserve Bank o f India (RBI) i s satisfactory for the purposes o f this operation, based o n the RBI audit report and the satisfactory outcomes o f other operations, which have been disbursed and managed through the RBI. The IMF does not carry out a Safeguard Assessment o f the Reserve Bank o f India (RBI), the central bank in India. As part of the appraisal for the DPL operation, the RBI audit report and published annual financial statements for the year ended June 30, 2005 were reviewed by the Bank. The audit report has a clean, unqualified opinion and was conducted by a group o f six private f i r m s o f chartered accountants appointed by the GoI. The financial statements are prepared in accordance with the Reserve Bank o f India Act, 1934, the notifications issued there under and in the fo rm prescribed by the RBI General Regulations 1949; the audit has been conducted fol lowing auditing standards generally accepted in India.

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D. DISBURSEMENT AND AUDITING

113. Upon effectiveness, the borrower, i.e., the Government o f India (GoI), will submit to the Bank a withdrawal application for the f i rs t tranche. T h e withdrawal application for the second tranche will be submitted after the Bank and Go1 have assessed that fiscal performance beyond 2005-06 has been in l i ne with the agreed correction path, as described in paragraph 101 above. Ln each case, the Bank will disburse the U S dollar proceeds to the credit o f GoI’s account with the Reserve Bank o f India (RBI). This account i s controlled by the Of f ice o f Controller o f Aid, Accounts and Audit (CAAA) o f the Department o f Economic Affairs, GoI, and i s part o f the GoI’s general foreign exchange reserves. Upon receipt o f each tranche o f the loadcredit proceeds, Go1 wil l transfer the equivalent rupee amount to G o 0 as per the revised guidelines for the transfer o f external assistance on back-to-back terms. This follows the recommendations o f the Twelf th Finance Commission (TFC) and enables the States to participate o n an equal footing in concessional external assistance, on the same terms and conditions as attached to such assistance by external funding agencies, thereby making Go1 a financial intermediary without any gain or loss. G o 0 will conf i rm to the B a n k within 30 days, the receipt o f each tranche and i t s credit into the Consolidated Fund o f the State.

114. Disbursement of the loadcredit proceeds would not be linked to specific purchases. However, Go1 would not use the loadcredit proceeds to pay for expenditures included in the Bank’s standard negative l i s t which includes expenditures on military hardware, and environmentally hazardous goods. If any portion o f the Credit i s used to finance ineligible expenditures as so defined in the DCA, IDA shall require the GoYGoO to refund the amount to IDA.

E. ENVIRONMENTAL ASPECTS

115. An analysis o f environmental aspects o f this operation i s based o n the Bank-supported Orissa Growth and Environment study undertaken over the past year. The study helped develop a good understanding o f key environmental issues associated with the reform program, and the capacity o f state institutions to tackle those. As the outcome o f the study, a plan o f actions to strengthen capacity o f the OPCB to perform proper due diligence while issuinghenewing permits and to monitor and enforce compliance o f an increasing number o f facilities has been prepared and its implementation i s proposed to be supported by the Bank through a parallel TA program. Similarly, G o 0 i s planning, with Bank support, to: (a) initiate a program for strengthening capacity o f the Forest Department to improve effectiveness o f forest conservation measures and forest clearance process for development projects, and (b) develop suitable processes and mechanisms for supporting peripheral development o f affected forest-dependent communities.

1 16. Rationalization of business entry regulations, supported by this operation, including one common application form does not impact on the environmental and forest clearance processes. Furthermore, actions to lower entry costs for new businesses will be accompanied by measures to improve the efficiency and effectiveness o f the environmental agencies. Therefore, this reform i s no t expected to have negative environmental impacts.

1 17. Restructuring and privatization of public enterprises: This program pays significant attention to environmental issues associated with public enterprise reform and privatization and i s likely to have a positive environment impact by incorporating environmental screening and auditing processes and addressing environmental liabilities in the public enterprise reform agenda.

1 18. Fiscal reforms and improved Jiscal management supported by this operation are not expected to have an impact. Generically, a negative impact can be expected if expenditure reforms are achieved at the cost o f cutting o n environmental protection and conservation expenditure. However, capacity strengthening actions plans being prepared for environmental agencies as part o f government program and supported by the Bank will include staffing plans enabling these agencies to perform regulatory and conservation functions effectively, for which these agencies also have dedicated sources o f revenue. More details are

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provided in Annex 3 (Environmental & Social Screening Matrix)

F. R I S K S AND RISK MITIGATION

119. As described in previous sections, this operation seeks to support the Government o f Orissa’s broad-based program of reforms to ensure more inclusive growth and faster poverty reduction; as wel l as fiscal, financial management and accountability reforms to enable the better delivery o f a range o f public services. In India’s poorer states such as Orissa, the potential benefits o f such reform are high, but so are the risks. The main r isks to the reform program and i t s outcomes include environmental and social risk, polit ical risk, exogenous shocks including vulnerability t o natural shocks, l imited administrative capacity and the risk that the second tranche i s not disbursed, due to fiscal slippage. The nature o f these r isks and the corresponding mit igat ion strategy i s discussed below.

120. Impact on the environment. The program anticipates that, while broadening i t s sources o f growth, a significant part o f Orissa’s future economic growth wil l be based on natural resources and extractive industries. In that context, there i s a risk that the technical and administrative capacity o f the state environmental regulators - the Orissa Pollution Control Board (OPCB) and the Forest Department - would be inadequate to perform their due diligence fbnctions - to provide appropriate clearances and monitorienforce compliance - for an increasing number o f development projects as a result o f reduced entry costs. T o address this issue, a program o f planned actions i s being proposed to build the capacity o f the OPCB to meet i t s anticipated needs, as supported by this operation, as well as a parallel TA program financed by the Bank. This Bank TA operation will also support the government’s efforts to develop and implement plans for strengthening the Forest Department’s capacity to perform conservation functions. In addition, in respect of the mining sector, G o 0 and its Department o f M ines and Steel, in cooperation with other relevant Departments, have also agreed to undertake, with Bank assistance, a strategic environmental and social assessment o f the mineral sector and develop, o n that basis, an action plan to mitigate and manage environmental and social r isks. I t will draw o n lessons o f best practices and r isk mitigation strategies in other mining dependent counties and in India.

121. Social Risk. The poorest sections o f the population in Orissa, which includes members o f the Scheduled Tribes (STs) living in forest and mining areas, have not benefited equitably f rom past growth. One risk i s that the process o f faster industrialization and mineral based industrial growth wil l lead to increased levels o f social inequality and conflict, especially affecting the STs who risk being excluded due to their location, education, reliance on subsistence agnculture and gathering o f forest products, inadequate access to services, and limited voice and participation. Orissa’s growing c iv i l society movement - a strength for the state overall -has already voiced i t s concern o n this issue and will continue to be proactive in i t s monitoring o f the impact o f reforms on STs. The operation supports several mechanisms to address the possible social r isks:

0 First, are measures in the overall direction o f reform by G o 0 to make the growth process much more inclusive (see Section 1II.A) so that visible gains are achieved and benefit a l l citizens o f Orissa, including the STs. Improved management o f forests to increase income earning opportunities o f forest communities and reform o f the food and nutrit ion programs as part o f the social safety net and anti-poverty programs are especially important. Second, i s to appropriately resettle and rehabilitate families affected by mining and related industry development. Although the number o f ST families and extent o f their lands affected by such development i s l ike ly to be relatively small, (to be confirmed by the proposed PSIA) due to considerably enhanced protection provided by national forestry policies and related Supreme Court of India decisions strictly protecting ST land rights in forest areas, G o 0 i s also undertaking additional mitigation steps. G o 0 has adopted a new R&R policy, which contains several measures beneficial for the affected population, including equity participation in any mining development, “land for land” transfers in water resources and irrigation projects, inclusion o f project affected persons in project design; “job options” in industrial and mining projects and peripheral development plan.

0

33

0 Third, i s the regular process o f consultations with civ i l society groups which has been initiated so that issues o f public concern and priority are voiced and acknowledged. In particular, the program proposes to hold consultation with groups that reside in forest areas l ikely to be affected by increased activity in extractive industries. Fourth, i s t o regularize land rights o f tribal people who have settled in forests pr ior to 1980, in accordance with the provisions o f the law. The planned actions in promoting higher incomes for people living in and around forests (including access to lands on slopes) also benefit broad communities perhaps otherwise excluded. Fifth, i s t o strengthen the framework for sustainable mining sector development, including mechanisms for enhanced “benefit sharing” for local communities.

0

0

122. This i s an important package o f policy measures that recognizes up front that social risks have to be actively managed to ensure that the potential growth impact o f the reforms wil l be broad based. Social risk management i s a dynamic process and measures may have to be changed or new approaches adopted as the economy grows and as new information about the impact o f reforms emerge. T o support Go0 to actively manage the risk aspects o f the reforms, the Bank will also be undertaking with Go0 a programmatic Poverty and Social Impact Assessment to better assess and monitor the types o f vulnerability that may arise from the reform program and associated policy actions.

123. In part because the reform program involves measures that affect entrenched interests that benefit from the status quo, as everywhere else but especially so in poor states, there i s a risk o f reforms being undermined as a result of polit ical opposition organized by such interests. The lessons o f experience in India and elsewhere suggest that several factors contnbute to a mit igat ion o f these risks. Importantly, G o 0 has begun to establish a track record and has implemented important up-front actions, laying the basis for subsequent reforms, as part o f the Onssa Socio-Economic Development Program. Particularly noteworthy and politically challenging measures have included the adoption o f the anti- corruption Act ion Plan as wel l as a number of measures that reduced the relative fiscal burden o f the salary bill and cracked down o n the problem of ‘grants-in-aid’ for private establishments in education, thus supporting the fiscal correction.

Political Risk.

124. The present Government of Orissa earned considerable goodwill in the state because o f i t s strong position against corruption. Elections for the Ollssa Legislature in 2004 returned the same alliance and Chief Minister to power, reflecting i t s better governance performance. Fairly broad ownership o f key program objectives has been built among senior polit ical leaders, bureaucrats and parts o f c iv i l society, through consultations that are ongoing. The Government o f India i s also strongly supportive o f Orissa’s reform program.

125. Nevertheless, analysis o f the polit ical economy o f reforms in Orissa, carried out by the Bank team in FY05, suggests that while the program being implemented i s beneficial to the major i ty o f the population, including the poor, few among the people in Orissa are aware that this i s the case. In this context, the lesson from within India and elsewhere i s that the principal r isks that threaten sustained progress are: (a) lack o f effective communication, informed media coverage and hence o f awareness among the people about the reform program and i t s benefits; and (b) alienation and lack o f voice among the poor and disadvantaged sections o f the population. In order to mitigate these risks, the Task Team proposes to provide non-lending technical assistance to help GOO: (i) strengthen i t s communication strategy; (ii) play a more pro-active role than in the past in supporting issues o f voice between government and c i v i l society; and (iii) build the knowledge and capacity o f the reform implementers to strengthen the ‘voice’ o f other stakeholders. Such a strategy would be aimed at gaining the ownership and support o f the key stakeholders in the program in order to accelerate economic growth and poverty reduction.

126. Vulnerability to Natural Shocks and Fiscal Slippage. Poor economic performance as a result o f drought, floods or other natural disasters could undermine the fiscal correction and slow down poverty reduction. This risk i s being partially mitigated by basing the Medium-Term Fiscal Plan o n a conservative assumption o f GSDP growth thus leaving room to adjust t o shocks; and by GOO’S efforts to enhance its

34

capacity for disaster management and to strengthen social protection programs. Enactment of the Onssa Fiscal Responsibility & Budget Management Act, 2005, and adoption o f an updated Medium-Term Fiscal Plan (MTFP) consistent wi th it, reduces the r i sk o f deviating f rom the fiscal correction path approved by the State Legislature. Sensitivity analysis conducted by the Bank team shows that a temporary growth shock in one year wi l l only postpone the achievement o f fiscal correction targets by about one year. The Bank i s currently also collaborating with Go1 on addressing issues o f adaptation to climate change, and this initiative includes working with Onssa on drought and flood issues.

127. Limited Administrative Capacity. Addressing capacity constraints and issues o f skill mix in the c i v i l service i s one of the components o f the Government’s civil service & administrative reforms program. In addition, capacity constraints are also addressed by substantial and focused technical assistance provided by the Bank and by DFID. Such assistance has facilitated the use by G o 0 o f experts f rom other reforming Indian states.

35

rn Secretary

Annex 1 m m 623-

* d f s c T m ’ 7 4 mm,

.r;f f235I-110 001 rn Government of India Ministry of Finance

Department of Economic Affairs North Block,

New Delhi - 110001 India

e-mail : ashokjhaQnic.in Tel(O11) 2309 261 1 Fax (01 1) 2309 4075

D.O. NO. 12/7/2001-FB.IV

Dated: 1 st July, 2006.

I am enclosing a Letter o f Development Policy dated 25* June, 2006, fiom the Chief Secretary to the State Government of Orissa. The letter delineates the broad and comprehensive reforms agenda through which the Government of Orissa proposes to strengthen and consolidate its reforms process, and for which it has sought assistance from the World Bank o f $225 million.

Government o f India supports this continued initiative and commends the proposal for the consideration o f the World Bank.

I Yours sincerely,

(Ash 9 h a )

Mr. Paul Wolfowitz President The World Bank Washington D.C. - 20433 USA

Encl: as above

Dr. Subas Pani,Ms Chief Secretary & Chief Development Commissioner

Govemment of Orissa, Bhubaneswar

D.O. No. 265941F, Dated 25.06.2006

Sub: Letter of Development Policy of Govemment of Orissa for (Orissa SociolEconomCc Developmerit Loan) OSEDL-/I.

The Government of Orissa has carried out the next phase of wide-ranging reforms under the rubric of the Orissa Socio-Economic Development Programme, thereby qualifying for a second World Bank loankredit to support this ongoing effort. The programme includes fiscal and administrative reforms needed to boost socio- economic development and achieve rapid poverty reduction over the medium term. The details of key actions that have been taken until 315' March, 2006, and actions that are scheduled to be taken during 2006-07 and subsequent years, are attached in the form of the Orissa Socio-Economic Development Programme Matrix

/ (Annexure-I). A list of indicators that will be used to monitor the ongoing progress of programme implementation is also attached (Annexure 11).

2. CompaFed with rest of India, Orissa has been facing a serious development imbalance. If one compares some of the major social and economic indicators, it would be amply evident that Orissa has a lot of catching up to do even to reach the national average, let alone achieve the levels of other developed states. It is because the economy of Orissa grew more slowly than the rest of India in the decade of the 1990s. Per-capita income fell further back compared to the rest of the country. The principal factors for slow growth in the State have been: (i) low productivity of agriculture, due to low penetration of modern technology and low level of assured irrigation; (ii) poor road connectivity and limited market access for farmers, along with food insecurity restricting their willingness to diversify from paddy; (iii) low level and inequitable utilization of mineral resources, with inadequate

Phone :Office (0674) 2534300,2536700, FAX : 2536660, E-mail : csori@ori.nic.in, Website : orissa.gov.in

forward linkage in the past; (iv) an over-sized public administration; and (v) the fiscal crisis, which constrained the State’s ability to undertake the public investments required for faster economic growth.

3. The multi-pronged approach of State’s reform programme includes:

(i) Economic reforms focusing on enhancing agricultural productivity, security of land rights and market access for poor farmers and forest dwellers, improving the business environment for private investors; and reform of public enterprises;

(ii) Fiscal and financial management reforms aimed at achieving creditworthiness while creating additional fiscal space for high priority developmental spending, along with public accountability, anti- corruption measures and public procurement reforms to promote more efficient and transparent management of the government’s financial resources; and

Cross-cutting and sector specific reforms in public administration and service delivery, including and especially for human development - Le., education, health and poverty alleviation programmes.

4. In light of Orissa’s fiscal crisis, the early phase of the State’s reform programme focused on the immediate necessity of fiscal correction. The Government of Orissa has made very significant progress in correcting the structural imbalance in its finances. As a result, the financial position of the State has shown a significant improvement in recent years, highlights of which are as follows:

Q State’s Own Revenue has increased from 6.3% of GSDP in 1999-00 to 9.2% in 2004-05 (adjusting for one-time factors), and estimated at 9.3% in 2005-06;

Q Revenue Deficit has declined from Rs. 2574 crore (6.7% of GSDP) in 1999-00 to Rs. 522 crore (0.9%) in 2004-05, and estimated at 0.8Y0 of GSDP in 2005-06;

0 Fiscal Deficit has been reduced from Rs. 3836 crore (9.9% of GSDP) in 1999-00 to Rs. 1366 crore (2.3%) in 2004-05, estimated at 2.2% in

(iii)

2 005-06;

2

Debt stock has been reduced from 341% of total revenue in 2001-02 to 287% in 2004-05; and

Interest payment as percentage of revenue receipt has declined from 40.2% in 2001-02 to 28.1% in 2004-05, and estimated at 25.2% in 2005-06.

5. The successful macro level fiscal correction achieved so far, the fiscal policy for 2006-07, and the road map ahead until 2009-10, have been tabled in the State Legislature in the form of Statements presented along with the Annual Budget 2006- 07 under the Orissa Fiscal Responsibility & Budget Management Act / Rule, 2005. The Medium-Term Fiscal Plan shows how the state plans to achieve the target of eliminating the Revenue Deficit by 2008-09, and at the same time improve the composition of public expenditure by raising the share of capital investment and non-wage recurring expenditures in high priority sectors.

6. The correction of macro-structural imbalances is leading to increasing fiscal space for developmental initiatives. The State is accordingly paying increasing attention to sector specific and cross-ckng institutional reforms to convert outlays into outcomes - that is, to improve the quality of public expenditure and service delivery, especially in education, health, social welfare and poverty alleviation program mesa

7. A comprehensive Anti-Corruption Action Plan was approved and notified by the Government of Orissa in December 2005. This covers measures to strengthen prevention, enforcement and public awareness, and systemic reforms in public procurement.

8. Substantial progress has already been made in the implementation of reforms in the regulatory environment for private investment. Economic growth has picked up, reaching an average of 8.4% in recent years, which is nearly double the growth rate of the 1990s. Orissa has emerged as number one among Indian states in terms of investment projects under implementation.

9. In the power sector, where Orissa was the pioneer in carrying out reforms to involve the private sector in generation and distribution, steps are being taken to implement the Order of the Orissa Electricity Regulatory Commission on the business plans of the distribution companies, including payment of reconciled dues of government departments to CESCO. Payment of current bills by government

3

departments to all the distribution companies have improved to over 90% in 2005- 06, compared to 81% in the previous year. Going forward, the State is committed to establish credible institutional arrangements and financial mechanisms, to ensure that the rural electrification programme is rolled out in a sustainable manner.

10. To ensure that faster economic growth benefits the poor and disadvantaged sections of the population, increased emphasis is being placed on measures to further improve the performance of agriculture and allied activities in which the majority of the poor are engaged. Amendments to the Agricultural Produce Markets Act were enacted by the State Legislature in April 2006 and published in the Orissa Gazette on 17" May, 2006. This legislation permits private investment in marketing yards and storage facilities for agricultural products; it also enables contract farming to help farmers diversify out of low-value paddy to higher value horticulture and other crops. To facilitate empowermerit of farmers in water resources management, considerable progress has been made in placing the management of irrigation systems below the main canal under the control of Paani Panchayats (water user associations) covering an area of about 0.75 million hectares till date. In order to improve access to land for the poor through better secured land property rights, the State Government is moving forward to establish a modernized land administration system, along with actions aimed at protecting the rights of tribal communities over forest resources in accordance with extant law.

1 1. New actions have been initiated to strengthen human development, including enhanced accountability of school teachers and improving the performance of programmes for the development of Scheduled Castes and Scheduled Tribes; and for women's empowerment.

12. Measures taken to improve the business climate include strengthening the framework for managing environmental and social impact of natural resource-based investments. With a view to ensuring sustainable industrial development, a new comprehensive Resettlement and Rehabilitation policy has been adopted, after broad stakeholder consultation, and published in the Orissa Gazette on 14" May, 2006.

13. Poverty monitoring and evaluation capacity has also been considerably strengthened. To accomplish monitoring and evaluation tasks more effectively, a comprehensive poverty and human development monitoring system has been set-

4

up by State Government. One of the main objectives of this system is to track4he impact of reforms on the public, and strengthen the Government's capacity to more clearly link expenditures with output and outcome indicators.

14. The proposed Orissa Socio-Economic Development Loadcredit (OSEDL) from the World Bank is indispensable for the success of our efforts to lift Orissa out of its current fiscal difficulties and set it on a sustainable course of rapid economic growth and poverty reduction. The OSEDL is needed for the following reasons:

The policy dialogue and reform linked programme of financial support plays a vital catalytic role in maintaining as well as accelerating the reform momentum,

The OSEDL enables the State to finance the direct up front cost of reforms such as VRS and other transitional costs (e.g. in the power sector and PSE), apart from enhancing technical assistance to implement the reform;

0 The availability of such financing at relatively concessional terms enables the State to reduce its debt servicing burden more rapidly than othetwise;

0 Such funding helps ease the liquidity constraint and assist Government of Orissa to make fuller use of available matching finance from Government of India for high priority social sector and poverty alleviation programmes.

15. The World Bank approved the first Orissa Socio-Economic Development Loadcredit, amounting to US$ 125 million, in November 2004, after the Government of Orissa had implemented the first phase of the programme. The Government of Orissa used the proceeds (i) to prepay old expensive debt to domestic financial institutions, and (ii) to substitute for more expensive sources of financing development expenditures. The proceeds of the proposed second loan / credit amounting to US$ 225 million (about Rs.1000 crore) would be used in a similar way: at least 60% for pre-paying old expensive debt and the remaining for financing reform costs and as a substitute for more expensive sources of financing development expenditures. Such borrowing by the State would be within the prescribed aggregate debt ceiling for 2006-07.

16. The Structural Adjustment Assistance is continuing since 2002-03 and is included in the 10" Plan Projection. Since this is an ongoing programme it would be also included in the projection of resources for the 1 1 ~ Five-Year Plan, within the

5

total loan ceiling to be approved by the Deptt. of Expenditure from time to time on yearly basis.

17. I would, therefore, request you to forward this proposal to the World Bank for approval of the Second Orissa Socio-Economic Development Loan/Credit.

Yours sincerely,

SriA.K. Jha, Secretary to Govt. of India, Department of Economic Affairs, Ministry of Finance, New Del hi.

6

LDP attachment A

Actions taken until March 2006 (2005-06 Actions in Italics)

Actions to be taken during 2006-09 (2006-07 Actions in Italics)

Consultations on Vision and Long-Term Stra

Establish a Poverty Task Force (PTF) chaired by the Development Commissioner, including officials in charge of key social sectors

Draft Orissa Vision 2020 document prepared, to be released for public discussion.

Organize colloquium for consultation between government and NGOs in Orissa

Prepare and initiate consultations on draft Rehabilitation & Resettlement Policy.

Establish a Task Force to spearhead the process of consultations with c iv i l society representatives a on a regular basis.

I. ECONOMIC REFORMS FOR INCLUSIV Agriculture, Irrigation and Land Administration

Enact amendment to Orissa Agricultural Produce Markets Act, to lijl state monopoly and enable contract farming

Draft Agricultural Policy formulated and discussed

Orissa Paani Panchayat Act and corresponding Rules approved by State Legislature in 2003 to ensure empowerment of water user associations

Over 750,000 hectares of agncultural lands handed over to Pani Panchayats for participatory irrigation management

System for updating o f Records of Rights in place

Establishment of representative Steering Committee and TasYorce to guide land administration modernization process

Go0 order (14643-R-S-6012000) allowing settlement o f land up to 30% slope and usufruct rights on lands beyond 30% slope in favor o f tribal shifting cultivators

Finalization of Orissa Vision 2020 after due public consultations.

Publication of Approach paper for the Eleventh Five Year Plan (2007-12), consistent with Vision 2020 and with National Approach paper of the Planning Commission

Adoption of Orissa R&R Policy after consultations with various stakeholder groups

GROWTH

Formulate Rules for implementing ag. marketing reforms, ensuring transparent approval through a one-stop-shop.

Formulation of demand-driven District Agricultural Diversification and Marketing Strategies in coordination with Dept of Water Resources and participation of PRIs

I . I million hectares of irrigated lands handed over for participatory irrigation management

1.4 mill ion hectares o f irrigated lands handed over for participatory irrigation management by 2007-08; complete transfer of irrigation management initiated

Ensure better coordination and rationalization of Registry Ofjce with the Tehsil Administration towards an integrated and user friendly land administration; delegate decision-making authority, particularly to frontline 0ficers;initiate steps for e-governance of land records; and launch survey and digitization work for transparent settlement of un-demarcated lands (including 210% slope)

Initiate discussion on reform o f tenancy legislation to enhance productivity and access o f tenant farmers to bank credit, with adequate protection o f all stakeholder interests

1

LDP attachment A

Ensure timely implementation of approved Business Plan; of the discoms including invoking remedies, conductin> independent energy audits, ensuring full payment by stat( government departments and local bodies, benchmarkin> and publicly disseminating key performance data

Monitor effectiveness of the theft reduction programme, including the special police stations and the designation of existing courts to try cases involving electricity theft

Establish a monitoring system to track expansion in rural connectivity and quality of service, impact on economic growth, cost of supply (incl. technical and commercial losses), revenues and 'last mile' arrangements

Strengthen the corporate structures of state-ownedpower companies

iorestry, Watershed and Fisheries Ievelopment of comprehensiveforest sector vision and trategy, with broad stakeholder inputs

Natershed Mission established

idoption of sector-wide livelihood-based watershed ievelopment in 4 districts

3iscussions with key stakeholders to gauge support for :apacity building and policy reforms in fisheries sector

Fil l ing of critical vacancies in Forest Department through re-deployment and contractual appointments, and abolition of redundant positions; delegation of decision making power to f ie ld based forest oflicers; and revised guidelines for Joint Forest Management - to support a change management process oriented towards effective community based forestry.

Review o f Orissa forest code underling community-based forestry to strengthen local governance, develop more efficient forest tenure models, simplify rules and procedures and open up wider marketing channels.

Establish dedicated coordinators with suflicient decision- makingpowers for watershed management in at least 14 districts, with activeparticipation from the Forest Dept.

Build vision, strategy, and capacity for comprehensive fisheries policy

Prepare district-wise fisheries infrastructure development plans, along with specification o f envisaged private investments and required public investments

Public Enterprise Reform

Tontinue implementation of (non-power) Public 5nterprise reforms, including sale of assets of closed rnits, and privatization of at least 2 additional units.

Initiate environmental screening process for 20 znterprises to be sold/closed under the reform wograrnme.

Continue implementation of PE reforms, including privatization of at least 2 additional units in 2006-07 and restructuring of 4 units

Complete environmental screening/audit for at least 10 units covered by the reform programme

Power Sector Reform

lnitiate implementation of the order dated February 28, 2005, passed by the Orissa Electricity Regulatory Commission, relating to the business plan of the Distribution Companies, to improve financial viability of the sector, including: (i) reconciliation and settlement of oast electricity dues between the largest consuming government department and CESCO; (i i) payment of current electricity bills by state government departments to the Distribution Companies on an average of at least 90% of bil l ing in Fiscal Year 2005-2006; (iii) execution of agreements between CESCO and at least two municipal authorities for ensuring discipline in the supply of andpayments for electricity; and (iv) initiation of steps to designate existing courts to try electricity theft cases

2

LDP attachment A legulatory Framework for Private Enterprise

Jotlfication of the Orissa Industries (Facilitation) Act nd Rules, including a Combined Application Form, hereby reducing the number of application clearance wms required for establishment of industries from I 8 to 'ne

:omplete capacity needs assessment of Orissa Pollution :ontrol Board (OPCB) and develop a capacity trengthening action plan.

Jndertake a review of international and local experiences fbenefit sharing from natural resource based growth

Adoption of Policy on Public Private Partnership in lnfrastructure

Initiate implementation by OPCB of a capacity strengthening action plan, including (i) govt. approval of staffing plan, including redeployment, and (i i) rationalization of consent (CTO) duration based on environmental and social risk

Operationalize the single window clearance system at the state level and for projects below Rs 500 million at two district level pilot sites viz. Bhubaneswar and Jajpur; and set up monitoring system to track time taken for clearances

Start strengthening capacity to improve effectiveness of forest conservation measures and forest clearance process for industrial projects.

Establish institutional and pol icy framework for equitable benefit sharing f rom natural resource based growth

;I.ISCAL REFORMS, FINANCIAL MANAGEMENT AND ACCOUNTABILITY ?iscal Sustainability

'rimary Fiscal surplus achieved in 2004-05.

3rissa Fiscal Responsibility & Budget Management Act znacted; primary surplus achieved in 2004/05 with werall deficit less than 3.5% of GSDP; execution ofthe ?005/06 budget and targets for 2006107 consistent with he FR&BM Act

Revenue Reforms

Implement state-level VAT effective Apr i l I, 2005

Rationalize motor vehicle tax rates and strengthen Idministration o f state excise on liquor.

Fiscal outcomes in 2005-06, budget execution in 2006-07 and targets for 2007-08 in compliance with the Orissa FRBM Act

Orissa's finances on a sustainable path, including elimination o f revenue deficit and less than 3% o f GSDP fiscal deficit b y 2008-09; debt lower than 275% of total revenue and interest less than 20% o f total revenue by 2009-10, both on a declining path.

Establish standard land valuation report as basis for valuation in determination of stamp duty and regn. fees Simplifv procedure for conversion of agricultural land for other use

Amend Registration Act to disallow registration oj transactions where land has been under-valued Enact Orissa Excise Act, a comprehensive law relating tc alcoholic liquor and other intoxicants, replacing the Bihai and Orissa Excise Act, 191 5

Rationalize classification of land and rent structure, wi th number of categories reduced from 133 to less than 10

3

nent A Expenditure Restructuring

?educe the share of salaries in the state S own revenues >om 89% in 2003-04 to below 80% in 2004-05 and zstimated 75% in 2005-06; and the share of salaries in :urrent expenditure( net of interest and pension) f rom j 7 % in 2003-04 to below 54% in 2004-05, and estimated 'ess than 50% in 2005-06

Sovernment decision to introduce a defined contribution ?ension scheme for new civil service entrants

Public Financial Management & Accountability

Improved ratio of actual spending to targeted outlay in the Annual Plan 2004/05; Improved utilization of centrally financed and eo-financed schemes in 2005/06; and completion of at least 50 identifed high-priority infrastructure investment schemes in 2004-05 and 2005-06

Implementation offirst phase of Development Action Plan, based on findings of State Financial Accountability Assessment, including enhanced level of disclosure of financial information in budget documents, and updated month-end accounts of rural local bodiesposted on Go0 Website

Procurement Reforms and other Anti-Corruption

Government approval o f Ant i -Conupt ion Ac t i on Plan, covering measures to strengthen prevention, enforcement and publ ic awareness, and including systemic re forms in publ ic procurement

Reduce, in 2006-07, the share of salaries in the state's own revenues and in current expenditure (net of interest and pensions) to less than their corresponding levels in 2005- 06

Increase share o f non-salary component o f total expenditure on Human Development - education, health, water and sanitation, nutrition, PDS, targeted welfare and anti-poverty programmes.

Institutional arrangements for defined contribution pension scheme for new civil service entrants to be finalized and made fully operational.

Develop a pensioners module for inclusion in the HRMIS and refine the audit mechanism fo r periodic updates (regular as we l l as fami ly pensioners) in the state

N e w l y hired employees under the N e w Pension Scheme (NPS) receive annual statements on personal in format ion and account balances.

Successful implementation of Treasury computerization and networking including sub-treasuries in 6 districts; web based computerized accounting and reporting systems operational at district & block level, initiated at GP level

Preparation of easy ready reference for Drawing and Disbursement Officers (DDOs) and Controlling Officers and an Internal Audit Manual

Progress in disposal of draft paragraphs in inspection reports, pending audit paragraphs and recommendations of the Public Accounts Committee

Reduction in the backlog o f audits o f publ ic enterprises

[easures

Implementation ofprocurement reforms component of the Anti-Corruption Action Plan, including (ii) posting of tenders and contracts awarded by the participating departments (Works, Rural Development, Water Resources; Housing and Urban Deve1opment)on the official website; and (ii) e-procurement for al l procurement above Rupees 10 mill ion in at least one of the participating departments

Implement e-procurement for procurement above Rs. 10 m i l l i o n by al l departments

Establish fully functional internal vigilance units in Depts of Water Resources, Rural Development, PRaj and Works.

Three more Special Judge Courts made operational Survey conducted to assess citizens' experience and perceptions o f corruption in selected pub l i c services

4

LDP attach [II. PUBLIC SERVICE DELIVERY AND HUMAN DEVELOPMENT. 3ross-cutting Reforms in Public Administration

Begin implementation of Orissa Health Sector Plan, including establishment of institutional arrangements to accelerate improvements in MDG-related health outcomes through health programmes and multi-sector initiatives

7stablish appropriate institutional mechanisms to wersee, monitor and communicate Governance reforms

Zontinue implementation of civil service reforms, ncluding (i) continued reduction in the salary bil l for emporary workers; (ii) identijication of vacant regular 7osts for abolition, of which over 15,000 abolished during 4pril2004 -Apr i l 2006; and (iii) continued staff eedeployment.

Education

Issue Government Order to empower Village Education Committees to certifL teacher attendance in elementary schools

Finalization of Reorganization Action Plan along the lines of the Organizational Review of the Department of School & Mass Education; and abolition of vacant non- teaching positions.

Strict enforcement of qualification criteria for grant receiving colleges and schools, and replacement o f salary based grants by block grants

Health

Initiate implementation of short-term recommendations of Organizational Review of the Department of Health, including abolition of some posts and conversion of paramedics to district cadre

Develop and approve Orissa Health Sector Plan (OHSP) to achieve priority health outcomes, including effective health spending and efficient pnancial management based on a Medium-Term Expenditure Framework (MTEF)

Progress in implementing the drug management policy: standard treatment guidelines developed and being utilized; health facility managers indenting for drugs as per local need; and computerized drug inventory management system functional.

Basic data on civil servants including employee name, date of birth, date of entry, unique employee code, current posting and details ofpay entered into HR database for all employees of at least 6 districts.

Complete HR database coverage o f all employees and pensioners.

Policy on Staff redeployment established and mechanisms put in place to deploy surplus manpower through establishment of a central database of surplus employees.

Establish process for identtfying stafing needs of departments and districts. (GAD/Finance)

Review institutional constraints facing the district administration, with particular reference to schemes of the Dept of Panchayati Raj; and decide on measures to strengthen coordination and monitoring. (GA/PRaj Depts)

Every Gram Panchayat and elementary school to display information on resources allocated for elementary education, with names and pictures of teachers designated for that area

Implement measures to enhance teacher accountability in elementary education, including certification of teachers' attendance by village education committees

Conduct achievement survey in Grades 4 & 5 to establish benchmarks for learning achievement at primary schools

Conduct public expenditure tracking survey in elementary education to assess exp quality and cost-effectiveness

Ensure that health budget for 2007-08 reflects MTEF.

Develop and make operational an independent system for regular and timely monitoring ofkey health output indicators at the district level which can be linked to expenditures and key social and demographic variables.

ent A

5

LDP attachment A Social Protection and Women's Empowerment

Government authorization of women's self help groups (SHGs) to deliver mid-day meals in elementary schools

Conduct a Public Expenditure Tracking Study covering supplementary nutrit ion and rural employment programmes

Other Service Delivery Initiatives Computerization of dr iv ing license and motor registration piloted in three locations.

Develop an integrated IT strategy for Government process reengineering.

Programme of training o f rural local body officials and elected representatives initiated, following recommendations o f training needs assessment.

~

Poverty and H u m a n Development Monitoring

Human Development Report 2004 published by GOO, presenting comprehensive district wise data on poverty and social indicators.

Implement programme to strengthen the statistical system and sign2Jicantly reduce the delays in availability of poverty related data.

Establish a Poverty & Human Development Monitoring Agency to provide technical inputs to the Pov Task Force.

Conduct assessment of the effectiveness o f current institutional roles and responsibilities in delivery o f anti- poverty programmes (of different levels o f govt and SHGs), & develop an Action Plan to promote closer alignment o f financial and human resource capacity with functions

Based on programme analysis and district pilot, develop an, initiate implementation of an Action Plan to strengthen efficiency, accountability and delivery of food distribution programmes (Deptxof Food, Women & Child Dev. And Panchayai Raj)

Business re-engineering to improve municipal services including building permissions, birth & death registration, and property tax (Housing and Urban Development Dept.)

Pilot a caseload management system to improve litigation management by GOO, reduce departmental workload and improve productivity ( Gen Administration Department)

Study devolution index compared to other states, and identifl measures to strengthen devolution to rural local bodies, including PRIs and PESAs (Panchayati Raj and SC / ST Development Departmens)

Provisional poverty estimates for Orissa based on the State sample of the NSS 61" round computed andpresented for init ial policy discussions (April 06)

Training of statistical district officers completed (July 06); State sample (NSS 61'' round) data analyzed and published (August 06)

Computerization of district ofices complete and devolution of data entry to district offices initiated (Dec 06)

6

LDP attachment B

OSED Programme: Monitorable Indicators

ITEM INDICATORS

4. Economic Reforms for

More vibrant and diversified narket oriented agriculture with 2etter secured land property rights

Enhance income earning Dpportunities for tribal communities resident in forests

Sustain high rates of broad based growth of Orissa economy led by private industrial investments, with effective environmental due diligence

Withdrawal of the State from commercial activities and expanding space for private enterprise

To improve financial performance of the power sector, reliability of supply and expand rural access

iclusive Growth

9

>

> 9

Number of paanipanchayats established and functioning (annual) Mln hectares of irrigated land under user group management

Proportion of agricultural produce sold outside government operated markets (Yo) Cumulative area of undemarcated land surveyed (15,000 by 06-07 and 25,000 by 07-08)

Share of forest communities in gross income from kendu leaf sales (to be increased each year, from 30% in 2005-06) la Number of critical field level vacancies in the Forest Department (to be reduced each year, from 2500 in 2005-06)

Number of application forms (from 18 in 2004-05 to 1 in 05-06) Number of inspections (from 12 in 2004-05 to 6 in 05-06) Cumulative Number of PPP transactions ( 1 by 2006-07 and 3

Percentage of consent applications carried forward (reduce from base level of 25% in 2005-06) Number of industrial units covered by environmental inspection

Number of unviable enterprises closed

Cumulative number of units privatized (3 by 2005-06 and 5 by

(1 .I by 2006-07 & 1.4 by 2007-08)

>

>

9 9 9

>

P

P 9 Value of assets sold 9

by 2007-08)

06-07)

P

P

Rate of payment of current power bills by govt departments (90Y0 in 2005-06 and 95% in 06-07) Rate of payment of current power bills by urban local bodies (bimonthly)

B. Fiscal reforms, Financial Management & Accountability To achieve fiscal sustainability9 avoid a debt trap and create fiscal space for well designed development initiatives

1 3 Primary (non-'nterest) fiscal Daiance as ratio of GSDP (>1.5y0 every year unt:l 2007-08) Fiscal deficit as ratio of GSDP ( ~ 3 % every year ) Revenue Deficit (reduced to zero by 2008-09) Ratio of Debt to Revenue Receipts (reauced to less than 275%

Ratio of Interest to Revenue Receipts ( ~ 2 6 % in 2005-06, c23Y by 07-08 and ~ 2 0 % by 09-10)

3 i i

3 by 2007-08)

Improve composition of public spending to encourage economic growth and development

P

P

Ratio of salary bill to state's own revenue (less than 80% in 2004-05, 75% in 2005-06 and 70% in 2006-07) Ratio of salary bill to current expenditure, net of interest & pension (e 50% in 2005-06 and declining each year thereafter until 09-1 0) Non-salary expenditure on Human Development - education, health, social welfare and poverty alleviation programmes (in Rupees, annual)

9

VlPLEMENTlNG DEPTT.

Water Resource

Water Resources

Co-operation

Revenue

F&E

Industries

'.E.

Energy

F.D.

FD

1

LDP attachment B Improve budget formulation, budget execution, accounts, reporting and accountability, to achieve improved composition and quality of public resource use

Measures to reduce corruption and increase value from money through more transparent and competitive process of public procurement

9

h

Ratio of actual to targeted State Plan expenditure (295% in 2004-05 and in each year thereafter) Utilization of central assistance (utilization certificates submitted as ratio of pending at beginning-of-year) raised from 68% in 2004-05 to over 73% in 2005-06, 80% by 06-07 & 90%

Rate of response to 'draft paras' in the inspection report and final observations in the audit report of the CAG

by 07-08) >

> 9

9

Pendency of Departmental proceedings against the retired employees reduced by 80% in 07-08 over 05-06 Number of Departmental inquiries pending ( reduced from 2100 in March 2006 ) Contracts awarded through e-procurement (all contracts above Rs. 1 crore in at least one dept. in 06-07, in all four participating depts. in 07-08, and in all Depts. by 08-09).

C. Public Service Deliverv & Human DeveloDment Streamline public administration by eliminating obsolete or unnecessary functions

Improve effectiveness of public service delivery in education sector

Improve effectiveness of public service delivery in health sector

> > > 9

Number of vacant base level positions abolished (at least 15,000 during 2004-06 and another 6,000 during 2006-08) Cumulative number of staff redeployed (1800 by 05-06, 2400 by 06-07 and 3000 by 07-08) Reduction in average time required for mutation of sale deed

Indicator of teacher accountability (such as rate of attendance) - to be assured through impact evaluation in 2007-08

Minimum level of child immunization coverage achieved in all districts (65% by 06-07 & 80% by 07-08)

>

-D/P&C

-DlP&C

FD/ All Deptts

GNAII Deptts.

GNAII Deptts.

IT/ Works/ WR/ RDI H&UD

FD

G.A

Revenue

S&ME

H&FW

a/ The 30% share in 2004-05 is a rough estimate, to be confirmed; following availability of more diverse and reliable data, the scope of monitoring will be expanded to include more items of forest produce

2

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Annex 4

IMF Executive Board Concludes 2005 Article I V Consultation with India Public Information No t i ce (PIN) No. 06117 February 2 1,2006

Public Information Notices ( P I N ) form part of the IMF's efforts to promote transparency o f the IMF's views and analysis o f economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions o f Article IV consultations with member countries, o f i t s surveillance o f developments at the regional level, o f post-program monitoring, and o f ex post assessments o f member countries with longer-term program engagements. PINs are also issued after Executive Board discussions o f general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Rcadcr to view this pdf f i le) for the 2005 Ar t ic le IV consultation with India is also available.

On February 6, 2006, the Executive Board o f the International Monetary Fund (IMF) concluded the Art icle I V consultation with India.'

Background

India's growth has remained robust in 2005106 fol lowing a strong performance last year. With rapid growth in services broadening t o encompass industry, GDP growth in 2004105, at 7% percent (recently revised upward f rom 6.9percent) was above the historical trend. Strong momentum in manufacturing and services has continued, resulting in rising capacity uti l ization and soaring business confidence. Staff projects growth o f over 1% percent this year, led by strong domestic demand, and broadly in line with the Reserve Bank o f Ind ia (RBI) and consensus forecasts. In 2006107, growth i s expected to decline slightly as the economy further adjusts to higher o i l prices and domestic and wor ld interest rates rise.

While inflation remains low, underlying pressures f rom buoyant domestic demand and higher international energy prices remain strong. Steps taken by the RBI to tighten liquidity in 2004105, including raising reserve requirements and pol icy interest rates, and incomplete pass-through o f higher o i l prices helped keep WPI inf lat ion low. With headline inflation hovering around 4% percent year o n year, the RBI raised overnight rep0 rates again in October 2005 and January o f 2006, by a cumulative 50 basis points, cit ing concerns about the rap id pace o f aggregate demand and monetary growth and high o i l prices. Staff projects inf lat ion to rise f r o m an average o f about 4% percent in 2005106 to 5% percent in 2006107, in part reflecting the adjustment o f administered fuel prices.

Af ter several years of current account surpluses and growing reserves, the investment recovery and consumption b o o m have pushed the external current account in to deficit. In 2004105, the trade deficit widened to over 5% percent o f GDP and the current account reverted into deficit for the f i r s t t ime in three years, notwithstanding high growth in services income. Wh i le export growth continues to be strong, a large increase in both o i l and non-oi l imports caused the trade deficit t o widen further this year, and contribute to a sharp deterioration in the current account deficit. Staff projects it to reach 3 percent o f GDP in 2005106.

The balance o f payments position remains comfortable with strong capital inf lows helping finance the growing current account deficit. In 2004105, close to half o f a l l capital inf lows were debt creating, as Ind ian corporates took advantage o f favorable global interest rates, an appreciating rupee, and the l iberalization o f restrictions o n external commercial borrowings to borrow abroad. Whi le portfol io flows have continued to gain importance, FDI in f lows remained weak. So far this fiscal year, capital inf lows have remained strong and reserves have only fal len modestly as a result o f the redemption o f the Ind ia M i l l enn ium Deposits. Wh i le more reliance o n debt and portfol io in f lows has increased India's susceptibility t o changes in investor sentiment, ample reserves and remaining capital controls limit r i sks of potential reversals.

Asset markets have strengthened. N e t foreign investor inf lows have accelerated since mid-2005, as equity prices soared. Equity prices are up around 50 percent f r o m end-April. Ample liquidity and historically l o w interest rates also helped f u e l property prices, wh ich have r i s e n in major cities by over 20 percent annually over the past two years. Concerned with speculative pressures, the RBI has raised risk-weights o n housing and real estate loans and imposed controls on real estate investments aimed at curbing speculative FDI inflows.

1

Annex 4 The exchange rate h a s exhibited increased two-way flexibil i ty. In the eight months to June 2005, the RBI scaled back intervention in foreign exchange markets and the rupee appreciated by 4 percent against the dollar (6% percent in real effective terms). In the second ha l f o f 2005,-with the exception o f a six-week period fol lowing China's July 2 1 revaluation, when the RBI intervened to stem appreciation pressures-the rupee depreciated, reflecting pressures from the g row ing current account deficit and renewed U.S. dollar strength.

Fol lowing three years of declining fiscal deficits, a "pause" in deficit reduction was announced for 2005106. The central government deficit came in below target in 2004105 for the second consecutive year at 4.1 percent o f GDP (authorities' definit ion, including privatization receipts as revenue), helped by a cyclical rebound in revenue and expenditure compression, but also reflecting greater recourse to off-budget petroleum subsidies. Ths , together with a 0.8 percentage points reduction in subnational deficits, contnbuted to a fal l in the general government deficit t o under 7% percent o f GDP, enough to stabilize public debt at about 86 percent o f GDP. The 2005106 Budget deficit target o f 4.3 percent of GDP falls short o f the minimum reduction required by the Fiscal Responsibility and Budget Management Act. This reflected significant spending increases for key social and infrastructure needs and higher transfers to the states. The general government deficit i s projected by staff to rise, for the first t ime in four years, t o 7% percent o f GDP.

The banking sector has continued to strengthen but some risks remain. Commercial banks have continued to reduce nonperforming assets, and aggregate capital adequacy remains high. Banks have reduced their exposure to interest rate risks, decreasing their holdings o f government paper and shortening maturity. Decl ining profi tabi l i ty due to rising interest rates has been in part offset by higher credit growth. However, interest rate risk remains a concern with bank holdings o f government paper (at 38 percent o f assets) s t i l l h i gh and in excess o f statutory requirements. At the same time, rap id credit growth raises concerns about credit quality and cooperative banks, accounting for about 6 percent o f banking system assets, remain in poor health.

Executive Board Assessment

Executive Directors noted that the Indian economy i s continuing to reap the rewards o f more than 15 years o f reforms. Notwithstanding h igh wor ld o i l prices and a weak monsoon, the economy showed remarkable resilience in 2004105, with growth remaining robust and becoming broader-based. These trends have continued in 2005106, and growth of more than 7% percent for the fill year i s expected.

Directors supported the broad objectives o f the government's economic program, in particular addressing infrastructure bottlenecks, alleviating rural poverty, and deepening global integration. They noted that current favorable economic conditions provide a good opportunity to speed structural reforms. In particular, measures to improve the business climate and reform labor laws wou ld have a large pay-of f by fostering private and foreign investment and j o b creation. With an acceleration o f the reform process, India would b e able to achieve sustained economic growth o f 8-10 percent, in line with the objectives o f the authorities.

Directors emphasized that macroeconomic policies should remain vigilant, in v iew o f the evolving macroeconomic situation. Although inflation has remained contained, underlying pressures point t o upside risks. In particular, domestic demand remains strong, as evidenced by a widening current account deficit and rap id credit growth. In tl- i~s context, Directors recommended that fiscal po l icy should counter demand pressures, and they underlined the importance o f overperforming o n the budget and meeting the minimum adjustment required under the Fiscal Responsibility and Budget Management Act. This wou ld not only b e an appropriate macroeconomic pol icy response, but would also bolster the credibil i ty o f the A c t and a l low the central government to lead by example in efforts to encourage adjustment at the state level. In this regard, some Directors cautioned that markets might interpret the pause in deficit reduction in the current fiscal year as a weakening o f the commitment to reform.

Directors underscored the need for the Indian economy to adapt to permanently higher international o i l prices. They recommended moving gradually t o the fill pass-through o f o i l prices-with targeted support for the poor-which would help limit fiscal and quasi-fiscal losses and provide incentives for more efficient energy use, thus aiding competitiveness in the medium term.

Directors considered that monetary po l icy should remain focused o n keeping inf lat ion expectations in check. The increases in the reverse rep0 rate by the Reserve Bank o f Ind ia in October 2005 and January 2006 were seen as

2

Annex 4 appropriate, signaling the R B I ' s commitment to price stability and helping the adjustment to higher global interest rates. Directors welcomed the R B I ' s continued two-way flexibil i ty in exchange rate management.

Directors noted that, notwithstanding the deficit reduction achieved since 2001102, India's large public debt remains a key constraint o n growth. Without further enhancing tax revenues and reducing lower-priority spending, i t wil l be difficult to create f iscal space for the planned large and crucial increases in infrastructure and social spending. In addition, with credit to the private sector rising fast, the risk that government borrowing needs wil l crowd-out the private sector has increased. Directors observed that fiscal consolidation i s a prerequisite for more complete financial sector development and further opening up o f the capital account.

Directors viewed an acceleration o f tax reform as crit ical to achieve the government's deficit reduction targets. They welcomed the introduction o f the value-added tax in most states and steps to widen the services tax base and modernize tax administration. Directors underscored the need to further broaden the tax base by trimming existing exemptions and eventually introducing a goods and services tax with few exemptions. Directors looked forward to the planned development o f tax expenditure estimates, which would provide a valuable too l for resisting attempts to introduce new ineff icient tax incentives.

Directors observed that greater spending efficiency, in particular improved targeting o f subsidies, wou ld b e required to generate the needed fiscal adjustment. They viewed the government's 2004 subsidy re fo rm blueprint as appropriate, and urged i t s rapid implementation. Directors underlined that the new rura l employment program represents a potentially large expenditure commitment, and advised the government to proceed cautiously with it.

Directors welcomed the init iation o f pension reform. The passage o f the Pension Bill wou ld a l low the introduction o f fully funded, defined contribution pensions, which in turn would help ensure a secure source o f retirement income and aid in the development o f capital markets. However, Directors pointed out that revisions to the existing defined benefit schemes for c i v i l servants are also required to reduce large unfunded pension l iabil i t ies.

Directors noted that states have succeeded, in the aggregate, in reducing their deficits in recent years, and they welcomed recent reforms undertaken in the context o f the Twel f th Finance Commission to further strengthen state finances. These reforms provide states with greater resources and incentives to undertake fiscal reform. However, Directors emphasized that state finances could be further strengthened by increasing conditionality and hardening budget constraints, including v ia tighter global borrowing ceilings. They called for consolidating the recent gains through tax base broadening and further reforms in the pension, subsidy, and state electric utility areas. Directors were encouraged that a number o f states have already shifted to defined contribution pension systems and enacted fiscal responsibility laws.

Directors supported the government's emphasis o n public-private partnerships to ensure greater private participation in investments in infrastructure. However, they cautioned that an improved regulatory framework and financial reforms to broaden the investor base are also needed. Directors viewed the 2003 Electr ici ty A c t as a sol id framework for reform, and advised that it be implemented quickly.

Directors commended the underlying strength o f financial regulation and the effective response to recent rap id credit growth. They advised close monitoring o f fast-growing credit card debt. A further strengthening o f prudential standards could be considered, where appropriate. Reliance o n pr ior i ty sector lending floors t o deliver credit t o agriculture and small and medium-sized enterprises could be reduced by addressing needed structural reforms in lending. Regulation should also be strengthened for cooperative banks. Directors urged the RBI to ensure readiness for the planned move to Base1 I1 by continuing to enhance monitoring o f banks' risk management systems, upgrade supervisory ski l ls, and strengthen disclosure requirements. Directors considered that the current sound posit ion o f the financial system provides a good basis for i t s further deepening, in particular through increasing private and foreign participation in the banking sector, including by accelerating implementation o f the R B I ' s banking reform roadmap.

Directors emphasized that further opening o f the economy would a l low it to reach i t s full growth potential. Wh i le they commended the progress already made in bringing down ta r i f f levels, they noted that faster convergence t o ASEAN levels would be desirable. Broad-based tar i f f reductions wou ld also help min imize the trade diversion potentially associated with preferential trade arrangements. Also, continued loosening o f sectoral l i m i t s o n foreign

3

Annex 4 direct investment, together with efforts to improve the business climate and liberalize labor laws, could foster growth and j o b creation, while reducing India's reliance on shorter-term capital flows. Some Directors noted that further privatization could spur efficiency gains and provide resources to reduce the public debt. Directors urged the authorities to consider labor market reforms, including expanded contract employment and streamlined labor regulations and reporting requirements. Such flexibil i ty would be key to ensuring that India can generate jobs for i t s rapidly expanding labor force.

India: Selected Economic Indicators 1/

2001102 2002103 2003104 2004105 2005106

Domestic economy

Change in real GDP at factor cost (base year 199912000)

Change in industrial production

Change in wholesale prices (period average)

Change in consumer prices (period average)

External economy

Merchandise exports 31

Merchandise imports 31

Current account balance 31

(In percent o f GDP)

Direct investment, net 31 41

Portfolio investment, net 31

Capital account balance 31

Gross official reserves 51

(In months o f imports) 61

External debt (in percent o f GDP) 51

Short-term debt (in percent o f GDP) 51 71

Debt service ratio (in percent o f current receipts)

Change in real effective exchange rate (in percent) 51

Financial variables

Central government balance (in percent o f GDP) 81

General government balance (in percent o f GDP) 81

Change in broad money (in percent) 51

5.8

2.7

3.4

4.3

44.7

56.3

3.4

0.7

4.7

2.0

8.6

54.7

8.0

20.7

3.0

13.8

1.8

-6.4

-10.1

14.1

4

3.8

5.7

3.4

4.0

53.8

64.5

6.3

1.2

3.2

0.9

10.8

76.1

9.3

20.6

3.8

16.3

-5.4

-6.0

-9.7

14.7

8.5

7.0

5.4

3.9

64.7

80.2

10.6

1.8

3.4

11.4

16.7

113.0

8.7

18.6

1.9

16.3

-0.9

-5.1

-9.0

16.7

7.5

8.4

6.4

3.8

80.8

119.0

-6.4

-0.9

3.0

8.9

31.0

141.5

7.7

17.9

2.7

4.7

1.3

-4.3

-7.4

12.4

7.6 21

...

4.7 21

4.5 21

97.3 21

161.7 21

-23.1 21

-3.0 21

4.6 21

9.3 21

27.5 21

139.5 101

5.7 101

17.9 21

2.4 21

6.9 21

5.4 111

-4.3 21

-7.7 21

17.7 11/

Interest rate 51 91 6.1 5.9 4.2

Annex 4

5.3 6.7 121

Sources: International Financial Statistics; Reserve Bank o f India; Min is t ry o f Finance; CEIC; and Fund staff estimates. l i Data are fo r Apr i l -March fiscal years as available at the t ime o f the Executive Board meeting, unless otherwise indicated. 2/ Staf f project ions for 2005106. 31 Based o n balance-of-payments data available as o f December 23,2005. 41 N e t foreign direct investment in India less net foreign investment abroad. 51 End o f period. 61 Imports o f goods and services projected over the fo l lowing twelve months. 71 Residual maturity basis, except contracted maturi ty basis for medium- and long-term nonresident Indian accounts. 81 Excluding divestment receipts f rom revenues and onlending o f small saving collections f rom expenditures and net lending. 9/ 9 1 -day Treasury Bill rate. 101 A s o f January 27,2006. 1 11 A s o f December 3 1,2005. 121 A s o f January 3 1,2006.

!- Under Ar t ic le I V o f the IMF's Articles o f Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with off icials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion o f the discussion, the Managing Director, as Chairman o f the Board, summarizes the views of Executive Directors, and this summary i s transmitted to the country's authorities.

5

Annex 5 Government o f Orissa

I i

I

. /

! ~

1

I I I

I ! ,

. FORM-.I

' {See Rule 4 (1)) FISCAL POLICY STRATEGY STATEMENT

A. FISCAL POLICY OVERVIEW - Fiscal imbalance has been an impediment to faster growth and development of the

State. To correct the structural imbalance, Government of Onssa have taken a number of measures. These include moderation of growth of revenue expenditure and introduction of several revenue augmentation measures: As a result of such measures, Orissa has been able to moderate revenue and fiscal deficits as indicated below.

State's own tax revenue as percentage of GSDP has increased from 4.4% in 1999-2000 to 6.4% in 2003-04 and 7.2% in. 2004-05. ' The Revenue 'Deficit has reduced from Rs.2574.19 crore in 1999-2000. to Rs.1420.92 crore in 2003-04 and Rs.522.30 crore in 2004-05. As percentage of GSDP, this represents reduction from 6.7% in 1999-2000 to 2.6% in 2003-04 and 0.91 % in 2004-05. The Fiscal Deficit has been reduced from Rs.3836.44 cmre in 2999-2000 to Rs.2469.94 crore in 2003-04 and Rs.1365.99 crore in 2004-05; As percentage of GSDP, this represents,reduction from 9.7% in 1999-2000 to 4.6% in 2003-04 2.37% in 200445.

(iv) ' The Debt stock which was 341% of total revenue in 2001-02 has been reduced to 335% in 2003-04 and 288.5% in 2004:05.

(v) Similarly, Interest payment as percentage of revenue receipt has already been

' ,

(i)

(ii)

. .

(iii)

. . I reduced from 40.2?i0 in 2001-02 to 30.3%in 2003-04 and 28.1% in 2004-05.

.r - I

I The GSDP growth for the State-Tn- 2004-05 was 7.07%. Comparative figures of sectoral growths during lheyear 2003-04 and 2004-05 is given in the Table below.

MAJOR SECTORAL CONTRIBUTION 8 GROWTH OF GSDP .

0 - Quick Estimates : A -Advance Estimates

It can be seen from the Tables above that there is a large variation in.the real growth rate of GSDP from 1999-2000 to 2004-05 (Advance Estimates) in the range of--Q.70% to

. . ~

14.40%. Similarly, the nominal growth rate of GSDP vanes,from'0.30% to.as high.as 21.30%. The average growth rate. of GSDP. in constant ,prices from 1999-2000'10 2004-05 (AE) is 4.59% and the annual average growth rate qf GSDP .at Cu(ent.Pnces is 8.57% during the same period. It is impitant io menfion here that Twelfth Finance Commission have assumed a nominal growth rate of 11% in GSDP for Odssa (page 383 of .the Report), It may also be noted that the growth rate of GSDP,during 'the Tenth Five Year Plan'.was targeted at 6.2% in 1993-94 prices and the actual growth has been 5.7% in the years 2002-03 10,2004-05. The attempt has been to enhance the growth rate through increased and efficient investment in public sector as well as creating a climate for larger flow of private investments'to the State.

(B) FISCAL poticy FOR THE CURRENT.YEAR - (1) Tax Policy -

VAT was introduced from 15' April 2005. Since this is a destination and multi-point tax there is potential for growth of revenue if well administered. It would also, result in a single market through out India and put an end to tax war among the states to attract investment.

The growth of tax revenue in the state has showed improvement. The growth rate was 16 4%, 15 0% & 26 5% in 2002-03, 2003-04 & 2004-05 respectively. The annual average growth of State's Own Tax Revenue during 1990-91 to 1999-2000 was only 11.1%, which has increased to 19.8% during the period 2000-01 to 2004-05.

(2) Expenditure Policy - The emphasis is to reduce unproductive revenue expenditure and provide more

funds for development expenditure. Ths "aempt' has been to increase capital expenditure which has been going down due to fiscal imbalance and linking outlay to output. While the attempt has been to reduce ,unproductive revenue expenditure, attention has been given to manpower needs of critical sectors like Health, 'Education and law enforcement etc. Government have created 74495 number of posts to be filled up on contractual I on regular basis in essential sectors in different departments during 2000-01 to October 2005.

New pension Rules B GPF Rules based on defined contribution has been introduced to reduce the pension liability of the Government.

Attempt has also to be made for higher allocation to social sectors. . .

\. . .

(3) Government Borrowings, Lendings and Investments - The 12'" Finance Commission have recommended as follows: .

i) :the financing of the plan, apart from a small contribution'of plan grants from,the centre, depends entirely on borrowing by the State. A large .Plan effectively also means larger borrowing. It becomes therefore, necessary, that plan size of every state is linked to the sustainable level of the debt" 7 Para 2.32 of the report of the 12h FC 'to determine the right size of fiscal deficit and the debt in 'relation to GDP is important for prudent fiscal management:. - Para 2.42 of the report of the 12* FC. 'Plan.grants should be given as genuine grants and states may be encouraged to borrow from the market directly. Such a change would require de-linking of grants from loans in plan assistance. This would facilitate determination of grants according to needs and loans according to'capacities. The plan size of each state needs to take into account the sustainable level of debt a.nd the capacity to borrow from the markel" (para 4.68 of the report, Page- 82).

ii)

iii)

2

-iv) Debt GSDP ratio should be brought down to 28% of GSDP (Para 4.45, page.- 70-71 of the report). In case of Orissa it was 62..92% as on 31.3.2003 compared to all States' average of 34.21%. As on 31.3.2005 this GSDP ratio for Orissa is 59.08%. The ratio of interest payment to revenue receipt should be brought down to 15% (para 4.54, page - 75). In.case of Orissa this ratio in 2002-03 was'35.85% compared to all states' average of 24.57%), in 04-05 this ratio for'.Orissa has been reduced 28.1% in 2004-05. States should follow a Recruitment and Wage Policy, in a manner such that the total salary bill relative to revenue ,expenditure, net' of interest and pension' payment does not exceed 35%(Para 4.63, page - 80-81). At present, this ratio is as high as 55% for the year 2004-05. This has to be brought dowr to 35% by

03 this ratio was 65.5% for Orissa compared to all states' average of 37.3%) "Getting the right size and the right composition of Government expenditure with a view to facilitating achievement of highest attainable growth rates, and meeting governments' social obligations including poverty reduction and provision of health and education should be considered integral to any plan for restructuring public finances. This requires increasing public expenditure in social and economic infrastructure for accelerating growth, while reducing the over-all fiscal imbalance." (para 4.6 of the report, Page - 78-79)

v)

.

vi) 9

2009-10 as per the recommendation of. the 12vI Finance Commission (. in 2002- .r

vii)

. . -

Another binding constraint prescribed by the 12b Finance Commission for debt relief is that the fiscal deficit of the State must bk contained at least to the level of 2004-05. The benefit of write-off of debt amounting to Rs'3'751.29 crore would be available only if the fiscal deficit of the State is contained to the level of. 2004-05. If, in any year, the fiscal deficit' exceeds this level, the benefit of 'write-off, even if eligible otherwise, would not be'given (para.12.43Q) page.231). In other words, if the revenue deficit is reduced each year and finally reduced to zero by 2008-09, but if the fiscal deficit in any of the year starting from 2005-06 to 2009-10 exceeds the fiscal deficit level of 2004-05, the debt write-off of Rs.1751.29 crore would not be available to the State. While formulating the budget for 2006- 07 all these aspects have been kept in view.

The 12th Finance Commission have also prescribed a debt relief scheme for the States'which in case of Orissa is estimated at Rs. 3632.57 crore as indicated bebw.

i) . Reduction in the repayment of principal by way of - Rs.872.85 crore rescheduling the repayment to fresh 20 years.

ii) Resetting the interest rate at 7.5% in respect of - RS.1008.43 crore the central loan contracted upto 31.3.2004 and outstanding as on 31.3.2005 (excluding NSSF Loan of Rs.4431 .OO crore.

tii) Debt write off subject to stipulation that Orissa - Rs.1751.29 crore reduces the revenue Deficit to Zero by 2008-09 (Annual average reduction Rs.493.33rore) and contains the Fiscal Deficit at least to the level of 2004-05.

3

, . . * .

However, all these debt write off are linked to State Government complying with the various stipulations and conditions suggested by the 12" Finance Commission. These include reducing'revenue deficit to Zero by 2008-09, reducing fiscal deficit by 200849 to 3% of Gross State Domestic Product (GSDP) and maintaining at the level of 2004-05; reducing the debt burden as percentage of GSDP from the existing level of 59% in 2004-05 to 28% in 2009-10, containing salary expenditure to 35% of revenue expenditure, net .of interest payment and pension. Thus, there is a built in restriction on borrowing and there is necessity tokeep within this limit to avail debt write off recommended by the 12" Finance Commission; Hence there is a critical need to reduce non-plan revenue expenditure and enhance revenue so that more resources become available for development. . . . .

. . . . (4) . Other Liabilities -

Government has taken steps to reduce contingent liabilities under guarantees. The results of these measures reveal that Govemment has maintained the ratios well within the sustainable limit. The guarantee outstanding ,as a-percentage of Revenue Receipt less of grant-in-aid in the second preceding year ,has been cedued from 127.33% in 2001-02 to 57.59% in 2004-05. The following table indicates the position.

Guarantee outstanding

5310.00

5498.53

Year Revenue Receipt less Guarantee GSDP at Guarantee Grant-in-Aid for the outstanding as Current as ?4 of -2M preceding year percentage of Prices GSDP

Revenue Receipt . 4169.01 (for the year 127.3% 38728 13.7% 1999-2000) 5473 47 (for the year 100.46% 42403 .13.0%

2001-02

2002.03

2003-04

I 2002-03) 2004-05

I

2002-03 2003-04 2004-05

I 2000-01) I 1 I 5177.91 , ( 5807.35 (for the year I ' 89.16% I 44684 I 11.6%

sector 27.24 . 17.85 0.00 45.09 21.03 17.09 . 0,oo 38.12 28.74 4.04 0.00 32.78

I 2001-02) 3823.25 I 6638.60 (for the year I . 57.59% ' 1 53830 I 7.1%

Government has so far spent Rs . l I 5 .99 Cr. on one time settlement (OTS) schemes to discharge guarantee liabiities.

Sector-wise OTS Position , (Rs. in crore)

I Year I PSU Sector I Co-operative I ULBSector I Total

(C) STRATEGIC PRIORITIES FOR THE CURRENT YEAR - (1) The policy of the Government is to broaden the tax base and hence revenue. Steps

will be taken to further increase collection from VAT, Excise, M. V. Tax and other tax and non tax sources. Expenditure management will link expenditure to output. Priority will be to complete incomplete projects by adequate funding and close monitoring.

(2) (3)

4

(D)' POLICY EVALUATION -

I Year

L 1998-99 Actual 1999-2000 Actual 2000-01 Actual -

This will be a continuing process basing on performance under revenue collection and expenditure pattern that emerges during the year

Ratio of Salary to Revenue Ratio of Salary to State's Own Revenue Expenditure Net of Interest and .

Pension (Oh) (%) 70.0 166.2 59.5 160.6 66.5 . 132.5

(E) RESTRUCTURING THE STATE FINANCES AS RECOMMENDED BY LATEST FINANCE COMMISSION -

(a) Bringing down the ratio of interest payments to total revenue receipt The ratio of interest payments to revenue receipt was 32.6% in the year 1998-99.

The ratio was 21.0% in 1999-00,33.1% in 2000-01,40.2% in 2001-02, 34.2% in 200243 and it was reduced to 30.3% in 2003-04. As per the actuals for the year 2004-05, the ratio is 28.1% As per the recommendation of the 12* Finance Commission, the ratio of Interest to Total Revenue Receipt is to be contained to not more than 15% by 2009-10 (Para 4.54). However, as per the Orissa FRBM Act of 2005, the ratio of interest payments to revenue receipt is to be restricted to 18% to 25%. Accordingly, the interest payment liabilily has been projected to reach a level of 19.6% in the year 2009-10.

Year I Ratio of Interest Payment to Total Revenue I

(b) Bringing down the ratio of total salary bill relative to revenue expenditure net of

12" Finance Commission have recommended that "States should follow a recruitment and wage policy, in a manner such that the total salary bill relative to revenue expenditure net of interest payments and pensions does no t exceed 35 per cent." The ratio of Salary to Revenue Expenditure net of interest and pension was 70% in the year 1998-99, 59.5% in 1999-2000, 66.5% in 2000-01, 60% in 2001-02, 61% in 2002-03 and 57% in 2003-04. It has been further reduced to 53.8% in the year 2004-05 as per the actuals. The salary expenditure has been estimated to reach a level of 40.4% of Revenue Expenditure net of interest and pension by the year 2009-10 and 60.2% of State's Own Reven.ue by the year 2009-10.

' interest and pension

'

5

I

-- Year Ratio of Salary to Revenue

Expenditure Net of lnterest and * Ratio of Salary to-

State's Own Revenue , I ' 2001-02 Actual ! 2002-03 Actual

2003-04 Actual 2004-05 Actual 2005-06 Projected in MTFP 2006-07 Projected in MTFP 2007-08 Projected in MTFP 2008-09 Projected in MTFP 2009-10 Projected in MTFP

I

(c) Containing the ever increasing pension liability by following the initiative taken by the central government for pension reforms - Government of Orissa have introduced the Defined Contribution Pension Scheme

vide Notification No. 4445VF dated 17" September 2005, for new employees joining the government service on or after 01.01.2005, as a measure to control the ever increasing pension liability.

Pension (%)' (%) 60.0 ' 114.8 ,

61 .O . .. 97.0 (12* FC estimated -'65.5) . .

57.0 88.8 . 53.8 ' 75.9

80.8. 75.8 ' '

.50.8 . . 49.3 46.9 70.3 . 43.3 65.1 40.4 60.2

(d) rationalizing subsidies and reducing their overall volume - Subsidy for the year 2003-04 was Rs. 230.89 crore and Rs. 93.35 crore in the year

2004-05 It has been estimated to gradua!!y_reduce to a level of Rs. 59.96 crore by the year 2009-1 0

' 1998-99 Actual 1 1999-2000 Actual I 2000-01 Actual

2001-02 Actual 2002-03 Actual 2003-04 Actual 2004-05 Actual

(e) bringing down the debt-GSDP ratio - The total outstanding'debt as on 31.3.2005 was Rs. 34051.18 crore. It represents

59.1% of GSDP. The Debt Stock was 14751.15'crore in the year 1998-99 (end year), Rs. 18100.80 crore in 1999-2000, Rs. 21001.90 crore in 2000-01, Rs. 24033.60 crore in 2001-02, Rs. 27801.19 crore in 2002-03 and Rs. 31633.96 crore in 2003-04 (end year). The YoY growt6 rate of Debt Stock was 19.1% in the year d998-99 over the previous year,. Similarly, the growth rate.went upto 22.7% in 2999-00 and it has been restricted to 7.6% by the year 2004-05. The Twelfth Finance Commission have recommended that "the long term goal for the centre and state for the debt-GDP should be 28 per cent each." (Para 4.79). .The Orissa FRBM Act of 2005 however stipulates that the Debt to Revenue Receipt ratio should be brought down to 300% by the year ending 31.3.2008. This ratio of debt to Tota1,Revenue receipt was 323.9% in the year 1998-99 and this has been substantially reduced to 287.3% in the year 2004-05. The ratio of debt stock to Revenue Receipt, as projected in the MTFP, has been estimated to be reduced to about 267% by the year 2009-.10, as compared to the target of 300% stipulated in the FRBM Act.

Receipt (%) 41 46 323.9 46 86 307 6 54 23 304.3 56 68 341 .o 62 22 329 4 58.71 335.1 59 08 287.3

,- __.- Year I Ratio of Debt to GSDP (Oh) I Ratio of Debt to Revenue 1

. .

r--- Year I ' Ratio of Debt t o GSDP (%) I Ratio of Debt t o Revenue 1 I

2005-06 Projected in MTFP

2006-07 Projected in MTFP

. Receipt (%)

(56.39 in R.E. for 2005-06) . (253.2% in R.E. $or 2005-06) . 58.6 ' 280.9

57.9 284.5 . I !

2007-08 Projected in MTFP 2008-09 Projected in MTFP 2009-10 Projected in MTFP

ttHI

(54.44% in B.E..for 2006-07) (245.5% in B.E. for 2006-07) 57.2 .276.8 .' 56.2 : 272.1 55.3 ' 267.0 . '

7

FORM - II MEDIUM TERM FISCAL 'PLAN

{ See rule 4 (2) }

,- Description Last Last Year

, available Revised Current Year Targets for Next two

Target Budget years . I

i i i

Revenue Deficit as percentage of GSDP (YO) Fiscal Deficit as percentage of GSDP (%)

I I I I I I

Actual Estimates '' Estimates Y Y + t Y + 2 ,

2004-05 2005-06 2006-07 2007-08 2008-09

-0.91 . -0.81 -0.68 ' - 0.2 .+ 0.1

- 2.37 - 2.23 - 2.40 ' -2.7' - 2.8

. . . .

59.08 56.39 . 54.44 57.16 56.23 !DI XOCK as 3ge of GSDP (%)

6. Assumptions underlying the Fiscal Indicators - Assumption on Gross State Domestic Product:

There is a huge variation in the real growth rate of GSDP from 1999-2000 to 2004-05 (Advance Estimates) in the range of -0.70% to 14.40%. Similarly, the nominal growth rate of GSDP varies from 0.30% to as high as 21.30%. The average growth rate of GSDP in constant prices from 1999-2000 to 2004-05 (AE) is 4.59% and the annual average growth rate of GSDP at Current Prices is 8.57% during the same period. This can be seen from the Table below.

- .;-r-- ..

It is important to mention here that Twelfth Finance Commission'have assumed a nominal growth rate of 11% in GSDP for Orissa (page 383 of the Report). 11 may also be noted that the growth rate of GSDP during the Tenth Five Year Plan was targeted at 6.2% in 1993-94 prices and the actual growth has been 5.7% in the years 2002-03 to 2004-05. Accordingly a moderate Nominal growth rate of 10% per annum in GSDP has been assumed during the period of projection in the MTFP.

,

1. Revenue receipts (a) Tax Revenue - The collection of State's Own Tax Revenue was Rs. 4176.70

crore in the year 2004-05. For. the year 2005-06, Finance Commission have assessed the collection of State's Own Tax Revenue at Rs. 4358.20 crore. The Commission estimated State's Own Tax Revenue for the year 2006-07 at Rs. 4933.48 crore as Twelfth Finance Commission have assumed a Nominal growth rate of 11.00% in GSDP at Current Prices and a buoyancy of 1.20 in State's Own Tax Revenue, thus the total growth rate being 13.20% (page 383 of the Report).

d f

a .

. . Accordingly, the projection made by the Twelfh Finance Commission for the year 2006-07 has been taken as the State's Own Tax Revenue Receipt for that year in, the MTFP. In view of likely phasing out of CST and uncertainty in the trend growth under VAT regime, this level of krojection has been assumed by the State Government.

(b) Non Tax Revenue - The collection of State's Own-Non tax revenue for the year 2003-04 was Rs. 1094.55 crore and for the year 2004-05 was Rs. 1345.52 crore. This receipt includes unusual one-time items such as advance dividend received from OP,GC to the tune of Rs. 30.00 crore for 2005-06 and interest receipt of Rs: 187.48 crore from GRIDCO on account .of overdue power sector bonds I loans

Own Non Tax'Revenue for the year at Rs. 1356.67 crore. Thus after taking out the impact of these one-time receipts, total State's Non Tax revenue is projected at Rs. 1185.75 Crore Gross in the MTFP for the year 2006-07 and accordingly the Non tax revenue has been projected'by taking a growth rate of 5% per annum for the period of projection.

.

b

passed on to GRIDCO. The Twelfth Finance Commission has assessed State's '

?

.

Share Tax

released

(c) Devolution to States - Share Taxes - The actual release of share tax during the year 2004-05 was Rs. 3977.56 crore. Thus taking a modest growth rate of 12.5VO over the actual receipt in the year 2004-05, as .prescribed by the Planning Commission, the share tax f x 4 h e year 2006-07 works out to Rs. 5034.10 crore as against finance 'cohnission estimation of Rs. 5403.19 crore. However, there has been sizable decline in the release of share tax during the Eleventh Finance Commission award period to the tune of Rs. 3663.13 crore compared to the recommendation made by the Eleventh Finance Commission, as can be seen from the table given below.

S h ortfa It in Share

In the i n Central Central Taxes Tax from the cTl::d Estimate

in the estimate Budget

of EFC Centra'

i .

own ! Revenue Year j Items assessed

\ by EFC !

I : .. I

! I

Share in Central Taxes

estimated in the

Central . Budget

' Sharein Central Own Improvement Taxes Revenue. in Own recomm. realised Revenue ended by

' . theEFC

2707.80

3003.39 ,

3063.31

3225.14

2603.97

264a.72

2805 58

3327.68

3977.56

15363.51

3978.02

15977.66

-129 30 -103 83

.m 02 -354 37

-910 33 . -257 73

-1006 53 102 54

-1078 64 -0 46

4653.13 *614.15

c

9

b

Thus, keeping in view such shortfall in the release of central taxes to the States we have assumed Rs. 5089.45 crore of share tax for'the year 2006- 07 in the MTFP and then a Nominal growth rate of 11% assumed over the same in the period of projection. Grants from Central Government (Non Plan) - The major items covered under Non Plan Grant are the grants recommended by the Twelfth Finance Commission. The details of Grants (Non Plan and Plan) covered under Finance Commission are given below.

Apart from these Non Plan grants under Twelfth.Finance Commission, no other non plan grants have been assumed during the period of projection in the MTFP.

Grants from Central Government (State Plan) - The State PIan'Grants from the Centre for the year 2005-06 a i d -2006-07 have been taken as per the decisions taken in the official level discussions for estimating the resources for the Annual Plan ,2006-07 for Orissa. The loan and grant ,component have been taken separately and the loan component of the respective State Plan Schemes have been assumed to be raised from the Open Market Borrowing in each of the years, as recommended bythe Twelfth Finance Commission.' . For the years 2007-08 to 2009-10, a moderate 10% growth in the said grants. from the centre have been ,assumed as was prescribed in'the guidelines for estimating there sources for the Annual Plan 2006-07. However, in case of ACA for externally aided projects, the same, level has been assumed for the subsequent years of projection. Apart from the grants from the Centre, Rs: 1000 crore of SAL from Warfd Bank has been assumed for each of the years beginning 2005-06 to 2009-10. However, out of these World Bank SAL, Rs. 600 crore in.2005-06 and Rs. 400 crore would be utilised towards debt swap each year during 2006-07 to 2009-10 to pre-pay high-cost loans from different sources. As ' i t has been decided that such SAL Ioankredit would be passed on to the States on back-to-back basis, the entire amount has been assumed as 100% loan in each of the years and not as 70% loan and 30%grant as was being done earlier; Grants from Central Government (CP B Csp) - C.P. and C.S.P. grants have been assumed by taking a 10% growth Over the budget estimates for the

I O

year 2005-06 for the subsequent years. However, the expenditure on account of the C.P. and C.S.P. grant have also been assumed at the same ,

level, thereby making the net effect on the revenue account nil.

r

Loan Receipts - Source I 2005-06 1 2006-07 I ' 2007-08 1 200849 1 2009.10 Government of India r -

Non Plan 15.25 _F . 0.00 0.00 0.00 0.00 - Srnall.Savings - NSSF 615.30 615.30 615.30 615.30 615.30 CP LCSP Loans 13.20 0.00 0.00 0.00 ' 0.00 Loans on Account of EAP 1 308.00 391.38 430.52 430.52 430.52

-

. World Bank I 1000.00 Of which for Debt Swap j 400.00 Total Loans from Go1 I 1951.75

3. Total Expenditure - Policy Stance (a) Revenue Account -

(i) Salary 8 Pension - The State Government have taken several measures to contain the ever increasing salary and pension liabilities. Recruitment in all sectors, excluding only essential sectors like police, doctors, nurses etc. has been banned and any recruitment, if required, are being done only on contractual basis in certain categories. Till date the State Government have abolished 38970 number of vacant base level posts (as on 1.1.2006). At the

' same time the Government in Finance Department have also' concurred 74495 number of posts to be filled up on contractual I

1000.00 1ooo.00 1M)o.oo 1ooo.o(1 400.00 400.00 400.00 400.00

2006.68 2045.82 2045.82 2045.82

11

regular basis /creation of new posts and filling up of the same in . .essential sectors in different departments during'2001-02 to October ' 2005. .Steps have also been !ken to.discontinue'. the benefit of

encashment of surrender leave salary to the employees. Similarly, in case of pension Government have introduced

.the Defined Contribution Pension Scheme for all the employees joining on or after 01.01.2005 vide Finance Department Notification . . No:.44451/F dated 17'" September 2005. , .

Subsidies - Subsidies have been substantially, reduced over the years and in the projection for the future years, it has been assumed that general subsidy would be reduced at a rate of 10% per annum beginning 2005-06. However, as per the recommendation of the 12h Finance Commission Food Subsidy amounting to Rs. 36.71 crore pe i annum has been provided for in the MTFP.

(iii) ' Maintenance Expenditure - The Twelfth'Finance Commission have prescribed the minimum level of expenditure for maintenance of roads' and bridges and ,buildings. The Commission have

' recommended that grants on account of maintenance expenditure would be released only if the State 'provides for the minimum

(ii)

. prescribed level of expenditure in maintenance heads like roads €i bridges and buildings etc and steps have been taken to 'maintain such.levels of expenditure for these sectors as well while projecting the expenditure inMTFP. Calamity Relief - The Twelfth Fina'nce Commission have also 's'uggested that the sckrne of CRF be continued in its present form with contributions from Centre and the States in the ratio of 7525. Accordingly provisions have been made towards 'State's share of contribution to CRF in the MTFP tn accordance with the recommendations of the 1 2'h Finance Commission, Others - Also in line with the recommendations of the Twelfth Finance Commission, the State Government haveset up the Sinking Fund ' for amortisation of huge Marke! Borrowings and other borrowings. A Guarantee redemption Fund has' also ' been established to me'et the contingent liability arising out of the total outstanding guarantees. The projection in the MTFP also takes into account the provision for investment in the sinking fundsat a rate o f . 2% of the total outstanding debt at the end of each year. . .

(b) Capital Account - ( i ) Loans 8 Advances - Loans and advances given by the State ,

Government to government employees, cooperatives and, likes was Rs. 1572.01 crore in 2003-04 which included Rs. 1102.87 crore of loans advanced to GRIDCO towards securitisation of NTPC dues and Rs. 204.81 crore to GRIDCO for upgrading transmission and distribution systems under state plan from World Bank, Similarly, in the year 2004-05, the total loans advanced by the'State Government was rs. 205.09 crore but this has been assumed to be gradually reduced over the years during the period of projection in the ,MTFP. Capital Outlay - The total capital outlay in the year 2003-04 was Rs. 852.95 crore which has been increased to Rs. 1055.55 crore in the year 2004-05. This constitutes 1.6% of GSDP in the year 2003-04

(ii)

. 12

- -

!

and 1.8% of GSDP in 2004-05. Twelfth Finance Commission have also recommended that the ' capital expenditure . n,eeds to be increased to 3% of GShP by the year ending 2009-10..Accordingly the,capital outlay as YO of GSDP'has been p;ojected to reach 2.2% in 2005-06, 2.6% in 2006-07,2.6% in 2007-08;2.9% in 2008-09 and 2.94% in 2009-10. However, the Capital expenditure as a whole (Capital Outlay + ,Loans & Advances) has been projected to reach

'from 2.4% in 2005-06 to 2.7% in 2006-07 and'2007-08, 3.0% in 2008-09 and 2009.1 0.

I I

C. Assessment of sustainability relating to - .

' Revenue (+) ' ?e?nue

(i) Revenue Deficit - Revenue deficit for the year 2001-02 was Rs. 2833.74 crore, which was reduced to (-) Rs. 1575.91 crore in 2002-03, (-) Rs. 1420.92 in the year 2003-04 and the revenue deficit for the year 2004-05 has been substantially reduced to (-) .Rs. 522.30 crore. The Twelfth Finance Commission have recommended that the revenue deficit should be eliminated by the year ending 2008-09. Accordingly, in the MTFP, the revenue deficit has been projected to be of the order of Rs. 671.10 crore in 2005-06, Rs. 498.05 crore in 2006- 07, Rs, 158.58 crore in 2007-08 and projection of revenue surplus of Rs. 52.79 crore has been made in the year 2008-09. The State Government have taken various measures for enhancement of collection of State's own revenue and to contain non-productive revenue expenditure in order to achieve the targeted reduction in revenue deficit.

Yo of the Io diverted I meet thc

' Total loan incurred (Gross

Loans + Net GPFl

.r.

(ii) Use of Capital Receipts foil$enerating productive assets - Ideally the capital receipts includifg-the borrowings should be utilised to generate

assets to ensure income for the State Government. However, the perpetual deficit in the tevenue account of the State had compelled the State Government to divert the funds from capital accounts to meet the revenue deficit in the past years. In the early eighties, this diversion was negligible or there was n o such diversion of capital receipts to meet the revenue deficit. However, this diversion reached an alarming level of more than 68% in the

le given below: (Rs. in

Ian ,

!O !

i .' j Year I ' I

. Total revenue revenue expenditure receipt I aencitpj

1997-98 1998.99 1999-00 200041 2001-02

Crore) 1

4632.03 5535.17 -903.14 2189.37 -41.2556 ' 4554.40 6816.90 -2262.50 2924.96 -77.35%

5884.64 8458.83 -2574.1 9 3734.74 ' -68.93% 6902.02 8833.99 -1931.97 3644.59 -53.01% 7047.99 9881.73 -2833.74 3952.56 -71.69%

13

.*-- - -. - --

E Year I

i--

I 2002-03 ! 2003-04

2004-05

Tota' revenue receipt

46 of the loan djverted to Total revenue surplus Revenue (t) incurred ' Total loan (Gross

expenditure .I revenue meet the deficit(.) loans,+ Net GPF) 'revenue deficit

. 0438.77 9440.24 11850.19

This diversion also reached still higher level of 71.69% in the year 2001-02. But there has been sincere efforts to reduce the revenue deficit of the State:Govemment, which has been re'duced from as high as (-) Rs. 2574.19 crore in 199940 to (-) Rs. 522.30 crore in the year 2004-05. Accordingly, the diversion from capital receipts has also reduced from 71.69% in 2001-02 to mere 15.08% in the year 2004-05.

The reduction in the level of diversion of funds from capital account to meet the revenue deficit creates a fiscal space for the State Government to invest in the developmental activities of the State Government. As per.the stipulation made in the O k a FRBM Act of 2005 and also as per the recommendation of the 12" Finance Commission, the revenue deficit is to be eliminated by 2008-09, and thus this diversion of funds from capital receipts to meet the revenue deficit would cease.

10014.68 -1 575.91 5127.63 -30.73% 10861.16. -1420.92 5247.04 -27.08% 12372.49 -522.30 ' 3464.63 -15.0m

BUDGET ESTIMATE 2006-07 - .r . L

The projection made in the Meqium Term Fiscai Plan (MTFP) are indicative only basing on which the Budget esti6aIes are to be prepared on year to year basis. The MTFP envisages rolling talgets, which is dynamic in nature and is to be updated periodically keeping in vie.w the changing circumstances and the latest available actuals. One of the stipulations of the 12" FC for enabling the State Government to claim debt write off is that the fiscal deficit should be contained to the level of 2004-05 and this calls for reduction in borrowing in 2005-06 and 2006-07 onwards. Since, the state pan outlay for 2006-07 has been approved at .Rs. 3500 crore, with .16,33O/0 hike over 2005-06, there is need for higher collection from State's Own. Tax and Non Tax Revenue in order to reduce the requirement of borrowing to finance the State Plan outlay of Rs. 3500 crore. Accordingly the stale's own tax for 2006-07 has been estimated at Rs. 5083.48 crore against Rs. 4933.48 ciore as projected in the MTFP. Similarly the estimate of State's Own Non Tax revenue for 2006-07 has been projected at Rs. 1369.51 crore in place

Further taking into account the latest trends in collection of central'taxes, the share in central taxes for 2006-07 has been assumed at' Rs. 5318.01,,crore in place of Rs. 5089.45 crore projected in the MTFP. On the same ground, 'the estimate of recovery of loans and advances has been kept at Rs. 276.40 crore for the year 2006-07 in place of Rs. 121:26 crore as projected in the MTFP. Higher assumption of State's Own Tax and Non Tax Revenue, recovery of loans and advances and share taxes in the Budget Estimate for the year.2006-07 has resulted in reduction in estimate of borrowings for the said,year.accordingly.

of Rs., 1185.75 crore assumed in the MTFP. . .

.

14

FROM -'I11 DISCLOSURE STAT.EMENT

{ SeeRule-6)

SIX TIER CODING PATTERN IN STATE BUDGET

In the existing Budget Coding System, seven digit code below the'Minor Head is being followed. Moreover under the existing system there are more than onesub head I detailed heads in between Minor Head and Object Head. This resulted in:-

1. Indeterminate level for sub-head, detailed head and object head: 2 The present coding system needed some fine tuning to be in conformity with Rule 26 of

Govt. Accounting Rules 1990 and the General direction contained in 'List of Major and Minor Head of Account' published by the Controller General of Accounts, God. of India.

After introduction of V.L.C. system of accounts in the office of the A.G., Orissa, it was:felt necessary to review and restructure the coding pattern of the existing budget heads below the Minor Head of Account by the State Government. For adoption of six tier coding a number of meetings of officers of Finance Department and Officers of A.G., Orissa were held. It was finally decided to revise the existing budget heads to six tier numeric coding patter and to follow the revised classification from 2006-07 i.e. in the Annual B d g e t to be prepared for that year.

The budget heads below the Minor Heads have now been'restructured to be fitted into the six tier coding pattern to be compatible with the accounting system followed by the Accountant General.

. , - .7- -

The six tier coding as prescribed is as follows - Existinq Revised

Major Head 1s' Tier 4 digits 4 digits Sub Major Head 2nd Tier 2 digits . 2 digits Minor Head 3! Tier 3 digits 3 digits Sub Head 4th Tier 7 digits 4 digits Detailed Head 5lh Tier 7 digits . 5 digits' Object Head , 6th Tier 7 digits 3 digits

In order to differentiate the accounting levels below Minor Heads lhe 4 digit code has been assigned to sub-heads where as 5 digit code has been assigned to detailed heads and 3 digit code to object heads. In order to analyse the budget data the detailed heads are taken as units for objec!s 0 1 expenditure. To identify the expenditures in respect of the objects of the same unique group, code number has been assigned to each group or object. Therefore, the 5" level Le. the detailed head which has been assigned with 5 digit code number includes the 1s' 2 digit for group code and the rest 3 digit for the specific expenditure.

,

The modification in coding pattern as explained above to make it compatible with A.G.'s accounts and for easy retrieval of information will in no way affect the analysis of budget and computation of prescribed fiscal indicators.

. .

15

FORM - V STATEMENT OF DEFERRED LIABILITIES

{ See Rule 8 } .

- While presenting the Annual Budget for the current year, the State Government shall furnish statement showing the deferred liabilities on the following accounts : . .

i) State's matching share 0 State's matching share under Centrally Sponsored Plan schemes not

provided for in the previous years and the deficit of,such'State share in the

0 Deficit in the State share under different Centrally Sponsored Plan schemes ' at the end of 2005-06 has been estimated at around Rs.235.00 crore under State Plan on the basis of likely receipts estimated by the Departments;' . During 2006:07, the State share' provided under State Plan,' is Rs.501.83 crore excluding Rs.167.42 crore provided, under Non-Plan for Sarba Sikhya Abhiyan Sci,eme in the budget of S c M & Mass Educatim Department. As per the information supplied by various Departments.there would be additional requirement of around Rs.330.00' crore which .is based on assumption of higher allocation of Central assistance during 2006-07. With improvement'in resourcSs'and reduction in unproductive expenditure it may be possible.to provide additional fund towards State share depending on the flow of Central assistance and progress of utilization. .

. current financial year. .. , .

ii) Bills presented in the treasury but not en-cashed :-

As on 31.03.2005 bills presented in the Treasury but not encashed is Nil,

iii) Central Assistance received but not utilized at the end of a particular financial year :-

As per the information supplied by various Administrative Departments, out of the Central Assistance received upto'31.03.2005, the U.C. pending as on 1.4.2005 was Rs.2150.66 crore and as on 1.1.2006 U..C. pending in respect of Central Assistance received upto 31.03.2005 is, Rs.689.89 crore. The Central . Assistance received during 2005-06 is being utilized along with unuticzed Central Assistance as on 1.4.2005.

iv) Un-disbursed amount lying in the Civil Deposits: Major part of balances lying in Civil Deposit relate to Central and

Centrally Sponsored Plan Scheme Funds released by Government of India towards the fag end of the financial year. In order to avoid lapse of Budgeted provision under these Schemes, the State Government resort to Civil Deposit. In case of urgent necessity provisions under Non Plan State Plan were also transferred to Civil Deposit. By this expenditure under-the scheme could be taken

I

16

I .....

up in the next financial year without making fresh Budget provision. The balances lying in Civil Deposit are part of the deferred liability of the State Government.

The transfer of Budgeted funds to Civil Deposit is declining from the year, 2002-

Croie ) 03 as may be seen from the Table below : ,-

. ,

Since.transfer of Budgeted funds to Civil Deposit distorts the total expenditure reflected in the accounts, Finance Department have issued several instructions in 2004: 05 and 2005-06 prohibiting such transfer. . Releases .from. Civil Deposit. are. being regulated by instructions issued from Finape Departmentbom time to time based on actual requirement at a particular point of time and actual preparedness for spending the money. During 2005-06 Finance Departmzt- have accorded concurrence for release of Rs.79.59 crore from Civil Deposit.

t

i

. .

17

A n n e x 6

Debt Sustainabilitv Note’

This Note on Debt Sustainability examines the impact on debt and debt servicing ratios of the ongoing reform program of the Government of Orissa, and of Bank financing of this program through a programmatic series of Development Policy Loans. The Note also analyzes the sensitivity of the outcomes to exogenous shocks, such as growth, fiscal and exchange rate shocks. The Note concludes that if Orissa follows the fiscal reform path envisioned in its Medium-term Fiscal Plan (2005-10) and institutionalized through the Orissa Fiscal Responsibility and Budget Management Act 2005, it w i l l no longer be a debt stressed state by 2009/10; and this projection is unlikely to be derailed even if there is a significant exchange rate shock.

Orissa has been classified by the Ministry o f Finance, Government o f India, as a ‘debt stressed’ state, on the basis of two indicators as recommended by the Twelf th Finance Commission (TFC)2:

Debt-Revenue ratio higher than 300% -- in Orissa i t was 335% in 2003104 Interest-Revenue ratio greater than or equal to 20% -- in Orissa i t was 30% in 2003/04.

This Note considers and uses the Interest-Revenue ratio as the single most important indicator o f the degree of debt stress. This i s because (i) an important developmental cost o f unsustainable debt i s the pre-empting o f revenue resources for debt servicing, and (ii) given init ial conditions o f high inherited debt, Orissa has relatively more room to reduce the interest-revenue ratio, including through debt-swaps and pre-payment o f expensive debt.

The Government o f Orissa (GOO) has implemented a number o f fiscal correction measures which have brought about considerable improvement in the state’s finances during 2001-05. N o t only has the primary (non-interest) fiscal balance been converted from a deficit o f 6.5% in 1999-00 into a surplus o f over 2% of GSDP in 2004-05 and in 2005-06, but Go0 has also made maximum use o f available debt restructuring and swapping possibilities with the Government o f India. In addition, Go0 has used part o f the proceeds o f the first Development Policy Loan (OSEDL-I) f rom the Wor ld Bank to pre-pay expensive debt to domestic financial institutions, and intends to use future such operations in a similar manner. The ratio o f outstanding debt to revenue, which was above 330% during 2001-04, has fallen below 300% in 2004-05. The interest to revenue ratio has declined f rom 40.2% in 2001-02 to an estimated 25.2% in 2005-06.

With average real economic growth expected to be around 6% and average real interest rate o n outstanding debt at around 5%, the state could run a small primary deficit and sti l l stabilize i t s debt ratio. However, given the high level o f inherited debt, Goo’s target i s to f i r s t reduce the debt and debt servicing ratios significantly before stabilizing them, by achieving and maintaining a significant primary surplus over the medium term.

T h i s note has been prepared by Pooja Churamani, SASPR, under the overall guidance of V.J. Ravishankar and Marina Wes. T h e TFC also recommended a tolerable level o f debt-GSDP o f about 35% for most states in India. Given the legacy o f h igh

past debt, it would take more than a decade for Orissa to achieve this ratio, unless the next Finance Commission recommends further debt write-off for the good performers and/or if growth exceeds 6% as envisaged in this analysis

1

Annex 6 Figure I: Indicators of Public Debt under Reform Scenario, 2003-2020

( In percent)

40 4 30

2o 10 t --- . 335 \- \- I 3 0 0

30

100 17

Debt-GSDP - Interest-Revenue - - Debt-Revenue I I -

T h e M e d i u m - T e r m F isca l P l a n (MTFP) for the p e r i o d 2005-10, tab led in the Or i ssa Legis la ture along with t h e 2006-07 annual budget on Februa ry 14,2006, pro jects a primary f isca l surplus o f around 2% of GSDP on average during 2005-10. Ou ts tand ing deb t i s pro jected to dec l ine to b e l o w 275% a n d interest b e l o w 20% o f to ta l revenue by 2009-10.

The analysis presented in this Note draws o n the results o f the fol lowing alternative scenarios o projected finances o f the Government o f Orissa. Assumptions that are common to a l l the scenano mclude: (i) inflat ion at 5% throughout the period 2005-2020, and (ii) interest rate in the domesti market r ising gradually f rom 8% in 2007-08 to stabilize at 10% in the long run: (1) Re fo rm Scenario with D P L Financing: In t h s scenario, G o 0 sustains a pnmary fiscal surplus o

2% o f GSDP during 2005-10 o n average, then at 1% during 2010-15 and at 0.6% dunng 2015- Real GSDP growth is assumed at 5% ti l l 2009110 and 6% thereafter. In addition t o O S E D L in 2004-05 and the second m 2006107, a third and fourth operation are ass 2007108 and 2008109 respectively, amounting to a cumulative total o f $625 m i l l i o n financing during 2004-09;

(2) G o 0 Reform Scenario without D P L Financing: With the same projected primary balance an GSDP growth as in the previous scenario, D P L financing i s excluded and replaced with financin at market terms o f interest, w i th 3 years grace and 7 years maturity.

(3) N o Reform Scenario: This i s a counterfactual scenario, generated for the purpose o f assessing impact o f reforms, wherein GSDP growth i s maintained at a historical 8-year average o f 3. (1994/95-200112) and the p r m a r y deficit i s maintained at 0.9% throughout the project ion penod;

(4) Status Quo Scenario: This reflects what wou ld happen if G o 0 achieves n o further fisca correction, but maintains a pnmary fiscal surplus o f 0.7% o f GSDP during 2004-20

2

Annex 6 I. Fiscal impact of Go0 s Reform Program

The No Reform Scenario shows that if Onssa had not introduced fiscal reforms in 2001102, then debt would have been unsustainable, touching almost 80% o f GSDP in 2019-20 and interest rising to above 30% of revenue by 2016. That the major part o f macro-fiscal correction has already been undertaken i s borne out by the fact that the Status Quo Scenario shows a marked improvement over the No Reform Scenario, with debt and interest ratios declining steadily throughout 20 10-20. However, the status quo i s not adequate for Orrssa to achieve the milestone o f reducing interest to below 20% o f revenue by 2009/10 (Figure 2a & 2b) and the analysis suggests that a higher primary surplus should be maintained, in order to bring debt indicators to comfortable levels by 2009/10.

30

25

20

15

Fiscal Impact of Reforms

Interest -to-Revenue Ratio (%) -. ~ 32,6 - -\ -

- -

Figure 2 a

30

20

10

0

Debt-teGDP ratio (%)

. 36.0

. - A2. Status Quo

. " " " " " " " " '

_ / e -

42.2

Figure 2 b I

lo j , , , -,; ;;f;;:;;a:; , , , , , , , , , , , , , I A1 .No Reform

A2. Status Quo 5

0 2003 2005 2007 2009 2011 2013 2015 2017 2019

2. Impact of DPL Financing

The impact o f DPL financing has been estimated on the basis o f comparing the outcome o f GOO'S reform scenario with and without such financing. T h i s comparison shows that development pol icy lending, as a result of i t s concessional interest rate, long maturity and significant grace period, results in a substantial improvement in debt indicators over the medium to longer run. In the absence of DPL financing, the ratio of interest to revenue would be almost 7 percentage points higher in 2019/2020 - at 24.7% compared to 17% if there was DPL financing available. Without DPL financing, i t would not be possible for Orissa to achieve the target o f reducing interest to below 20% o f revenue, and thus emerge out o f i t s debt-stressed condition, even by 2019/20. Further, in the absence o f DPL financing and associated pre- payment o f high cost o ld debt, about Rs. 38 b i l l ion (1.4% o f GSDP) in 2019/20 would be used towards debt servicing instead o f for productive investments and developmental initiatives. Thus, D P L financing enables Orissa to emerge out o f debt stress much faster than otherwise (Figure 3).

3

Annex 6 Figure 3

Without DPL financing: Interest-Revenue (I%)

35 1

Go0 Reform Scenario

Go0 Reform scenario w/o DPL

3. Sensitivity Analysis

The government’s reform scenario was subjected to various sensitivity tests to assess the vulnerability to exogenous shocks. A one standard deviation shock to GSDP in 2007-08, i.e., if GSDP growth falls to - 1.4% in that year, results in a one or two year delay in achieving the target o f interest less than 20% o f revenue (Figures 4a & 4b).

Figure 4a

70

60

50

40

30

20

10

0

Debt-to-GDP ratio (%)

36.0

-Go0 Reform Scenario

__ - - Bl . Growth Shock B2. Fiscal shock

I

2003 2005 2007 2009 2011 2013 2015 2017 2019

Figure 4b

35

Interest -to-Revenue Ratio (YO)

20

15

-GOO Reform Scenario B1. Growth Shock B2. Fiscal shock loi_, 5 , , , , , , , , , , , , 0

2003 2005 2007 2009 2011 2013 2015 2017 2019

4

Annex 6 Besides the growth shock, other shocks such as shocks to the primary balance (fiscal shock), a combination o f f iscal and growth shock, a one time increase in debt creating flows (increase in contingent liabilities) and a depreciation shock have also been analyzed. In al l o f these cases, the three debt indicators stabilize at a higher leve l compared to the reform scenario and all indicators stabilize after the shocks subside.

4. Depreciation and its effect on Debt

The impact o f currency risk assumes importance given that DPL financing wil l be passed by the center to states on back-to-back terms, following the recommendations made by the Twel f th Finance Commission in 2005. The sensitivity analysis shows that a substantial nominal depreciation o f the rupee against the dollar - by 43% in 2010 - does not constitute a threat to debt sustainability in the long run. This i s because foreign currency denominated debt constitutes a small proportion o f total state debt in Orissa, despite including $625 mi l l ion o f four D P L operations and some project financing. The interest-revenue ratio stabilizes at a slightly higher level o f 17.9% as against 17% without depreciation o f the rupee (Figures 5a & b).

Figure 5a Figure 5 b

35 , I 400 1 Interest -to-Revenue Ratio % I 350 c Debt-to-Revenue Ratio ( O h )

15 1- Go0 Refo rm Scenario-

B4 nominal depreciation in currency 5

- - - - B4 nominal depreciation in currency in 20 10

2003 2005 2007 2009 2011 2013 2015 2017 2019 2003 2005 2007 2009 2011 2013 2015 2017 2019

5

07/06/2006

Annex 7

Statement of Loans and Credits

Project Name RAJASTHAN HEALTH SYSTEMS DEVELOPMENT ALLAHABAD BYPASS AP Comm Forest Mgmt AP DPlP AP RURAL POV REDUCTION Assam Agric Competitiveness CFC PRODTN SECTOR CLOSURE ODS 111 INDIA Chatt DRPP DISEASE SURVEILLANCE ELEMENTARY EDUCATION PROJECT (SSA) Food & Drugs Capacity Building Project GEF Biosafety Project GUJARAT HWYS Grand Trunk Road Improvement Project Gujarat Emergency Earthquake Reconstruct Hydrology II IN SME Financing & Development IN-TA for Econ Reform Project India Tsunami ERC KAR WSHD DEVELOPMENT KARN HWYS KARN Tank Mgmt KARNATAKA RWSS iI KERALA RWSS KERALA STATE TRANSPORT Karn Municipal Reform Karnataka Panchayats Strengthening Proj Karnataka UWS Improvement Project Lucknow-Muzaffarpur National Highway MAHAR RWSS MAHAR WSlP MIZORAM ROADS MP DPlP MUMBAI URBAN TRANSPORT PROJECT Madhya Pradesh Water Sector Restructurin Mid-Himalayan (HP) Watersheds NAlP NATIONAL HiGHWAYS 1 1 1 PROJECT ODS IV-CTC Sector Phaseout Project Power System Development Project Ill RAJ DPEP II RAJ WSRP RAJASTHAN DPlP REN EGY II Rural Roads Project TECHN EDUC 1 1 1 TN Empwr & Pov Reduction TN HEALTH SYSTEMS TN ROADS TN Urban 1 1 1

Project ID FY PO50655 2004 PO73776 2004 PO73094 2003 PO45049 2000 PO71272 2003 PO84792 2005 PO69376 2000 PO76467 2003 PO73651 2005 PO55459 2004 PO75056 2003 PO79865 2004 PO10566 2001 PO71244 2001 PO74018 2002 PO84632 2005 PO86518 2005 PO59501 2000 PO94513 2005 PO67216 2001 PO70421 2001 PO71033 2002 PO50653 2002 PO55454 2001 PO72539 2002 PO79675 2006 PO78832 2006 PO82510 2004 PO77856 2005 PO73369 2004 PO84790 2005 PO69889 2002 PO59242 2001 PO50668 2002 PO73370 2005 PO93720 2006 PO92735 2006 PO09972 2000 PO85345 2005 PO86414 2006 PO55455 2001 PO40610 2002 PO10505 2000 PO49770 2000 PO77977 2005 PO50658 2001 PO79708 2006 PO75058 2005 PO50649 2003 PO83780 2006 PO72123 2003 PO50657 2000 PO67606 2003 PO50646 1999 PO50647 2002 PO78550 2004 Uttar Wtrshed 69.62 63.19 -2.03 Overall Result 6339 5259.45 139.38 469.23 7180.16 2104.14 286.62

IBRD IDA GRANT Cancel. 89

108 111

150.03 154

240

85.34 112.56 20.06

68 500

54.03 1 .oo

38 1 101.00 589

442.8 80.23 104.98

120 45 12.03

100.4 20.06

98.9 25.07 151.6 15.04 65.5 12.27

465

360

255 216

39.5 620

325

120

181

60

463 79

60 200

110.1 20.06

394.02

51 6

400 53.04

74.4 140 15.04

100.48 80 50 18.00

99.5 300 64.9 120

110.83 20.06 348 300

250 40.11 110 30.09

488 194.1 149.2 40.11

55.49 203.00 165.45 35.92

400.00 26.87 85.91 40.59 41.70

273.40 14.20

109.70 81.91

269.76 283.29

Difference between expected and actual

disbursements Undisb. Orig. Frm Rev'd

76.87 34.77 168.52 96.52 56.31 -3.79 15.97 7.64 47.91 9.45

141.52 13.76

89.82 37.12 62.00 14.07

101.61 -105.68 44.66 22.43

0.76 0.71 38.76 139.76 108.76

236.51 236.51 146.26 153.74 14.36 104.46 26.11 0.30 19.40 4.40 19.08 27.13 1.80

400.66 152.37 52.41 56.79 39.93 89.32 64.32 61.44 51.70 -2.11 85.80 58.03 18.06 16.82 3.10

138.78 35.78 216.00 120.83

24.68 -1.96

28.39 16.29

143.16 15.98 293.18 -19.82 35.31 11.95 16.08 23.05 -8.59

377.76 158.96 371.58 38.01

-2.06

524.23 -35.77

165.45 65.45 -3.12

16.94 46.48 31.42 26.38 57.98 56.98

-25.59 8.11 -2.95

6.22 9.73 64.46 9.04

-6.85

164.80 57.44 -23.58 37.74 57.77 0.74

348.50 155.66 8.96 5.30 -3.69

101.71 104.35

Annex 7

INDIA Statement o f IFC's

Held and Disbursed Portfolio As o f 4/30/2006

(In U S Dollars Millions)

Held Disbursed

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi 2005 2006 2005 2005 2002 2003 2005 2003 2004 200 1 2003 200 1 2005 1984 200 1 2003 1990 1992 2004 2004 2002 2005 2005 2003 2005 2003 2006 2001 2006 1994 2003 1998 2006 1998 2005

2006 1995 2006 1996 2001

ADPCL AHEL AP Paper Mills APIDC Biotech ATL ATL ATL BHF BILT BTVL Balrampur Basix Ltd. Bharat Biotech Bihar Sponge CCIL CCIL CESC CESC CGL CMScomputers COSMO COSMO DCM Shriram DQEL Dabur Dewan Federal Bank GTF Fact GTF Fact GVK HDFC IAAF IAL IDFC IDFC IHDC IHDC IL&FS VC Indecomm India Direct Fnd Indian Seamless

40.77 0

35 0

14.15 1

9.69 10.64

0 0.72

12.41 0 0

5.83 6

1.5 6.87 9.82

15 0

3.75 0

30 0 0

10.75 0 0 0 0

100 0 0 0

50 7.16 8.15

0 0 0 6

7 5.08

5 4 0 0 0 0 0 5 0

0.98 0 0 0 0 0 0 0

10 0

3.73 0

1.5 14.09

0 31.5

1.2 0 5 0

0.47 9.86

10.82 0 0 0

0.03 2.57

1.1 0

0 0 0 0 0 0 0

10.64 15 0 0 0

4.5 0 0. 0 0 0 0

2.5 0 0 0

1.5 0 0 0 0

0.99 0 0 0 0 0 0 0 0 0 0 0 0

2

0 0 0 0

9.36 0 0 0 0 0 0 0 0 0

5.75 0 0

21.89 0 0 0 0 0 0 0 0 0 0 0 0

100 0 0 0

100 0 0 0 0 0 0

0 0

15 0

14.15 0.68

0 10.64

0 0.72

12.41 0 0

5.83 6

0.59 6.87 9.82

8 0

3.75 0

30 0 0

10.75 0 0 0 0

100 0 0 0 0 0 0 0 0 0 6

0 5.08

5 1.24

0 0 0 0 0 5 0

0.98 0 0 0 0 0 0 0 0 0

3.73 0

1.5 14.09

0 27.43

1.2 0 5 0

0.3 7.7

10.82 0 0 0

0.03 2.57 0.66

0

0 0 0 0 0 0 0

10.64 15 0 0 0

3.3 0 0 0 0 0 0 0 0 0 0

1.5 0 0 0 0

0.99 0 0 0 0 0 0 0 0 0 0 0 0

Annex 7 1992 2006

2005 2005 2003 2002 2003 2001

1996 1999 2000 200 1

2003 2004 2003 2001 1997 2006 2004 1995 2004 1995 2004 2005 2005 2001 1997 2000 1995 2004 2001 2003

2004 2000 2002 1998 2005 2004 1996 2005 2002 2001 2005 1997

1997

Indus VC Mgt CO JK Paper K Mahindra INDIA KPIT L&T MMFSL M S S L MahInf ia Montalvo Moser Baer Moser Baer Moser Baer

Nevis NewPath NewPath Niko Resources Orchid Owens Coming PSL Limited Powerlinks Prism Cement RAK India Rain Calcining Rain Calcining Ramky Ruchi Soya SBI S R E I S R E I Sara Fund SeaLion Spryance Spryance Sundaram Finance Sundaram Home Sundaram Home TCW/ICICI TISCO UPL United Riceland United Riceland Usha Martin Vysya Bank Vysya Bank WIV Walden-Mgt India

NIIT-SLP

0 15

22 11 50

8.69 0 0 0 0 0

12.41 8.37

0 0 0

24.44 0

6.83 15

75.34 5.54

20 0

10 3.86

10 50

3.21 7 0

4.54 0 0

44.32 0

7.39 0

100 16.48 6.25

8.5 0 0 0 0

0

0.01 11.5

0 2.5

0 0

2.29 10 3

0.82 8.74

10.54 0 4

9.31 2.79

0 0.73

0 5.19

0 0 0

2.3 0

10.61 10 0 0 0

3.43 0

1.9 0.95

0 2.18

0 0.8

0 0 0 0

0.72 3.66 3.51 0.37

0.01

0 0

0 0 0

7.76 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0

0

0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1.5 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0

300 0 0 0 0 0 0 0

0

0 0

22 4

50 8.69

0 0 0 0 0

12.41 0 0 0 0

24.44 0

6.83 0

66.24 5.54

20 0

10 0 0 0

3.21 7 0

4.54 0 0

44.32 0

7.39 0 0

16.48 6.25

3 0 0 0 0

0

0.01 11.26

0 0 0 0

2.2 0.79 1.08 0.82 8.74

10.54 0 4

8.31 2.49

0 0.73

0 4.98

0 0 0

2.3 0 0

7.5 0 0 0

3.43 0

1.9 0.95

0 2.18

0 0.8

0 0 0 0

0.72 3.66 3.51 0.37

0.01

0 0

0 0 0

7.76 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0

0

Total Portfolio: 931.38 230.79 42.89 538.5 563.55 175.61 39.19

3

Annex 7

2004 2000 2004 2006 2001 2006 2001 2004 2005

2006

CGL APCL CIFCO IDFC B Inc Vysya Bank Federal Bank GI Wind Farms Ocean Sparkle Allain Duhangan Lok Microfinance

Approvals Pending Commitment Loan Quasi Equity Quasi Partic

10 0 0 0 0 7.1 0 1.9 0 0

0 22.07 0 22.07 0 0 0 0 0 100 0 0 0 0 0

10 0 0 0 0 9.79 0.98 0 0.98 0

3 0 0 0 0 0 0 0 0 0

0 0 2 0 0

Total Pending Commitment: 39.89 23.05 3.9 23.05 100

4

Annex 8

2003 2004

Agriculture 35.2 30.4 21 .o 19.6

Manufacturing 16.4 16.9 15.4 16.0 Services 38.7 42.5 52.5 53.2

Household final consumption expenditure 69.0 66.2 62.9 60.7 General gov't final consumption expenditure 10.8 10.7 11.2 11.3

(% of GDPj

Industry 26.2 27.1 26.4 27.3

Imports of goods and services 7.9 10.3 16.1 21.0

India at a dance 6/21/06

Growth of capital and GDP (%) 20

10

0

- i o

-GCF - O I G D P -

POVERTY and SOCIAL

2004 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1998-04

Population (%) Labor force (%)

Most recent estimate (latest year available, 1998-04)

Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1.000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Literacy (% ofpopulation age 15+) Gross primary enrollment I% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

GDP (US$ billionsj Gross capital formationlGDP Exports of goods and servicesiGDP Gross domestic savingdGDP Gross national savingslGDP

Current account balance/GDP Interest payments/GDP Total debtlGDP Total debt service/exports Present value of debffGDP Present value of debffexports

(average annual gromfhj GDP GDP per capita Exports of goods and services

1984

206.5 21.6

6.5 18.8 19.4

-1.4 0.5

16.5 18.3

1984-94 1994-04

5.4 5.8 3.3 4.1 9.0 13.3

lndia

1,079.7 630

680.3

1.6 1.9

29 29 63 62 47 86 61

107 111 104

1994

322.6 23.4 10.0 24.8 26.0

-1.2 1.3

31.8 26.6

2003

8.3 6.7 5.8

South Asia

1,447 590 859

1.7 2.1

29 63 66 49 84 61

103 108 97

2003

600.7 27.2 14.8 28.9 32.0

1.7 18.4 19.2 12.6 16.7 87.4

2004

8.5 7.0

39.3

Low- income

2,343 51 0

1,188

1.9 2.2

31 58 79 43 75 61

100 105 94

2004

694.7 30.1 19.0 29.1 31.4

-1 .o 16.8 17.5 7.3

2004-08

6.9 5.5

)eveloprnent diamond' I Life expectancy

T GNI

capita per i

Gross primary

enrollment

Access to improved water source

lndia Low-income group -

Economic ratios'

Trade

Domestic Capital savings formation

Economic ratios'

Trade

Domestic Capital savings formation

Indebtedness

lndia Low-income group

(average annual growth) 1984-94 1994-04 2003 2004 1 Growth of exports and imports (%)

Agricuhre 3.4 2.1 10.0 Industry 6.3 5.7 7.6

Manufacturing 6.2 5.5 7.1 Services 6.7 8.1 8.2

Household final consumption expenditure 5.7 5.3 8.9 General gov't final consumption expenditure 4.8 6.0 2.4 Gross capital formation 5.0 6.1 15.8 12.8 Imports of goods and services 8.4 11.0 16.8 41.9

Note: 2004 data are preliminary estimates. 2004 represents Indian Fiscal Year 2004-05, which runs from April 1 to March 31. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomolete.

14&4 19134

4 'I i I; 7 4 ! i f

1984 $994

1984 1994

1984 19J4

ZUQS 2QO4

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Annex 8

India Social Indicators

POPULATION Total population, mid-year (millions)

Urban population (YO of population) Total fertility rate (births per woman)

POVERTY (% of population) National headcount index

Urban headcount index Rural headcount index

Growth rate (% annual average for period)

INCOME GNI per capita (US$) Consumer price index (2000=100) Food price index (2000=100)

INCOMElCONSUMPTlON DISTRIBUTION Gini index Lowest quintile (% of income or consumption) Highest quintile (% of income or consumption) S OCl AL INDICATORS Public expenditure

Health (YO of GDP) Education (% of GDP)

Net primaly school enrollment rate (% of age group)

Male Female

Access to an improved water source (% of population)

Urban Rural

Total

Total

Immunization rate (“h of children ages 12-23 months)

Measles DPT

Child malnutrition (YO under 5 years) Life expectancy at birth (years)

Total Male

. Female Mortality

Infant (per 1,000 live births) Under 5 (per 1,000) Adult (15-59)

Male (per 1,000 population) Female (per 1,000 population)

Births attended by skilled health staff (%) Maternal (modeled, Per 100,000 live births)

Latest single year

1980-85

765.1 2.1

24.3 4.4

290 28 28

1 l a

57 57 57

97 146

261 279

1990-95

932.2 1.9

26.6 3.4

36.0 32.4 37.3

380 69 76

3.7

68 88 61

72 71 53

61 61 62

74 104

236 24 1

34

1998-2004

1,079.7 1.6

2.9 28.5

28.6 24.7 30.2

620 117 i oa

32.5

43.3 8.9

1.2 4.1

87 90 a4

86 96 a2

56 64 47

63 63 64

62 a5

24 1 161 540 43

Same regionlincome group

South Asia

I ,446.8 1.7

28.3 3.1

594 115

1 . I 2.4

aa 90 85

a4

ao 94

61 67 48

63 63 64

66 92

237 169 564

36

Low- income

2,343.0 1.9

30.6 3.7

507 120

1.3 3.1

79

75 a2

75 89 69

64 67 43

59

60

79 122

300 246 682

40

58

Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCEDE to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey.

World Development Indicators database, World Bank - 5 April 2006.

MAP SECTION

KORAPUTKORAPUT

GANJAMGANJAM

CUTTACKCUTTACK

BAUDABAUDA

DHENKANALDHENKANAL

KENDUJHARGARHKENDUJHARGARHBALESHWARBALESHWAR

MAYURBHANJMAYURBHANJ

SUNDARGARHSUNDARGARH

SAMBALPURSAMBALPUR

BALANGIRBALANGIR

KALAHANDIKALAHANDI

MALKANGIRIMALKANGIRI

RAYAGADARAYAGADA

NU

APA

RHA

NU

APA

RHA

JHARSUGUDA

JHARSUGUDA

BARGARHBARGARH

PHULABANIPHULABANI

SONAPURSONAPURANGULANGUL

BHADRAKBHADRAK

JAGATSINGHPURJAGATSINGHPUR

KENDRAPARAKENDRAPARA

JAIPURJAIPUR

KHORDHAKHORDHA

NAYAGARHNAYAGARH

NABARANGAPUR

GA

JAPATI

DEOGARHDEOGARH

PURIPURI

KORAPUT

GANJAM

CUTTACK

BAUDA

DHENKANAL

KENDUJHARGARHBALESHWAR

MAYURBHANJ

SUNDARGARH

SAMBALPUR

BALANGIR

KALAHANDI

MALKANGIRI

RAYAGADA

NU

APA

RHA

JHARSUGUDA

BARGARH

PHULABANI

SONAPURANGUL

BHADRAK

JAGATSINGHPUR

KENDRAPARA

JAIPUR

KHORDHA

NAYAGARH

NABARANGAPUR

GA

JAPATI

DEOGARH

PURI

Koraput

Dhenkanal

Phulabani

Sundargarh

Sambalpur

Bhawanipatna

Malkangiri

RayagadaNabarangapur

NuaparhaBalangir

Jharsuguda

Bargarh

Bauda

Parlakimidi

SonapurAngul

Cuttack

Kendujhargarh

Baripada

Baleshwar

Bhadrak

Puri

Jagatsinghpur

Kendrapara

Jaipur

Chhatrapur

Nayagarh

Deogarh

BHUBANESHWAR

ANDHRA PRADESH

WESTBENGAL

BIHAR

MADHYA

PRADESH

R.

Vansadhara R.

Tel R.

Mahanadi R.

Devi

BrahmaniR.

Brahmani R.

Baitarani R.

Bay of

Bengal

Mahanadi R.

R.

Indravati

82° 84° 86°

82° 84° 86°

22°

20°

18°

22°

20°

18°

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

INDIA

STATE OF ORISSADISTRICT CAPITALS

STATE CAPITAL

DISTRICT BOUNDARIES

STATE BOUNDARIES

0

0

20

20

40

40

60 80

60 MILES

100 KILOMETERS

IBRD 33341

AU

GU

ST 2004