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Select a strategy :
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Strategic Objective 1:
Increased Transparency and Efficiency in the Allocation and Mobilization of Resources in Selected States
Problem
While India today is a large and vibrant $440 billion plus economy-one of the twelve largest in the world-it still has the world's largest concentration of people in poverty-more than 300 million. This figure equals the combined number of impoverished in all of Africa and Latin America .
To reduce poverty, economic growth must accelerate. International experience clearly indicates the positive relationship between growth and poverty reduction, and between sound economic policy and poverty reduction. According to India 's Tenth Five-Year Plan, in order to reduce the absolute number of those living in poverty, the country must achieve and sustain real economic growth rates of 7 to 8%. Although First Generation Reforms of the past decade enabled India to achieve average annual growth rates of 6.5%, these earlier growth rates have not been sustained and have actually decelerated (4.0% in 2000-2001).
A set of Second Generation Reforms is necessary to achieve sustainable higher rates of growth that can substantially reduce the absolute number of people living in poverty. This requires not only massive additional capital investments in physical and social infrastructure, and increases in domestic and foreign investment, but also better allocation and management of existing resources to achieve sustained economic growth and more equitable development.
Constraints
Current critical constraints to economic growth in India are linked to under investment in the social and physical infrastructure that supports increased productivity. The alarmingly large fiscal deficits of central and state governments severely constrain investments in infrastructure and the productive sectors. The strategy will therefore address poor management of public resources; rapidly growing fiscal deficits; inefficiency in the allocation of financial resources; inadequate physical and social infrastructure to serve a rapidly growing population; and an agricultural sector that remains the single largest contributor to income and employment but that suffers from extremely low productivity.
Financial Sector
India 's First Generation Reforms made significant progress toward achieving a more transparent and efficient financial system. Major changes occurred in the capital markets. These earlier capital market reforms focused on improvements in the efficiency of market infrastructure, the effectiveness of regulatory oversight and transparency in the operations of market intermediaries. In order to further enhance the operational transparency of the market intermediaries, the surveillance, enforcement and disclosure practices regulated by the government need to be improved; investor education, corporate governance, and dispute resolution mechanisms need to be strengthened; and the government needs to support insurance and pension reforms.
India 's insurance sector, until recently a public sector monopoly, is plagued by low market penetration, inefficient mobilization and allocation of resources, and inadequate supervision. The situation is no different in the pension sector. Insurance companies and pension organizations together mobilize only 4% of annual GDP ($15 billion), over 90% of which is used in either low yielding government securities or bonds of poorly performing public sector companies. The insurance and pension markets, respectively, cover around 18% of the insurable population and 11% of the working population. As a result of such low coverage, the infrastructure sector, which has the greatest need for long-term funds, continues to be starved of much needed investments.
Access to timely and efficient financial services (credit, savings, as well as insurance and pensions) is critical for India 's 60 million poor households if they are to take advantage of the economic opportunity created by reforms. Creation of an enabling policy and regulatory environment that promotes the growth of sustainable micro finance institutions is key to achieving broad-based economic growth and development in India .
Public Fiscal Management
The importance of reducing the fiscal deficit under the Second Generation Reforms cannot be overstated and is strongly emphasized in the 2000-2001 Indian national budget. High annual fiscal deficits in the 1980s were a root cause of the 1991 economic crisis. Yet the central and state governments have still been unable to reduce the gap between their revenues and expenditures. Heavy borrowing to finance the rapidly growing deficits increases real interest rates, crowds out the private sector's ability to raise resources and reduces investment in infrastructure and the social sectors, such as health and education. This not only slows economic growth but also severely constrains the ability of the poor and unemployed to escape poverty.
Over time, the quality and outreach of public services has deteriorated due to fiscal stress. This has harmed the poor more than any other segment of society. The segments of the population that can afford it switch to private sector service provision, leaving the poor as the primary users of public service systems. As the middle class switches from public schools and health facilities to private facilities, for example, the quality of the publicly provided health and education services continue to deteriorate, further affecting the poor. Severe investment deficiencies in urban infrastructure have resulted in shortages in potable water, declining quality in sewerage, drainage, wastewater management, waste disposal, transport, and housing. This has led to the spread of unsanitary and largely unserviced slums. Inadequate investment in social and physical infrastructure not only affects quality of life, but also prevents the poor from gaining the ability to influence their own economic and social destinies.
One of the prime causes of poor fiscal decision-making within government (especially within state government finance, treasury, and planning departments) is insufficient capacity to analyze and track the fiscal implications of policy, regulatory and procedural decisions. While government and donor-driven programs have focused primarily on sectoral reforms, few have addressed the need to strengthen technical competencies and upgrade critical management and information systems (MIS) of these departments that influence and monitor resource mobilization and allocation. Without improving fiscal management and discipline within these departments, sectoral reforms cannot be made sustainable, and the overall impact of continued donor aid will not be maximized.
Municipal Services
The 74th Constitutional Amendment Act of 1992 delegated the primary responsibility for urban management to local governments. Cities and towns now form critical parts of states' fiscal structures and are responsible for the delivery of primary health care, education, and urban infrastructure services. However, implementation of the act has been slow. Urban local governments have inherited responsibility without the corresponding tax and expenditure authorities to carry out those responsibilities. A consensus among national, state and local governments, and external donors has emerged on the direction of needed reforms to improve the functioning of local governments. The core issue in these reforms is establishing financial viability and discipline to make cities more creditworthy and public works projects more "bankable." The total investment needed to meet urban infrastructure requirements has been estimated at $600-$850 million per year. Existing public sector funding sources only meet a fraction of these requirements-approximately $100 million per year. It is the urban poor who suffer most from the lack of resources for better infrastructure services and the poor management of existing resources. India 's capital market is the best potential source of investment resources to close the financing gap.
Agricultural Sector
The productivity gains from Green Revolution technologies have essentially ended, yet Indian agricultural policy remains dominated by incentives instituted three decades ago to encourage farmers to adopt high-yielding rice and wheat varieties. The increasing subsidy costs of inputs (i.e., fertilizer, irrigation, and power) constitute a serious misallocation of public resources at the national and state levels, further aggravating the fiscal deficit. Concurrently, a costly food subsidy, which originally assured the minimum price for rice and wheat, is now used to purchase 80% of the marketable supply of rice and wheat, discouraging private food grain marketing and distorting on-farm production and resource allocation decisions. Rather than diversifying into other crops, farmers continue growing food grain for which there is no market other than the government food parastatal. Food grain stocks may soon reach 80 million tons, more than four times India 's emergency needs.
In spite of paralyzing fiscal deficits, most elected officials are extremely wary of reducing agricultural subsidies for fear of offending their rural constituencies. Both elected officials and their constituents may be more amenable to change if they can sense the possibility of alternative, better futures.
Economic Governance
The effort to implement Second Generation Reforms, and increase the transparency and efficiency of resource mobilization and allocation in India, will require considerable changes in attitudes. The level of understanding and discourse by the broader public on policies and regulations related to economic governance must be enhanced. Ensuring that those groups who stand to benefit from reform not only understand their interests but also are able to participate in the governance process is an essential part of the economic reform effort. A better informed public debate on economic reform and stronger constituencies supporting economic governance reforms must be created.
This highlights the need to create opportunities for key civil society groups to analyze, discuss, and debate the implications of policy, regulatory, and institutional reforms-especially in areas where the economic reform process has been slow. As economic liberalization progresses across sectors, it is important to give voice, through the creation of such opportunities, to groups that may be adversely affected by reforms initially. Improved economic governance can empower these groups to help ensure and sustain a more equitable sharing of the benefits of reform. This will require efforts aimed at supporting reformers at the state level; strengthening corporate governance and disclosure practices; enhancing the competence of municipal leadership to improve the overall policy, legal, and institutional environment for domestic and foreign investors; and developing strong local institutions and deepening popular participation in support of improved service delivery.
Technology Use
The communications revolution has been instrumental in promoting more open policies for international trade and capital flows, and can be a powerful tool to help integrate India more fully into the global economy. Information and communications technologies (ICT) can be used to deliver multiple social, economic and public services (health, education, agriculture, commerce, public information, and governance) in the absence of widespread service delivery networks. To date, little emphasis has been placed on ICT as a tool for India 's domestic development. Of the small number of initiatives that do exist, few have demonstrated commercial viability and sustainability. Given India 's resource scarcity, the introduction and demonstration of commercially viable models becomes critical.
The extent to which India can use technology, especially ICT, to accelerate development and bring the benefits of the knowledge-based economy to the poor will depend on the policies promoted and the infrastructure established. The government has made major progress toward introducing a pro-competitive framework in recent years to attract investors, but several serious questions remain about its policy program. Further, the recently passed Convergence Bill of 2001 repealed five existing laws and merged telecom, IT, media and broadcasting. Unless the capacity of the regulator for this sector is appropriately enhanced, more damage than good may be done. The 1930s US Federal Communications Commission (FCC) model could offer guidance in this area.
Rationale
USAID India's Economic Growth Strategic Objective is consonant with the Agency's Economic Growth, Agriculture, and Trade pillar and consistent with the GOI's Tenth Five-Year Plan. It is based on the hypothesis that accelerated, broad-based economic growth is essential to reduce poverty and that large additional capital investments are required, especially in physical infrastructure (power, roads, ports, and water supply) and social services (health and education). Agricultural sector reform becomes critical in this effort since it comprises 26% of GDP, yet continues to suffer from extremely low productivity of resources. The needed capital investments can be generated by mobilizing net additional resources and improving the allocation of existing resources, which in turn, requires: an improved policy and regulatory environment and market practices that influence public and private sector financial and investment decisions; increased technical competence of state and local governments to better analyze the fiscal implications of policy, regulatory and procedural decisions; and better management information systems and application of cutting edge technology that reduce the transaction costs of doing business.
Comparative Advantage
Multilateral aid organizations have limited grant funds to finance the kind of capacity building indicated in the above discussion, especially at the state and local government levels. Multilateral assistance takes the form of large loan packages for broad budgetary support while the states initiate reform. USAID, on the other hand, has considerable comparative advantage to respond to India 's needs in the above-referenced areas. Specifically, USAID:
- Can respond to India 's interest in accessing grant and other loan funds to initiate systemic changes;
- Has a wide range of international expertise and experience in financial sector institutional capacity building, urban management and finance, and economic policy analysis and institution building;
- Has recognized experience in agricultural policy analysis and access to an outstanding system of agricultural science and expertise in biotechnology and agribusiness. This experience includes a history of successful collaboration with India to launch the Green Revolution;
- Has done considerable work on state and local fiscal issues around the world;
- Can draw upon US organizations, such as the Securities and Exchange Commission (SEC) and the FCC, to address institutional and regulatory reforms that increase investor confidence and promote citizen empowerment;
- Has been a leader in setting the agenda and supporting urban sector reforms in India, and has the unique opportunity to build upon this successful experience;
- Has the respect of many key Indian policy-makers and scientists who have been trained in the US and understand the benefits of interacting with US scientists, analysts, and business people; and
- Remains the undisputed leader in cutting-edge technologies (USAID has rich experience in ICT development under the Leland and Internet for Economic Development Initiatives).
Assumptions
Achievement of the SO is based on the following key assumptions. They will be carefully monitored for their continued validity and relevance during program implementation:
- Sufficient political stability to enable the GOI to continue to pursue economic reforms, at the center and state levels, in the areas of financial markets, fiscal management reform, and the agriculture sector; and
- Civil society and strong vested interest groups, when provided with sufficient opportunity and appropriate platforms, will actively engage in, and not derail, the reform process.
Target Groups
The SO targets the following broad sets of beneficiary groups, key representatives of which were consulted in developing this strategy:
- Investors, both domestic and foreign;
- Poor households not currently part of the mainstream financial services market;
- Poor communities in urban and rural areas;
- Selected state government finance and planning departments; and
- Selected state level treasury operators.
Geographic Focus
There is a growing consensus that impact and results from donor interventions will be greater at the state level. Therefore, IR 1.2 and 1.3 interventions will be focused on selected states, while IR 1.1 activities will remain focused at the national-level, as will a large part of IR 1.4 (especially related to agricultural policy). IR 2-related activities will be focused on Karnataka, a relatively reform minded state, Uttar Pradesh (UP), a relatively slow reforming state, and Jharkhand, a newly formed state (recently created from part of the state of Bihar). Rajasthan is a potential fourth candidate.
In selecting states for intervention under this SO, the following criteria were used:
- The perceived demand for the proposed assistance;
- Opportunities for synergies between the activities proposed under the economic growth strategy and other SOs (especially with the energy portfolio, which is one of the largest recipients of subsidies, and the health portfolio);
- The ability to partner with and leverage other donor resources, especially investment resources (World Bank, Asia Development Bank, etc.); and
- The need to select states at different stages of development in order to maximize the demonstration effect.
Impact Measurement
The success of the Economic Growth SO will be measured by the following illustrative indicators, which will be finalized following approval of the strategy:
- Increased resources mobilized through market mechanisms;
- Increased investment by state governments in social infrastructure; and
- Increased investment by private sector in infrastructure services.
Intermediate Results
IR 1.1 Increased Capacity of Financial Markets to Conduct Efficient Intermediation
Decades of virtual control and ownership of the country's financial system by the Government of India has compromised the efficiency and transparency of the country's financial markets. This has resulted in: low productivity of investment, manifested by continually low returns on investments; stagnation in the share of household savings in the form of financial assets; and low penetration of financial services. The government has taken several significant steps in the recent past to reduce its presence in the financial markets. Simultaneously, it has created independent regulatory agencies to support orderly development of the various segments of the markets. Promoting regulatory competence, strong institutions, and sound market practices are critical to building greater investor and consumer confidence and increased mobilization of household savings in the form of financial assets. Sustainable microfinance institutions will also help deepen the financial intermediation process.
USAID activities will: improve the efficiency, integrity and outreach of both the equity and debt markets; develop a vibrant, efficient and sound contractual savings (insurance and pension) sector; and develop an enabling regulatory and institutional framework for the growth of sustainable microfinance.
Illustrative Activities
- Strengthening systems and market practices related to securities market surveillance and enforcement;
- Strengthening the competence of the insurance regulator and market support institutions to create a safe and financially sound insurance market;
- Establishing and promoting pension system reform and developing sound employee benefit programs through training and objective research; and
- Supporting the development of prudent regulatory and reporting standards and performance benchmarks for microfinance institutions.
Illustrative Indicators
- Increased investments in capital market (tradable) securities (both equity and bonds); and
- Increased use of generally-accepted financial and management standards by microfinance institutions.
IR 1.2 Increased Capacity of and Public Support for State Governments to Strengthen Fiscal Discipline
Major structural weaknesses in state public finances are negatively influencing the allocation and mobilization of resources at the state level. In 1999-2000, India 's consolidated deficit stood at 10% of GDP, with the states responsible for 50% of this deficit. Much of the current fiscal crisis facing the states is largely the result of state-level policy choices, rather than events outside of their control. States finance their deficits by increasingly heavy borrowings on capital markets. They are borrowing to finance such unproductive investments as wages and salaries, civil service pensions, and interest on past debts. They contain their deficits by reducing their capital expenditures for investments in social and physical infrastructure. Increased market borrowings for deficit financing has raised real interest rates, constraining the private sector's ability to raise funds for investment. Reduced state and private sector investment in infrastructure, especially in the health and education sectors, particularly affects the poor, the unemployed, and the illiterate who are heavily dependent upon public services and programs.
USAID activities will: promote fiscal discipline through increased technical competence of relevant state government departments and civil society organizations; create knowledge networks to share best practices and raise awareness; and introduce better management information systems to improve the quality and analysis of fiscal and other economic data.
Illustrative Activities
- Establishing fiscal analysis units (in all target states) within finance departments and enhancing their technical competence for better policy analysis, performance budgeting, and monitoring and adjustment of the mid-term fiscal frameworks. This activity
would link the state level fiscal analysis units via an e-network and meetings to share experiences;
- Strengthening state government treasury operations in selected states and linking them via e-network and at the national level to discuss common issues and share best practices;
- Assisting in improving the management information systems of state-level planning and statistics departments and other relevant departments (e.g. health and education) to improve data collection, analysis, and information dissemination and coordination; and
- Training for state legislators, members of local government, the media, and NGOs to strengthen their understanding of the budget, economic policy decisions, and trade-offs and reporting thereof.
Illustrative Indicators
- Decreased percentage of days during the previous Indian fiscal year that treasuries in selected state governments are in overdraft; and
- Policy analysis cells established in key state government departments.
IR 1.3 Increased Capacity of Urban Local Governments to Raise and Allocate Resources
Fiscal decentralization from state to local governments is critical for the financial viability of both. The financial viability of cities is critical to investor confidence in business ventures targeting cities, and to the managed growth of state urbanization. By transferring authority to local governments, state governments will reduce pressures on their budgets, and eventually be able to reduce their subsidies for municipal services. Severe investment deficiencies in urban infrastructure plague most Indian cities. Public sector sources currently meet only about 12% of the estimated investment requirements. With rapidly increasing urbanization, local governments must make greater efforts to generate revenues, and create more opportunities for private sector investment and participation to meet ever-growing demands for basic urban services.
Activities will promote urban fiscal reform to sustain a predictable flow of resources from local, state, and private sources to fund urban infrastructure on a long term basis.
Illustrative Activities
- Promoting municipal economic development policies that maximize land and infrastructure resources, and generate increased revenues from existing and new businesses;
- Creating state level infrastructure funds and pooled financing mechanisms for development and financing of urban infrastructure;
- Strengthening municipal financial management, accounting, and asset and property management systems; and
- Assisting in the creation and operation of city manager associations to share and transfer, within and between states, urban management experience and best practices among local government officials.
Illustrative Indicators
- Amount of resources raised by urban local governments in selected states through market-based mechanisms; and
- Number of urban local governments adopting improved accrual based and double entry accounting practices.
IR 1.4 Increased Capacity of Policy, Technology and Trade to Improve Farm and National Level Resource Allocation
Understanding the high opportunity cost of agricultural subsidies, GOI officials recognize the need for a new revolution in Indian agriculture. The revolution would be initiated by a wave of decontrol and deregulation to create a new investment climate, which mobilizes and reallocates resources within the sector. Over the short term, this will include the removal of restrictive practices that have limited private sector purchase, storage, processing and transport of agricultural products including food grain. This will have to be complemented by improvements in targeted food grain distribution programs, which will allow India to draw down its extraordinary food grain stocks in ways that benefit its most vulnerable households. Over the longer term, sustaining the new investment climate must encompass changes in agricultural policy and technology. This will improve productivity, and promote competitiveness and integration with the global economy.
Illustrative Activities
- Revitalizing food and agricultural policy to reduce sectoral subsidies, improve household food security, encourage crop diversification, promote private investment in agricultural product processing, and create new sources of growth and employment;
- Promoting collaborative ventures that generate, adapt and diffuse cutting edge technologies in agriculture, telecom and other key development sectors;
- Supporting independent business groups, consumer advocacy and pro-reform NGOs, professional associations and think tanks to conduct research and analysis and participate in public debate on economic reforms; and
- Utilizing roundtables, public hearings, and town hall type meetings to identify reform and investment priorities for state, district and local governments.
Illustrative Indicators
- Decreases in selected agricultural subsidies;
- Increased private sector share in food grain marketing;
- Lower cost of food grain available through commercial channels;
- Increased food grain consumption among low-income households;
- Increase in crop diversification;
- Increased value added and employment in food and agricultural processing; and
- Increased citizen knowledge about state and local budgets, government budget trade-offs and key government reform issues in selected states and local governments.
Relationship to Other Strategic Objectives
This SO has strong links to the other strategic objectives in that it addresses fundamental state-level fiscal and financial management in selected states where other SO activities also target state government activities. It is unlikely that interventions in the other sectors will be sustainable unless national and state governments create a policy and regulatory environment that strengthens investor confidence, opens up the economy, and encourages competition.
Activities under this SO to increase mobilization of financial resources through the capital markets will increase resources for private business formation and expansion, and investment in infrastructure. This will lead to growth in employment and income, and reductions in infrastructure service gaps. Better urban infrastructure services, especially in poor slum communities, combined with improved health practices, will improve the health status of the urban poor. Improvements in policies governing microfinance will help to increase economic opportunities for vulnerable groups and low income women. Improved state fiscal management will help state governments shift public spending away from costly subsidies and services that could be better provided by the private sector, to high priority social services such as education and health. This will help create more opportunities for vulnerable populations and improve the health status of the poor. In the longer term, this will also provide more solid socio-economic and financial footing for the country to better withstand the ravages of disasters. The SO will specifically coordinate with the Health and Energy-Water SOs to target reform minded states in an effort to have maximum impact on improving reallocation of resources currently used for power, agricultural and health sector subsidies.
Donor Coordination
During the development of this SO, USAID coordinated closely with other donors that are currently or may become engaged in targeted areas of assistance. This coordination will continue during strategy implementation to avoid duplication and maximize synergy. Specifically, USAID is coordinating with the following donors:
- The World Bank (WB) is assessing the integrity of India's capital markets, the Asian Development Bank (ADB) is completing a study of India's bond market for presentation to government and stakeholders, and both ADB and the WB are interested in supporting pension reform;
- In the area of microfinance, the British Department for International Development (DFID), German Technical Agency and Swiss Development Cooperation agency are providing onward lending and capacity building within specific state-owned institutions active in microfinance;
- ADB and WB are providing budgetary support loans to selected states (Uttar Pradesh, Karnataka, Gujarat , Kerala, Andhra Pradesh, Madhya Pradesh) to assist in fiscal restructuring and management reforms. DFID is providing technical assistance in three selected states (Andhra Pradesh, Orissa, Madhya Pradesh), but lacks the resources to expand to other states;
- WB announced an urban sector investment strategy, particularly targeting private-sector participation in infrastructure. WB and USAID are cooperating to promote urban development in Tamil Nadu, and enabling states and cities to use municipal bonds and support municipal accounting reforms; and
- USAID's assistance in information and communication technology will focus on policy and regulatory assistance, demonstration of commercial viability, and creating networks at the state and local government levels to share experiences and best practices, areas in which other donors are not focused.
Strategic Objective 2 - Health >>
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