Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 40230-IN

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR

A PROPOSED LOAN IN THE AMOUNT OF US$150 MILLION

AND

A PROPOSED CREDIT IN THE AMOUNT OF SDR 47.8 MILLION (US$75 MILLION EQUIVALENT)

TO

THE REPUBLIC OF INDIA

FOR

THE FIRST BIHAR DEVELOPMENT POLICY LOANKREDIT

November 20,2007

Poverty and Finance India Country Management Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS (As of November 20,2007)

Currency Unit: Indian Rupee

APMC ATMA

APEP

ADB ADRI BARC BDPL

BSIDE

PCN DfID DPL DDO EMIS FRBM

GDP GIS GOB Go1 GSDP

Rs. 1 U S $ l .oo

Agriculture Product Marketing Control Agricultural Technology and Marketing Agency Approach Paper for Eleventh Plan

Asian Development Bank Asian Development Research Institute Bihar Administrative Reforms Commission Bihar Development Policy Loadcredit

Bihar State Infiastructure Development Enabling Project Concept Note Department for International Development Development Policy Loan Drawing & Disbursement Officers Education Management Information System Fiscal Responsibility and Budget Management Gross Domestic Product Geographic Information System Government o f Bihar Government of India Gross State Domestic Product

IC IDA

IBRD

US$0.0254 19 Rs. 39.34

JBIC MoU M&E NABARD

PHC

PFM PMGSY PPP PRI RCD RSVY

RTO SIPB SSA TRR VAT

Investment Climate International Development Association

International Bank for Reconstruction and Development Japan Bank for International Cooperation Memorandum of Understanding Monitoring & Evaluation National Bank for Agricultural and Rural Development Public Health Centre

Public Financial Management Pradhan Mantri Gram Sadak Yojna Public Private Partnership Panchayati Raj Institutions Roads Construction Department Rashtriya Sam Vikas Yojna

Regional Transport Office State Investment Promotion Board Sarva Shiksha Abhyan Total Revenue Receipt Value Added Tax

Vice President: Country Director: Senior Manager: Sector Director: Ernesto May, SASPF Sector Manager: Ijaz Nabi, SASPF

Prahl C. Patel, SARVP Isabel M. Guerrero, SACIN Fayez S. Omar, SACIA

Task Team Leaders: Ahmad Ahsan and Dipak Dasgupta, SASPF

Bihar DPLoadCredit Team Members: Vikram Chand, Mark Dutz, Suhail Kassim, Deepak K. Mishra, Mohan Nagarajan, Ambar Narayan, Binayak Sen, Niraj Verma, Tara Vishwanath, Ananya Basu, Pralhad Burli, Bhaskar Naidu, Sapna John, Rita Soni, Shahnaz Ahmed (SASPF); Kapil Kapoor (AFMZM); Mandakini Kaul (SACIA); Vikram Raghavan (LEGES); Sr i Kumar Tadimalla (SASDT); Clive Harris (SASDO), Mohan Gopalakrishnan (SARFM); Joel Turkewitz (SAWS); Ernesto Sanchez-Triana (SASDN); Biswajit Sen (SASDA); Smita Misra (SASDU); Varalakshmi Vemuru (SASDS); Mohini Malhotra (WIND); Deepa Sankar, Jagmohan Kang, Philip B. O'Keefe, Samuel Carlson (SASHD); Ashish Khanna (SASDE); Ashok Kumar (SASDA); Raj Nallari (WBIPR). Peer reviewers: Hassan Zaman (PRMPR) and Mark Sundberg (IEGCM). DfID Team: Chris Chalmers, Debashree Mukherjee, Jenny Amery, Mukhmeet Bhatia, Meenakshi Nath, Padma Kumar; ADB Team: Hiranya Mukhopadhyay

FOR OFFICIAL USE ONLY

I. 11.

111.

Iv.

V.

VI.

VII.

A PROPOSED FIRST BIHAR DEVELOPMENT POLlCY LOAN AND CREDIT TO THE REPUBLIC OF INDIA

Table of Contents INTRODUCTION 1 THE COUNTRY AND STATE CONTEXT A. Recent Political and Economic Developments in India B. India’s Challenge o f Inclusive Growth C. Bihar’s Development: Challenges, Recent Reforms and Signs o f Turnaround D. Political Economy o f Reform and Momentum o f Change

THE GOVERNMENT OF BIHAR’S REFORM PROGRAM A. Pillar 1 : Stepping-Up Public Investment and Strengthening Public Financial Management

and Governance Fiscal Policy and Public Financial Management Governance, Administrative Reforms and Local Governments

B. Pillar 2: Raising Economic Growth Rate Through Agriculture, Investment Climate Reforms and Infrastructure

Revitalizing Agriculture Creating an Enabling Investment Climate Roads, Power, and Building New Platforms for Providing Infrastructure

Education Health Social Protection

C. Pillar 3 : Improving Public Service Delivery in the Social Sectors

BANK SUPPORT TO THE GOVERNMENT’S PROGRAM A. Link to India’s Country Strategy and Rationale for Bank Support B. Collaboration with other Development Partners C. Relationship to other Bank Operations D. Lessons Learnt from other State DPL Operations E. Analytical Underpinnings and Technical Assistance

THE PROPOSED OPERATION A. Objectives, Sequencing and Proposed Impact B. Policy Areas

OPERATION IMPLEMENTATION A. Poverty and Social Impact B. Implementation, Monitoring and Evaluation C. Fiduciary Aspects D. Disbursement and Auditing E. Environmental Aspects

2 2 4 6 9

9

10 10 15

17 17 18 19 22 22 24 25

28 28 29 30 31 32

33 33 35

38 3 8 39 42 43 44

RISKS AND MITIGATION 46

ANNEXES

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

11

ANNEXES ANNEX A: GOVERNMENT OF BIHAR’S LETTER OF DEVELOPMENT POLICY AND POLICY MATRIX ANNEX B: GOVERNMENT OF BIHAR’S DEVELOPMENT PARTNERSHIP FRAMEWORK ANNEX C: THE NEW CENTER-STATE REVENUE SHARING FRAMEWORK AND BIHAR’S PUBLIC FINANCE ANNEX D: DETAILED PUBLIC FINANCIAL MANAGEMENT REFORM ACTION PLAN ANNEX E: TECHNICAL ASSISTANCE FOR CAPACITY BUILDING ANNEX F: M F PUBLIC INFORMATION NOTICE ANNEX G: INDIA AT A GLANCE

ANNEX I: MAP: INDIA-BIHAR (m 353 11) ANNEX H: INDIA OPERATIONS PORTFOLIO (lBRD/IDA)

... 111

Borrower Implementing Agency Amount

Terms

Tranc hing

Description

Benefits

i i s k s and vlitigation

PROGRAM SUMMARY FOR A PROPOSED

FIRST BIHAR DEVELOPMENT POLICY LOAN AND CREDIT TO THE REPUBLIC OF INDIA

State o f Bihar

Credit: SDR 47.8 mi l l ion (US$75 mi l l ion equivalent) Loan: US$150 mi l l ion. Credit: Standard IDA terms; 35 years maturity with 10 years o f grace. Loan: Payable in 20 years including 5 years o f grace period; at the standard interest rate for LIBOR-based variable spread US Dollar single currency loans. The loan and credit proceeds for the operation are to be disbursed in two equal tranches o f US$75 mi l l ion and SDR23.9 mill ion, respectively. Under the operation’s design, al l key actions for release o f the f i rst tranche have been taken pr ior to Board Presentation. Disbursement o f the second tranche i s expected in FY 2008-09, conditional o n fulf i l lment o f the pr ior actions for the second tranche. The proposed operation supports the broad-based medium term program o f the Government o f Bihar (GOB). The overarching objective o f the operation i s to support the implementation o f critical structural reforms to attain sustainable and inclusive development over the medium-term, while improving the delivery o f key public services. The operation’s pr ior actions and tranche-release conditions focus specifically o n three areas: (i) improving fiscal policy, public financial management; and governance; (ii) raising economic growth through reforms in agriculture, investment climate and basic infrastructure, with an emphasis o n roads; and (iii) improving public service delivery in education, and social protection. Consistent with the objectives o f the Bank’s India Country Strategy, the proposed operation supports measures to institutionalize fiscal reforms and sustain rapid and inclusive economic growth in one o f India’s largest and poorest states. Fiscal reforms and measures to strengthen public financial and administrative management should allow more effective utilization o f centrally allocated funds for Bihar and more Sffective public spending and development results, whi le creating more fiscal space and meeting i t s fiscal responsibility obligations. Improvements in governance and administrative reforms wil l also spur improvements in the broader investment climate m the state, and hence, to greater private investment and growth. Growth-enhancing Jolicies in agriculture will a l low the state to capitalize o n i t s most abundant resources md comparative advantages o f land, labor and water, whi le improved roads will mprove the connectivity between rural and urban areas and integration o f the xonomy with the rest o f fast-growing India and the rest o f the world. Access to mproved social services in education and anti-poverty social welfare programs with :ffective poverty monitoring are critical for improving human capital in the state and ichieving Mi l lennium Development Goals (MDG). The Bank’s support for the xogram i s complemented by coordinated assistance f rom the Government o f India ‘GoI), and development partners, including the Asian Development Bank (ADB) and he UK Department o f International Development (DfID) The proposed operation faces five main risks, common to many other similar contexts. The design o f the operation includes steps to mitigate and manage these risks. (i) First,

iv

3peration ID Vumber

there i s a potential risk o f losing the current reform momentum or change in the Government priorities and commitment to reforms. This risk i s mitigated by the planned focus o f the operation on areas o f reforms that can quickly deliver tangible benefits o n the ground, thereby building o n an existing and broad-based constituency for sustained reform (anchored by legislation or administrative regulation where appropriate). In addition, the risk i s reduced by the planned operation that supports creating space for other stakeholders to participate, namely c i v i l society, private sector, and rural local bodies or panchayati raj institutions (PRIs); (ii) Second, implementation o f reform may be slower than planned because o f significant institutional capacity constraints. T o mitigate this risk, a parallel technical assistance program financed by DfID grants and managed by the Bank i s being simultaneously undertaken, both in terms o f immediate needs to address key areas o f support in this operation, and to strengthen more medium-term capacity building efforts with coordinated support f rom other partners, including DfID; (iii) Third, fiduciary r isks are high in Bihar, especially given institutional and organizational weaknesses. This risk i s addressed by the operation’s emphasis o n specific measures to improve public financial management, governance and anti-corruption initiatives, and i t s support for transparency, disclosure, and other demand-side interventions. Measures to strengthen public financial management include increasing the credibility o f the budgetary process, predictability and control in expenditures and budget execution, public procurement, accounting, recording and reporting and external scrutiny and audit. These measures will take time, and the r i s k mitigation strategy, therefore, focuses on immediate priorities and appropriate sequencing, including a focus o n key expenditure l ine authorities in the state government, including the Departments o f Finance, Roads, and Rural Development; (iv) Fourth, there i s a risk o f deterioration in security and the law and order situation. T h i s risk cannot be mitigated directly and will rely on the Government o f Bihar’s commitment to improved security; and (v) Fifth, there are r isks arising f rom frequent natural disasters, such as floods, that may defer or derail reform momentum. Risk mitigation measures not directly included in this operation, but supported elsewhere, include supporting Bihar’s efforts to strengthen and sustain i t s disaster and f lood management framework. Whi le successful full r isk mitigation in al l these areas i s unlikely, the strengthening o f the measures over time and the potentially large payoff f rom improving the lives o f mill ions o f poor people in one o f the poorest states in India makes this a worthwhile balance o f rewards-to-risk operation. P102737

V

PROGRAM DOCUMENT FOR

A FIRST BIHAR DEVELOPMENT POLICY LOAN AND CREDIT TO THE REPUBLIC OF INDIA

I. INTRODUCTION

1. Bihar is a crucial state for poverty reduction and inclusive growth in I n d i a While India has emerged as one o f the fastest growing countries in the world, i t faces the challenge o f addressing widening economic disparities across i t s sub-national entities. Bihar - located in the north- eastern part o f India bordering Nepal and Uttar Pradesh, with a population o f 90 mi l l ion and a per capita income around $160 - i s India’s third most populous, poorest as we l l as one o f i t s slowest growing states. One in seven o f India’s poor resides in Bihar, with about 39 percent o f population in poverty compared to 23 percent for all-India.’

2. With a reformist government at the helm, Bihar appears to be poised for an economic turnaround. With arable land, water resources, favorable demography, unexploited tourism potential and a large diaspora o f slulled professionals in government and private sector a l l over India - Bihar has the necessary preconditions to accelerate development. But it has long been held back because o f weak governance, distorted policies and poor ly functioning institutions. The current Government, which came into office in November 2005, has initiated extensive reforms: f rom improving public financial management practices to delivering better public services. The results are encouraging: the l a w and order situation i s improving, private investment i s picking up, more central government funds are being utilized than before and citizens report improved infrastructure and public services.

3. The World Bank has been expanding its engagement in Bihar and the proposed operation is an important step in that direction. In the 2004 Country Strategy, the Bank expressed i t s intention to go as far as possible in opening up new engagements with the largest and poorest (Indian) states - involvement in Bihar being an important element. During the last three years, the Bank has stepped up i t s engagement through knowledge products, capacity building activities and new lending initiatives. The Bank report “Bihar: Towards a Development Strategy (2004),” was a f i rs t comprehensive analysis o f the developmental challenges and opportunities facing the State. The Rural L ivel ihood Project, approved by the Bank Board in June 2007, was the f i rst single-state investment operation in Bihar after a gap o f three decades. This proposed operation i s based on deepened pol icy dialogue and accelerated Bank analytical work and technical assistance to the State.

4. The proposed operation is part of a larger framework of support by development partners to Bihar. I t will follow the structure of previous sub-national DPLs to India. Along with the Bank, several development partners including Asian Development Bank (ADB) and UK’s Department for International Development (DfTD) are also preparing in close coordination a substantial and accelerated program o f long term assistance to the State, with support f rom Japan expected in parallel. The f i rst Bihar Development Policy Loadc red i t (BDPL-I) will be part o f this larger framework o f development partner support (see Annex B) and the f i rst in a series of programmatic budget support operations. The size and composition o f the DPLs will fo l low the

’ Surveys commissioned by the Government o f Bihar suggest that poverty estimates from other sources may even be higher, on the order o f 45-50 percent o f the households in poverty, using Below Poverty Line indicators to define poverty.

guidelines o f the Government o f India (GoI), currently set at about US$225 mi l l i on with a two- thirdone-third IBRD/IDA composition and disbursed in two-tranches.

5. The proposed DPL will assist Bihar towards achieving the development goals set out in its Eleventh Plan. A subset from the Government’s broader program of reforms will be the focus of the DPL support. The overall objective o f the DPLs will be to accelerate growth and improve public service delivery, which are the themes o f Bihar’s Eleventh Plan.* The key features o f the wide ranging reforms o f the Government o f Bihar, both what they have implemented and their medium term reform plan are presented as the heart o f this document in Part 111. The reforms addressed by BDPL-I will address the Government’s immediate priorities in: ($fiscal and public financial management and governance reforms; (ii) agricultural and investment climate reforms and infrastructure to raise economic growth; and (i i i) strengthening public service delivery in education and social protection. The rationale for this selective set o f pr ior actions and triggers are explained in Section V. In parallel with BDPL-I, a technical assistance program financed by DfID Trust Fund grants and managed by the Bank i s being undertaken to augment the Government o f Bihar’s (GOB’S) capacity to implement i t s overall reform program.

6. Somewhat similar to the case of Bank operation in countries emerging out of a history of weak governance, this operation poses considerable risks. A budget-support operation in Bihar wi l l involve several r isks and hence steps to mitigate them (see Section VII): (i) there i s a potential risk o f losing the current reform momentum and change in the Government priorities and commitment to reforms. This risk i s mitigated by supporting reforms that can deliver tangible benefits quickly and create higher expectations and a constituency for reform (that are anchored by legislation or administrative regulations where appropriate); (ii) given GOB’S weak capacity, implementation risk i s significant. This risk i s reduced by a strong emphasis o n technical assistance activities and by creating space for other stakeholders to participate, namely c iv i l society, private sector and panchayati raj institutions (PRIs); (iii) fiduciary r isk i s high in Bihar, especially with rising public spending, and i s addressed by an emphasis o n governance and anti- corruption initiatives, procurement and financial management reforms; (iv) there i s a risk o f a deterioration in security; and (v) finally, there are risks arising f rom natural disasters that may defer or derail reform momentum (floods are frequent in Bihar, see B o x 1). Whi le full risk mitigation i s unlikely, the potentially large payoff f rom improving the lives o f mi l l ions o f poor people makes this a worthwhile balance o f rewards-to-risk operation.

7 . The rest of this Program Document is organized as follows. Section I1 presents the Country and State context. Section I11 presents key aspects o f the Government o f Bihar’s broad-based program o f reforms. Section IV discusses how the Bank i s supporting these reforms, while section V presents the three specific pol icy areas supported by this operation. The details o f implementation, including the fiduciary and disbursement arrangements and monitoring and evaluation are presented in section VI, while the r isks and mitigation strategies are presented in section VII.

11. THE COUNTRY AND S T A T E CONTEXT

A. RECENT POLITICAL AND ECONOMIC DEVELOPMENTS IN INDIA

8. Broad-based thrust of reform at the national level. The present government in India came to power in M a y 2004. The government adopted as i t s guiding framework a National Common Minimum Program (NCMP)-a comprehensive and well-balanced program that emphasizes social

* Source: Draft Approach Paper to Bihar’s Eleventh Plan (2007). 2

protection and service delivery, rural employment and agriculture, infkastructure development, and continuation o f reforms to support the private sector and to accelerate economic growth.

9. An accepted social framework. These elements o f the national economic and social reform framework are widely accepted and there i s broad-based support. The current directions in economic and social frameworks remain very much intact in India: t o ensure continued rapid growth, and more importantly, to ensure more inclusive growth; favoring measures to support poorer regions and states, and to weaker sectors such as agnculture; and enhanced access o f poorer and disadvantaged households to the f ru i ts o f rapid national economic growth. In addition, there i s a strong core o f support to measures to improve governance and the delivery o f public services. Successive governments have maintained the direction and momentum o f reforms in the last two decades despite changes in governments and coalition arrangements.

10. Commitment unchanged. A broad national commitment to the country’s reform agenda i s therefore expected. Several state elections (Tamil Nadu, Maharashtra, Andhra Radesh, Karnataka, Orissa, Bihar, Jharkhand, Kerala, Assam, West Bengal, Punjab, and Uttarakhand) have taken place in recent years. In ha l f o f these, elections brought about a change in government that has fostered a trend towards greater accountability for better performance and governance. India’s developments have been mirrored in Bihar. The current state government, a coalition o f parties, was elected with a mandate to reform and spur economic development and improve governance in Bihar. In to i t s second year, the Government o f Bihar remains stable and committed to a program o f wide-ranging reforms. The Government o f Bihar also enjoys the support o f the Central Government for this program, reflecting the sense in India that inclusive growth must include its poorest and largest states such as Bihar.

11. India’s economy benefiting from process of wide-ranging, gradual reform. India’s economy has been booming over the past three years and i s making an impact globally, thanks to steady pace o f reforms that i s gradually expanding in scope to cover more o f i t s economy. Growth has surged to among the world’s fastest. After two decades o f growing at 6 percent per annum, the growth rate accelerated to over 8 percent over the past three years, and i s estimated to have exceeded 9 percent in 2006/07. T h i s surge in growth i s underpinned by strong fundamentals, and has been resilient to higher o i l prices and the potential softening o f growth prospects in the global economy. There has been a sharp increase in investment rates f rom 24 to 33 percent o f GDP in the last f ive years. Growth has been broad based, and not just l imited to the services sector, as was the case in the 1990s. In 2005/06, for instance, strong growth was reported in manufacturing, insurance, construction, financial services, real estate, agriculture, and business services and transport. The Indian economy i s becoming increasingly competitive as i s evident f rom a robust 25 percent growth in merchandise exports in recent years, although some labor- intensive exports are slowing very recently because o f the effects o f exchange rate appreciation. Structural shifts are evident, with the share o f services in GDP rising to 55 percent between 2002/03 and 2006/07, and industry’s share to 26 percent, while agriculture has declined to 19 percent. In purchasing power parity terms, India i s the third largest economy in the world, after the U.S. and China.

12. Structural reforms deepening in India. In the immediate past year supply constraints caused the economy to slightly overheat, but this has been corrected by prudent macroeconomic and structural policies that have brought inflation down to less than 4 percent. Strong addition to capacity given the recent increase in investment will ease these constraints. Inadequate infrastructure i s constraining productivity growth. The problem has been compounded by an acute shortage o f sh l led manpower. Related to these constraints are medium-term structural issues, such as inadequate fiscal space for public investment; continued distortions in labor, land, and financial markets; and an inadequate public service delivery system. The Government i s

3

beginning to address these structural constraints. Infrastructure constraints are being eased by a considerable emphasis on funding new public investments and by encouraging private investments within private participation framework, as in telecommunications, roads, power, ports, airports, and other sectors. Factor market constraints are also being addressed gradually, with a focus on creating special economic zones, whose framework i s improving with considerable public debate and consultations, especially for compensation for land acquisition f rom farmers. Slulled labor shortages are being addressed by a combination o f newly announced schemes for expanded public spending o n secondary education, higher education and vocational training, while the private sector i s being encouraged to step up i t s role considerably. Public services delivery continues to face enormous difficulties, especially in education, health and other areas, with private services the main and expanding source o f incremental services.

13. Overall Fiscal Situation Improving. The principal macroeconomic risk facing India i s the fiscal deficit, although sharply rising revenues thanks to improved tax measures and higher growth, have brought this risk down considerably: the consolidated (combined center and state) fiscal deficit i s estimated to have fallen f rom over 10 percent o f GDP in 2001/02, to an expected 6 percent in 2006-07. General government debt, which rose from 60 percent o f GDP in the mid- 1980s to 86 percent in recent years, i s also falling. Reducing the fiscal deficits over the next three years nevertheless remains a central objective to create the fiscal space for additional public investment spending, especially in core infrastructure sectors. The latest 2006/07 Budget continues the trend towards fiscal consolidation by reducing the expected central government current deficit to 2.0 percent o f GDP and the overall central fiscal deficit to 3.5 percent o f GDP while supporting a corresponding reduction in the states’ deficits (see below), although quasi- fiscal deficits are rising because o f higher international o i l prices and unchanged domestic prices.

14. Macroeconomic management strong. India’s vulnerability t o an external crisis remains l imited because o f i t s record level o f foreign reserves, o f about US$260 billion, far exceeding India’s gross external debt. In spite o f an increasing trade deficit, the balance o f payments situation remains comfortable and the current account deficit i s estimated at about 1 percent o f GDP for 2006/07. Significant deficits o n the trade account (over 5 percent o f GDP) are more than balanced by very large inf lows on the invisibles account, including remittances from abroad. Capital inflows remain buoyant with a sizeable surplus on the capital account, o f US$45 b i l l ion in 2006/07, with surging and higher inf lows continuing as India benefits f rom the realignment o f risk perceptions in global capital markets in the wake o f the sub-prime mortgage issues. The fastest increase continues to be in foreign portfolio investment, with foreign direct investment (FDI) also surging, with attendant pressures on the exchange rate which has been appreciating despite measures to manage the surge in inflows. The main downside risks, albeit quite low, facing India in the short-term remain the fiscal risks, the pace o f exchange rate appreciation, inflation, and the rapid growth o f the financial sector.

B. INDIA’S CHALLENGE OF INCLUSIVE GROWTH

15. The key issue facing India is making growth more inclusive and shared. The benefits o f faster growth are not being widely shared and increasing disparities and inequalities are evident. India remains a land o f contrasts: top students f rom the Indian Institutes o f Technology and Indian Insti tutes o f Management are not just globally competitive, they are setting global standards, yet many children in India are unable to complete primary schooling; whi le there i s increasing “medical tourism”, many primary health centers do not function well; and while parts o f urban India compete for business in global software engineering and biomedical research, parts o f rural India have poverty rates comparable to some o f the poorest countries in the world.

4

16. One sign of inadequate inclusion is that the pace ofpoverty reduction has been muted. The poverty rate has declined by less than 1 percentage point per annum over the past decade, markedly below trends in neighboring countries such as Nepal and Bangladesh where both average income levels and growth are lower. In the beginning o f the 21” century, India thus remains a country where more than 300 mi l l ion s t i l l l ive in deep poverty at less than a dollar (in purchasing power parity terms) a day, posing one o f the most significant challenges to achieving the global millennium development goals. Another sizeable 350 mi l l ion people are just above the poverty line, with incomes below $2 per day and with not much assets or incomes or human capital to distinguish them fkom those below the poverty line. H a l f o f India’s children remain malnourished. India’s 40 percent illiterate people, the significant gender, ethnic and regional differences in human development and poverty reduction have raised concerns about “two Indias” - one which i s on a fast development trajectory and the other caught in a l o w level development trap.

17. There are several reasons why India’s growth has not been adequately inclusive:

Regional Divergence: The poorest states as a group - Bihar, Uttar Pradesh (UP), Ollssa, Madhya Pradesh, Rajasthan, Jharkhand, and Chhattisgarh - home to 60 percent o f India’s poor, have yet to accelerate growth. About 60 percent o f the population increase in India will take place in these poorer and slower growing states. Poor Labor Market Outcomes: N o t enough good or wel l paying jobs are being created. Whi le overall employment growth has been about 2 percent p.a. over the past two decades and has accelerated recently, this hides the more than 100 mi l l ion working poor whose wages are too l o w to take them out o f poverty. Less than 10 percent o f the labor force can find employment in the formal private sector. Bihar provides the largest numbers o f unskilled migrant workers to other statese3 Low Growth in the Agricultural Sector: Agnculture growth has been slow, even though agnculture and the rural economy continue to be the main sectors for livelihoods o f two- thirds o f India’s population. Bihar and other lagging states are especially dependent o n agnculture, with better water resources, rainfall and good soil. The continuing incidence o f farmer suicides across India, especially in drought-prone districts, i s a reminder o f the enormous challenges, exacerbated by fall ing ground water tables, l o w returns, and limited access to credit. Bihar has the lowest credit to deposit ratio in India.

Scheduled castes and tribes (nearly a quarter o f the population), women, other minor i ty groups, and the disabled face tremendous diff iculty in economic access and opportunity. Female participation rates are l o w and wage rates significantly lower than males unexplained by skills, especially in states such as Bihar. Similar exclusion i s evident for the scheduled castes, which i s especially significant in Bihar.4

Gender and Social exclusion:

Panel data from 18 villages in North Bihar suggest that out-migration rate may have doubled from about 7 to 14 percent o f the population between 1982-83 to 1999-00, with greater long-term migration, more widespread destinations (from rural-rural to rural-urban), and where remittances help raise (by up to one-third) incomes and to deal wi th unexpected health expenditures and loan repayments (A. Karan, 2003, Changing Pattern of Migration from Rural Bihar, Bihar Times, Institute for Human Development, and Ministry o f Statistics and Programme Implementation, GoI). Migration is spread across al l castes and classes, wi th more long-term migration from upper castes and Muslims, although remittances play a bigger income role for lower caste and poorer families. Recent surveys confirm rising migration and their importance (The Role of Migration and Remittances in Promoting Livelihoods in Bihar, ODI, 2006). Remittances are equivalent to some 4-5 percent o f GSDP in Bihar, twice remittance receipts for low-income countries (1.9 percent o f GDP) by way o f comparison.

population. The poorest scheduled caste, the Musahars, for example, numbered about 1.4 million, or nearly 3 percent o f the 198 1

5

18. Underlying these challenges is the enormous task of improving the quality of core public services. Here access/satisfaction gaps are s t i l l huge and sometimes growing. Improving the accountability o f service providers, with greater decentralization to elected panchayati raj and other local bodies, and more competition may hold the key to the realization o f more inclusive growth in the next decade.

Ninth Plan (1 997/98-2002103)

c. BIHAR’S DEVELOPMENT: CHALLENGES, RECENT REFORMS AND SIGNS OF TURNAROUND

Tenth Plan (2002103-2007/08)

19. Challenpes: Bihar’s challenges lie at the heart of the inclusive growth agenda. While Bihar has 8.5 percent o f India’s population, i t accounts for only 1.6 percent o f the country’s GDP. The State i s predominantly rural, with an urbanization rate o f only 11 percent compared to nearly 28 percent for all-India. Landholdings are highly fragmented, with an average size o f 0.75 hectares, which i s ha l f o f the all-India level o f 1.4 hectares. Nearly ha l f o f a l l households are landless or near landless, with agricultural laborers constituting 48 percent o f the labor force, about double the all-India level o f 27 percent. Female participation rates at about 24 percent are among the lowest in India whi le female literacy rates are about only 34 percent. Infant mortality rate i s about 72 and underweight children constitute 54 percent o f the total. Bihar’s public services and infrastructure are among the worst in India. Nearly 60 percent o f habitations in the state are not connected to roads, only 21 percent households have access to piped water and electricity i s inaccessible to the vast majority o f households. Absenteeism among health and education staff are among the highest in Indian states.

India 4.0 Per capita GDP growth rate

20. Bihar, thepoorest state in India, grew much slower than the rest of the economy. In recent years, the growth rate o f Bihar has averaged 4 percent which i s much lower than the national growth rate o f 7 percent per annum. Comparison in terms o f per capita income growth i s even more disappointing as i t s population growth rate (2.5 percent) has been higher than the national average (1.9 percent).

Bihar India Bihar 1 .o 5.5 2.0

Growth in GDP o f which (a) Agnculture (b) Industry (c) Services

5.5 2.9 7.0 4.0 2.0 -1.1 1.8 1 .o 4.6 6.5 8.0 9.8 8.1 6.4 8.9 5.1

21. The structure of the economy remains undiversified. It i s a predominantly agrarian economy with a small manufacturing base-it accounts for 0.6 percent o f country’s industrial GDP and a meager 0.3 percent o f the nation’s manufacturing GDP. Whi le the share o f agriculture has declined, i t remains very large, but mired in l o w productivity and l o w value cultivation. The share of industry has remained stagnant, while traditional, l o w productivity services has increased i t s share f rom 41 percent to nearly 50 percent o f GSDP, which i s in l ine with the national average.

22. Governance and institutions have been weak. Bihar has been facing a severe law and order problem for many years. Historical data suggests that incidence of many serious crimes i s worse in Bihar as compared to the Indian average. Bihar had the second highest overall crime rate in

6

India, after Uttar Pradesh.’ Compared to national averages, violent crime rates were 40 percent higher in Bihar and 70 percent higher in Assam and the Northeastern states. Overall, violence, slow court processes and caste, ethnicity and land related conflicts have traditionally discouraged economic activity, especially in Assam, Bihar, Jharkhand and UP. Moreover, the incidence o f kidnappings for ransom in Bihar was higher than the Indian average, acting as a major deterrent to investment. Similarly, the incidence o f corruption was high in Bihar. There i s a perception o f widespread corruption which worsened Bihar’s case as an investment destination for investors.

23. The state’s economic and social problems have their roots in long-standing structural factors. Bihar faces geographical disadvantages. I t s northern areas are highly flood-prone with one-third o f the cropped area subject t o annual flooding; southern areas suffer f rom frequent droughts; and, being land-locked, the state has l imi ted access to international trade. The problem was exacerbated in 2000, when a new state, Jharkhand, was carved out o f the erstwhile Bihar - and Bihar lost access to huge mineral resources, while being apportioned much o f the public debt o f the erstwhile state. Bihar i s also disadvantaged by i t s history: an unreasonable land settlement system (zamindari) and an incomplete land reform have accentuated landlessness and limited the land rights to cultivators. These in conjunction with the serious caste divisions have long polarized Bihar’s society and i t s politics.

24. Modest growth of the Bihar economy also reflects a very weak investment climate. The Bank’s recently completed India Enterprise Survey 2005-066 and the Doing Business (DB) 2007 reports, both o f which cover Bihar, point to the overall weaknesses in the investment climate in Bihar. Indeed most indicators o f investment climate, at the time these studies were conducted, were worse in Bihar than in other states (Figure 1 below). Other important constraints identified in the enterprise survey include poor access to finance (secondary data for the banlung sector shows that Bihar has a very l o w Credit-Deposit ratio o f less than 30 percent, compared to a national average o f over 60 percent) and regulatory burden, which i s closely correlated with corruption. While most indicators o f investment climate are weaker in Bihar than other states, the problem appears to be most acute in three areas: electricity, corruption and crime, theft and disorder (Figure 1, below). Amongst other indicators the weak investment climate i s manifested in the slow growth rate o f the manufacturing sector and the l o w levels o f investment in the state (only 0.4 percent o f the proposed investments in India are in Bihar’).

Figure 1: Major Perceived Constraints to Firms’ Growth: Bihar vs. India 73 Percent of respondents identifgngfactor as a rnajororsevere obstacle

8o 1 70 -

60 - 50 -

An - 35 36 .- 30

20

0

0 External Anti- TaxAdrnin. Licensiw Costof H igh taw finanang competitive finacing

orinforrnal Factice

Source: Ind ia Enterprise Survey, 2005-06.

Crirne.thefl Corruption Electricity an3 disorder

www.indiastat.com T h e survey covers and captures the perceptions on various investment climate parameters o f a sample o f existing, not

prospective f i rms. ’ Data as cited by Government o f Bihar in a presentation to the Investment Commission.

7

25. Recent Reforms and Turnaround. Against this backdrop, there are visible signs of a turnaround where the current Government in Bihar has been implementing wide-ranging reforms. During the past two years, the current Government has initiated a comprehensive, home grown reform program, buttressed by a number o f Commissions and strengthened administrative apparatus. These reforms range f rom addressing cross-cutting issues l ike l aw and order, investment climate, fiscal policy, financial management, administrative reforms and greater accountability, to sector-specific reforms (e.g., health, education, roads, rural development, agnculture, urban development, power and others). The effects have been especially notable in the following three areas.

26. First, Bihar ’s law and order situation is gradually improving. The current administration’s foremost priority has been to address the most binding constraint to Bihar’s development, namely restoration o f law and order. The most recent data f rom the National Crime Records Bureau and GOB indicate that, between 2004 and 2006, a l l forms o f violent crimes are o n a declining trend. Along with it, the conviction rate has remained high relative to i t s historical average. Whi le a distinct improvement i s notable in the l a w and order situation, the absolute number o f crimes remains high compared to other Indian states and the number o f convictions l o w relative to the cases outstanding. This underscores the need for the Government to continue and strengthen law and order and judiciary reforms that were started earlier. Recent steps corroborate renewed efforts by the Government to do so, by stepping up prosecution o f high-profile and other cases.

27. Second, Bihar has managed to markedly increase the utilization of central funds and capital expenditures more broadly, and is taking steps to improve their effectiveness under the umbrella of the Fiscal Responsibility and Budget Management Act of 2006. One o f the signs o f a dysfunctional administration in the past was the inabil ity o f Bihar’s government to fully utilize the centrally allocated funds (mostly grants) before they lapsed. This appears to be changing dramatically. Between 2004/05 and 2006/07, GOB’S total expenditure increased by as much as 54 percent - from Rs.170 b i l l ion to Rs. 261 b i l l ion (i.e. f rom $3.8 b i l l ion to $6.5 b i l l ion equivalent) - with capital expenditure increasing by over 140 percent during the same period. Virtually a l l o f this has been financed back-to-back by increased utilization o f central assistance and increased central grants. The utilization o f state plan resource allocation has also been in the range o f 95- 100 percent across departments as indicated in the estimates for 2006-07. Overall development expenditures have increased -- and their composition improved -- markedly (see para 35). All these improvements have taken place underpinned by the Fiscal Responsibility and Budget Management Act o f 2006, which commits the Government to reducing overall deficits to 3 percent o f GSDP and eliminate the current deficit (Annex C provides more details). Still, considerable challenges remain: budget preparation i s weak, expenditure management needs strengthening and there i s significant scope to raise transparency involving budget and public procurement procedures - many o f which are beginning to be addressed by GOB and supported by this operation (see Sections I11 B and Annex C for more information).

28. Third, preliminary evidence suggests improved public service delivery, albeit from a low base. Along with increased funding, GOB has taken a number o f complementary reforms to raise the quality o f public service delivery. Though it i s too early to fully assess the effectiveness o f these reforms, preliminary evidence i s encouraging’: 49 percent o f respondents feel that the roads have improved in their districts, 44 percent report positive improvement in health service delivery and 42 percent say the same for electricity. GOB’S own monitoring shows that the use o f services

* The Bank had commissioned the Asian Development Research Institute (ADRI), a local think-tank based in Patna, Bihar, to undertake a primary survey to assess the impact o f recent reforms. The study, based on five districts (Ana, Bhojpur, Lakhisarai, Patna and Saran), interviewed 580 respondents, 120 respondents from each district except Lakhisarai, which had 90 respondents. Detailed results are available in Bihar Policy Note (2007).

8

at the public health centers (PHCs) has increased significantly: f rom an average o f 39 patients treated per PHC per month, this number had increased to 3,000 patients and then stabilized at about 2,200 patients. Similarly there are reports that the PRIs - who n o w hold the authority to appoint the teachers - are beginning to take actions against the errant and irregular teachers. And many more children are now attending school, with numbers o f out-of-school children declining by some one-third. But much o f this improvement i s happening on a l o w base and therefore deeper and lasting reforms are necessary to sustain the current gains.

D. POLITICAL ECONOMY OF REFORM AND MOMENTUM OF CHANGE’

29. The Government of Bihar is committed to a platform of good governance. Following Assembly elections in the state in February 2005, n o party was able to establish a clear majority. After a br ie f period o f President’s Rule, Assembly elections were held again in November 2005. In that election the current government assumed office with a comfortable majority in the state Assembly. The government i s committed to improving l a w and order, providing better governance, and improving the delivery o f basic public services. The process followed since has been equally important: establishing standards for accountability, regular forums for consultations with citizens, formation o f high-level commissions to provide recommendations, successful elections to the local self-governments at the panchayati raj (with majority reservations for women and the poorest sections o f society), and engaging a broader all-India audience in support o f the reform initiatives in Bihar.

30. Rebuilding the basic functions and institutions of the state and government is the most importantpriority. This will not happen overnight and i s a task that will take some years, but i s nevertheless, essential t o begin. Part o f that effort includes rebuilding the capacity o f the c iv i l service, reestablishing the transparent rules o f government business, improving accountability and transparency, and restoring basic l aw and order. Second, the momentum o f sustained change will also be fostered by increasing the demand for greater accountability and performance: by encouraging c iv i l society institutions, better information sharing, and creating the space for alternative ways o f delivering public services, including the private sector and non-governmental organizations. Third, analysis also suggests that citizens need to be provided at some point quickly with some tangible evidence o f improvements in core public services-such as roads and social services---so that the broader coalition o f support for sustained change and efforts has some resonance.

111. THE GOVERNMENT OF BIHAR’S REFORM PROGRAM

3 1. I n a short span of time, GOB has established a strong track record of implementing policy reforms in a wide range of areas. During the past two years, Bihar has been seeking to catch up on policy reforms that have been usually taken a decade or more in more progressive Indian States. These include law and order and governance reforms, fiscal and financial management, liberalizing agricultural marketing, lowering entry barriers in industry and institutional reforms to improve public service delivery. A development partner engagement framework i s in place to support these reforms (Annex B). This section and the policy matrix in Annex A presents the key elements o f the broader reform program that the Government i s implementing as we l l as those to be implemented in the medium term. Whi le the proposed DPL operation focuses o n a subset o f these reforms (as presented in Section V), they are embedded in the broader reform program la id out in the GOB’S 1 lfi Five Year Plan currently being prepared.

Th is section has been drawn from ongoing analytical work on the Political Economy o f Reforms in Bihar (2007), supplemented by publicly available work.

9

THE BIHAR ELEVENTH FIVE YEAR PLAN - REFORM OBJECTIVES

32. Bihar ’s Approach Paper for the Eleventh Plan provides the analytical underpinning for the proposed DPL operation. The Draft Approach Paper for the Eleventh Plan (APEP) lays out a development strategy and the reform direction for the state government in considerable depth. I t s overarching objective i s “inclusive growth at a much brisker rate, accompanied by improved delivery of social services”. The analysis o f the APEP indicates that it rests on three inter-related pillars (see Chart-1): (a) Stepping-up public investment and strengthening public financial management and governance; (b) Raising the economic growth through agriculture, investment climate reforms and infrastructure for private investment and growth; and (c) Delivering public services efficiently, with an emphasis o n accountability.

Chart 1: Building Blocks of the GoB’s Development Priorities Based on the 11” Plan Approach Paper

t 7 Objectives: Inclusive growth at a br isker rate and improved del ivery o f social services

Pillar#l: Stepping-up publ ic investment, and Pillar#3: Del iver ing publ ic

through agriculture, investment c l imate strengthening publ ic services efficiently, with a n reforms and infrastructure f inancial management and emphasis o n accountabil ity

I - Pillar#2: Raising economic growth

governance

Source: Based on the Approach Paper for the Eleventh Five Year Plan. GOB

A. PILLAR 1 : STEPPINGUP PUBLIC INVESTMENT AND STRENGTHENING PUBLIC FINANCIAL MANAGEMENT AND GOVERNANCE

Fiscal Policy and Public Financial Management

Fiscal Policy Management

33. Bihar’s development has been constrained in thepast by its inability to use effectively its fiscal resources and weakfiscal management. Taxes and grants (plan and non-plan) shared by the central government comprise almost 80 percent o f the state’s total revenue. L o w own revenues and consistent underutilization o f i t s share in central Plan resources resulted in l o w public expenditures relative to the development challenges facing the state. There were relatively high fiscal deficits o f over 5 percent o f GSDP between 2001-02 and 2005-06. High deficits combined with a legacy o f high debt, a large part o f which devolved to the state during the state’s bifurcation in 2000, has resulted in the debt to GSDP ratio increasing to 53 percent o f GSDP in 2005-06.

34. Progress with Reforms. I n this context, the GoB’s immediate fiscal priorities are four-fold: (i) increase fiscal space for development and public investment in a sustainable manner; (ii) spend

10

centrally allocated funds before they lapse; (iii) improve the composition o f expenditures broadly, and (iv) increase effectiveness o f public expenditures. The following are some o f the key fiscal and P F M reforms initiated since November 2005 to achieve these objectives (with a detailed analysis provided in Annex C):

Fiscal Responsibility Law and Fiscal Progress. GOB has enacted the Bihar Fiscal Responsibility and Budget Management (FRBM) Act 2006 that seeks to eliminate the revenue deficit by 2008/09 and to contain the fiscal deficit at 3 percent o f GSDP from 2008/09 onwards. At the same time, the Government has stepped up development spending sharply. Evidence to date suggests that the acceleration o f spending coupled with improved composition (see below) i s already producing improved results o n the ground as described earlier (paras 26 - 28) and discussed further below in sectoral developments. Prudent fiscal management-by generating revenue surpluses and increased utilization o f central schemes and grants, and increased financial support f rom central transfers---has enabled this without GOB exceeding i t s overall fiscal deficit targets. Whi le there was an init ial increase in overall fiscal deficits, this i s projected to fa l l in line with FRBM targets to 3 percent in the current fiscal year and beyond. The debt burden has also started to decline. Further as discussed below (Para 44 and in detail in Annex C), a medium term fiscal program has been prepared and will be finalized as part o f the Government’s commitment under the Fiscal Responsibility and Budget Management Act.

As public expenditures have increased sharply under the umbrella of the FRBM their composition has also improved significantly. Committed expenditure, l ike salaries, pensions and interest payments, which used to absorb as much as 60-65 percent o f a l l the expenditure in the early 2000s, has fallen to 46 percent in 2006/07. A review o f Plan expenditures over the past few years shows a dramatic increase in development spending, especially in some key sectors. The transport sector (includes roads) has the largest allocation among the infrastructure sectors growing twenty fo ld in 2006-07 over 2004-05. Similarly Social Services (covering health, education) has seen expenditure rise 200 percent in 2006-07 over 2004-05. Other sectors that have seen a sharp increase in plan expenditure are special area programs. Over the entire Eleventh Five Year Plan period the thrust o f spending will be on the Rural Development, Irrigation and Flood Control, Energy, Transport and Social Services sectors.

Public Expenditure Management Reforms. A very far reaching impact o n spending has come from decentralization o f financial powers to l ine departments. Whi le previously any expenses in excess o f Rs. 2.5 lakh (nearly US$60,000) had to be approved by the State Cabinet, now amounts up to Rs. 2.5 crore, Rs.10 crore and Rs. 20 crore (nearly US$ 0.6, 2.4 and 4.8 mi l l ion respectively) can be approved by the relevant Secretary, Minister, and the Finance Minister respectively.

Tax Policy and Tax Administration Reforms. Along with most Indian states, Bihar has switched from sales tax to the value added tax (VAT) o n April 1, 2005, a major accomplishment. The tax rates for registration o f motor vehicles have also recently been rationalized to be in alignment with neighboring states. The stamp duty on property registration has also been reduced to reduce evasion, f rom 15.4 percent t o 8 percent in urban areas and f rom 8.4 to 6 percent in rural areas. The contracts for networking o f VAT offices and Treasuries, and setting up a VAT management information system, have been awarded and work begun.

35. Medium Term Reform Plans. In the medium term, Government reforms in fiscal areas will focus on three objectives: (i) enhance the effectiveness o f the budget as an economic pol icy tool

11

and strengthen the capacity for economic analysis o f budgetary policies in the Finance Department; (ii) implement a medium term fiscal reform program that provides more fiscal space for development and public investment in a sustainable manner over the medium term; and (iii) increase the effectiveness o f public expenditures. T o achieve the f i rs t objective the plan i s to establish an economic analysis cell in the Finance Department that will prepare and update the medium term fiscal program in line with the Government's development priorities and fiscal management targets, and also improve debt management capacity.

36. To meet the second objective, the Government is preparing and implementing its Medium Term Fiscal Program whose framework and underlying assumptions and policy framework is presented in Annex C. T h i s MTFP, which will be tabled in the next budget, shows that the revenue deficit target indicated by the Twelf th Finance Commission has been met, and state i s o n course to meet the fiscal deficit target o f 3 percent o f GSDP. Overall the fiscal program provides a good balance between accommodating sizeable increases in capital expenditures and operations and maintenance over the next four years and maintaining deficit and debt management targets. However, the MTFP face two issues. First, the fiscal adjustment targets fixed by the Twelfth Finance Commission are based on 2004/05, which was an unusually l o w spending year for GOB and so the init ial deficits were extremely small. This has made GOB ineligible for the annual debt write-off scheme which i s l inked to maintaining the 2004/05 deficit. As that deficit size provides very l itt le fiscal space to meet Bihar's needs, Bihar i s unable to take advantage o f the debt reduction incentives provided by the GoI. Second, the GOB i s n o w beginning to rapidly increase much needed development spending to catch up for past l o w levels o f spending: over the past decade per-capita spending o n economic and social development in Bihar has only been about a third that in the richer and faster growing states in the South. Thus the ceilings imposed by the FRBM may become a constraint on investment. The trade-off between fiscal conservativeness and higher public investment, dormant for years, has reappeared. The improvements in the MTFP seek to address the second challenge, while Go1 support addresses the former indirectly through improved transfers to Bihar.

37. The GOB'S third objective is to enhance expenditure effectiveness in key service departments through improved monitoring of expenditures in departments supported by the computerization of treasury operations. An important institutional reform wil l be to prepare and implement medium term expenditure fiameworks that link budget and expenditures to pol icy goals. Finally the reform wil l a im to strengthen the Public Financial Management and Accountability Systems, as discussed next.

Strengthening Public Financial Management and Accountability Systems

38. The past limitations of the Government of Bihar's processes for planning, spending, and accounting for the use of money have been well documented. Up until 2005, Bihar demonstrated an inabil ity to utilize financial resources from centrally sponsored schemes that were readily available." Poor performance reflected the government's weak capacity in many areas o f public spending, as wel l as the limitations o f the public financial management system. Decision-making in regard to budgeting as wel l as authorization to spend was characterized by high degree o f centralization, procedural delays and weak budget implementation. Accounting and auditing systems functioned at very low-levels o f effectiveness, providing incomplete, late,

lo For example, from 1997 to 2006, the Government o f Bihar used 23 percent o f its available central allocation in rural development programs. Utilization reached i t s peak in 2005-2006 when the State was able to draw down slightly more than 34 percent o f its central allocation. In that year, it was able to actually spend slightly less than 50 percent o f the money available.

12

and inadequate information o n public spending and very l imited oversight. L o w growth rates and limited public spending contributed to the evolution o f a very small private sector with severe limitations in regard to competency and experience.

39. Progress with Reforms. Over the past two years, GOB has made notable strides in revitalizing the foundations for an effective public financial management system. Passage o f the Bihar Fiscal Responsibility & Budget Management A c t (2006), amending the Bihar Financial Rules (2006) relating to procurement, along with the adoption o f the Bihar Panchayat Raj Ac t (2006) and the Bihar Municipal Ac t (2007) have introduced improvements in overall fiscal governance and at the same time provide a pol icy framework for further public financial management reforms. Legal enactments have been complemented by new practices designed to improve the effectiveness o f spending and the transparency o f results. The state budget was for the f i rs t t ime in years passed, o n time, in full, allowing spending to begin during the first quarter o f the year. Spending authority has been decentralized and thresholds for spending have been raised. Independent third party monitoring has been introduced in the roads sector. GOB has invested resources in developing a mechanism for quickly responding to Right to Information queries. The state’s ability to mobilize centrally-provided resources has increased to a point where it now only trails national averages slightly.

40. Procurement legislation and reforms have been noteworthy. GOB has replaced the outdated Bihar Financial Rules with a new set o f rules modeled after GoI, with regard to public procurement. The revised Rules have introduced the objectives o f economy, efficiency, equal opportunity, non-discrimination, transparency and accountability as the guiding principles o f public procurement. In addition, the new rules have brought about a range o f technical improvements, f rom raising approval thresholds to more realistic levels, to improving bid invitation and evaluation procedures, requiring explicit eligibility/qualification criteria, public opening o f bids, use o f generic specification, pre-bid conference, and allowing negotiations only under exceptional circumstances. The procurement ru les for the public works department have also been simplified and modernized, including adoption o f a standard bidding document that incorporates new practices relating to mobilization advance, advances against equipment and price variation clauses. This has greatly enhanced the clarity o f the procedures to be followed in procurement o f capital works-methods o f procurement, execution o f procurement transactions, and the appropriate levels o f authorization to make procurement decisions. The challenge now will l ie in implementation.

4 1. The achievements demonstrate the Government’s commitment to improving public financial management, and establish much of the basis for a well-performing system, but continuing reforms are needed. At the same time, i t i s important to recognize the severe challenges including human resource capacity constraints that need to be addressed if GOB i s to succeed in managing i ts financial resources to best effect. As o f now, state budgets do not reflect the flows and expenditures under many centrally funded development programs funded by the GoI, as these funds f low directly t o societies formed by the state governments under Go1 guidelines. And therefore Bihar’s budget does not serve as a comprehensive guide to the total public money being spent in the state. The accounting and other control mechanisms do not provide complete and timely information on what i s being spent, or what i s being acquired or produced by public spending. l1 This combined with a fragmented public financial management architecture present a need for reform.”.

I’ In the financial year 2006-2007 approximately 37 percent o f the discretionary expenditure from the GOB budget i.e other than that on salaries, pension and interest was spent outside the treasury and appropriately filed utilization certificates and the settlement o f advances drawn were available for 2 percent of such spending.

are governed by varying PFM and accountability rules and varying capacities. The architecture consists o f GOB, Urban and Rural Local Bodies, parastatals and registered bodies (societies) which

13

42. Medium Term Reform Plans. As GOB recognizes, significant issues are s t i l l pending. These reflect the fact that policies can be improved relatively quickly through the adoption o f well-designed regulations and laws, but practices take more time to change. The Government has put together a well-conceived multi-year plan designed to strengthen public financial management systems over time and incrementally reduce the r i s k that public money will be wasted. The GOB has decided to establish a high-level committee to be headed by the Chief Secretary and operational by January 2008 to oversee implementation o f the action plan. The overall program, whose details and sequencing i s presented in Annex D, has identified a range o f actions centered around three core objective^'^:

0

0

Strengthening PFM fundamentals in the GOB, as wel l as in Urban and Local Bodies; Strengthening the linkage between budgets and spending; and Improving the effectiveness o f spending.

43. Strengthening PFM fundamentals: GOB intends to move quickly to update i t s financial and treasury rules and create the administrative infrastructure necessary for their proper application by defining the position o f Integrated Financial Advisor (EA) and Chief Procurement Advisor (CPA) and building the capacity, both numbers and technical slulls, o f the finance and accounts cadre. These positions will subsequently be staffed with a priority given to ensuring staffing in al l major spending departments. Training courses in public financial management will be established in order to develop officers capable o f takmg on responsibilities for managing finance. In addition to work at the state level, the GOB will draft and adopt financial management rules for urban and local governments.

44. Strengthening the linkage between budgets and spending: Strengthening the linkage will require improved budgeting as wel l as systems for accounting and monitoring spending. The GOB strategy includes development and ro l l out o f Integrated Financial Management and Information System (IFMIS), reduction in the number o f budget items and the number o f drawing and disbursement officers, to procedural changes (relating to the issuing o f fund advances or the collection o f utilization certificates) and pol icy changes (creation o f budget that integrates plan and non-planned expenditures, periodic reporting o f the financial position o f major societies).

45. Improving the effectiveness of spending: The third set o f actions defined by the GOB center around steps to improve the effectiveness o f public spending. Initially, GOB intends to improve i t s ability to plan by identifying i t s medium-tern fiscal framework. The government's ability to control spending will be augmented by a strategy to strengthen internal audit. Immediate improvement in spending i s expected to be generated by pi lot activities to improve oversight o f spending in two core spending departments - state roads and rural de~elopment . '~ These init ial efforts will be reinforced by steps to ensure completion o f on-going capital investment projects, the piloting o f risk-based internal audit in two departments, the piloting o f e-Procurement, and the introduction o f mechanisms to track responsiveness to AG audit reports. Pilot work in improving the management o f public funds in Rural Development will be followed up with the creation o f consolidated financial reports in PRIs which will bring together financial data regarding al l spending happening within these entities. Ultimately, the GOB intends to establish medium-term expenditure plans in key departments and support this budgeting innovation with annual

l3 A core set o f PFM indicators based upon the Public Expenditure and Financial Accountability (PEFA) PFM indicator set, have been identified and performance improvement will be monitored on a regular basis. See Annex D. l4 The pilot in State Roads i s intended to enhance oversight o f spending through utilizing information technology to capture and make public information on procurement processes and outcomes. The pilot in Rural Development will focus on increasing transparency, financial monitoring and timely audit assurance o f spending in the Rural Employment Guarantee Program.

14

performance reports -from each department which al low for an assessment of financial and physical performance.

Governance, Administrative Reforms and Local Governments

46. Prowess with Reforms. Improving rule of law, public administration, and governance has been the highest priority. The Government has initiated a wide range o f measures in this regard and the init ial results have been encouraging.

a) Restoring the Rule of Law. The current government has adopted a number o f police reforms, partly in response to a Supreme Court order binding o n a l l states. The Director-General o f Police’s appointment i s now based on recommendations o f a committee rather than by the Chief Minister alone. Reforms have been initiated to improve collaboration between the police and the Courts, while the High Court has improved access to justice through the use o f mobile courts, for example. The Vigilance Department has been given the mandate to pursue cases regardless o f the polit ical consequences. Government has taken steps to reduce the burden of litigation o n senior management and the Courts by reducing pending contempt cases-which tied up the administration and weakened the perception o f compliance with the law--from 8,000 to only 400 n o w and establishing an effective process at the Advocate General level to screen out appeals that may not be justified.

b) The government has addressed the problem o f unstable tenures in the police department by becoming the f irst state in India to pass a Police Ac t establishing a minimum tenure o f two years for a l l senior positions in the police services, thus reducing the scope for the politicization o f the force. The government o f Bihar has adopted a policy to stabilize the tenures o f c iv i l servants by limiting transfers to 10 percent o f departmental cadres per year with transfers l imited to once in June o f each fiscal year. In order to implement this policy, a system o f monitoring and compliance has been put in place in cases where compliance cannot be fulf i l led due to exigencies. The Government i s further considering implementing in the next few months minimum average tenures o f 2 to 3 years for the c i v i l service including All India service officers and will be monitoring average tenures (See Table 2).

Empowering the Senior Civil Service.

c) Improving the Working of the Civil Service: Bihar has constituted a Bihar Administrative Reforms Commission (BARC) which has made important recommendations to improve the working o f the c iv i l service, including rationalization o f departments, downsizing, controlling premature transfers, and administrative delegation. The government has moved quickly to adopt some key reform measures, such as the delegation o f financial powers, and abolishing several defunct corporations.

d) Reactivating Accountability The current government in consultation with the opposition has appointed a Chief Information Commissioner. The Bihar Lok Ayukta i s beginning to use the ample powers conferred o n the office by the state’s Lok Ayukta A c t more effectively. It should be noted that Bihar i s the only state in the country to have created an IT-enabled facilitation center to process requests for information under the RTI Ac t through dedicated phone lines. Implementation o f the RTI A c t i s being further facilitated by pushing departments to comply with the suo-motu requirements o f the RTI Act, such as publishing beneficiary l is ts for government schemes, and improved training for Public Information Officers in the administration o f the Act.

e) Addressing Corruption: The reactivation o f accountability institutions combined with greater autonomy for the police and the restoration o f the rule o f l a w also represent important f i rst steps towards curbing the problem o f corruption in Bihar. Administrative simplification through the adoption o f the BARC’s recommendations, the greater use o f e-governance, reducing the

15

fiequency o f transfers at a l l levels o f the bureaucracy, more effective monitoring o f expenditures and public works by c iv i l society, the media and local institutions, and transparent procurement practices are additional steps being envisaged by GOB.

47. Medium Term Reform Plans. In addition to deepening the reforms already initiated, medium term policy reforms will focus on two areas: (i) improving public service delivery through agency reforms in departments such as land records, registration; and (ii) strengthening local level accountability through supporting the PRIs.

48. Agency reforms to improve service delivery will focus on critical services such as tax administration, land records and registration, urban services, water supply and sanitation. A combination o f measures such as e-governance, citizens’ charters, and partnerships with the private sector will be used to strengthen citizen awareness and the demand for good services. Alongside this, process reengineering that delegates more power to heads o f agencies, greater f lexibil i ty for redeploying staff, and reducing the number o f layers through which a fi le passes will also be considered to enhance capacity and accountability o f these agencies.

49. Strengthening Local Level Accountability and Public Services through supporting the PRls. A principal priority o f GOB has been strengthening the PRIs at the local level. The panchayat elections were recently held and Bihar i s the only state in India to have reserved at least 50 percent o f seats for women, and a further 20 percent t o the “extremely backward classes”’5; as a result, nearly 60 percent o f the 8,500 panchayats are now headed by women and 20 percent by persons belonging to the SC/ST group. In a state where girl’s education and women’s l o w status has been a perennial problem, and the SCs/STs had been stripped o f any sense o f empowerment, this situation o f leadership by women and the persons belonging to the SC/ST groups in local governance represents a major long-term development The following are the key steps taken by the GOB to revive a PRI system in the state:

Legislation. The revised Bihar Panchayat Raj (BPR) Act was passed by the legislature in April 2006. I t has provisions for improving community participation, and malung PRIs more responsive, transparent and accountable: quorum, beneficiary selection, audit and budget presentation, social audit, vigilance, and provisions for removal o f members. Devolution: T o enable funds and devolution in service delivery, GOB has undertaken an activity mapping exercise and set up high-powered committees to: (i) increase devolution; (ii) create a Panchayat window for augmenting fiscal transfer t o PRIs; (iii) make District Planning Committees vibrant planning bodies; (iv) supervise and monitor overall devolution; and (v) implement the Backward Regions Grant Fund (BRGF). PRZ role in implementing flagship projects: GOB has given the PRIs the responsibility for implementing certain provisions in the following programs: providing j o b cards under National Rural Employment Guarantee scheme (NREG), selection o f beneficiaries for social protection programs, appointment o f teachers, supervision o f mid-day meals and constitution o f Education Committee under SSA, distribution o f coupons for Public Distribution System (PDS), and selection o f anganwadi worker and assistant under the ICDS program.

Is As per official definitions

16

€3. PILLAR 2: RAISING ECONOMIC GROWTH RATE THROUGH AGRICULTURE, INVESTMENT CLIMATE REFORMS AND INFRASTRUCTURE

Revitalizing Agriculture

50. Although central to Bihar’s economy, agriculture and the rural economy remains mired in low productivity cultivation and informal sector jobs. Close to 90 percent o f Bihar’s population lives in rural areas, and nearly 80 percent o f the rural population i s engaged in agriculture. Agriculture also accounts 40 percent o f GSDP. However, land productivity in agricultural cultivation i s only ha l f or less than ha l f that in states such as Punjab and Haryana. The performance o f the agriculture sector in the last decade offers reasons for hope and transformation: the growth rate through the 1980s was 4.6 percent, dipped to -2 percent between 1992 and 1996, since then has shown an upward trend, with a growth rate o f 3.7 percent during the last ten years. Horticulture, diversification to maize, milk production and other areas show recent signs o f strength. Floods, which are frequent, and their mitigation plans are discussed below in B o x 1.

5 1. Propress with Reforms. GOB has initiated reforms on multiple fronts to lay the foundation for emergence of a dynamic agriculture sector led by the private sector. Specifically:

a) Land Commission. A Land Commission has been constituted by GOB with the key architect o f the successful “Operation Barga” in West Bengal as i t s Chairperson. The Commission i s loolung at a l l dimensions o f land reform: land ceiling, occupancy-tenancy rights, modernization and computerization o f land records, land disputes, encroachment o f public property, feasibility o f contract farming and others. The Commission i s expected to submit i t s report soon.

b) One- Window Service for Farmers. The Agricultural Technology and Marketing Agency (ATMA) model has been scaled up to a l l districts in Bihar-adopting a successful all-India model and providing a one window service to the farmers through technical advisory and related services. The ATMAs are also mandated to work towards promoting models for agriculture that

17

are environmentally sustainable. Being the primary implementing arm for a variety o f agricultural programmes of the GOB, they have been promoting different environmentally sustainable models o f agriculture and monitoring soil quality through a network o f soil testing centres established in each district on a regular basis. Both these initiatives provide an early warning system and mitigation measures for any environmentally unsound impacts that may occur through the introduction o f new technology. The state-owned Seed Corporation o f Bihar has been revived to increase the replacement rate o f seeds as a precursor to private seeds activities. Public spending in agriculture has also been raised from Rs. 20 crore in 2005/06 to Rs. 119 crore in 2006/07 to provide some basic services.

c) Participatory Management in Irrigation. Using the Bihar Irrigation Act, 1997, and the Bihar Irrigation, Flood Management and Drainage Rules, 2003, the Government has transferred nearly 150,000 hectares o f irrigated command area to Water User Associations by February 2006. There i s plan to further expand the participatory irrigation management program to cover an estimated 800,000 hectares by end-2007 and 1.6 mi l l ion hectares by 2012.

d) Access to rural credit. To improve the access to financial services particularly for small and marginal farmers as wel l as more broadly for the agriculture and agro-processing sector and for rural entrepreneurs, GOB has signed a Memorandum o f Understanding (MoU) with Go1 and the National Bank for Agnculture and Rural Development (NABARD) committing to substantive legal, governance and institutional reforms o f the rural credit cooperative sector.

e) Greater Competition in Agricultural Marketing. The Agriculture Product Marketing Control (APMC) Act has been repealed. This i s expected to open up opportunities for direct purchase o f farm products by organized retail, agro-processing units, exporters and by agencies involved in contract farming - providing additional avenues to farmers to sell their produce and to create greater competition in the agncultural marketing system. Measures have also been taken to liberalize agn-markets such as expansion o f maize seed production and supply through private sector participation; simplification o f rules for establishing sugar industry and procurement of sugarcane from farmers; and implementation o f the Horticulture Mission.

52. Medium Term Reform Plans. In the medium term, in addition to deepening the reforms initiated, reforms will stress three areas: (i) facilitating private sector entry by setting up the licensing system for private agn-input suppliers; (ii) in the same way improved management and exploitation o f common resources such as through fishing of public water bodies will be encouraged through facilitating licenses and contracting out o f such bodies to the private sector and communities; and (iii) computerization o f land records in al l the districts in a phased manner.

Creating an Enabling Investment Climate

53. Proaress with Reforms. GOB recognizes the importance of improving the state’s investment climate. I n line with this focus, Bihar has recently made significant steps in adopting a more conducive legal and regulatory framework. A key step i s related to efforts to promote rapid clearance procedures for establishing enterprises and issuing required licenses and certificates. The survey o f enterprises in Bihar report the highest number o f annual inspections or mandatory meetings with officials (including tax, labor, fire and building safety, police, and environmental). To reduce the regulatory burden on f irms, the Bihar Single Window Clearance Act-2006 has been enacted. As part o f this Act, a State Investment Promotion Board (SIPB) has also been created.

54. I n addition other policy measures include formulating the New Industrial Policy (2006)’ simplification o f VAT regime (2006) which has led to alignment o f i t s tax rates with neighboring state West Bengal to prevent trade diversion, computerization o f VAT administration, and

18

changes introduced to the Shops and Establishment Ac t with respect to the IT sector. GOB has also taken the initiative o f establishing a high level pol icy think tank, the Bihar Development and Investment Promotion Council, chaired by the Chief Minister and comprising senior policy makers, top industrialists and researchers f rom around the country. The Urban Land Ceiling Act has also been repealed, one o f the f irst states in India to do so.

55. Some of these reforms appear to have started making an impact. For example, the recently established SIPB has to date approved 99 investment proposals which could, i f realized, bring in large amounts o f investment and generate employment in the state; and there have been several pol icy announcements aimed at attracting private investment in the state, particularly in the infrastructure sector. In addition, GOB has made efforts to improve the l aw and order situation in the state (Section C earlier) - in discussions with industry associations, there was a clear sense that this had markedly improved for f i r m s in the state, though there i s scope for further improvements.

56. Medium Term Reform Plans The state intends to attract large share o f private investment and FDI through appropriate policy initiatives, infrastructure development and investments in areas o f strategic importance - such as agnbusiness and tourism. On agnbusiness, GOB has identified areas for private investment in select crops (sugarcane, litchi, makhana, mango, maize, vegetables, aromatic rise, fish, milk), and initiated several administrative measures and supporting programmes to boost agribusiness in the state. l6 A land bank i s being established to provide access to land for private investors

57. On tourism, GOB has tabled a State Tourism Policy which outlines their vision for exploiting their comparative advantages. GOB i s also workmg o n development o f airports (both domestic and international) and specific initiatives l ike international go l f courses, natural hot springs, and convention centers, to promote tourism in select destinations particularly those such as Nalanda and Bodh Gaya, that have considerable religious and/or cultural significance. Support f rom international investors and the Bihar diaspora i s being actively sought.

58. To work towards improving the state’s investment climate, the Industries Department has expressed interest in working with the Bank Group o n a DfID financed technical assistance initiative that would help address some o f the key regulatory bottlenecks that are barriers to the growth prospects o f industry in the state, and would also help build the capacity o f the state to design and implement programs for creating a more investor friendly environment. In i t ia l wo rk on this proposed medium term technical assistance engagement has been started.

Roads, Power, and Building New Platforms for Providing Infrastructure

ROADS

59. Poor condition of the road network in Bihar is a major obstacle for economic growth and poverty reduction. The road network i s Bihar i s poorly developed and has suffered years o f neglect, under-funding, and extensive damages due to lack o f maintenance, overloading, and frequent floods. The road density in Bihar i s only 901 km per mi l l ion population against a national average o f 2567. About ha l f o f the villages lack all-weather road connectivity. Mos t roads have poor riding quality, poor geometry, weak pavements, inadequate capacity, and missing bridges - leading to high transport costs and excessive travel time. A major part o f the network i s

l6 Bihar Government presentation to the Investment Commission

19

practically not usable. The network requires extensive road rehabilitation and capacity augmentation. L imited implementation capacity o f both the state implementing agencies (Road Construction Department, RCD, responsible for state highways, and Rural Engineering Department, RED, responsible for rural roads) and the construction industry and weak sector management are key issues.

60. Prowess with Reforms. The Government of Bihar now considers roads amongst its top priorities: GOB has recently launched major road development programs funded by both the Government o f India and i t s own resources. There i s a big surge in the road sector funding in recent years - current budget o f RCD and REO i s respectively about Rs. 17,000 mi l l ion and Rs. 12,000 mi l l ion annually. The Government o f India has allocated about Rs 30,000 mi l l ion for improvement o f 2,100 km o f State Highways under the Rashtriya Sam Vikas Yojna (RSVY). The Ministry of Rural Development (MORD), Go1 i s funding rural roads in a big way under the Prime Minister Gram Sadak Yojna (PMGSY - A Prime Minister Rural Roads Program aiming to connect al l the habitations having population more than 1000). The GOB has also launched Mukhya Mantr i Gram Sadak Yojana (to connect habitations having population between 500-999) and Mukhya Mantr i Setu Nirman Yojna (for construction o f missing bridges).

61. The RCD and R W D have already started many initiatives to improve their performance and implementation of the road sector programs. These include a road fund to create a non- lapsable pool o f resources, out-sourcing o f project preparation and management, improved contract management and close monitoring o f the performance o f contractors, third-party quality monitoring, computerization and networking o f f ie ld offices, training o f f ie ld engineers, setting- up o f an equipment bank for the contractors, introduction o f construction plus maintenance contracts, revision o f the R C D manual, establishing a GIS based road information system, for regular monitoring, and establishing dedicated f ie ld divisions and strengthening o f institutional set-up to implement PMGSY. Bo th the RCD and RWD have started to prepare Institutional Development Act ion Plans and to improve their organizational structure based o n functional assessments.

62. Medium Term Reform Plans. identifed the following sector reforms.

Key GOB agencies such as the R C D and R W D have

Developing and implementing road sector policy/strategy, financing arrangements, and sector reforms and policy enhancements.

Improving organizational set-up o f the R C D and the RWD based on functional assessments to improve planning, programming, project preparation, procurement (including e- procurement for c i v i l works), quality assurance and contract management, including computerization and networking o f the Headquarters and Field Offices.

Establishing an effective institutional set-up for road maintenance, including performance based maintenance contracts; increasing private sector participation in the sector through outsourcing o f project preparation and other fimctions.

Carrying out a road sector financing study to identify various options to finance the road construction and maintenance programs; and ensuring adequate funding for road maintenance including through a road fund.

Carrying out a strategic option study for the road network with a v iew to identify and prioritize the needs for road improvements, including rehabilitation, pavement

20

strengthening, safety enhancements, and bridge construction; and developing and implementing plans to build capacity o f local construction industry.

1.

0 Establishing and operationalizing an asset management system to prepare multi-year rol l ing plans for road improvements including road widening and/or strengthening, spot improvement, pavement rehabilitation, and maintenance.

Average National I Bihar

Village Electrification 86.6 Dercent I 37.0 Dercent

POWER

2. 3.

63. The power sector in Bihar suffers from a period of long neglect across generation, transmission and distribution. The peak load in Bihar i s only about 1,500 MW under the currently constrained demand scenario. Against this constrained demand, peak availability i s 900- 950 MW, causing a peak shortfall o f about 550 MW. T h i s peak availability i s only 10 percent o f a peak availability in Andhra Pradesh (which i s around 9000 MW) even when Bihar’s population is higher than that o f Andhra Pradesh. The current electricity system covers barely 37 percent o f the villages and 11 percent o f the households. Total installed generation capacity in state sector i s 584 MW (post bifurcation o f the state in 2000), most o f which i s non-operational (currently only 30 MW i s operational). The comparison between national average and that o f Bihar across select parameters i s presented below:

Household Electrification 56 percent 11 percent P e r Capita Consumption 612 Units 82.40 Units

64. Progress with Reforms. GOB has embarked on an ambitious plan, involving strong central sector institutions like National Thermal Power Corporation and Power Grid Corporation of India Limited in generation and transmission sectors respectively, t o assist in rapid augmentation o f capacity as wel l as provide avenues for institutional strengthening o f Bihar State Electricity Board (BSEB). A joint-venture company between National Thermal Power Corporation (NTPC) and BSEB (with 50 percent stake o f each) has been formed to run the Muzaffarpur Thermal power station. Additional generation o f about 220 MW (2 * 110 MW) after renovation and modernization i s expected to commence in 2008. However, there are now reported delays in renovation time-tables for these old units.

65. I n addition, some initiatives in distribution are being explored - with special focus o n distribution generation involving renewables and small hydro; and distribution franchisees in rural and urban areas. Already 125 distribution lines have been handed over to private parties for maintenance, minor repairs, fuse calls, billing and revenue collection. The Bihar Electricity Regulatory Commission (BERC) has been constituted and f i rst tar i f f revision process has already been accomplished. In terms o f policy, a hydel power policy has already been announced. A new power policy i s also on the anvil which i s expected to focus on: (i) augmenting generation and distribution by encouraging Private investment; (ii) bringing down aggregate transmission and commercial losses (AT&C) by 3 percentage points per annum in the next f ive years; and (iii) reducing levels o f cross-subsidy and increase recovery o f costs through tariff.

21

66. Medium Term Reform Plans. Given widespread f ie ld o f activities going forward and a huge historical backlog, the l i s t o f activities and areas requiring GOB intervention i s long. Under these circumstances, in order to retain focus, there i s a need for prioritization o f activities. GOB i s being encouraged to prioritize i t s reforms in short to medium term (by FY 2009-10) and to work backward to identify critical bottlenecks and success factors required to achieve those desired outcomes. Other policy and procedural aspects, though needed in the long run, wil l also need to be subjected to only basic preparatory work during this period. In addition, there i s need for Complementary Capacity Building Activities in sector entities (BSEB, BHPC and BREDA) which will be supported through a parallel DfJD financed Technical Assistance facility, focusing on: (i) efficient project execution o f Renovation and Modernization o f o ld plants; and (ii) building internal institutional capacity and innovative policy instruments (outsourcing, management contracts).

67. PPP Frameworks. Broadly, the Government o f Bihar has also recognized the need to transform the way the infrastructure sector works. Part o f this has focused o n providing a new impetus to attract PPPs and private participation. In 2006 the government enacted the Bihar State Infrastructure Development Enabling (BSIDE) Act, has set up the Infrastructure Development Authority, and has created a Steering Group to guide the government’s developing policies in this area. The government i s planning to improve the legal and pol icy environment for enabling infrastructure PPPs and to augment capacities at various levels o f government to conceptualize structure and implement PPP projects in an effective manner. The DfID financed BDPL TA program will provide technical assistance for this purpose.

c. PILLAR 3: IMPROVING PUBLIC SERVICE DELIVERY IN THE SOCIAL SECTORS

Education

68. Bihar is one of the most educationally backward states in India. While many states have dramatically improved primary enrollment rates, learning outcomes and literacy levels over the last decade, Bihar has remained, consistently, the state with the worst education indicators. There are around 2 mi l l ion out-of-school children in the age group o f 6-13 years in the state, mainly due to a shortage o f teachers. At the primary level the Gross Attendance Rate o f 89 percent compares to 102 percent for the nation as a whole. Bihar’s literacy rate o f 48 percent i s 6 percentage points lower than Jharkhand, the second lowest state, and 17 percentage points lower than the national average o f 65 percent. Female literacy in the state i s just 34 percent, compared to 55 percent nationwide. The poor performance o f education service delivery in Bihar i s largely due to an absence o f a systemic focus on outcomes, resulting in the lack o f accountability at a l l levels, which i s most clearly seen in the recruitment and management o f teachers, a key determinant o f both education access and quality.

69. A central issue is the shortage of teachers and the need to redefine recruitment criteria, selection processes, contracting terms, and overall management of teachers, who constitute the largest group of civil servants in Bihar. Lack o f comprehensive data (or incomplete and inaccurate data) on teachers, especially their service records, leads to problems such as corruption and polit ical maneuvering in teacher recruitment, irrational deployment and transfer o f teachers, an ever-increasing number o f court cases related to teachers, high teacher absenteeism and ineffective overall management o f the school system. Lack o f complete and relevant information results in long delays in payments o f teacher salaries, does not allow department officials to plan for future hiring needs, analyze s k i l l levels, or provide relevant support to teachers in the form o f training and capacity building. The situation has become increasingly acute as Bihar has in the last two years dramatically expanded its participation in the centrally sponsored Sarva Shiksha

22

Abhiyan (SSA), which aims to enroll a l l out-of-school children aged 6-14 by 2010. SSA has increased the need, and provided most o f the additional financing, for more teachers. But without a comprehensive database and knowledge o f the quantity and quality o f i t s teaching force, the State i s unable to govern the education sector.

70. Prowess with Reforms. During the last two years the Department of Education has been introducing major changes in the education sector to address the many constraints in education. One o f these measures i s to devolve considerable administrative and financial powers to local self governments or Panchayati Raj Institutions (PRIs), specifically for the recruitment, deployment, oversight, evaluation and payment o f teachers for basic education. T o ensure real improvement in service delivery, i t i s critical that there i s a smooth transition f rom existing practice to this new highly decentralized system, which involves almost 9,000 PRIs. The Department o f Education in Bihar i s keen to maintain and deepen the education personnel reforms which have begun, in the short and medium term, in order to increase the accountability o f education service providers (teachers and local officials) to citizens. These reforms are directly related to overall fiscal management (teacher salaries are one o f the largest items in state budget), governance, and service delivery.

71. Critical reforms to date have been the following: In teacher recruitment, the regulatory process for the devolution to Panchayats o f the responsibility for a l l new teacher hires has been completed, resulting in the hiring o f approximately 100,000 teachers. These teachers have signed open-ended contracts with the Panchayats (US$l25/month for trained teachers and US$lOO/month for untrained teachers). PRIs are thus responsible for payment o f salaries, using funds transferred to them from the State Department o f Education through their corresponding education district office^.'^ However, there were reports o f irregularities in this recruitment process, with accusations o f favoritism o n the part o f the Panchayats for certain candidates and an overall lack o f transparency in h o w teacher applications were evaluated and ranked. In addition, the non-availability o f qualified candidates to fill many posts led to the recruitment o f candidates who were available, irrespective o f their training or quality. This issue became more acute with the enforcement o f the reservations for SC/ST/OBC pol icy in teacher recruitments, and the requirement that 50 percent o f new teachers hired to be females. T o address these issues, the Department o f Education has revised i t s procedures for the second round o f 100,000 teachers to be hired this school year: (i) recruitment criteria will be standardized; (ii) transparency o f the candidate review process will be increased, with proper registries o f a l l applications at the P R I level and third party observation o f the selection process; and (iii) ex post sample-based checking o f the recruitment process wil l be conducted by an independent agency. I t i s expected this second round o f teacher recruitment will be completed by July 2008.

72. Medium Term Reform Plans. I n the medium term, the Government is focusing on strengthening teacher qualification, pedagogical skills and accountability systems. Fol lowing their recruitment, a l l new teachers will be assessed in terms o f their basic education levels (language arts and mathematics) and pedagogical skil ls. T h i s will be carried out by the State Council for Education Research and Training (SCERT), in collaboration with b lock and cluster resource centers and head teachers, to identify additional training needs for individual teachers and to form the baseline for development o f an ambitious teacher professional development program. This assessment will be completed by October 2008. For untrained teachers, they will participate in a 51-day induction training program (including 21 days o f supervised practice- teaching), after which they will participate in a pre-service teacher certification program offered

” A significant proportion of this financing, an estimated R. 1,200 crore, or USD 300 million, i s provided through the centrally sponsored Sarva Shiksha Abhiyan (Education For Al l program), to which the World Bank, DfID and European Commission contribute funding.

23

by the Indira Gandhi National Open University, delivered one day per week at Cluster Resource Centers over a two-year period, assisted by mentor teachers. Successful completion o f this pre- service course i s a condition in new teachers’ contracts for a ten percent salary increase. Trained teachers will also participate in the induction training, and will benefit f rom ongoing in-service professional development offered through Sarva Shiksha Abhiyan. Technical assistance will be provided through a DfID financed Capacity-Building TA Grant to support both teacher competency assessment and professional development.

73. I n addition to assessment of teachers, the Department is committed to clarijj, simplijj and accelerate the payment of teacher salaries, including those financed by the State Treasury and those financed under the centrally sponsored Sarva Shiksha Abhiyan. This i s an urgent task as staff has noted very long delays in issuance o f salary payments to teachers, without which the State i s in a poor position to insist o n improved teacher attendance (many teachers are forced to take second jobs to make ends meet). Electronic banking methods will be used to promote monitoring: PRIs wil l transfer teacher salaries o n a monthly basis directly into teachers’ bank accounts. Elimination o f a l l salary arrears greater than two months will be done by August 2008.

74. Linked to this process of improving teacher payment and assessment, the state will develop a comprehensive Human Resources Management Information System ( H m I S ) for all teachers in the state. This will include information collected during the teacher assessment process, teacher payment updating process, and other key data (years o f experience, deployment, personnel records, etc.). T h i s would also include the 165,000 teachers hired earlier by the state, and both rounds o f teachers w h c h have been hired by the PRIs. This process should be completed by October 2008, and will be supported through a DfID financed Technical Assistance Capacity Building Grant.

75. Once the HR MIS is fully up and running, the state education department, in collaboration with district education offlces, village education committees and Panchayats, wil l develop and roll-out a teacher attendance monitoring system. This will include clarification o f responsibilities for monitoring and reporting o f teacher absenteeism on a regular basis, spot checking by a third party on a sampling basis to verify that teacher attendance i s being tracked and reported, and introduction o f sanctions and remedial measures for teachers who continue to show high unexplained absentee rates. Public announcement and enforcement o f this system should begin with the school year 2009-10.

Health

76. Bihar is well below the national average on most key health indicators and i s the only state where some indicators, e.g., total fertility rate, have actually deteriorated in recent years, although immunization rates have improved rapidly f rom a l o w base. Approximately 400 infants die every day and a mother dies every hour due to pregnancy related causes. Disease burden due to communicable diseases i s high: 90 percent o f all reported Kala Azar cases in India are f rom Bihar and TB incidence o f 989 per 100,000 i s high against the national average o f 544. The state has large deficits o f infrastructure and sh l led personnel, and most health facilities need repairs and are poorly equipped. Of the 38 districts, 14 do not have district hospitals. The state i s short o f 78 sub-divisional hospitals, 549 Referral Hospitals, 135 Primary Health Centers (PHCs), 152 1 Additional PHCs and 7718 sub-centers. In human resources, the state lacks 3,376 medical officers, 19,945 Auxil iary Nurse Midwives ( A N M s ) and similar large numbers o f other sh l led staff categories. N o t surprisingly, only 5 percent o f the rural population has been using public services with 95 percent using the private sector consisting o f allopathic and traditional practitioners, pharmacies, and, regrettably, quacks and the like. Out o f a per capita expenditure o f about US$26, 90 percent i s out o f pocket. The allocation and spending o f the public health expenditure have been inefficient.

24

77. Propress with Reforms. Government of Bihar has undertaken several initiatives to address the above issues andproduce improved health outcomes. Large investments have been made to establish new and upgradehenovate existing health facilities. T o address skilled staff shortages, the government has created 2,100 posts o f doctors and already hired, on contract, 400 specialists and 1,200 medical officers. I t has also similarly hired some 1,100 Auxil iary Nurse M idw i fe ( A N M s ) and i s trylng to hire an additional 12,000 A N M s f rom a l l over the country. The Department o f Health and Family Welfare (DOHFW) has reorganized the existing providers to provide 24 hour services at the Primary Health Centers (PHC). Further, i t has hired over 200 private specialists in Pediatrics, Gynecology, Surgery, ENT, Ophthalmology and Orthopedics, o n an honorarium o f Rs. 500 a month to provide free consultation at the PHCs; further hiring o f specialists on this basis continues. For more effective management, authority t o transfer doctors has been delegated to the district level. Nearly 60,000 Accredited Social Health Activists (ASHAs) have been recruited and over 40,000 already trained. Slulls shortages are also being addressed. T o improve the management at the district level, fully staffed and equipped District Health Society Offices have been established and Rogi Kalyan Samities (Patient Welfare Committees) are being given increased autonomy and financial authority.

78. To increase the system’s capacity, DOHFW has opted for extensive outsourcing of support services and improved monitoring. It has outsourced pathology, radiology and hospital maintenance. I t i s also piloting outsourcing delivery o f core services at the 36 Additional Primary Health Centers (APHCs), and through Mobi le Medical Uni ts for hard to reach areas. I t has introduced a free drug distribution scheme with 13 essential out-patient drugs, 24 in-patient drugs and al l drugs under the national Programs. An effective system o f vaccine delivery for routine immunization through private carriers has been developed and i s successfully operating. The Bihar State Health Society (BSHS) has revamped i t s monitoring through an outsourced State Data Center. Dai ly monitoring includes, by PHC, the number o f out-patients treated, deliveries conducted, other services provided, the number o f patients treated by each doctor, drugs prescribed as wel l as the drug stocks. Data centers have also been established at 450 sites at the district, sub-divisional and PHC levels. Client satisfaction surveys have also been stepped up, with a to l l free number 102 any time day or night to provide access to an ambulance and a pre- contracted health facility for medical emergencies.

79. These initiatives have startedproducing solid, on the ground results. Use o f services at the PHCs and district and sub-district hospitals has increased dramatically. The average o f 39 patients treated per PHC per month went up to 3,000 patients but has stabilized at about 2,200 patients a month. Over 1.7 lakh women and children have been registered for delivery and chi ld health services. About 7,000 institutional deliveries are being conducted per month. Routine immunization coverage, which had been stagnating for several years, has increased from 11 percent to 33 percent in eighteen months.

80. Medium Term Reform Plans. Given the strength of results to date, the Government is building on sustaining these initiatives. I t has approached DflD to explore possibilities for technical assistance to GOB’S public health sector. DflD i s also pursuing the idea o f a multi- sector support operation in Bihar, which also includes the health sector. This might include more contracting out o f APHCs, revamped construction and maintenance, drug procurement improvements and evaluation o f outsourcing initiatives.

Social Protection

81. Bihar has suffered from poor implementation, low expenditure execution, and very low impact for poor households in its key social protection and social werfare programmes. This

has been documented in various Go1 performance assessments, where Bihar has been one o f the poorest performing states on implementation o f social protection (SP) programs. Poor results f rom the SP system have resulted f rom many factors, including l o w capacity o f different actors in the service delivery chain, weak incentives for good performance, weak accountability mechanisms from both “top down” and “bottom up”, lack o f transparency in service delivery which facilitates corruption and leakage, poor SP delivery infrastructure, and fragmentation o f SP programmes across several Departments. As a result o f implementation performance, Bihar’s considerable resources devoted to SP programmes and social welfare services have yet to yield the expected outcomes in terms of reduction in poverty and vulnerability.

18

82. Reform Plans. A range o f initiatives are underway to improve the situation. The Government realizes the need for a sustained transformation o f the SP sector which will require long term investment and will be challenging to achieve in the face o f strong vested interests. However, the potential pay-offs can be substantial. Since 2005, the Bank has been engaged with GOB in advisory work o n the SP sector, including GOB’S reforms o f the Public Food Distribution System (PDS) introduced in 2007, analytical work o n program performance, and technical support to develop a disability pol icy for the state. Government o f Bihar has already requested Bank investment lending support to help realize their goals in the sector, and DEA i s currently considering the lending request.

83. Progress with Reforms. I n the near term, reforms have four key elements:

Transforming the Public Distribution System, the largest SP program providing subsidized grains to poor households. Leakage o f grains in Bihar has been estimated at around 90 percent by Go1 and even higher. T o address these issues, GOB has introduced a food coupon system which it hopes will improve traclung o f supplies and bottom-up accountability in the delivery system. The coupon system has been rol led out statewide during 2007, and the baseline survey for an impact evaluation has been completed. Updating and consolidating the targeting system. Bihar has been using l is ts o f poor households which were based o n a 1997 survey. The PDS and other “anti-poverty programs” were targeting based o n different l i s t s and approaches. Since 2006, GOB has been carrying out a thorough verification process on new BPL (below poverty line) l ists, including a strong role for community verification. The process i s expected to be completed by the end o f 2007. Modernization of SPprogram delivery. The delivery mechanisms for most SP programs are outmoded, with n o effective oversight and reporting. GOB has initiated a range o f short-term measures to modernize administration, amongst others: (a) contracting-out collection and computerization o f basic SP program performance f rom administrative data sources at block-level; (b) improved payment systems in the targeted rural housing program (JAY); (c) piloting o f biometric muster rolls in the major public works program

Addressing social welfare services for especially vulnerable groups: Despite widespread and often acute need, social welfare services for especially vulnerable groups in Bihar have seriously lagged developments in the rest o f India. This includes services for children at-risk such as street children, orphans and working children, youth and children in conflict with the law, people with disabilities, and services for vulnerable elderly. Most o f these policies and programs come under the Welfare Department, which i s in the process o f reinvigorating various institutions which are critical t o social welfare

(NREG); and,

See for example, Planning Commission Go1 2005 report on the Public Distribution System (the largest SP program) and World Bank, Social Protection for a Changing India (forthcoming).

26

service delivery (e.g. Juvenile Justice Boards’ Chi ld Welfare Committees; Commissioner for Disabilities). A f i r s t step has been sanctioning o f posts to cany out core functions.

84. Medium Term Reform Plans. A f i r s t pil lar o f GoB’s agenda o n social protection and welfare services i s to build more efficient, capable and credible institutions to oversee and support services delivery in the SP sector. Second pil lar i s developing systems for public/private partnerships in SP service delivery. A third pil lar i s broadening the SP policy and program mix to enable effective risk management by households, particularly for the poor. The DPL would support this three-pillar SP reform program, supplemented by technical support under the proposed investment project for SP and from grant funds. Specific reform measures include:

0 Overhauling business processes for delivery of rural SP programs, including capacity strengthening of oficials involved in program administration and oversight: While program-specific improvements in SP delivery mechanisms will continue, the RD Department i s planning a more fundamental functional review and overhaul o f business processes and staf f capacity to allow for system-wide improvements. T o this end, a business process and functional review i s planned, as we l l as a training needs assessment, both o f which would be followed by programs to implement the identified needs. Understanding SPprogram impacts and the channels for impact: L i k e many states, a shortcoming o f current SP programs in Bihar i s the lack o f careful evaluation o f impacts at the household level. An impact and process evaluation will be initiated for the key program the National Rural Employment Guarantee (NREG) with TA support during 2008. The PDS coupon reform will also continue to be closely monitored. Consolidating the institutions and policies for social welfare services: Building on init ial steps, GOB plans to have in place in the coming 1-2 years the statewide policies and network for operation o f core social welfare services. This would include programs for at-risk children, people with disabilities, and others. A key principle o f GoB’s strategy i s that partnerships with NGOs, disabled peoples’ organizations and other c iv i l society actors will be essential to go to scale. This will require a transition in the role o f Government f rom financier and provider to financier and regulatodquality assurance which will be challenging. Expanding social insurance for the unorganized sector. As in much o f India, poor households remain very vulnerable to shocks, both idiosyncratic such as health events and covariate. GOB plans from mid-2008 to initiate a phased expansion o f health insurance for unorganized workers, with financing f rom GOB, Go1 and beneficiaries. In i t ia l districts have been identified and preparations are ongoing for introduction o f the program. Strengthening linkages between the SP system and human capital acquisition. An emerging area o f focus for GOB i s how SP transfers can be used to leverage better human capital outcomes. T o this end, programs have been initiated to incentivize school participation among girls and vulnerable groups. GOB would l ike to assess experience and explore how to develop such initiatives into demand-side interventions such as conditional cash transfers, which have proved effective in neighboring countries such as Bangladesh and Palustan. Increasing policy and institutional coordination and coherence across the social protection system: One o f the weaknesses o f SP pol icy in Bihar and elsewhere in India i s that it i s very scheme driven, and that the schemes are implemented across a range o f l ine departments which coordinate poorly. As a result, the SP system i s “less than the sum o f i t s parts”. GOB recognizes these issues and that addressing them i s a long term agenda. In the interests o f improving coherence in the social protection system, GOB will work to strengthen cross-departmental mechanisms for coordination and harmonization.

0

0

0

27

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. LINK TO INDIA’S COUNTRY STRATEGY AND RATIONALE FOR BANK SUPPORT

85. The rationale for the Bihar Development Policy Loan is three-fold. First, it will support the Government o f Bihar’s broad-based program o f reforms and development anchored in i t s Approach Paper to the 11’ Plan. Second, the operation i s specifically l inked to the Government implementing a few critical reforms in fiscal and financial management, governance, investment climate and service delivery that underpin the overall reform program, and are presented in Section V o f this document. Finally, the funding fi-om the operation will help to create fiscal space for development by financing the Government’s budgeted expenditures including retiring expensive public debt.

86. Strategic Importance of the Bihar operation. The India CAS, approved by the Board on August 26, 2004, and i t s Progress Report, circulated to the Board in March 2007, highlights support for poor and reforming states as one o f the main thrusts o f the Bank’s assistance strategy in India. The 2004 CAS represented a shift f rom the previous “focus state” strategy, which had targeted support to only those states willing to adopt comprehensive major reforms, to a broader and more inclusive strategy aimed at providing in-depth support to India’s 12 poorest states, which account for more than 90 percent o f India’s poor, including a particular effort for the Bank to work proactively to build a productive relationship with the four “lagging” states among the 12, where poverty i s increasingly concentrated and public institutions are considered to be the weakest -- Bihar being one o f the four, the others being k s s a , Uttar Pradesh and Jharkhand.

87. Close Alignment of Operation’s Design with CAS outcome objectives. The design o f this Operation i s also very closely mapped to the India CAS and i t s Progress Report, and supports three key CAS-period strategic priorities and outcomes, which are aligned with India’s own development goals: (i) improving government effectiveness (outcomes targeted at strengthening fiscal management and reallocating public resources to priority areas for the poor; improving governance and service delivery); (ii) investing in people and empowering communities; and (iii) promoting private sector-led growth (outcomes targeted at fostering the competitive economy, accelerating rural growth, and provision o f adequate infrastructure). Specific outcomes identified in the CAS along these lines for the 4 priority states, which are supported by this operation, included:

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

88. The operation supports a coordinated and accelerated effort to address Bihar’s formidable development challenges. Along with the aggressive reform effort o f GOB, other stakeholders are contributing to rebuilding Bihar. Go1 continues to deploy large amount o f funds, often in the form o f grants, to build infrastructure and to augment basic services in the state. Many Indian businesses in telecommunication, power sector, agri-business, air transport, construction and financial services are expanding their activities in the state or have announced their intention to

28

invest in the near future. Some o f the important CSOs-cg., Pratham in the education sector, Adithi in water and sanitation sector, Janani in reproductive healthcare sector-are active in the state.

89. The rationale for a long term partnership between the Bank and Bihar has several important dimensions. According to the recently prepared Bihar Discussion Note: (i) There i s strong consensus among informed observers inside and outside India that a window o f opportunity i s now open for change in Bihar; (ii) Evidence o n the ground suggests important changes have already occurred and Bank support would assist GOB in talung i ts planned reforms to the next level; and (iii) Given the large number o f poor in the state, reducing poverty and accelerating growth in Bihar are l ikely to have national and global significance, and thus important f rom the perspective o f achieving the Mi l lennium Development Goals (MDGs).

B. COLLABORATION WITH OTHER DEVELOPMENT PARTNERS

90. The Bank’s policy dialogue and technical work has been carried out in close collaboration with the UK Department of International Development (DJD), for which Bihar i s a focus state; and with the Asian Development Bank (ADB). As elaborated in Annexes B and E and Chart 2 below, the Government’s approach includes a DfID program for TA to improve the state’s administrative capacity and in the urban sector, sector specific budget-support operations in Health and urban development o f Tier-I1 towns. ADB’s program includes support to roads, power, major towns, and agriculture, as wel l as TA in the power and agriculture sectors. JBIC i s also expected to be an important partner for the GOB in selected areas such as the Buddhist- circuit, universities and other sectors. UNICEF i s also a key partner with DfID and the Bank in child health and in the recent f lood rel ief operations. Recognizing the need to coordinate assistance and to be fully informed, and especially not to overload the administrative capacity in the state, a streamlined and explicitly agreed coordinated approach has been adopted from the start o f work among a l l partners, including jo in t visits and information sharing among a l l development partners active or interested in Bihar.

29

Chart 2: A Coordinated Approach to Support GoB’s Reform Agenda

GOB’S Reform Program and Development Partner

support

Physical and social infra-structure (supported by investment operations)

Policy and institutional reforms fsuDDorted bv the DPL series)

1. Fiscal, PFM and Procurement Reforms

2. Governance and Administrative Reforms

3. Investment Climate Reforms

4. Sector-specific Policy Reforms

1. w: ADB (National, State and District Roads), JBIC (Roads connecting tourist spots); WB (Rural Roads) 2. Power: ADB (Distribution) 3. b: ADB (Patna and Bodh Gaya); DffD (Tier-I1 Towns); and WB (Demo project) 4. &&: Df fD 5. Education: WB (through SSA I and 11) 6. Social Protection: WB (proposed investment project) 7. Rural: ADB (agriculture), WB (Rural Livelihood; Decentralization)

1. DfID: Governance Reforms, Urban Sector

2. WB: Public Financial Management, Monitoring and Evaluation, Flood Management, Investment Climate, Roads, Social Protection, Power Policy, Education, PRIs, and Environment

3. ADB: Power, others

Source: GoB’s Development Matrix; WB’s Bihar State Strategy; W B ’ s Bihar Coordination Note

c. RELATIONSHIP TO OTHER BANK OPERATIONS

9 1. A programmatic development policy operation is expected to play a key role in enhancing the effectiveness of other forms of Bank support, by (i) enhancing fiscal space in the state budget for high priority development initiatives; (ii) strengthening overall public financial management and effectiveness o f public spending; and (iii) catalyzing pol icy and institutional improvements, and thereby unblocking innovations in service delivery and possible future investment operations. In addition to the Bihar DPL-I, and national multi-state projects such as national highways, primary education, primary health and otherslg which benefit Bihar, the current program for direct support t o Bihar include:

0 A f i rst Rural Livelihoods project, JEEVIKA, which was approved in June 2007. The project’s objective i s to enhance social and economic empowerment o f the rural poor in Bihar’s districts and will build community institutions, financial support to catalyze livelihoods, and TA to help quality o f public services and private-public partnerships (FY07). A multi-state Rural Roads project, concentrating o n connectivity o f village level roads to district and state roads (FY09). A Panchayati Raj project, designed to improve the functioning o f the PRI institutions and capacities to deliver better quality public services in basic education, health and safety nets (FY09).

0

0

The Bank’s acfiveporffolio currently includes only 1 state-focused project (Rural Livelihoods) in Bihar. However, several of the Bank’s national / multi-state projects are being implemented in Bihar, including Sarva Shiksha Abhiyan (SSA), Disease Surveillance, National Highways I11 and Grand Trunk Roads. Also, about one-third of the Bank‘s Lucknow-Muzaffarpur Highway project (US$620 million), under which a total o f 483 kms o f highways i s being upgraded, falls in Bihar. Altogether, Bihar’s share in the Bank’s total net commitments in India i s about 5 percent (approximately US$442 million as of June 30,2006, plus the addition US63 million for the Rural Livelihoods since committed).

30

Request has been made to DEA for a Social Protection project focused o n capacity building and innovation in major SP programs and for social welfare services for most vulnerable groups. (FY 10) An umbrella Technical Assistance program o f medium-term duration (see Annex E for details) i s being undertaken to support capacity building in al l core areas o f the programmatic series o f the DPLs including: (a) strengthening public financial management; (b) investment climate and private sector development; (c) strengthening monitoring and evaluation; (d) roads; (e) power sector management; ( f ) public-private partnerships in infrastructure development; (g) enhancing PRI capacity; (h) social protection; (i) flood and disaster management; u) environment; and (k) education. The technical assistance program i s financed by DfID and managed by the Bank through an existing DfID Trust Fund arrangement (closing in June 2008) and a new DfID Trust Fund being currently developed (FY09).

0

The Wor ld Bank Institute’s proposed program for Bihar supports the strategic framework for the Bank’s program outlined above, with an emphasis on content provision for DfID’s separate state program aimed at raising the capacity and strengthening o f the public administration and the state training institute. IFC and MIGA have also participated in the investment climate assessment work in Bihar and will be extending technical assistance support to GOB.

D. LESSONS LEARNT FROM OTHER STATE DPL OPERATIONS

92. The Bank’s approach to engagement with other poor states with Development Policy Loans offers several lessons of experience, as set out below. Overall, the main conclusion i s that Bank’s DPL-supported states continue to perform better than the national average o n key economic and social indicators. The results f rom DPLs so far seem to have been good. All states, whether DPL or non-DPL states, have passed individual FRBM acts (thanks to the incentives for fiscal reforms provided by the much broader framework o f support f rom the GoI, especially by providing a bigger quantum o f grants rather than loans for states in fiscal adjustment) and have in aggregate virtually met the target o f reduction o f revenue deficits to zero and reduction o f fiscal deficits to below 3 percent o f state GDP. Whi le causality i s complex and performance hard to attribute with precision, Bank-supported D P L states have on average performed better than non- DPL states, not only in terms o f their fiscal performance, but more importantly, in growth, poverty reduction, public sector reforms, and governance (India CAS Progress Report, 2007). The four main lessons are the following:

0 First, the underpinnings o f successful pol icy dialogue in any state needs to be based o n the preparation o f a comprehensive state economic report and substantial analytical work o n specific areas to identify and focus on the major reform areas. This was done in Bihar where the Bank’s earlier report was influential in setting the dialogue with the Government. The Bank’s timing was fortuitous as the state report was released just pr ior t o the current government taking office.

0 Second, the experience o f other states suggests that strong ownership of the reform process i s a fundamental requirement. In the case o f Bihar, the proposed operation comes as a result o f a home-grown reform process that has allowed the Government to develop, refine and test a large range o f pol icy and institutional reforms over the past two years, leading n o w to a strong commitment, ownership and track record.

0 The third lesson i s that bringing to bear other states’ performance and lessons o f comparative experience in pol icy and institutional reform i s an important value-addition

31

and significant comparative advantage that the Bank can bring to the table, and which i s valued by the new Government in a new state.

0 The fourth i s that states find it useful t o underpin andprioritize theirproposed reforms in diff icult cross-cutting areas such as fiscal, governance and administrative reforms, and where the Bank’s knowledge base o f a comprehensive Development Policy operation can be a decided advantage to the client.

E. ANALYTICAL UNDERPINNINGS AND TECHNICAL ASSISTANCE

93. The Bihar DPL is based closely on several importantpieces of analytical work of the World Bank and other organizations. These include the Wor ld Bank report (2004) “Bihar: Towards a Development Strategy”, the Wor ld Bank report (2006), “Bihar Agriculture: Building on Emerging Models of Success” and the forthcoming Wor ld Bank report “Accelerating Growth and Development in the Lagging Regions of India”. The Wor ld Bank report (2004) “Bihar: Towards a Development Strategy” identified Bihar’s key challenges to be reducing poverty; increasing and sustaining the growth rate; improving the delivery o f services, in particular in health and education; strengthening the accountability, performance, and transparency o f institutions and government systems; and improving the l a w and order situation. The most critical area the state needs to strengthen i s the delivery o f core public services. Chief among these are: (i) improvement o f basic infrastructure, particularly in rural areas; (ii) the support o f agncultural research and extension services; and (iii) the provision o f basic l aw and order. Further the report noted that efforts to reform public finance and public administration will be essential. Bihar i s more dependent than other states on the Government o f India’s support to the State Plan and Centrally Sponsored Schemes to meet i t s development expenditure. One o f the challenges confronting the government o f Bihar i s to increase i t s utilization o f the fairly substantial amount o f resources allotted to the state under Centrally Sponsored Schemes.

94. A forthcoming World Bank report “Accelerating Growth and Development in the Lagging Regions of India” similarly highlights, through empirical analysis at both the state and district levels, important implications for Bihar such as : (i) investing in agncultural productivity growth as the starting point and driver for economic growth and diversification; (ii) the critical importance o f road development, in particular paved road access for villages, where Bihar particularly falls behind; (iii) the wide range o f governance and institutional failure such as l aw and order, and regulatory problems that have kept Bihar’s share in India’s investment flows to be less than 3 percent; (iv) the need to ramp up public investment and development expenditures after more than a decade o f neglect o f infrastructure and social sectors.; and (v) the need to strengthen public financial management for greater effectiveness and efficiency o f public expenditures.

95. Other important and forthcoming analytical work is also ongoing to support this operation more directly. These include the Bihar Implementing Reform Report, which focuses on the careful trackmg and recording o f key pol icy actions o f the Government o f Bihar, as wel l as district-based survey o f the preliminary effects o f such reforms. A second input i s the draft Bihar ’s Public Financial Management Note, which i s underpinning the planned PFM reforms. A third i s a political economy assessment o f reforms to date and priorities for success going forward. In addition to these analytical products, others are related to the DfID financed technical assistance being provided to the Government in the area o f fiscal reforms and service delivery improvements (e.g. jo in t work on an evaluation o f Bihar’s PDS coupon reforms which i s ongoing).

32

V. THE PROPOSED OPERATION

A. OBJECTIVES, SEQUENCING AND PROPOSED IMPACT

96. The overarching objective of the proposed First Bihar Development Policy Loan (Bihar DPL-1) i s to support the implementation o f critical fiscal, governance, administrative and service delivery reforms needed to boost economic growth and achieve faster poverty reduction over the medium-term, which are also the themes o f Bihar’s Eleventh Plan. The priority areas o f the operation -- in broad correspondence with the three pillar’s o f the GOB’S reform program described in Section I11 -- are to: (i) improve fiscal, financial management and governance reforms, allowing stepped up and more effective public investment and services; (ii) raise economic growth through reforms in the agriculture sector, increasing connectivity and creating an enabling environment for the private sector to spur development; and (iii) improve public service delivery in key social services such as education and strengthen anti-poverty programs and social welfare services for the most vulnerable groups. These three areas correspond to the three pillars o f the Government’s 11” Plan. In parallel with BDPL-I, a technical assistance program, financed through DfID Trust Fund, i s under operation and will be augmented to support Government o f Bihar’s (GOB’S) capacity to implement the reform program.

97. Commensurate with Bihar’s fiscal adjustment program and financing need, and in conformity with the guidelines of GoI as revised from time to time, adjustment support from the Bank could be in the form of a programmatic series of operations during 2007-2012. The individual size o f each operation, as wel l as the sectors to be covered i s to be determined at the time o f negotiations depending on progress with reform and Go1 policy. Indicative milestones would be agreed at the time o f negotiating each operation, for a potential subsequent operation. The Bank’s assistance will also allow more fiscal space in the medium-term to fund development activities. In the absence o f such Bank support, GOB would need to resort to more expensive market borrowing, undermining progress towards the development goals. Bank support would also support the state to meet i t s Fiscal Responsibility and Budget Management (FRBM) targets agreed with the central government and avail o f the concessions therein. Because this proposed operation i s budget support lending with relatively weak starting public finance management institutions, satisfactory progress in public financial management practices would also be required, with key indicators such as a significant reduction in stock o f unsettled fund advances and pending utilization certificates f rom a baseline as o f March 3 1,2007.

98. The choice of sectors and prior actions in each DPL is influenced by technical analysis, political economy considerations and lessons learnt from past sub-national DPLs in India, as well as lessons on good practices from international experience (Box 2). Given the pol i t ica l economy context o f Bihar, i t i s important that the Government builds a track record o f delivering visible results on the ground relatively quickly in a few areas o f greatest perceived importance among citizens. If such results are achieved, then it would strengthen the hands o f reformers and encourage the reform momentum; in their absence, unmet expectations could potentially reverse the reform climate, a knife-edge problem common to many regions and countries coming out o f a history o f poor governance or conflict. This explains the focus o n helping the Government scale up public investments, improve agricultural services, develop roads and education services, a l l areas where public demand i s high and Government can deliver relatively quickly. At the same time, experience from Indian States indicates that, sub-national DPLs have a good track record o n delivering cross-cutting reforms l ike fiscal and public financial management and selected

33

administrative reforms. Technical work has highlighted the critical importance o f paved rural roads, agricultural technology and marketing, and facilitating private sector entry in manufacturing, and the long term importance o f education for growth in l o w income states such as Bihar. Keeping al l these in view and the outline o f the GoB’s 11” Plan Approach Paper, the actions supported by the DPL series will be in line with the three pillars o f the Government’s reform plan with the following themes and sectoral coverage:

a. Pillar 1 o f the DPL series will consist o f supporting cross-cutting reforms to strengthen fiscal and public financial management (PFM), strengthen the effectiveness o f public expenditures and improve governance. Given Bihar’s large infrastructure and social sector requirements and the need to rapidly increase investments and i t s past record o f poor governance, increasing public investments in an effective manner and improving governance are the two most important and complementary priorities for Bihar. The PFM systems need to be modernized to keep pace with increased level o f spending and to ensure efficiency in utilization o f resources. In the case of governance, a key priority i s also to strengthen local government institutions as noted in their inclusion in the pol icy matrix. However, as that i s already supported by a forthcoming Bank investment operation, the DPL focuses on public administration and agency reforms.

b. Pillar 2 o f the DPL series will deal with raising growth through agnculture and investment climate reforms and provision o f physical infrastructure. The sequence and coverage o f infrastructure sectors i s influenced by GoB’s reform priorities, perceived binding constraints and the capacity o f the sector to undertake the necessary reforms. The DPL’s focus will be on (i) facilitating entry o f private sector investment; (ii) public-private partnerships in infrastructure; (iii) promoting the dissemination o f agncultural technology and facilitating marketing; and (iv) supporting Bihar to develop i t s roads. This has been based o n consultations with GOB as wel l findings f rom economic work that has highlighted the systematic importance o f roads, especially paved road access to villages and the need to facilitate marketing. Whi le the power sector i s also critical and included in the pol icy matrix, assistance here i s expected to be provided by the ADB with complementary technical assistance from the Bank by a DflD financed TA.

c. Pillar 3 o f the DPL series will deal with improving service delivery in the social sectors, with special focus on education and social protection with the intent to maintain and deepen the education personnel reforms which have begun and support committed counterparts, and to support a similar process in social protection. A set o f cross-cutting coherent, and sequenced education personnel reforms will be supported, which focus o n institutional changes related to devolution o f teacher recruitment to PRIs and overall fiscal management (teacher salaries one o f largest items in state budget), governance, and service delivery. The DPL also supports init ial positive steps in reform o f Bihar’s social protection system such as strengthening overall management o f anti-poverty program in the rural development department, reforms to strengthen the delivery o f NREG and PDS which are expected to mature as implementation capacity i s strengthened. Whi le significant reform actions have been initiated in the key health sector, as discussed in the text and the pol icy matrix, this i s a priority sector for DfID in Bihar and therefore not the focus o f the DPL.

34

B. POLICYAREAS

99. Consistent with GoIguidelines, the Bank support under the proposedfirst operation will be provided in two equal tranches of US$75 million and SDR 23.9 million, respectively. The f i rst tranche would be based o n pr ior actions before Board Presentation and the second tranche will be released after an assessment o f whether the reform program i s on track, based o n milestones agreed at the f irst tranche.

100. Under the First Bihar Development Policy Program, a number of prior actions were identified during preparation, agreed upon at negotiations, and endorsed by the Bank’s Senior Management and the Board o f Directors. These actions have a l l been taken, as explained in Section I11 above. The following eight key measures highlighted as pr ior actions o f the f i rs t tranche o f Bihar DPL-1 have been undertaken.

Prior Actions for Release of the First Tranche

10 1. Bihar has undertaken the following policy and institutional actions under its Program, for which the Bank i s expected to release the first tranche o f the loadcredit in support o f the program.

35

Pillar 1: Fiscal Reforms, Financial Management and Governance

0 Passage and implementation o f the Bihar Fiscal Responsibility and Budget Management Act 2006. T h i s act seeks to eliminate the revenue deficit by 2008/09 and contain the fiscal deficit at three percent o f GSDP fkom 2008/09 onwards.

0 Amendment o f the Bihar Financial Rules, which modernizes financial procedures and rules relating to government procurements and adopt improved Public Works Code.

0 Adoption o f a pol icy that limits overall c iv i l service transfers to 10 percent o f departmental cadres per year with transfers restricted to once in June o f each Fiscal Year and a system o f monitoring and compliance in cases where compliance cannot be fulf i l led due to exigencies.

Pillar 2: Raising Economic Growth through Agriculture and Investment Climate Reforms, and Infrastructure

Scaling up o f Agricultural Technology and Marketing Agency to provide single window service to farmers in al l districts.

0 Repeal o f the Agriculture Product Marketing Control Act. increase competition in wholesale market for agricultural products.

This pol icy i s expected to

0 Enactment o f the Bihar Single Window Clearance Act. This measure will facilitate providing prompt clearance procedures for establishing new enterprises and issuing required licenses and certificates.

Out-sourcing o f project preparation and project management work in the rural roads sector.20

Pillar 3: Strengthening Public Service Delivery in Education

Devolution to Panchayats o f responsibility for a l l new teacher hires, with a f irst round o f approximately 100,000 teachers hired.

Second Tranche Release Conditions

102. The requirements for the release of the second tranche of BDPL-1 will be the following:

0 Satisfactory progress achieved by Bihar in carrying out the objectives o f the operation.

Implementing the fiscal framework and the 2008/09 Budget in line with the Medium Term Fiscal Program (MTFP).

*' Efforts are underway to involve the private sector in a PPP framework for construction and maintenance o f important State Highways.

36

Reduction in the number o f object and detailed heads; alignment o f these with the object heads in Accountant General system and reduction o f budget l ine items with n o object heads.

Hiring o f the second round o f approximately 100,000 Panchayati Raj teachers, which incorporates lessons learned in terms o f (i) standardization o f recruitment criteria, (ii) increased transparency o f candidate review process with proper registries at PRI level and third party monitoring o f selection process, and (iii) sample-based evaluation o f recruitment process by independent agency.

0

--

103. Indicative triggers for a potential Second Development Policy Loadcredit have been selected from among the key policy actions that GOB is committed to take over the next 12 months, as part of its reform program (presented in GOB’S Reform Program Matrix in Annex A). The selection o f prior actions i s based o n the criterion that such an Operation could be l inked to those actions that are especially important for enhancing the positive impact o n the poor and reducing the r i sks o f negative impacts. Indicative reform actions for a potential BDPL-11, whose preparation will be initiated subsequent to a request received f rom Go1 and subject to extant guidelines, are listed below:

Fiscal Reforms, Financial Management & Governance

0 Continued Progress in meeting Medium Term Fiscal Program Targets.

0 Piloting o f e-Procurement in two or more departments

Completing the f irst phase o f establishing an integrated financial management information system by completing the computerization and networkmg o f a l l District Treasuries/sub-treaswries, budget allocation module and automated paybill.

Creation o f a dedicated Monitoring and Evaluation Cell in the Office o f the Development Commissioner.

Raising Economic Growth through Agriculture and Investment Climate Reforms, and Infrastructure

Support to adequate marketing infrastructure for agricultural products, with a design and feasibility study for a terminal market in Patna to be implemented through a PPP model.

Operationalization o f the Bihar State Infrastructure Development Enabling Act’s provisions to attract private sector investment for the development o f physical and social infrastructure.

Preparation and execution o f Institutional Development Action Plan for the roads sector, and establishment o f a road fund to ensure adequate funds for road improvement and maintenance.

37

Strengthening Public Service Delivery in Education and Social Protection

0 Development and piloting o f teacher competency assessment tool and assessment o f 100,000 new teacher hires in terms o f basic education levels (language arts, maths) and pedagogical slulls.

Development and implementation o f a monitoring system to record and improve teacher attendance (for both primary and secondary schools).

Completion o f Business Process and Functional Review o f Rural Development (RD)

Agency reforms for improving public service delivery (e.g. Regional Transport Offices, Land Records, Registration).

VI. OPERATION IMPLEMENTATION

A. POVERTY AND SOCIAL IMPACT

104. The proposed operation is expected to have signijlcant poverty and social impact. The operation’s focus i s to help the Government (i) increase fiscal space for investment in a sustainable fiscal framework; (ii) use these resources effectively through financial management reforms; (iii) improve governance and public administration so that Government’s program can be better implemented and corruption reduced; (iv) invest in rural infrastructure with a special focus on roads and the spreading o f new agncultural technology with private partnership; (v) attract private investment in manufacturing and other areas in Bihar; and (vi) improve public services with a special emphasis o n education and devolution to local government. All this i s underpinned by a strong emphasis on better implementation through regular monitoring and evaluation as spelled in the next section.

105. All of these are growth enhancingpolicies that are robustly linked to higher household consumption including those of poorest households, to improvements in human development, and to poverty reduction. If implemented properly these reforms should have significant impact in reducing poverty and enhancing social development. Policies to promote growth in agriculture with greater private sector participation in the spread o f technology will be particularly important. I t will allow the state to capitalize o n i t s most abundant resources and comparative advantages o f land, labor and water, while improved roads will improve the connectivity between rural and urban areas and integration o f the economy with the rest o f fast-growing India and the rest o f the world.

106. Improvements in governance and administrative reforms will also spur improvements in the broader investment climate in the state and promote social development through better services. Greater private investment and growth o f incomes, employment and earnings will have direct impact on reducing poverty. Access to improved public social services in education and other areas are critical ingredients to improving human capital for the poor and increasing their lifetime earnings which will also help achieve the poverty reduction goals.

107. These gains will be creating a bigger constituency in support o f the reform process -- by creating more fiscal space, higher and more effective public investments, better public administration, greater connectivity, more opportunities for agricultural productivity improvements, a better enabling framework for private investment and improved public services

38

in education, health and social protection. The process might also create possible adverse impacts and those disadvantaged by reform, if not managed carefully. Three potential areas o f possible adverse social impact (teacher recruitment and management, private participation in infrastructure, and public food distribution reform) are discussed below, as wel l as others later (e.g., targeting o f poverty programs). The lesson applies generally. The operation would therefore benefit f rom a strong institutional framework for implementation, monitoring and evaluation and communication particularly focusing o n these areas, as discussed in the next section. The planned operation also supports greater involvement o f c i v i l society institutions and greater participatory processes, especially in enhancing the role o f representative local bodies (panchayati raj institutions) to sustain the reform process.

108. Three policy reforms under this program that are likely to have social impact will need monitoring and evaluation to avoid possible adverse outcomes:

(i) the new system o f teacher recruitment and management by the PRIs; Whi le teacher recruitment and management by PRIs will enhance accountability o f teachers, the success o f this initiative wil l depend o n the capacity o f the PRIs. In addition to the planned monitoring o f schools and teacher performance under this program the parallel Bank investment operation in support o f the PRIs could be used to increase the capacity o f the PRIs and monitor and evaluate the impact o f this measure.

(ii) promotion o f private sector participation o f infrastructure in general and the outsourcing o f road maintenance to private contractors will depend on the abil ity to identify the right projects, the appropriate terms o f contracts and monitoring their performance. In the absence o f such capacity, infrastructure services could even deteriorate. Recognizing this issue, over the next 2-3 years, the government wil l be implementing a capacity building program that would help these PPP agencies and line departments in establishing a prima facie case for the desirability and feasibility for PPPs in their respective sectors and handhold them in structuring, awarding and managing PPP projects.

(iii) introduction o f the new food coupon system for the Public Distribution system, though not directly supported by the DPL, can have an adverse impact through poor targeting and increasing errors o f exclusion (the truly poor are lef t out) and inclusion (the non-poor are included at the expense o f the poor. Recognizing the importance o f this program, a baseline survey has already been completed for a careful impact evaluation o f the new PDS coupon system. Based o n a follow-up survey, the implementation o f the new PDS will be evaluated against a benchmark o f PDS users under the current system.

B. IMPLEMENTATION, MONITORING AND EVALUATION

109. Monitoring and evaluation is critical to measure outcomes and benchmark progress on poverty and other social indicators. This i s even more critical given that Bihar has just embarked on a major reform program whose impact will need to be monitored. However, a key issue for the GOB i s the lack o f capacity to analyze existing data and create additional databases that help achieve the goals o f t rachng outcomes and informing policy. In addition, it also appears that a large amount o f data exist in various departments including l ine ministries and Directorate o f Statistics and Evaluation (DSE). The reforms proposed for M&E and supported under the DfID financed Bank technical assistance program, will assist the Government.

110. Implementation arrangements. A committee headed by the Chief Secretary with the Development Commissioner, Secretaries f rom Finance, Planning and Development and other administrative departments as members will oversee the implementation, monitoring and

39

evaluation o f the reforms camed out in this DPL supported program and the key outcome indicators identified in Table 2 below. The Finance Department will be the nodal and coordinating agency for this operation.

11 1. A dedicated technically wel l staffed monitoring and evaluation cell, supported by DfID t rus t fund supported technical assistance program (Annex E), will be established in the Development Commissioner’s office to support the Chief Secretary’s Committee by January 2008. The cell’s activities will include providing quarterly monitoring reports, developing the reporting frameworks, and supporting the implementing agencies with technical help on data collection and analysis, and monitoring and evaluation methodologies. T h e cell will undertake monitoring and evaluation o f the program following both the implementation o f the policy matrix (Annex A) as wel l as monitoring o f key indicators as outlined below in Table 2.

112. The capacity of line agencies and departments as well as the Directorate of Statistics and Evaluation in the Department o f Planning and Development will also be strengthened for timely data collection, analysis and evaluation o f the Government’s development programs. Furthermore, selected work with other l ine ministries i s also proposed to inform the design o f evaluation o f important pi lot interventions. The Government i s also encouraging wider participation o f local think tanks, communities, c i v i l society organizations and others to provide third-party monitoring and evaluation o f the Government’s programs.

TABLE 2: INDICATIVE MONITORING INDICATORS UNDER GOB REFORM PROGRAM

Indicators (Targets are from latest year to N 2010)

DPL Implementation

Poverty and Human Development (Basic Needs)

Fiscal Policy and Expenditure Management

Public Financial Management

Prior Action Implementation and Second Tranche Review

Analysis o f Trends starting with the N S S 6 1 st Round

Budgets in Line with MTFP Actual expenditureBudget Expenditures remains above 90 percent

State own- tax revenue grows by more than 15 percent per year. Limit the variations in budget introduced by supplementary

on plan expenditures.

estimates to 10 percent.

PFM Reform Plan Implementation Reduce stock o f unsettled fund advances (AC Bills) as o f March 3 1,2007 relating to fiscal years 05/06 and 06/07 by 80 percent by March 3 1,201 1 (50 percent by March, 2009 and 30 percent by March 201 1)and limit utilization of fund advances (AC Bills) to current levels prevailing in 08/09. Reduce the number o f pending utilization certificates as o f March 3 1,2007 relating to fiscal years 05/06 and 06/07 by 50 percent by March 3 1,2009 and achieve 80 percent level o f receiving utilization certificates against grant-in-aid in FY09/10. Increase in average number of bidders for state contracts and decrease in the delay experienced in completing investment projects.

Institutional Arrangement for Monitoring

Biannually Starting From February, 2008, DPL Committee led by Chief Secretam Annual -- Planning, Statistics and Evaluation (using thick and thin rounds)

Quarterly, Finance Department

PFM Committee to be headed by the Chief Secretary

Annual Basis

40

TABLE 2: INDICATIVE MONITORING INDICATORS UNDER GOB REFORM PROGRAM

Indicators (Targets are from latest year to FY 2010)

Governance Reforms

Investment Climate Improvement.

Agriculture

Roads and Infrastructure

Education

Social Protection

10 percent ceiling for transfers o f departmental cadres. Average tenure for the c iv i l service, including All India service

Reduction in perception o f corruption and improvement in service

10 percent annual increase in private investment (Reference:

Reduction in average annual inspection from 11 to 6 per year

Increased number o f in-principle approval under BSWCA Reduction in time to start a business from 41 to 30 days (Reference:

Increase access o f small and marginal farmers to agricultural inputs

Seed replacement rate i s raised to at least 30 percent from the

Increase percentage o f roads in good condition. Percent roads receiving regular maintenance Increase in share o f private investment in infrastructure spending. Improved supply o f primary education, especially in rural areas; Panchayat contracts issued to at least 100,000 teachers Gross enrollment rate (baseline 89 percent) Reduction in out-of-school children (baseline 2.3 million) Pupil- teacher ratio (baseline 63: 1 goal 40: 1).

officers, i s 2-3 years.

delivery as measured by user surveys.

CMIE).

(Reference: I C A 111).

DB07).

and sustainable agricultural practices

current 6 percent

Indicators on expenditure execution and targeting performance o f NREG (as agreed with the RD department).

Institutional Arrangement for Monitoring

Annual - Department o f Personnel and Administrative ReformdThird Party Surveys.

Annual - Department o f Industries

Annual-Department o f Agriculture/Third Survey Surveys

Annual -- Planning/RCD/RED/Third

Annual -- Department o f Education/ Information System (DISE Third Party Surveys to track teacher salary payments and allocations to Village Education Committees.

Party surveys

Biannual for budgetary spending from Finance Department. For targeting, Planning, Directorate o f Economics and Evaluation using NSS where available and RD Department through periodic dedicated surveys

113. With a large number of welfare programs being launched in Bihar, the need to strengthen M&E systems for these schemes cannot be over emphasized. As o f now, there i s n o system in place to track short-term outcomes to assess the programs and undertake mid-course corrections, if necessary. The only data being collected reside in the relevant departments and are more in the nature o f process indicators rather than intermediate or f inal outcomes. Given this, there i s a need for a monitoring system that regularly assesses progress, by focusing on a few key indicators that are priorities for the government o n a regular basis. Some o f the initiatives underway in this area include:

Support from the dedicated M&E Cell. The dedicated cell in the Development Commissioner’s office will assist l ine departments to undertake M&E activities and to build awareness among the citizens about such activities. The M&E Cel l i s expected to prepare an ‘Annual Report’ summarizing the findings o f the key M&E activity in the state. In addition, the Cel l will have the mandate to strengthen outcome monitoring, expenditure tracking related to outputs, specialized surveys that may be useful to assess the strength o f ongoing reforms, and pi lot experiments in areas where GOB i s loolung for better ways to improve design or target welfare schemes.

41

The objective of Bank’s engagement in this area is to create a database and capacity to provide more disaggregated profile of poverty and related indicators for Bihar. GOB i s planning to computerize and analyze the National Sample survey (61st round, state sample). Whi le the Department o f Economic and statistics (DES) has recently received computers and related software support for facilitating data entry, there appears to be l itt le capacity to conduct t imely entry o f data. GOB i s therefore keen to explore outsourcing o f the data entry o f the 61st round state sample to an external firm with DES supervising the work. In the meantime, the Bank, in consultation with GOB, i s initiating some analyses o f the central NSS sample to get an updated poverty prof i le for Bihar and extend the work done using the 55th round. This analysis i s expected to feed into the Human Development Report that Planning Department i s going to prepare with the new data.

The monitoring of the introduction of new Below Poverty Line (BPL) lists for targeting ofpublicprograms. T h i s an important area to monitor in light o f the potential impact on access to benefits for the poor due to errors o f exclusion (the truly poor being lef t out) and inclusion (the non-poor being included). Prior analysis in Bihar and other states o f India suggests that this i s a legitimate concern. The ongoing evaluation o f the PDS coupon reform will provide an init ial vehicle for assessing the distributional impact o f the transition f rom previous to new BPL l ists. On a more systematic basis, comparison o f data f rom the 61st round o f the NSS (which was the f i rs t t o collect information on official BPL status o f households and reflects incidence o f the previous BPL lists) with data subsequent rounds will provide periodic and more representative insights into the distributional pattern o f BPL status under the new lists.

Assessment of mid day meal pilot. The Education Department intends to undertake ‘concurrent evaluation o f the pi lot mid-day meal in a few urban areas in Bihar21. This pi lot involves a community kitchen model where the lunch i s prepared in a central kitchen and delivered to al l schools in the pi lot areas during lunchtime. The outreach o f this pi lot i s very large covering 384 schools with 51,000 students. The assessment will include the quality o f the meals, timeliness o f delivery and impact o n student attendance.

Assessment and improvement of education management information system: Given the number o f reforms and new programs that are initiated, i t i s important for the education management information system (EMIS) to capture these changes to serve as a useful monitoring and management tool for GOB. Along with the efforts under SSA program, the Government i s keen o n developing the EMIS to fit the states’ needs as wel l as innovate to capture new efforts for expansion o f middle and secondary schools. The f irst step will be to assess the existing E M I S and then develop a strategy for technical support to strengthen it.

C. FIDUCIARY ASPECTS

114. Improving public financial accountability is a central part of the reform program in Bihar. Many 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 P F M improvement as spelled out in Section 111 C and Annex D. GOB has demonstrated i t s will to continue the PFM reforms, evidenced by the scale and variety o f actions underway. These

2’ In India, public schools are mandated to provide free lunch to students fiom economically backward families through a program called ‘mid-day meal scheme.’

42

positive strides taken by GOB, i t s demonstrated results and the strong commitment for continued P F M reforms provide a satisfactory basis for the purposes o f the DPL operation.

115. Fiduciary aspects are specifically addressed in this operation by linking access to the DPL to specific improvements in economic and public financial management benchmarks. These include: (i) strengthening fiscal and budget management as per the FRBM A c t and meeting the targets set under the medium term fiscal program; (ii) achieving satisfactory progress on annual benchmarks established under the agreed Public Financial Management Reform Program Act ion Plan on which there i s preliminary agreement and which will be finalized as part o f this operation; and (iii) reforming Procurement Rules through the recently enacted Bihar Financial Rules, which in the f i rs t phase has introduced new rules in the key public works department, based on the model GoI's financial rules. In the next phase procurement manuals wi l l be modernized and e-procurement wil l be introduced in key l ine departments. Section 111 A and Annex D have elaborated on these actions.

116. The Bank has reasonable assurance that the control environment for foreign exchange in the Reserve Bank of India (RBI) is satisfactory for the purposes of 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 central bank in India. The IMF does not carry out a Safeguard Assessment o f the Reserve Bank o f India (RBI). As part o f 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 firms 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 form prescribed by the RBI General Regulations 1949; the audit has been conducted fol lowing auditing standards generally accepted in India.

D. DISBURSEMENT AND AUDITING

1 17. Legal and Disbursement Arrangements. The financing terms and conditions for the IBRD loan and the IDA credit will be reflected through a Loan Agreement between India (as the borrower) and TBRD and a Financing Agreement between India (as the credit recipient) and IDA. Pursuant to the Loan Agreement and Financing Agreement, the Government o f India will onlend the financing proceeds it receives f rom the Bank to Bihar, which i s the sub-national beneficiary o f the operation, in accordance with i t s standard arrangements for providing central financial assistance to state governments. The Bank (IBRD and IDA) will also enter into a Program Agreement with Bihar. The Program Agreement includes a l i s t o f key pol icy and institutional actions that constitute part o f Bihar's reform "program" and the manner in which the Government o f Bihar may use the financing proceeds onlent to i t by the Government o f India.

118. The loan and credit proceeds will be disbursed in two equal tranches of US$ 75 million and SDR 23.9 million, respectively. As part o f the reform program, Bihar has already taken a number o f policy and institutional actions. These "prior actions" are listed in the Program Agreement between the Bank and Bihar and constitute the legal basis for the Bank to disburse the f i rst tranche o f the loan and credit after effectiveness. Evidence o f the completed prior actions was scrutinized at negotiations and found to be satisfactory and acceptable. The release of the second loan and credit tranche will depend o n whether Bihar has met three tranche-release conditions. These conditions are: (1) maintenance o f an adequate macroeconomic pol icy framework; (2) implementation o f the overall program in a manner satisfactory to the Bank; and (3) completion o f specific pol icy and institutional actions to be taken under the program and listed in the Program Agreement.

43

119. Upon effectiveness of the loan and credit, the borrower, i.e., the Government of India (Goo will submit to the Bank a withdrawal application for thefirst tranche. The withdrawal application for the second tranche will be submitted after the Bank and Go1 have assessed Bihar’s compliance with tranche release conditions. In each case, the Bank will disburse the U S dollar proceeds to the credit o f GoI’s account with the RBI. This account i s controlled by the Off ice o f the Controller o f Aid, Accounts, and Audit (CAAA) o f the Department o f Economic Affairs, Go1 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 will transfer the equivalent rupee amount to GOB as per the standard on-lending arrangements for the transfer o f external assistance to states. GOB will confirm to the Bank within 30 days, the receipt o f each tranche and i t s credit into the Consolidated Fund o f the State.

120. The loan and credit proceeds for this operation do not finance specifically agreed activities. The proceeds may be used for any purpose, in support o f the Program, other than to finance excluded expenditures (as defined in the Loan Agreement and Financing Agreement for the operation). Pursuant to the Legal Agreements for this operation, India (in i ts capacity as the borrower o f the IBRD loan and recipient o f the IDA credit) and Bihar will undertake not t o use the proceeds to finance any excluded expenditures. If any amount o f the loan or credit proceeds are used to finance excluded expenditures, the Legal Agreements will authorize the Bank to require India or Bihar (through India) to refund the said amount.

E. ENVIRONMENTAL ASPECTS

12 1. Potential Environmental Impacts. The policies supported by the proposed DPL program entail potential secondary and indirect effects on Bihar’s environment. However, environmental impacts associated with the DPL are not l ikely to be significant as none of them are expected to be unprecedented, sensitive, and diverse. Whi le environmental effects are inherently uncertain, n o direct impact o n natural habitats or physical cultural resources i s anticipated due to the proposed policy reforms. However, mainstreaming o f environmental considerations within sectoral pol icy reforms and improvement in environmental management capacity will enhance the over-all environmental benefits o f the program and will help in attaining sustainable development objectives in the long run.

122. Sectoral Impact - Roads: Reforms in the road sector will strengthen environmental management capacities within sectoral agencies, facilitate private investment and foster adequate maintenance. The proposed reforms include an integrated approach o n environmental management during project planning, design, construction and operation, and will result in improved project management and enhance sectoral capacity to supervise compliance with environmental regulations and contractual provisions with regard to environment, health and safety aspects. Environmental management within R C D and RWD will be strengthened with technical assistance &om the ADB through inclusion o f environmental considerations in the road design manual and performance based contracts. Environment management wil l be mainstreamed in these GOB organizations through institutional re-organization and capacity building o n project management, including environmental aspects.

123. Sectoral Impacts - Power: Reforms in the power sector are expected to result in reducing indoor air pollution by increased coverage and reliability of electricity supply. These reforms would significantly benefit households that currently use biomass for fuel, as it would reduce exposure to indoor air pollution and would facilitate the use o f time for education or economic activities, instead o f fuel collection. Power sector reforms wil l also reduce reliance on polluting diesel-fueled generators. Moreover, Bihar’s diverse natural resources provide an opportunity to generate energy f rom different sources (e. g., water, coal).

44

124. Sectoral Impacts - Agriculture: I n agriculture, another sector supported by the DPL, Bihar is promoting enhanced agricultural productivity technology alongside sustainable agricultural practices. Reforms in the apcu l tu re sector include improvements in governance, which i s expected to have environmental dividends in the form o f increased agricultural output, improved water use efficiency and reduction in water logging and salinity. Specific measures include the following:

(0

(ii)

(iii)

For monitoring soil quality in different eco zones GOB has recently established a grid o f Soil Testing Centres in each district that regularly tests soil quality in different locations/villages. This information i s compiled at the state level and analyzed on a regular basis to both provide information on any deterioration o f soil quality as wel l provide a focused and localized strategy for apcu l tu ra l development that takes into account the local soil needs. In the case o f paddy, Bihar’s main crop, the ATMAs are promoting Rice intensification technology that i s labor intensive rather than input intensive. T h i s environmentally friendly package o f practices has been welcomed by the farmers and slowly spreading informally through Bihar. The Department o f Agriculture i s actively promoting the adoption o f Integrated Pest Management (IPM) practices (such as the feramon trap), which utilizes biological methods o f crop protection, instead o f chemical pesticides. Private sector players are also entering this practice as demand picks up with the farmers. The ATMAs have also adopted this approach through tying up with the Indian Institute o f Pest Management o f the GO1 who i s pioneering research and promotion in sustainable practices in agriculture. The ATMAs are also promoting vermin-compost fertilizers in al l vegetable growing areas through the Horticultural Mission and commercial players are also entering as suppliers o f these products.

125. Strendheninp Environmental Management Cavacitv at the State Level. The GOB is aware about the importance of adequate environmental and natural resource management to foster sustained economic development in Bihar. The State Pollution Control Board and the Department o f Environment and Forests produced ‘the State o f Environment Report’ for Bihar in 2007, which summarizes data on a broad range o f environmental indicators. The report’s indicators point at substantial environmental health risks, as they reflect conditions that are typically associated with significant illnesses among poor children, women, and other vulnerable groups. The GOB also recognizes that environmental and natural resource quality i s l inked with the productivity o f some o f the economic sectors where Bihar can have a competitive advantage. Bihar’s l o w agricultural productivity partly stems from problems with deteriorating soil quality and inadequate management o f water resources.

126. The Government of Bihar also aims to fulfil the responsibilities reserved for state authorities under India’s environmental institutional framework Some o f the existing tools that the GOB currently uses to cany out these responsibilities include the Consent to Establish (CoE), Consent to Operate (COO) and Environmental Impact Assessment (EM). However, as the State o f Environment Report concludes training and other institutional building efforts will be needed to prioritize and enhance the capacity o f Bihar’s environmental and sectoral agencies to ensure adequate pol icy implementation and enforcement.

127. The GOB has taken initial key steps to strengthen environmental agencies. The State o f Environment Report constituted the state’s f i rst effort to integrate and disseminate environmental data covering a range o f environmental factors, including urban air pollution, urban wastes, water pollution, biodiversity and the identification o f environmental hotspots, among others. In

45

addition, the state budget for environmental investments has increased since the inception o f the current administration. Institutional strengthening action plans being prepared as part o f the government program and supported by the Bank, as wel l as technical assistance that will be provided by the Bank and DfID, include capacity building components to enable the sectoral agencies, particularly those in the roads, power and agriculture sectors to enhance their environmental management performance. In addition, the program and technical assistance provided by the Bank and DfID includes institutional strengthening o f the environmental regulatory agencies, particularly the Department o f Environment and Forests (DoEF) and the State Pollution Control Board (SPCB), which will help in enhancing the effectiveness o f environmental management in the state.

128. I n the medium term, the GOB’S next effort to strengthen the environment sector will include the undertaking of a systematic analysis to define its environmental priorities and develop a plan of environmental investments to address such priorities effectively. The State o f Environment Report provides a snapshot o f Bihar’s environmental conditions and identifies further analytical work required to identify the environmental challenges that merit priority attention due to their linkages with economic development and poverty reduction. According to GOB, the needed additional analytical work should a im at identifying regulatory gaps and institutional weaknesses at the national and state level that may limit the capacity o f environmental agencies to adequately manage the environmental impacts f rom developmental activities. This needed analytical work wi l l be supported under the Technical Assistance program and will consider the particular challenges o f the sectors that could be associated with significant environmental impacts, such as roads, power and agriculture. Based on this analytical work and with the support o f the Technical Assistance that will be provided by the Bank and DfID, the GOB will focus during a f i rst stage on strengthening DoEF’s capacity to implement the most relevant environmental policies. Both the identification o f priorities and strengthening o f DoEF and SPCB are expected to be concluded for the DPL’s second operation. Also, in the second DPL operation, similar efforts would be undertaken to cover sectoral agencies with a mandate in roads, power and apcul ture.

VII. R I S K S AND MITIGATION

129. The proposed operation faces five main risks, common to many other similar contexts. The design o f the operation includes steps to mitigate and manage these risks. Whi le successful full risk mitigation in al l these areas i s unlikely, the strengthening o f the measures over time and the potentially large payoff f rom improving the lives o f mill ions o f poor people in one o f the poorest states in India makes this a worthwhile balance o f rewards-to-risk operation.

0 Political Economy Risk. There i s a potential risk o f losing the current reform momentum and/or change in the Government priorities and commitment to reforms. This risk i s mitigated by the planned focus o f the operation on areas o f reforms that can quickly deliver tangible benefits o n the ground, thereby building o n an existing and broad-based constituency for sustained reform (anchored by legislation or administrative regulation where appropriate). In addition, the risk i s reduced by the planned operation that supports creating space for other stakeholders to participate, namely c iv i l society, private sector, and rural local bodies or panchayati raj institutions (PRIs).

Implementation and Capacity Risk. Implementation o f reform may be slower than planned because o f significant institutional capacity constraints. The GOB i s talung specific measures to mitigate this risk. A committee headed by the Chief Secretary with the Development Commissioner, Secretaries f rom Finance, Planning and Development and other administrative departments as members wil l oversee the implementation, monitoring and evaluation o f the

46

reforms carried out in this DPL supported program. A dedicated technically wel l staffed cell, supported by DfID trust fund supported technical assistance program (Annex E), will be established in the Development Commissioner’s office to support the Chief Secretary’s Committee by January 2008. In addition a parallel technical assistance program financed by DfID grants and managed by the Bank i s being simultaneously undertaken, both in terms o f immediate needs to address key areas o f support in this operation, and to strengthen more medium-term capacity building efforts with coordinated support f rom other partners, including DflD.

0 Fiduciary Risk. Fiduciary r i s k s are high in Bihar, especially given institutional and organizational weahesses. Sharply rising public spending combined with a fragmented public financial management architecture results in a risk that public money may not be used either appropriately or effectively without reform. This r i sk i s addressed by the operation’s emphasis on governance and anti-comption initiatives, and by supporting transparency, disclosure, and other demand-side interventions. I t i s also addressed by the a strong program o f strengthening a l l aspects o f the basic structures and organization o f public financial management, including the credibility o f the budgetary process, predictability and control in expenditures and budget execution, public procurement, accounting, recording and reporting and external scrutiny and audit. These measures will take time, and the risk mitigation strategy therefore focuses o n immediate priorities and appropriate sequencing, including a focus o n key expenditure l ine authorities, including the Departments o f Finance, Roads, and Rural Development.

0 Deterioration of Security Risk There i s a r i s k o f deterioration in security, and law and order situation. This risk cannot be directly mitigated. The operation would rely o n the Government’s commitment to improved security.

0 Disaster Management Risk. There are risks arising f rom frequent natural disasters, such as floods, that may defer or derail reform momentum. Risk mitigation measures not directly included in this operation, but supported elsewhere, include supporting the Government to strengthen its disaster and flood management programs o n a more sustained basis.

130. Exit Mechanisms. Finally, the proposed operation i s also significantly self-limiting in respect o f some o f the fiduciary and reputation r isks because o f the essential features o f the Guidelines for DPL operations established by the Government o f India. First, one-half o f the proceeds o f the operation i s expected to be used by Bihar to reduce recourse to or repay more expensive debt. Second, the Operation i s also a two-tranched operation, front-loaded with pr ior actions. The release o f the second tranche i s conditional on satisfactory performance by the state on essential fiscal and other key Public Fiscal and Financial Management triggers. T h i s design provides a mechanism for continued monitoring o f the progress made by the state in fulfilling i t s program. In addition, the FRBM Ac t provides incentives for adherence to prudent fiscal management. Because this proposed operation i s budget support lending, satisfactory progress in public financial management practices would also be a useful benchmark for measuring progress, with key indicators such as a significant reduction in stock o f unsettled fund advances and pending utilization certificates f rom a baseline as o f March 31, 2007. In the event o f non- performance on the second tranche andor unsatisfactory progress o n public financial management benchmarks, an automatic exit route is therefore in place both in the near-term and in the medium-term for the program as a whole if significant risks eventually do materialize and are unmitigated by the steps mentioned above. The reputation r isks are also fundamentally self- limiting because the greatest reputation risks o f the reform program are faced by the Government itself, providing strong self-reinforcing incentives for better performance and management o f r isks.

47

13 1. The prospective gains from improved performance and reputation enhancement, relative to risks---in the event o f even some modest success in achieving the expected policy improvements and outcomes---are significantly larger. The positive impacts would be large not only for Bihar, but also for illustrating the way for other large poor states in India, and for the achievement o f poverty reduction goals in the global context. In a state with 90 mil l ion people and nearly 40 mi l l ion in absolute poverty, even a small change in improved governance, fiscal space, effectiveness in public spending, and stronger delivery o f key services would potentially make a large difference, not easily possible in other contexts. The program draws o n well- established success track records elsewhere in India and in Bihar. The strength and record o f the Government o f Bihar, the strength o f i t s reform program, i t s public commitment, the support o f the Government o f India, and those o f the broad c iv i l society in Bihar and India are at the end o f the day the strongest risk mitigation reasons in support o f this Operation.

48

Annex A ANNEX A: GOVERNMENT OF BIHAR'S LETTER OF DEVELOPMENT POLICY

a. a. V J f DR. D. SUBBARAO

Mr. Robert M. Zoellick President The World Bank 1818 H Sfmet, NW Washington DC 20433 USA

faiT39f=n D.O. N0.111/2007-FB.N

37rmwvjRffsrm fk+ilwi

*- m 3 m J i m

FINANCE SECREFARY DEPARTMEKT OF ECONOMIC AFFAIRS

MINISTRY OF RNANCE GOVERNMENT OF INDiA

New Delhl Tel : 2309261 1,23092555 Fax : 23094075

November 20,2007

Dear Mr, Zoellick:

I am attaching the Letter of Development Policy dated $7 November 2007 from Chid Secretary to the Government of Bihar. The letter outlines the agenda through which the Government of Bihar proposes to strengthen and consolidate its reforms process, and for which it has sought assistance from the WorM Bank of US $225 million.

2. for the consideration of the World Bank.

Government of India supports this initiative and commends the proposai

Yours sincerely,

(D. Subbarao)

End: as above

Annex A

D.O. LetterNo ... 2..%..ol.FC Dated.1 l... Nov., 2007

Subject: L e t t e r of Development Policy World Bank's Pint Bihar Development Policy LoanKredit (BDPL-I)

As you are aware, the Government o f Bihar is negotdng the first Bihat Dwebpment Policy LoanfG.adit as part o f a senG o f programmatic Development

Pohcy L a w ' W t s with the World Bmk I would like to take this .opportunity to

apprise you about the wide rangmg initiatives taken by the governinmt since

Noverdber 2005 in terms o f ;mproving governance, strengthening infrastructure,

upgrading public service delivery and attracting private investment and the future '

po~icy r e f o m this govcmmcnt mtends ro pursue in the me&um term. -- - . _ _ _ __

2. Governance

2.1 To begln with, t h e Government bas emphasized establishmg the rule o f law. In

this d~ection, the Government bas taken a number o f measures, including

strengthening the police forces, supporttng the judiciary, and paymg attention to due

process and the admhstrabon ofjustice . The results have been encouraging on the

ground and the Government i s committed to monitoriug the situation carefully. The Govemmcnt has also inshtutcd processes to make itself and its programs more

accountable to the people T h i s includes successlirl elecaons to the gram panchayats

T h e move to reserve 50 percent o f the seats for women across all categones in these

elections has resulted in tremendous enthusiasm, and 58 percent o f the seats now

have women elected to these local bodies Over time, this is expected to have major

benefits €or delivery of health , educahon and other social protection programmes.

I I

i i I

I

I I

2.2

and Development and then enacted Fiscal Responsibility and Budget Management

Act, 2006 (FRBM) within first three months o f coming to power to ensure

T h e Government brousht out a stock-taking White Paper on State Finances i

2

Annex A

transparency, discipline and accountability in financial transactions. Even thou& this meant imposing limits on expenditure and balancing income md expcnditurc, the

Government remains committed to the macroeconomic stability and budget discipline

for long term benefit to the State. Simuftaneously, an Administrative Reforms

Commission was set up. The Comrtision has submitted its first repait on

rationalization of departments and delegation o f powers for streamlining pvmance. The state government has already implemented many o f the recommendations,

notably those pertaining to delegation o f administrative and financial powers to the

depmcnts which has rossulted in simplification of procedures and speedier approval

of plan schemes .

2.3 The State Govmamwt has mended the Bihar Financial Rules based on Government of India’s Financial Rules 2005, m o d d n g and simplifying financial

procedures and the rules relating to government procurement. The archaic Public

Works Dcpartrnent (PWD) code has also been modified to take h t o account modem

pmcurcment and contracting practices. Instead of the traditional votoon-account. full

bydget i s being passcd by %e legislature for the last !,wo years, This i s the mo!t

important mcasure that has resulted in faster implementation o f progms. The State

Government M l y appreciates the importance o f continuity and stability in

administrative system for formulation o f development policy as well as i ts

implementaticm. Kceping this in view, it has hem decided to limit the transfer o f government ernployea to 10% of cadre strength and that t u 0 only once in a yea in

June. At the same time rhe state government has fostercd local level accountability in

development administration by strengthtnlng the Panchayati Raj Institutions (PRls)

and Urban Ix>cal Bodies WBs). Bihar is the first stale in the country to have 5Wo rwmation of scats for women in both PRIs and ULBs under the newly enacted Bibar Panchayati Raj Act and Bihar Municipal Act respectively. More and more functions

are being devolved to thcse local bodies to enhance the effectiveness af public

expenditure and enswc accounrability. The effect o f these refomis has been a rapid increase in the development expenditure and greater mobilization and utilization of

central funds.

3. Public Sen ice Delivery

3.1 The State Govmnment has also taken significant initiatives for improving

public s m c e delivery in education and health scctor. In case o f education, a

3

Annex A

comprehensive educational refom process i s under way. fn order to bring teacher

pupil ratio to national n o m of 1:40, about 100,000 teachers have been recnxitcd by

panchayati raj institutions and urban local bodies. As these teachers would be under

the discipline and control of thcse democratically elected local bodies, the problem o f

absenteeism t h i s sector also i s expected to be significantly addressed. Tnfrastructurc

in schools is behg upgraded under the "Mukhya Mantri Samagm Vidyalilya Vikas

Yojana" (CM Integrated School Development Project) in tandem with funds provided

through Sarva Shiksha Abhiyan. As a result of these initiatives, the number o f out-of-

school chi ldm i s rapidly falling. Rihar the first state in thc country to t&e initiative

fin the "Ckmmon School System" and a Commission was set upfor the same. The

Commission has since submitted its report which is under consideration o f the Government. Similarly in the health sector, entire chain of health facilities from

primary health centres and sub centres to hospitals i s being upgradecf. Commonly

required rnodiclnes me now being provided free to all the patients. Diagnostic smices

have been outsourced and are being provided at a reasonable cost at PHC level. In

order to tide over immediate shortage, doctors and paramedics have been taken on

' contf8Ct to ensure health sWices in rural arms. Average number o f patients visiting a

PHC every month has now gone up f i ~ m a mere 39 in January 2006 to about 2,500

now, clcarly demonstrating increasing faith of people in government services.

4. Investment Climate

4.1 The State Government realizes the i m p w c e of pnvate investment in

rcbuilding Bihar. The key ingredients for private sector investment - rule o f law,

infiastructurt and hassle-he, lighter regulation are the main focus o f the new

Government. The Government is trying to skemgthen arid modernize police administration, provtding basic facilities and infrastructure, and ensuring speedy trials

so that guitty are brought to book expeditiousiy. Bihar i s the first state in thc country

to enact a new Police Act. As rcgards inbstructurc, more than 50% of plan

expenditure is being earmarked for infrastructure particularly for roads and power. A huge investment o f Rs 17,900 cmros i s underway for 4-lanjng of 700 kms of National IIighways, 2-1anhg of 3.000 kms o f State Highways and other major district roads. h

rural roads sector, besides PMGSY ( the Prime Minister's Rural Roads Program

which aims to connect a11 the habitations having population more than lOOO), the

State Government has launched Mukhya Mantri Gram Sadak Yojana to connect

habitations having population between 500-999 and Mukfiya Maiitri Setu Nirman

4

Annex A

Yajna for construction o f missing bridges. In power sector, in order to o v m r n e the

severe shortage of power, joint venture i s being formed with Central Public Sector

Undertakings and old power plants are king rehabilitated and modernized at

Muzaffarpur and Barauni.

4.2 The State Cdvernment bas alsa decided to encourage public-private partnership in infrastructure sector. For selection o f private p m m in a transparent

mannerT the state government i s taking the help o f I U F S and IDFC as transaction

advisors, Project preparation and project management work in the state's rural road

sector has been oursourced to private sector. A joint vcnturo company i s being farmed with U F S for identifying priva.te partner for greenfield electricity generation plants at d i f f m t locations in the State. DFC and E&FS are advising the state government in selection of private partners in urban, tourism and industrial infrafitructuse sectors

too. In order to reduce the difficulties o f private sector, Bihar Singlc Windows

Cleatancc Act, 2006 Iias bccn enacted and a high powered State lnvestment

Promotion Board has been set up for coostfmation and one point clearance o f investment projects. New Industrial Policy, 2006 bas been announced for attracting

jnvestmenl. Shops a d Establishment Act has been amcnded to do away with annual

renewal o f licenses. As agriculture i s the core crzmpetence o f the state, with ncarly

80% o f the rural population engaged in agiculture and accounting for 40% of GSDP,

the state government has focusd on improvmg the productivity in agriculture sector.

I t has been decided to extend the Agriculture Technology and Marketing Agency

(ATMA) to dl the districts in the state to provide a single-window service to f m e r s .

The Agricdfure Product Marketing Control A a has been repealed. T h i s i s txpccted

tu open up opportunities for direct purchase o f farm produceby organized retail unils,

agto-processing units, exporters and agcncies involved m contract farming - providing additional avenues to famters to sell their produce and creating greater

competition in the agricultural marketing system.

5. Need for Programmatic Development Policy Loans

5.1 The Statc suffers from a huge development deficit. Improving infrastructure,

strengthening public service dtlivcry and provrding safety nets to the disadvantaged

sections o f the society require substantid financial resotme$. Enactment of FRBM

Act has limited the msource av;UIabiIity for deuelopment expcnditurc. Therefore the

govemmeiit i s trying to create fiscal space to mea its development requirement by

5

Annex A

looking for cheaper resources within i ls E'RBM limits so as to deepen thc reform

process. With this end in view, the state government is in discussion with

development partners and also negotiating this loan as first of a series of

programmatic Develapmmt Policy Loans with the World Bank to support the Bihar's

1 lth Plan objectives. Government i s in dhialogue With all major development partners

in a well coordinated way in order to avoid duplication and to save time.

6, Road Map for Devebpment

6.1 T ~ E State Govcmmcnt has had several rounds o f discussions with the World

Bank tcam. As the State Government had already taken various pohcy and

institutional reform initiatives including fiscal reforms, financial management and

accountability, economic reforms for inclusive growth, public service delivery and

human deveiopment, the prior actions identified jointly by the WB team and the Slate

Gavement officials have already been completed. M e r delailed dialogue between

the Bank team and the concerned Administrative Secretaries of the State Government,

Covemtnent o f Bthar has prepare$ the attached policy matrix, which is based on the

State Govermnont'ss"Appro@h Paper fur 112 Five Year Plan - A yisiision for

AEceferatcd Inclusive Growth" brought out in 2006 and would form government's

road map for t h i s and future Devclaprnent Policy LoandCredits. The Statc

Government has embarked upon a strategy for rapid growth and development in the

state shce the past two years, and i s mkng cansiderabfe progress towards these

goals. I ts program to address the development challenges o f the state, as envisaged in

its Approach Paper for 1 l'h Five year Plan rests on three mah inter-related pillars:

.

.

Creating fiscal space with continued reforms in fiscal policy, public financial

management and governance,

* Crating an enabling investment climate €or growth in industry and agriculture, and

Delivering public services including social protection efficiently with more

accountability

6

Annex A

6.2 Creating fwcal space witb Continued Reforms in Fiscal Policy, Public FfnanciaI Management and Governance

6.2.1 One o f the most serious impediments to the state’s growth has been the shortage

of investment flows from pubfic sou~ces, which in turn has impeded private captal

formation. This has constmined other sectors ofthe economy, such as agriculture and

industry. State Government plans to step up public investment, doubling the Tenth Plan levels, IO an average ranging betwem 8-9 percentage points o f GSDP, with

iniproved utilizatioil of existin% assets. In the medium term, Gov&nment refomis in

fiscal areas wil l focus on three objectives: (i) enhance the effectiveness o f the budget

as an economic policy tool and strengthen the capacity for economic analysk of

budgetary policies in the Financc Department; (ii) to implement a medium term fiscal

reform p m p m that provides more fiscal spacc for development and public investment in a sustainable manner aver the medium term; and (iii) increase the effectiveness of public expenditures.

6.2.2 To achieve the fvst objective the plan i s to establish an economic analysis cetl in the Finance Department that will prepare and update the medium term fiscal program

in line with the Govcment’s development prioritics and fiscal management targets,

and also improve debt management capacity. The State Government will devclop

institutional capacity €or managing fiamncial risks associated with foreign currency

loans as it i s externalizing its borrowings. To meet the second objecljve, the

Gowmment is preparing its Medium Term Fiscal Program (MTEP) {copy attached}.

This NTFP shows that the revenue deficit target indicated by the Twelfth Finance

Commission has been met, and state is on c o m e to mmt the fiscal deficit target o f

3% of GSDP. Overall the fiscal progrm provides a good balance between

accommodating sizeable increases in capital and O&M expenditures over the next

four years on the one hand and maintainig deficit and debt mmiigemeat targets on the other. T h e State Government is now beginning to rapidly increase much needed development spendmg io catch up for past low levels o f spending. The Statc

Government’s sectoral priorities, as refleded in 1 I’ Plan will be on rural

development, infrastructure and social services.

6.2,3 The State Government’s third objective i s to enhance expenditlire effectiveness

in key service departments through a range o f initiatives including improved

7

Annex A

monitoring of expenditures in dcpamtents supported by the Integrated Financial

i Management Information System o f networked tseasuries, medtum term expenditure

fhnework that link budget and expcndinue to policy goals, and strengthened public

financial managcment and accountability systems (PFM). The overall program has

three core elements:

0 Strengthening PFM fbndanentals in the State Government, as wcll as in

Urban and Local Bodies;

Smgthening the linkage between budgets and spending; and hiproving the effectiveness of spending.

* - 6.2.3'.1 SnengUrenhg PFM firndamenrals: The Slate Government has already engaged consultants for thorough overhaul o f i ts old budgct, financial and

treasury rules and internal audit manuals. In addition to work at the state Level, the

state government also intcnds to have ncw financial management rules for urban and

local governments in sccordame with new legislations. The Statc Govcmment ha%

alrcady initiated the creation of Integrated Financiat Managerrient f nforniation System

through ongoiig networking of treasuries.

6.2 3.2 Strengthening the iinkage benveen budgels and spending:

Strengthening the linkage will require improved budgeting as well as systems for

accounting and rnoniton'ng spending. The state government's strategy includes

modernization of systems (reduction in the number of budget items and the number of

drawing & disbursement officers), procedural chmges (relating to the issuing o f fund

advances or the collection of utilization certificates) and policy changes (creation o f

budget that ktegratcs plan and non-plan expenditures, pwiodic reporting o f the

financial position of major societies). The implementation of budget i s already being

monitored on a quarterly basis and a report i s presented to the legislature as wcll as

publicly disclosed.

6.2.3.3 Improving the efleebiveness of spending: The third set o f actions identified

ccntrc around steps to improve the effectiveness of public spending. Initially, the slate

govcmmmt intends to improve its ability to plan by identifying its medium-temi

fiscal framework. The government's ability to control spending will be augmented by

a strategy to strengthen internal audit. Immediate gains are expected throu@ ptlot

activities to improve oversight o f spending in swo core spcnding departments - state

8

Annex A

roads and rural development. These initial efforts will bc reinforced by steps to

ensure completion o f on-going capital investment projects, the pitoting of risk-based

internat audit in two departments, thc piloting of e-procument, and the introduction

of mechanisms to track responsiveness to AG audit reports. Pilot work m improving

the management of public funds in Rural Devcfopmont will be followed up with the

creation of consolidated financial reports in PRIs which will bring Zogether financial data regarding all spending happening within these entities. Ultimately, the state

government intends to establish medium-tern expenditure plans in key departments

aid support &is budgeting innovation \vi& m u a l perfonname reports from cach

department which allow for an assessment o f h c i a l and physical performance.

6.3 Agrieultnre:

Creating an Enabling Investment Climate €or Growth in Industry and

6.3.1 Increased public hvestment and enabling private investment in b~frastxucrm,

conttnued policy refoms in all sectors and good governance will remain the focus of

the govemdmt to haw a significantly ifnprovd investment climate-.

6.3.2 Infrastructure- Road, Pmver and Urban development

6 . 3 2 1 While emphasizing increased public investment in providing infrastructure,

capacity building will be undertaken in these sectors to utilize the available statc

funds, to access more funds from Government o f India and also to attract private

investment With the enactment of the Bihar State Infrastructure Development

(Enabling) Act, 2006, the Government intends to lake up more public private partnership projects in all infrastructure sectors. G o v m e n t intends to prepare and

execute a comprehensive Institutional Development Action Plan for the road sector

and also to explore various financing options. Similarly in thc power sector, a new

policy i s being worked out far sector reforms focusing on generation and distribution, encouraging private investment, bringing down transmission losses and

developing a mdum term power sector strategy,

9

Annex A

63.3 Industry and Agriculture

6.3.3.1 The State Government inlcnds to furthcr streamhc inspection procedures to

make the regulation lighter and investment hendry. It h a s already been decided 10

attract private investment in State-owned Sugar Corporation through a transparent

bidding process. The State Government has already signed all MOTJ with NABI\RD to reform the nual cooperative credit sector and intends to make legislativc changes IO

cany out these reforms. Land Commission has been set up and a process for

comprehensive computerization of land records has hecti taken up. Participatory

irrigation management systom wiU be expanded furthw through setting up of more

Water Usm Associations. There i s a pIan to set up a grid o f marketing infrastructure

for agricuttmal products with a termrial market in Patna rhrough a PPP modcl.

6.4 More Accountability

Delivering Public Services including Social Yrotecticm Efficiently with

64.1 While significant strides hatre been made in the delivery of health and

education services, continued reforms arc still needed. Important lessons have bccn

learnt in the hiring of lOQ,OOO teachers by Panchayats ia the first round, and

Government intends to further standardize recruitment criteria, increasing

transparency o f candidate review process by involvhg independent agencies for

second round of hiring. There is a need for imparting training to the newly recruited

teachms for improving basic educational and pedagogical skills. In the health sector

too, Government plans to strcngthcn human rcsourccs with more accountability.

Government intends to continue further outsourcing o f health services at all levcls.

There i s a plan lo develop Human Resource-Management hforrnahon Systems

{HRMIS) both for teachers and doctors and to have comprehensive monitoring

systems to improve their attendance and delivery of public services.

6.4.2 Improving Social Protection

6.4 2.1 As part o f lh js broader.sh.ategy o f improving the delivcry of essential public

services, the Govemmmt also intends to address programs o f vital interest to thc

poor, and to take mcasurcs to strengthen social protection generally. Govcmrnent has

already introduced the system crf coupons for distribution o f foodgains and kerosene

10

Annex A

oil as part of the Public Distribution System. By using a coupon syslern, i t will be

cnsfared that cach eligible family i s actually able to draw the supplies from the

local ration shop. The list of BPL (Below Poverty Line) beneficiaries i s also being

updated tlmugh a comprehensive system, using a 13- parameter scale of a minimum

standard o f living ta identify Ole poor . The new list will be vcrificd by &e local

community. Based on this revised and updated list, the coupon system now in place

will help check leakages from the pubIic distribution system and better target the intended beneficiaries. Thcre i s also a plan for introduction of e-attendance system in

all beneficiary oriented social protmtion programs for increasing lhcir ttflmtiveness.

In addition to these plans, the Government intends to strengthen the program delivcry

systems and mechanisms, illcludjng theif consolidation as needed, and improvmg

their effectivmcss across a large range of existing mterventions. The focus af

business process improvement wit1 be on the Rural Development and W c l h

Departments. There i s also a commitment to extend social protection Tor the most

vulnerable pups-cfiildren at risk, poorest communities with special needs, peopIc

with disdbilities, women and the vulnerable elderly.

7 Monitoring and Evaluatioo

7.1 The Gavemment is fully committed to improving the monitoring an3 evaluation

of its programs. A committee heded by the Chief Secretary with the Development

Commission, Secretaries from Finance, Planning and Development and other administrative departments as members will oversee the implt?mentation, monitoring

and evaluation o f the reforms camcd out in this DPL supparted program T h e

Finance Dcpmcnt will be the nodal and coordinating agency for this operation.

7.2 A dcdicatcd technically well staffed cell will be established in the Development

Commissioner’s office to support the Chicf Secretary’s Cornnittee by December

2007. T h e cell’s activities wit1 iacludc providing quarterly monitoring reports,

developing the reporting frameworks, and supporting the implementing agencies with technical help on data collection and analysis, and monitoring and evaluation

methodalogies. The capacity of l ine agencies and clcpartments as well as the

Directoratc o f Statistrcs and Evaluation in the Departmcnt of Planning and

Develaprncnt wi l l also be strengthened for timely data collection, analysis and

evaluation of thc Government’s developmcnt programs. Furthermore, sclwtcd work

with other line ministries i s dso proposed to inform the design o f evaluatiun o f

11

Annex A

important pilot interventions. The rjovemment i s also encouraging wider participation

of local think tanks, communities, civil society organizations and others to providc

third-party monitoring and evaruation o f the Government’s p r o s CJ dms.

8. In view of the strong commitment o f the Statc Government for reforms and

development and a huge histmica1 deveiopment deficit o f thc State, it is requested that

full support be given by the Ministry of Finance, Government of India for pursuing

the Development Policy Loan tranches with the World Bank. Mnisby o f F i m c e is

requcstcd that State g o v m e n f ’ s proposal for the First Hifiar Dcvelnprnent Policy

Laan/ Credit may be recommended to the World Bank for approval.

Dr. D. Subba Rao, Secretary Department of Economic Affairs MiaPtry of Finance Government o f India NEW DELHI,

12

. . . e

E .I

b s Q2

m 3

d 3

I I

e

e e

e e

vr 3

e e e

e

e

0

0 0 0 0

0 0

0 N

. .

. .

.

.

. a

a I

0 0 0

0 0 0

0 0 0

N N

c

B

Annex A

25

Annex A

MEDIUM TERM FISCAL PROGRAM

26

Annex B

ANNEX B: GOVERNMENT OF BIHAR’S DEVELOPMENT PARTNERSHIP FRAMEWORK

The Bank’s involvement in Bihar is part of a broader initiative by GOB and several development partner agencies, including ADB, Dji’D and JBIC, to support the State’s development agenda. GOB has been workmg on a framework for development partner engagement that takes into account the comparative advantage o f the partners and outlines non-overlapping areas o f engagement with each o f them (see below chart’). Apart from analytical and advisory activities, GOB intends to seek assistance through three different instruments: budget-support operations, investment operations and technical assistance. The proposed DPL operation by the Bank wil l be the only instrument to focus on cross- cutting reforms, while DflD’s budget support operation will be restricted to the health sector. The investment operations will form the largest component o f development partner assistance, providing funding to create new physical and social infrastructure as wel l as to upgrade the existing ones, primarily in roads, power, urban and rural water supply, and health, education and social protection sectors. As indicated earlier, given i t s weak implementation capacity, GOB will seek a number o f capacity building technical assistance operations from each o f the partners as shown in the third column o f chart-1. The design and contents o f the DPL series has therefore been prepared keeping the overall partnership framework in mind.

WB (Rural Roads) 2 Power ADB (Dismbuuon) 3 urban ADB (Patna and Bodh Gaya), DflD 2. Sector-Specific Budget

5 Education WB (through SSA I and 11) 6 Social Protection. WB (proposed investment

7 Rural ADB (agnculture), WB (Rural Livelihood; Decentralization) 3. m: Power, Agnculture.

I I

I Source: GOB’S Presentation, July 27,2007; WB’s Bihar State Strategy; WB’s Bihar Coordination Note

’ T h e chart i s reproduced from a presentation made by GOB to the Bank DPL mission during July 22-27,2007. 1

Annex C

ANNEX c: THE NEW CENTER-STATE REVENUE SHARING FRAMEWORK AND BIHAR’S PUBLIC FINANCE’S OUTCOMES AND PROSPECTS

Center-State Revenue Sharing Framework

1. Many of the structural andfiscal reforms required to accelerate India’s growth and reduce poverty are in the domain of the states. Improvements in the composition o f public expenditures, improvements in the investment climate (through the removal o f bottlenecks in product and factor markets), as wel l as more effective delivery o f education, health, and safety-net services, a l l require significant policy and institutional reforms at the state level. In addition, almost ha l f o f the consolidated fiscal deficit i s made up o f the state-level deficits. State-level development efforts and reforms are thus key to India’s development and recognizing this an elaborate inter-governmental fiscal framework provides significant f l ow o f fiscal resources f rom the Un ion Government to the States.

2. The inter-government fiscal framework is determined by Plan and Non-plan transfers. The former through support to the state plan and the latter on the recommendations of the Twelfih Finance Commission (TFC) for the period 2005-10. Under this framework, the TFC has increased tax devolution to states f rom the existing 29.5 percent to 30.5 percent o f the net proceeds o f a l l shareable central taxes and duties. Revenue transfers f rom the center t o the states have been budgeted to increase by one percentage point o f GDP in 2005106 alone. Several new reform incentives for states have also been introduced that will impact State and central finances:

0 A Debt Consolidation and Rel ief Facil ity (DCRF) replaced the Fiscal Reform Facil ity which was based o n progress on a single indicator-the revenue deficit. 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 under the DCW; and the states are also offered a waiver o f annual repayment as a reward for meeting prescribed annual targets for reducing the revenue deficit and the fiscal deficit.

The terms o f support f rom the center to the states have changed. Central support to state development plans will now 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 andor external development partners in support o f their state plans. On-lending o f external loans will be at back-to-back terms, instead o f the practice o f the center intermediating and passing on a l l external loan funds at the standard terms o f central support t o 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, increased by 50 percent in 2005106 alone.

3. Implications of the TFC award for Bihar include: (i) a larger share in central revenue sharing (for all states and for poorer states including Bihar), (ii) reduced debt servicing contingent on continued improvements in fiscal performance; (iii) a harder ceiling on overall borrowing; and (iv) grants for operations and maintenance in specified areas as mentioned earlier. Besides there will be large increase in central grants for special programs such as the Rural Employment Guarantee

1

Annex C

Scheme, the Backward Districts Program, the National Rural Health Program, and Education for All through central sponsored schemes. Given the new back-to-back lending arrangements that are in place, India’s states will now carry any exchange rate r i sks associated with foreign currency lending.

Bihar’s Public Finance - Outcomes and Prospects

4. High dependence on central government. Bihar i s substantially dependent o n central government devolution. Shared taxes and grants (plan and non-plan) comprise almost 80 percent o f the state’s total revenue. Weak own resources (because o f bifurcation) and consistent underutilization o f i t s share in central Plan resources of up to 20 percent o n average in the past, resulted in l o w public expenditures relative to the development challenges facing the state. Inefficient fiscal management combined with impacts o f the fiffh Pay Commission and take over by the state o f the o ld dues o f the State Electricity Board towards Central Electricity PSUs implied relatively high fiscal deficits o f over 5 percent o f GSDP between 2001-02 and 2005-06. High deficits combined with a legacy o f high debt devolved o n to the state during the state’s bifurcation in 2000 has resulted in the debt to GSDP ratio increasing to 53 percent o f GSDP in 2005-06.

5. Level of Spending. In a short-span o f time, GOB has managed to enhance i t s spending ability, though some o f i t i s a reflection o f increased drawdown and not actual usage of funds. The government’s total expenditure increased by as much as 54 percent between 2004/05 and 2006/07- f rom Rs.170 b i l l ion to Rs. 261 b i l l ion (Le. f rom $3.8 b i l l ion to $6.5 b i l l ion equivalent) (left panel, figure-3). Plan size has more than doubled over 2005-06. The state’s annual f ive year plan for 2007- 08 was Rs. 102 b i l l ion as compared to Rs 86.47 bn in 2006-07 (as against an origmal plan size o f Rs.82.50 bn) and Rs. 44.68 bn in 2005-06. Inherent in this i s the increase in capital expenditure f rom Rs. 23 bn in 2004/05 to Rs. 55 bn in 2006/07, an increase o f almost 140 percent. There i s other evidence that Bihar’s current utilization o f finds under centrally sponsored schemes i s increasing close to the national average. For instance data for the Sarva Shiksha Abhiyan (Primary Education) shows that in 2006/07, Bihar had utilized close to 79 percent o f funds allocated as against a national average o f 86 percent and the Indira Awas Yojana (Rural housing) shows close to 65 percent utilization. At a more disaggregated level, as the right panel o f f igure3 shows, estimates o f the actual plan expenditure has been in the range o f 95-100 percent across various departments based o n the revised estimates for 2006-07. Util ization o f State Plan resource allocation exceeded budget allocation in most departments during 2005/06 also. Whi le impressive, some o f these numbers should be interpreted with caution for the following reasons: (a) year-end surrendering o f resources by departments can be very high malung the budget an over-estimate; and (b) funds may have been released by the treasury and booked as expenditure, but parked in various bank accounts, to that extent reflecting commitment as opposed to actual expenditure. Parlung i s sometimes resorted to for meeting continued expenditure requirement during the w o r h n g period o f March to June when there i s dry weather but the break in March due to the Budget could impede work completion. Some o f these advances relate to State’s share in Centrally Sponsored schemes.

1

’ The stock of unsettled advances seems to be o f the order of Rs. 78 billion as on March 31, 2007 of which Rs. 38 billion relates to 2006107. The problem appears to be a combination of advances taken, but yet to be spent and expenditure out o f advances yet to be settled. Similarly in 2006107 out o f Rs. 19 bn released to other government entities (urban local bodies, universities etc.) utilization certificates have not been received for Rs. 17 bn.

2

Annex C

Figure 3: Trend, Composition and Utilization of Public Expenditure in Bihar (Plan and Non-p lan Expenditure in Rs. Billion) (Ut i l izat ion rate in ma jo r departments in 2006/07)

350

300

250

200

150

100

50

0 T

Total 1 . 5 ~

FYO2 FY03 FYO4 FY05 FY06 FY07 FYO8

8 8 4 bral Devebpmnt

Ed u c a Q n

Watw

Energy

Industry

mmg and Devebpmnt

sccld WeKae

Health and Family Welfare

l Actual Expenditure

PBudget Provisim

I r I

0 2 4 6 8 10 12 14 16 11

Note: RE-Revised Estimate: BE-Budget Estimate: Source: Finance DeDartment. Government o f Bihar.

6. Composition of Spending. The acceleration in public spending has coincided with significant improvement in i t s composition. In the past, committed expenditure, l ike salaries, pensions and interest payment, used to represent as much as 60-65 percent o f a l l the expenditure, leaving l itt le for capital spending and operation and maintenance expenses (left panel, figure 4). The picture i s dramatically different today: salaries, pensions and interest payment constitute only 46 percent o f the total expenditure-while the share o f capital outlay and non-wage 0 & M has increased to 20 percent each and other recurring expenditure to 13 percent o f total expenditure (right panel, figure 4). Preliminary evidence indicates that the increased spending coupled with improved composition i s beginning to make i t s impact felt: large numbers o f public infrastructure projects are under construction throughout the state, existing infrastructure in energy and road sectors are being upgraded and maintained, drugs are n o w being made available in the public health centers and so on.

7. A review o f Plan expenditure over the past few years shows a dramatic increase in spending in some key sectors. The transport sector (includes roads) has the largest allocation among the infrastructure sectors growing by 1350 percent in 2006-07 over 2004-05. Similarly Social Services (covering health, education etc.) has seen expenditure rise 200 percent in 2006-07 over 2004-05. Other sectors that have seen a sharp increase in plan expenditure are special area programs and industries. Over the entire Eleventh Five Year Plan period the thrust o f spending wil l be o n the Rural Development, Irrigation and Flood Control, Energy, Transport and Social Services sectors.

3

Annex C

..

85.5

l e 1: Plan ExDenditure bv Sectors

-.

I 102.0

T:

Rs. Bn Agriculture and A l l i ed Rural Development Special Area Program Irrigation and F lood Control Energy Industry and Minerals Transport Science,Tech and Environment General Economic Services Social Services General Services

2004-05 1.8 8.9 0.1 5.9 3.2 0.1 1.3 0.0 1.6 8.5 0.5

- 2005-06

1.5 9.0 0.1 8.1 5.0 0.2 3.5 0.2 4.1 12.6 0.6

ITotal 44.7

- 2006-07

2.5 8.2 0.3 6.4 5.6 5.5

24.9 0.3 4.5 26.4 0.9

2007-08(BE) 2.5 9.6 6.8 13.4 8.3 3.4 25.0 0.7 3.1 27.6 1.7

Eleventh ’lan (2007

16.3 75.5 11.3 75.8 45.4 18.9 138.9 3.2

26.9 165.1

12) -

5.9 583.1

8. Monitoring of Expenditure. In a move to strengthen the monitoring o f plan expenditure, the Planning Department has started to seek scheme-wise ‘work plan’ f rom l ine departments f rom 2007/08. The financial progress i s monitored on a month to month basis. The review i s conducted at the highest political level. Information i s sought under two heads: sanctioned and details o f expenditure. Physical progress i s monitored on a quarterly basis. These reports will be placed o n the state’s website for public information. The strategy i s helping Bihar to raise i t s Plan spending. Unl ike the past, GOB i s n o w preparing project plans in advance should new resources be available. Presently the GOB has under i t s consideration proposals worth Rs. 70 bn. In 2007/08 while GOB proposed an annual plan size o f Rs. 96 bn, the national Planning Commission approved a Plan o f Rs. 102 bn. Encouraged by i t s recent success, GOB subsequently raised the Plan size to Rs. 116 bn, to be reviewed in December. F rom 2006/07, GOB has strengthened financial decentralization to pre- sanction expenditure o n schemes for inclusion in the Budget.2

* Departmental Secretaries can now sanction schemes costing up to Rs.0.025 bn; schemes costing between Rs. 0.025 bn and 0.1 bn may be sanctioned b y a Departmental Expenditure Committee and approved by the Department Minister; schemes costing between Rs. 0.1 bn and Rs. 0.2 bn require the sanction o f the Departmental Expenditure Committee, Department Minister and Finance Minister. Schemes costing over Rs. 0.2 bn require the sanction o f the Empowered Committee headed b y the Development Commissioner wi th subsequent Cabinet approval. All Plan related Establishment expenditure require the Empowered Committee’s approval regardless o f size.

4

Annex C

Figure 4: Composition of Public Expenditure: 2003104 and 200612007

2003-04 Total Expenditure Rs.168 Billion

Net lending 15%

Capital outlay 9%

O&M 8%

$ Transfers

lnteresr

20%

+

P

Salary 30%

'ension 13%

Source: Finance Denartment, Government o f Bihar

2006-07 Total Expenditure Rs.261 Billion Net lending-

- -

O&M 20%

9. Tax Policy and Administrution. L ike the rest o f the country, Bihar i s experiencing an unprecedented boom in revenue collection: i t s total revenue receipt (TRR) i s l ikely to have risen by 29 percent in 2006/07 and projected to increase by an optimistic 22 percent in 2007/08 (left panel, figure-5). The increase i s a mixture o f rising central transfers as wel l as a robust increase in i ts own revenue collection. The state has undertaken VAT reform, aligned i t s tax rates with i t s neighbor West Bengal to prevent trade diversion, eliminated sales tax concessions to f i r m s formerly o f Bihar but now in Jharkhand, reduced property stamp duty rate to 8 percent and computerization o f VAT administration i s being undertaken. The state has also undertaken changes to the alcohol vending licensing regime (moving to an area wise system with minimum assured off-take and lottery for allocation) to increase the contribution o f state excise. Motor Vehicles taxes have been reduced and aligned with i t s neighbor West Bengal. However, a continuing complement o f tax strengthening measures focusing on compliance and expanding coverage would be necessary to keep up the underlying buoyancy. The MTFP i s predicated o n an improving tax effort f rom better tax administration with an annual underlying buoyancy o f 1.2.

10. Deficit on truck. The rising spending has been supported by a buoyant revenue situation and this buoyancy has to be sustained if the FRBM targets are to be achieved. The buoyant revenue has meant the revenue surplus i s about 2.7 percent o f GSDP in 2006/07+xceeding the FRBM target o f zero deficit by 2008/09 (right panel, figure-5). Despite the sharp increase in capital expenditure in the last year (46 percent), the fiscal deficit i s 3.2 percent o f GSDP in 2006/07 (lower than 4.6 percent in 2005/06). In order to stay within the FRBM target o f 3 percent o f fiscal deficit by 2008/09, and at the same time meet the rising investment needs o f the future, GOB has to significantly improve own- revenue to avoid further debt build-up. At the same time, if GOB continues to spend more effectively, and delivers better results on the ground, i t i s conceivable that Go1 may consider favorably compensating measures to lower Bihar's debt burden, and/or providing new windows o f exceptional grant assistance, and/or stretch the target dates for achieving fiscal sustainability, consistent with the Go1 framework o f supporting the poorest lagging states in India.

5

Annex C

Figure 5: Trend and Composition of Revenue, and Key Fiscal Indicators of Bihar

300.0 1 - 250.0

200.0 Grants

c ‘9 150.0 ul nz Shared

100.0 taxes

50.0 own Tax revenue

0.0 W03 W04 p i 0 5 FY06 FY07 FYO8

BE

Source: Finance DeDartment, Government o f Bihar

-8.0 - Fiscal DeficitlGSDP %

Projections

6.0-n n n -n -n n -n n n n < < < < < < < < < <

0 0 0 0 0 0 0 0 - - r u w ~ c n m - ~ w ~ ~ o -

11. Medium-Term Framework. The MTFP o f GOB i s produced at the end o f the Annex (Tables 3, 3a, 4, and 4a) along with key assumptions and policy parameters. The MTFP shows that while the revenue deficit target indicated by the Twelf th Finance Commission has been exceeded, the state i s on course to meet the fiscal deficit target o f 3 percent o f GSDP. But there are two problems with the MTFP. First, the Finance Commission fiscal adjustment targets are based on 2004/05, which was an unusually l o w spending year for GOB and so the init ial deficits were extremely small. T h i s makes it diff icult for GOB to be e l igb le for the incentivized annual debt write-off scheme o f the centre l inked to annual deficit reduction. Second, unlike the past, GOB i s now beginning to spend and so the trade- o f f between fiscal conservativeness and higher public investment, which was dormant for years, have become real again.

12. The Government’s view is that meeting the fiscal deficit target of 3percent of GSDP could be onerous, unless the state economy grows rapidly and,the state’s own tax revenue expands at a rate of about 13 percent per annum. The reason i s that there i s a demand for higher public investment in infrastructure, improving public services in key areas etc. Unl ike in other state’s, the MTFP has to be prepared within certain data limitations. The main data l imitation i s that detailed object head wise data i s not readily available for the final audited Finance Accounts thus making detailed economic classification o f expenditure unavailable as in the Budget, excepting for heads such as salaries, interest and pensions. Therefore, data on expenditure such as transfers, subsidies and non-wage operations and maintenance expenditure was determined after accounting for available information and after a comparison with the Budget. Government o f Bihar i s n o w workmg with the Comptroller and Auditor General o f the state to make available detailed expenditure object wise data in future. For projection purposes Bihar’s economy i s assumed to be growing at a nominal rate o f 10.5 percent even though the Plan supports 13.5 percent growth. Under this scenario, it i s shown that the State would seek to achieve the targets set out in the FRBM Act while at the same time maintaining increasing public investment levels.

Key Challenges

13. Debt Sustainability: A variety o f scenarios and stress tests conducted for the debt trajectory projected under the MTFP prepared by GOB as an init ial exercise. I t shows that with a focused attention on implementing the MTFP, Bihar’s debt i s l ikely to be sustainable in most scenarios. In

6

Annex C

the baseline scenario, real interest rate i s init ially assumed at 5.5 percent-stabilizing to 5 percent f rom 2008-09 onwards. Real GSDP growth begins at 6 percent (against a recent trend o f 5 percent in the past five years), and increases to 7 percent during the next f ive year plan period beginning f rom 2012-13 and 7.5 percent during the following plan period. As the reference scenario, under the base-line scenario o f the MTFP, if projected forward to 2020-21, debt to GSDP ratio should decrease to about 30 percent f rom 44 percent in 2006-07. As against this, if the state grows only at the historical average real rate o f 4.5 percent per annum, debt to GSDP would decline only to 41 percent o f GSDP by 2020-21. If o n the other hand the historical growth rate i s combined with a primary deficit o f -0.5 percent beginning with the next Finance Commission period in 2010-11 (possibly induced by a decline in central transfers) debt to GSDP would increase to 5 1 percent by 2020-2 1.

14. Table 2 below shows the state’s likely debt trajectory under different scenarios. A shock to GSDP growth o f 1.5 percent in the f irst three years o f the next plan beginning from 201 1-12 combined with a primary deficit o f -0.5 percent o f GSDP over the next Finance Commission period f rom 2010-2015 could slow the reduction o f debt to GSDP to 36 percent by 2020-21. An interest rate shock o f 3 percentage points in 2010-1 1 and 201 1-12 over the baseline will have a marginal impact on the 2020 debt stock, increasing it to 32 percent o f GSDP. In the improbable event o f simultaneous materialization o f a l l three shocks, the projected debt to GSDP ratio increases over the baseline by nearly 8 percent o f GSDP in 2019-20-40 38 percent compared to the reference case o f 30 percent. To maintain the original debt trajectory in the face o f such shocks, the state would have to generate higher primary surpluses. While these stress tests show hypothetical scenarios, they do indicate that the state needs to stay on a strong fiscal correction path over the medium term to achieve its MTFP.

Table 2: Debt Proiections under Various Scenarios Dercent GSDP)

Baseline Historical growth o f 4.5 percent Historical growth o f 4.5 percent and primary deficit Growth Shock in three years to baseline beginning 201 1-12 and primary deficit of 0.5 percent of GSDP from 2010-15 Combined interest rate shock in 2010-12, GSDP shock o f 1.5 percent between 201 1-2014 and primary deficit between 2010-2015 o f 0.5 percent o f GSDP.

44.3 44.3 44.3

44.3

44.3

41.0 43.5 44.9

41.7

41.7

36.4 42

47.8

42.6

45.0

30.2 40.7 51.6

35.8

37.9

15. There are a number of other factors that may reverse the initial gains on thefiscal front. The improvement in the expenditure composition may be temporary, as the salary component would rise after the large number o f teachers most o f who are currently being paid out o f the SSA budget, are paid out o f the state budget. Salaries o f university teachers have also not been revised to reflect University Grants Commission’s pay-scales and the estimated arrears o f salaries and pension o n this account are close to Rs. 10 bn. Similarly, while the state’s financial position has l itt le scope to implement pay revision in line with the forthcoming Sixth Pay Commission recommendations for the Center there wi l l be pressure to fa l l in line with other states if implemented elsewhere. Although this i s notionally built in to the MTFP the actual impact i s an unknown at the present time.

16. The organizational and institutional capacity to increase spending in line with commitments and expectations is uncertain. Bihar’s machinery for planning and spending public money has endured over many years o f neglect, if not outright attack. Levels o f public spending have been

7

Annex C

Fiscal SurpluslDeficit Non-Interest expenditure Primary SurpluslDeficit

extraordinarily l o w and the state repeatedly failed to spend money that it has received from the Union. Bihar's inabil ity to spend money was so severe that i t had to resort to hiring Union-level agencies to manage the money it received to construct rural roads in order to make even minimum progress. The feeble state o f the public sector spending process has been mirrored by the lack o f development in the private sector. The recent past has created an institutional and organizational legacy that tremendously complicated Bihar's ability t o improve i t s developmental outcomes. Increasing spending will require the state to rely increasingly o n spending machinery that proved to be unable to cope with much lower levels o f spending in the recent past. Achieving the ambitious social and economic goals o f Bihar will depend in large measure on the speed with which core spending institutions can be improved and new methods o f spending in a prudent fashion can be developed.

-25.83 -29.88 -43.63 -12.42 -37.00 97.93 109.35 134.75 134.82 178.93 0.46 0.34 -10.20 22.32 -0.56

THE MEDIUM TERM FISCAL PROGRAM

Debt stock Adjusted debt stock * GSDPnominal

291.58 320.16 344.01 393.44 424.98 266.90 295.49 319.33 368.76 400.30 578.04 651.17 669.61 737.91 796.82

8

Annex C

9

Annex C

Net lending Capital Expenditure (net) Total Expenditure

Fiscal SurpluslDeficit Non-Interest expenditure

16.97 3.08 2.54 3.23 3.40 3.57 37.81 55.19 66.43 78.04 87.33 101.93 215.37 261.03 313.01 350.16 397.82 452.23

178.93 226.87 273.97 308.1 1 353.62 405.70 -37.00 -30.20 -31.59 -34.52 -38.15 -42.16

Debt stock Adjusted debt stock * GSDPnominal

Source: Finance Department, Government o f Bihar

424.98 442.27 473.86 508.39 546.54 588.70 400.30 417.59 449.19 483.71 521.86 564.02 796.82 942.51 1041.48 11 50.83 1271.67 1405.20

10

Annex C

TABLE 4a: MEDIUM TERM FISCAL PROGRAM

11

Annex C

Assumptions and Policy Parameters underlying the MTFP

Using the pre-actual figures for 2006-07 as the base, the MTFP projects State’s Own Tax Revenue to grow at a rate o f 13 percent in the period 2008-09 to 2010-1 1 assuming a buoyancy o f 1.2. The Government plans to expand the c i v i l service to fill up the backlog o f vacancies. Fo r instance the Police, Health, Agriculture, Law, Nutrition, and Engineering departments have plans to h r e about 23,551 staff. Teachers replacing retirees (about 3300 a year reflecting an attrit ion rate o f 3 percent) will increasingly be hired by PRI institutions in addition to P R I establishment staff o f about 9000. Besides an additional 100,000 teachers wil l be hired by PRIs to attain opt imum student teacher ratios o f 40: 1. These expenditures will be provided by the Government o f Blhar through Grant-in-aid (besides Grants-in-aid to Universities mainly for pay) and i s reflected under transfers. The Government has already hired 100,000 teachers in the year 2006-07. Salary projections and transfers in the MTFP reflect these assumptions. The MTFP also assumes that pay revision fol lowing the central sixth Pay Commission could be implemented in 2009-10 increasing salary expenditure by 15 percent. In the absence o f actuarial information o n retirement and pension l iabi l i ty projections, the work o n which has just begun under an ADB funded TA, pensions have been assumed to move in tandem with salary growth. The Government has already implemented the Defined Contributory Scheme for new employees f r o m September 1,2005. About 2300 pensionable staff i s covered by the n e w scheme. Staff hired by PRI’s, including teachers, are being paid a consolidated salary and are currently no t pensionable. These projections wil l need to be refined in due course as the pension l iab i l i ty projections provide more information. Government o f Bihar’s average interest cost was about 8 percent o n outstanding Debt stock in 2006- 07. DPL financing o f about Rs. 9 bn a year over the next four years i s expected to reduce the weighted average cost o f debt gradually t o 7.5 percent by 2010-1 1. The M T F P also provides data o n adjusted debt stock. The adjusted debt stock nets Rs. 24.67 b i l l i on rupees o f debt (share in General Provident Fund) yet t o be apportioned to Jharkhand. Over the next four years the state wil l b e repaying Rs. 26.87 bn o f h igh cost borrowing bearing coupon rates o f 9 percent o r greater. The MTFP assumes Rs. 3 6 bn o f Wor ld Bank assistance through the DPL over the next four years will replace these maturing loans. The stock o f debt declines f r o m 44 percent o f GSDP in 2006-07 to 42 percent by 2010-1 1. The fiscal space for Capital Outlay and non-wage Operations and Maintenance expenditure is derived after providing for contractual expenditure under salaries, pensions and interest. Capital Outlay and non-wage Operations and Maintenance expenditure are expected to increase substantially in support o f the growing annual plan, f r o m 11 percent o f GSDP in 2006-07 t o 13.5 percent o f GSDP in 2010-1 1. Transfers are projected to increase substantially (by 15 percent annually) as compared to past trends over the period 2008-09 to 2010-1 1 to support the decentralization effort o f the Government, transferring funds and functions (eg. teachers) t o PRIs and urban local bodies. The third State Finance Commission has also recommended that the state bear the establishment expenditure o f PRIs beginning f rom 2007-08 at a decreasing scale: beginning with 100 percent in 2007-08 decreasing by 20 percent annually. The main subsidy provided by the Government o f B ihar is to the Bihar State Electricity Board for supply o f subsidized power. In 2007-08 t h i s is budgeted at Rs. 7.2 bn. T h i s i s assumed to grow in the future at about 15 percent. Additionally, notional amounts have been provided for n e w subsidies such as capital investment subsidy and sugarcane subsidy. The Fiscal Def ic i t and Revenue surp lus have been maintained in accordance with the guidelines l a i d out by the FRBM Act. The guidelides require that the Fiscal Def ic i t b e reduced to 3 p i rcent o f GSDP by 2008-09.

12

N

n x

4

m

Annex E

ANNEX E: BIHAR CAPACITY BUILDING TECHNICAL ASSISTANCE PROGRAM’

I. INTRODUCTION

1. Bihar i s India’s poorest and third most populous state, ranking at the bottom o f most economic and human development indicators across Indian states. The Government has a mandate to spur economic development and reform in the state and has initiated a wide set o f reforms aimed at accelerating the state’s economic growth, improving governance and making development more inclusive.

2. In order to support effective and timely development in the state and enable faster delivery o f results, the Asian Development Bank (ADB), U K ’ s Department for International Development (DfID), Japan, and the Wor ld Bank (the Bank) have developed a strategic partnership for Bihar, and will develop and implement their programs in the state under this rubric. The Bank’s program i s underway in Bihar on several fronts. The Bihar Rural Livelihoods project (US$ 63 mill ion) was approved in June, 2007, and the first Bihar Development Policy Loan / Credit i s currently under preparation, which i s expected to be presented to the Board in December 2007. The Bank has also recently received a request for a PRI strengthening project, and other operations in the medium to long term may include urban, water supply, rural roads, and power/rural electrification.

11. BIHAR’S CAPACITY CONSTRAINTS

3. Although GOB has introduced a vast array o f reforms since coming to power, most sectors continue to face severe capacity constraints, which not only hinder their development but also prevent them f rom fully leveraging the benefits o f the newly introduced reforms. Bihar i s also one o f the more dependant states on Government o f India’s (GoI) support to the State Plan and Centrally Sponsored Schemes (CSS) to meet i t s development expenditure, but utilization levels continue to be fairly l o w - both due to inadequate systems and the absence o f coherent plans for sector expenditures.

4. The limited capacity o f departments to effectively absorb and channelize funds adversely affects the implementation o f the GOB’S programs and i s l ikely to similarly impact development partner program in the state. This has also been highlighted as one o f the challenges for the proposed Bihar DPL, and achieving the ambitious social and economic goals o f Bihar will depend in large measure o n the speed with which the functioning o f core spending institutions and departments can be improved and new methods o f spending in a prudent fashion with improved monitoring and evaluation with respect to outcomes can be developed.

111. OBJECTIVES OF BIHAR CAPACITY BUILDING TECHNICAL ASSISTANCE (BCB TA) PROGRAM

5. Acknowledging the need to address these capacity constraints, GOB has sought technical assistance fi-om the Bank to help build the capacity o f various departments. The scope o f the B C B TA has emerged fi-om sector discussions on the DPL with GOB l ine departments, and i s intrinsic to the design o f the DPL. The B C B TA covers sectors that are being supported by the DPL loans series, but is, by design, not l imited to the DPL sectors. This has been done keeping in mind

’ Prepared in consultation with the Government o f Bihar and DfID.

1

Annex E

Bihar’s medium term development prospects, the dialogue between the Bank and the Government and as a complement to other more substantial assistance being provided by other development partners working in the state. Thus, the purpose o f the proposed Bihar Capacity Building Technical Assistance (BCB TA) program i s two-fold - it will not only serve to be a “means to an end” through i t s support to implementation o f the various development partner operations in the state, but i t will also be an “end in i t s e l f ’ through i t s primary objective o f supporting the building o f the state’s capacity in critical sectors.

6. The overarching objective o f the BCB TA i s to provide assistance to help build capacity o f the government to enable better implementation o f policies and programs and realize the benefits o f the reform process. The BCB TA will assist GOB to implement actions committed to in the Bihar DPL and also provide technical support in areas not included in the f i rst DPL operation. The specific objectives o f the BCB TA are to help: i. ii.

111.

Build capacity in core areas o f fiscal management and governance Improve the climate for investment and facilitate infrastructure development Support the efficient delivery o f public services, including through effective monitoring and evaluation

...

7. Consistent with the jo in t development partner strategy for Bihar, the BCB TA i s fully integrated with the technical assistance program o f the main development partners operating in the state. In some sectors, such as power, one development partner (ADB) i s providing investment lending, while the B C B TA i s providing complementary technical support. There wil l be a clear division o f labour on TA support offered by development partners so that there i s n o duplication and transactions cost for GOB are minimized. In sectors where more than one development partner i s operating, there i s agreement about which development partner i s taking the lead.

8. The objectives o f the B C B TA have been aligned with the priorities o f GOB’S Eleventh Plan and the Bihar DPL. The objective o f GOB’S Eleventh Plan strategy i s “inclusive growth at a much brisker rate, accompanied by improved delivery o f social services” and i t rests on three inter- related pillars: (i) stepping-up public investment, with fiscal adjustment; (ii) improving the climate for private investment and growth; and (iii) delivering public services efficiently, with an emphasis on accountability. The objectives o f the Bihar DPL are to (i) increase utilization o f central funds through better public finance management, improved governance and more effective monitoring and evaluation systems; (ii) raise economic growth through reforms in the agriculture sector, increasing connectivity and creating an enabling environment to spur agriculture-related industrialization; and (iii) improve public service delivery in education and strengthen anti-poverty programs. Figure 1 explains how the objectives o f BCB TA, GOB’S Eleventh Plan and Bihar DPL are linked.

2

Annex E

FIGURE 1: LINKS BETWEEN OBJECTIVES OF BCB TA, GOB’S ELEVENTH PLAN AND BIHAR DPL

More effective public Improving the climate investment, with for private investment fiscal investment

I Bhar Bve iopmen t Policy Lorn ’

I I

Delivering public services efficiently, with an emphasis

Build capacrty in core areas of fiscal management and

Improve climate for investment and facilitate infrastructure

Support eficient services

S o m t F’rotection, Educatim, Ennfonmeer, Data System,

Mid-day meals evaluation

Public Financial Management Private Sector Development, Power,

PPPs, Urban, Roads Sransncs, Agncufnue

IV. COMPONENTS OF THE BCB T A

[t i s proposed that the B C B TA will have three components, which are described below.

9. Component I: Building capacity in core areas of fiscal and financial management and governance. One o f GOB’S priorities i s to fully and effectively utilize funds allocated by the Central Government, which constitute as much as 80 percent o f the state’s total revenues. GOB i s also focusing on improving governance, expenditure efficiency and outcomes, and increased public sector accountability at all tiers o f governments.

i. Public Financial Management. Addressing the capacity needs o f the financial systems in place for planning, budgeting, spending, and accounting for the use o f public money will be fundamental to enabling Bihar in utilizing public funds effectively and achieving i t s economic and social goals. Technical assistance by the Bank will support the development o f policies and methodologies for addressing key issues including improving the quality o f financial management (budget, cash, debt, pension management, procurement, and other related aspects). The Bank will also provide technical assistance to select agencies for the application o f new processes, and develop training materials in PFM and pilot train-the-trainer programs.

3

Annex E

ii. Agency reforms to improve service delivery and supporting DfID program for BIPARD. In the medium term, the B C B TA will support agency reforms in departments such as tax records, land records, registration. These agency reforms will focus on critical services such as tax administration, land records and registration. A combination o f measures such as e-governance, citizens’ charters, and partnerships with the private sector will be used to strengthen citizen awareness and the demand for good services f rom these departments. Alongside, process reengineering that delegates more power to heads o f agencies, greater flexibility for redeploying staff, reducing the number o f layers through which a fi le passes will also be considered to enhance capacity and accountability o f these agencies. The World Bank Institute will support the DfID program to develop BIPARD by providing technical support in developing the curriculum in areas such as public financial management and Panchayati Raj .

10. Component 2: Improving the climate for investment and facilitating infrastructure development. Another priority for GOB i s to generate economic growth and create an enabling environment to spur development in key sectors. The state’s investment climate has not been very encouraging so far for private investors, and the absence o f the private sector in key areas, such as infrastructure, has been one o f the reasons for the modest growth rate o f Bihar’s economy. GOB has now introduced several reforms aimed at attracting private investment in the state, particularly in the infrastructure sector. Some o f these reform measures can be made more effective if they are complemented by enhanced capacity o f the state and bolstered by coherent longer-term sector strateges and business plans.

i. Finance and Private Sector. GOB has introduced several reforms in the past two years to address constraints and impediments to improving the investment climate in the state. These reforms are beginning to have an impact on the perception o f investors on the investment climate and are generating increased interests f rom outsiders. However, given the long-held unfavorable perception o f the investment climate in Bihar, in particular o f out-of-state investors, further progress and tangible improvements are required to significantly reverse investor perceptions. In the short-term, tangible improvements in the investment climate can come from radical regulatory and PSU reforms, and these need to be complemented and supported by a longer-term PSD strategy, which in turn wil l need to cover further enhancing regulatory quality and implementation o f regulations. This sub-component has been designed to provide support to the GOB in implementing the short-term regulatory and PSU reforms, preparing and implementing a PSD strategy and render technical assistance for the restructuring o f PSUs. The Bank wil l also help the GOB in mobilizing investment in select ago-industry sub-sectors, improving the capacity o f Department o f Industries and the DICs to implement the PSD strategy and to formulate and implement future policies, and improving access to finance.

ii. Public Private Partnerships. GOB i s keen to harness PPPs to improve the delivery o f infrastructure services across various sectors as it would be more efficient and also because the expenditure through exchequer alone will not be sufficient to mobilize the large scale investments required to bridge the infrastructure gaps. Towards this end, it has established an Infrastructure Development Authority and constituted a Steering Group to provide advice and guidance on PPP related issues. The Bank will work with the Industries Development Commissioner and the Infrastructure Development Authority to strengthen the policy and legal frameworks governing infrastructure PPPs in the state and build capacities for undertakmg PPPs in the Infrastructure Development Authority and

4

Annex E

key l ine Departments (other than sectors such as power, agricultural marketing, urban and health that will be covered by DfID and/or ADB).

... 111. Power. The power sector was highlighted as the main business constraint during Investor

Climate Assessment, and capacity building o f this sector i s strategic and critical to the socio-economic development o f Bihar. The Bank will provide capacity building support to BSEB and i t s successor entities. In particular, support will be provided for implementation o f Electricity Act provisions; strengthening the framework for rural electrification, including framework for managing large number o f rural franchisees; assistance in Process Re-engineering and IT usage to improve customer service and improve T&D losses in the system; and implementation support on generation expansion strategy. T h i s TA support will be complementary to the investment lending operation and possible technical assistance that ADB i s providing in this sector.

iv. Roads. The road network i s Bihar i s poorly developed and has suffered years o f neglect, under-funding, and extensive damages due to lack o f maintenance, overloading, and frequent floods. The network requires extensive road rehabilitation and capacity augmentation. Implementation capacity o f both the implementing state agencies (Road Construction Department, RCD, responsible for state highways, and Rural Works Department, RWD, responsible for rural roads) i s severely limited. TA support to improve implementation performance o f i s envisaged in the areas o f planning, design, policy and operations and maintenance, including development o f institutional action plans for both agencies.

v. Urban. The Urban Local Bodies in Bihar have very weak capacity and low levels o f revenue mobilization. D fD will support a comprehensive capacity building programme to strengthen ULB capacities to plan, raise and manage resources, implement, monitor and be held accountable by the citizens. The B C B TA will support the DflD program in the area o f urban water supply and sanitation, principally demonstration projects.

1 1. Component 3: Supporting the efficient delivery of public services, including through effective monitoring and evaluation. Improving the outcomes o f i t s service delivery programs i s a priority o f GOB. The state has launched several welfare programs, and has introduced a number o f complementary reforms to raise the quality o f public service delivery. As these programs are required to be adapted to the needs o f the people, effective monitoring and evaluation becomes imperative, especially if mid-course corrections have to be introduced in order to improve outcomes. Accordingly, the Bank will assist the GOB in developing monitoring and evaluation systems, and buttressing i t s implementation capacity.

i. Social Protection. As a result o f poor implementation o f the social protection system in Bihar, considerable resources devoted to the programs and welfare services have yet to yield the expected outcomes in terms o f reduction in poverty and vulnerability. The Bank has agreed with the State on technical assistance to help increase the poverty reduction impact o f social protection service delivery for the poorest and most vulnerable households in Bihar through systemic improvements in administration o f SP programs and social welfare services and to increase the efficiency and transparency o f public spending on SP programs. The key counterpart Departments would be Rural Development, Welfare (under i t s specially vulnerable groups mandate, but not on Nutrit iodICDS which i s being supported by DflD), and Food and Civ i l Supplies. In particular, the Bank will help in: (i) strengthening the delivery o f traditional safety nets in rural areas through various tasks including a business process and functional review in

5

Annex E

RD, survey based impact and process evaluations o f NREG and PDS; (ii) technical support to the RD Department in the form o f a small reform support unit, and consultancy support to the Welfare Department on disability and child protection issues; (iii) a situational assessment o f social welfare and disability policies and services in Bihar to inform strategic planning in these areas, and (iv) technical assistance to GOB on pilots to expand coverage o f social insurance to unorganized sector workers. The Bank team would coordinate wi th DflD in design and implementation o f the support.

ii. State Education Management Information System (SEMIS). Lack o f complete and accurate data on teachers in Bihar, w h c h leads to issues such as difficulties in teacher recruitment, deployment and transfer; excessive unresolved litigation; high teacher absenteeism; and ineffective overall management o f the school system. T h i s lack o f information does not allow department officials to plan for future needs, analyze s lu l l levels and provide relevant support in the form o f training and capacity building. The objective o f this sub-component i s to provide support by the Bank to the GOB to establish a comprehensive database through the development o f State Education Management Information System (SEMIS). T h e database, which will be maintained at the State, district and block levels, will better equip the State to manage and monitor the performance o f individual teachers, and increase the overall transparency and accountability o f public expenditure in the sector.

iii. Enhancing the capacity of PRIs to work effectively with the Education line departments and Village Education Committees, in order to improve the effectiveness o f education service delivery. T h e f irst objective o f this sub-component i s to reach a consensus and broad awareness o f the respective roles and work responsibilities o f PRIs and education l ine departments, specifically clarifying the roles and responsibilities o f the District and sub-district departments o f education, the Block Resource Centers and Cluster Resource Centers, and the Village Education Committees, relative to the authority and responsibility o f the PRI institutions. A second objective i s to enhance the capacity o f local governments to administer and manage education functions that have been transferred to them. Basic sk i l ls to be developed include planning, financial management, and monitoring o f school processes and outcomes. A third objective i s to develop the slulls, knowledge and attitudes among education authorities which facilitate and assist PRIs to fulfill their roles and responsibilities, shifting their focus from inspection to technical assistance in local education policy-making.

iv. Environment. The existence o f an adequate environmental management system i s necessary to ensure that infrastructure development does not result in increased environmental pressures that generate additional environmental health r isks or affect the productivity o f key economic sectors. Although a sophisticated system o f environmental laws and regulations i s currently in place, the GOB requires technical assistance to develop the capacity o f line departments and environmental agencies to implement existing policies with increased efficiency and effectiveness.

v. Agriculture. In order to infuse knowledge and technology into the sector, the Bank will help the government to create a network o f knowledge providers through a cell within the Department o f Agriculture. The Bank wil l be involved in providing financial assistance to the state for the establishment o f knowledge cell, help in the empanelment o f key consultants, and pilot testing approaches in the field through the ATMA structure.

6

Annex E

vi. Improving monitoring and evaluation. The Bank will provide support to technical capacity building in the dedicated cell in the Development Commissioner's Office. This would help i t become operational quickly, and provide the regular monitoring o f all key aspects o f the GOB reform program and support the Chief Secretary's Committee to oversee the entire program. Data systems will also be strengthened, including that for poverty monitoring. In Bihar, the N S S rounds o f sample survey data for poverty and social sector monitoring are currently maintained in the paper form, and hence are not amenable to inform policy. The Bank wil l provide support to the GOB in creating a database and will help build capacity to compile a more disaggregated profile o f poverty and related indicators for Bihar. The Bank wil l also help the GOB to develop a poverty map for the State.

vii. Capacity building of Directorate of Statistics and Evaluation (DSE). The Bank w i l l help in strengthening the capacity o f Bihar DSE to improve the timeliness and quality o f data through addressing issues relating to methodologies o f estimation and rebasing, provide implementation support on specific requirements such as capacity and resource needs, help in the preparation o f MoU between the Ministry o f Statistics and GOB for improving and strengthening the DSE, and provide for computerizing unprocessed datasets, printing and disseminating statistical abstracts and other DSE publications.

viii. Pilot evaluation o f the mid-day meals scheme in a few urban areas in Bihar. The government i s keen to base any scaling up o f this intervention (in terms o f quality o f the meals, timeliness o f delivery and impact on student attendance) on the basis o f the findings o f the study. It i s expected that this assessment will take the form o f at least three rounds o f surveys that focus on the process o f delivery and perceptions among the beneficiaries.

V. STRUCTURE AND GOVERNANCE ARRANGEMENTS

12. The B C B TA i s envisaged as a multi-year non-lending capacity building program that will provide cross-sector technical assistance to the Government o f Bihar. This approach was considered the most appropriate in the case o f Bihar as it would enable strategic coordination (within the Bank and with other development partners) to ensure achievement o f the overall development objectives o f GOB; lower transaction costs for the GOB and the Bank; knowledge spillovers between sectors and better informed cross-cutting work; avoidance o f duplication in efforts; consistency in policy advice to the GOB; and sustained planning in the target sector o f the GOB.

13. The B C B TA will be financed through DfD grant funds', with an implementation period o f three years. The fund will init ially be executed by the Bank, with the expectation that execution would be transferred to GOB in 1-2 years time. The Department o f Finance, GOB, will act as the nodal counterpart for the B C B TA, and implementation o f sub-components will carried out through concerned l ine departments.

14. The following operating principles have been used for selection o f in i t ia l sub-components, and for additional sub-components that may come up during the implementation o f the TA

DFID has confirmed their support to provide grant funding o f $5 million for the BCB TA; this will be provided from the existing World Bank - DFID Trust Fund for India and from the next Trust Fund that i s in the process of being set up.

7

Annex E

Activity

i. Each sub-component that wil l be approved for funding would have been developed on the basis o f GoB’s immediate priorities for capacity building

Implementation Budget ($) Period

ii. The sub-component would be a part o f the larger development partner work program and be a component o f the Bank’s priorities in Bihar

Public Financial Management System Agency Reforms

... 111. Implementation and functioning modalities will: (i) provide for transparency and

accountability; (ii) facilitate efficient and prompt delivery; and (iii) support the progressive development o f capacity in the various sector units o f GOB.

2 years 600,000 3 years 150,000

15. The BCB TA will be task managed by the State Coordinator for Bihar, and the supervision of each component has been closely integrated with the sectoral supervision o f the DPL operation. The Bank team has been in continuous consultation with DfID and other development partners operating in the state, on the scope o f the BCB TA and wil l continue to coordinate in i t s implementation. The governance and reporting arrangement for the TA will also be developed further in close consultation with DfID.

Public Private Partnerships Urban

16. Section V I provides the breakdown o f the funding requirements for the entire program by broad heads. The funding for the BCB TA for an amount o f $1.5 mil l ion i s already in place and available for immediate implementation o f the TA program, and some activities have started. The remaining $3.5 mil l ion has been committed by DfID and will be provided under a new Trust Fund Arrangement between the DfID and the Bank that i s being currently developed and expected to be operational by July 2008.

2 years 250,000 2 years 100,000

VI. INDICATIVE BUDGETA

Power Roads

2 years 350,000 2 years 350,000

State Education Management Information System Capacity Building o f PRIs to improve quality o f education

- - I I

Improving the climate for investment and infrastructure development

1.5 years 600,000 1 year 150,000

I Private Sector Development I 2 years I 600,000 I

Environment Network o f knowledge providers in agriculture

3 years 300,000 3 years 150,000

8

Annex E

Activity Implementation Budget ($) Period

Improving Monitoring and Evaluation /2 Strengthening o f Directorate o f Economics and Statistics Pilot Mid Day Meals Evaluation

1 year 550,000 2 years 50,000 1 year 200,000

/1 Support to flood-protection and disaster management information system no t included in the table

TOTAL

/2 Support to capacity-building in Development Commissioner's office and the Ch ie f Secretary's Committee, and building data systems o n poverty monitoring

I 5,000,000

9

Annex F

ANNEX F: IMF PUBLIC INFORMATION NOTICE

IMF Executive Board Concludes 2006 Article I V Consultation with India Public Information Notice (PIN) No. 07/9 January 25,2007

____

Public Information Notices (PINS) form part oft l ie TMF’s efforts to promote transparency o f the IMI3 views and ai ialysis o f ecoiiomic developnients and policies. With the consent of the country (or countries) concerned, PlNs are issued after Executive Board discussions o f Article 1V consultations with member countries, o f i t s surveillance o f clcvelopments at the regional level. o f post-program inonitoring. and o f ex post assessments of member countries with longer-term program engagements. FINS are also issued after Execiitive Board discussio~is o f general policy matters, unless otherwise decided by the Lxccutivc J3oard in a particular casc.

On December 20, 2006, the Executive Board o f the International Monetary Fund (IMF) concluded the Art ic le I V consultation with India.” An update was requested from IMF i s attached below.

India-Assessment Letter for World Bank November 20,2007

As requested, this note provides the IMF staf fs assessment o f India’s macroeconomic conditions, prospects, and related policies for the Bihar Development Pol icy Loadcredi t being considered by the Executive Board o f the World Bank. The thrust o f our assessment remains the same as in the 2006 staff report.

Growth remains strong, supported by domestic demand. GDP growth has been stronger than expected, but is expected to moderate to 8% percent in 2007/08, f rom a high o f 9% percent last fiscal year. Headline inflation (WPI), at around 3 percent, i s below the R B I ’ s near-term projections, although CPI inflation is higher. The rupee has appreciated by 10 percent in real effective terms y/y through September, but export growth remains strong at about 19 percent y/y. The external current account deficit i s expected to widen to about 2 percent o f GDP in 2007/08 (close to the projection in the 2006 staff report), against the backdrop o f the strengthened rupee and slowing global growth. The deficit i s comfortably financed by private inflows. Reserves exceed $260 bi l l ion (over 10 times short-term external debt), and external debt remains l o w (about 17 percent o f GDP, as o f end-2006/07). India’s financial markets have largely recovered from corrections during the summer’s credit-market

’’ Under Article IV 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 officials the country’s economic developments and policies. O n 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 o f Executive Directors, and this summary is transmitted to the country‘s authorities.

Annex F

turbulence, with the Sensex stock price index ranging near record highs. India’s strong economic performance is the consequence o f steady reforms over the past 16 years, although more remains to be done to sustain that performance going forward.

The immediate macroeconomic policy challenge i s managing the effects of rapid capital inflows. India’s bright economic prospects have driven inflows, which in turn have given r ise to rupee appreciation and excess liquidity. In response, the authorities have intervened in the foreign exchange market, undertaken sterilization operations, and tightened controls on inflows while loosening those o n outflows. The Reserve Bank o f India has also withdrawn monetary accommodation, most recently by increasing reserve requirements. With WPI inflation remaining low, monetary pol icy could remain on hold for now, but in light o f rapid monetary growth, vigilance for inflationary pressures i s warranted.

High government debt needs to be brought down, and fiscal space made for social and infrastructure spending. General government debt remains very high-nearly 80 percent o f GDP-limiting the room for priority spending. In 2007/08, staff expects a further decline in the on-budget general government deficit, to 5.7 percent o f GDP (compared with a projection o f 6% percent in the staff report), on the back o f buoyant revenues and improved state-level finances. However, off-budget subsidies for food, fuel and fertilizer, projected to amount to about 1 .O percent o f GDP this fiscal year, wil l slow consolidation, with upside risks to fuel subsidies if o i l prices range higher (retail fue l prices are administered). For the medium term, comprehensive revenue and expenditure reforms are needed, including the streamlining o f tax exemptions and better targeting o f subsidies.

In addition, greater progress in structural reforms i s needed to tackle supply constraints, create jobs and further reduce poverty, and prepare the financial sector for a more open capital account. Investments in health, education and infrastructure are essential. Trade tariffs could be further reduced to enhance competition and reduce the cost o f imported inputs, building o n the trend in recent years. In addition, steps to develop corporate bond and derivatives markets would facilitate investment (including infrastructure) and enable better risk management as the capital account opens further.

Overall, prospects for India’s growth and macroeconomic stability remain good, and a higher growth path could be achieved by accelerating key reforms. The staff report on the 2006 Article IV consultation with India was published o n February 15,2007.

2

ANNEX G

India at a glance 9/28/07

POVERTY and SOCIAL

2006 Population, mid-year (millions) GNI per capita (ANas method, US$) GNi (Atlas method, US$ &/lions)

Average annual growth, 200046

Population (%) Labor force (%)

Most recent estimate (latest year available, 200046)

Poverty (% ofpopu/ation below national poverty line) Urban population (% oftotal population) Life expectancy at birth (years) Infant mortality (per ~,OOO/ive births) Child malnutrition (% ofchildmn under 5) Access to an improved water source (% ofpopulation) Literacy (% ofpopulation age 15t) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986

GDP (US$ billions) 246 4 Gross capital formatiodGDP 230 Exports of goods and ServiceslGDP 5 3 Gross domestic SavinQdGDP 21 2 Gross national savingdGDP 21.6

Current accwnt balancdGDP Interest paymenWGDP Total debtlGDP Total debt servicdexports Present value of debUGDP Present value of debtkxpotts

-2.0 0.7

19.5 32.5

1986-gS 199646 (average annual growth) GDP 5.5 6.4 GDP per capita 3.5 4.7 Exports of goods and services 11.8 13.4

India

1.109.6 820

910.0

1.5 1.9

29 23 64 56

86 61

119 123 116

19M

388.3 22.1 10.5 20.9 23.2

-1.3 1 .o

24.1 22.2

2005

9.2 7.7 5.9

South Asia

1,493 766

1.143

1 7 2 1

28 64 62

84 58

110 115 105

2005

805 7 334 203 304 32 7

-1 2 0 8

15 3 12 5 13 7 569

2006

9 2 7 7 8 6

Low- Income

2,403 650

1,562

1.9 2.3

30 59 75

75 61

102 108 96

2006

911.8 33.9 23.0 31.1 33.5

-1.1

2006-10

I Development diamond.

Life expectancy

Ni\

Access to improved water source

-India -- Low-income group

iconomic ratios'

Trade

T

Indebtedness

-/ndia .- ---- Low-income group

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Household final consumption expenditure General gov7 final consumption expenditure Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Household final consumption expenditure General gov7 final consumption expenditure Gross capital formation Imports of goods and services

Manufacturing

1986 1996

30.0 27.4 26.3 27.0 16.4 17.5 43.7 45.6

66.9 68.4 11.9 10.7 7.1 11.7

1966-96 199646

3.7 2.3 6.2 6.4 6.5 5.9 6.6 8.2

5.2 4.7 4.0 5.3 7.0 9.1

10.8 9.9

2005

18.3 27.6 16.0 54.1

58.3 11.3 23.3

2005

6.0 9.6 9.1 9.8

6.1 9.8

18.8 10.3

2006

17.5 27.9 16.3 54.6

57.6 11.3 25.8

2006

2.7 10.6 12.3 11.2

7.5 9.0

14.2 11.4

Growth of capital and GDP (%)

= T 20

10

0

.10 01 02 03 M 05 06

GCF -GDP - I

1 Growth of exports and imports (K) 1

Note: 2006 data are preliminary estimates. This table was produced from the Development Economics LDB database. *The diamonds show four key indicators in the country (in bold) compared with its income-grwp average. If data are missing, the diamond wiii

be incomplete.

1

India

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implick GDP deflator

Government finance (?A of GDP, includes current grants) Current revenue Current budget balance Overall surpluddeficit

1986 1996 2005 2006

TRADE

(US$ millions) Total exports (fob)

Marine products Ores and minerals Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000-100) Import price index (2000=100) Terms of trade (2000=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, locaWS$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

8.7 9.0 6.8 7.5

19.6 17.5 -2.3 -3.5 -9.9 -6.4

1986 1996

10,413 34,133 414 1.129 476 1.172

6,564 24,613 17,729 48,948 1,028 1,214 2,371 10,036 4,914 9,922

101 104 119 115 85 90

I986 1996

13,630 41,607 19,951 55,696 -6,321 -14.089

-977 -3,307 2,327 12,367

-4.971 -5,029

4.397 10,847 574 -5,818

6,574 26,423 12.8 35.5

1986 1996

48,124 93,466 3,475 8,768

10,529 17,616

5.273 11,981 469 1,514 152 364

595 589 1,404 184 2,793 -148

118 2,426 0 3,958

1,790 1,725

235 1,074 1,062 518

386 804 676 -287

1,297 1,592

4.2 5.8 4.4 5.9

19.7 21.6 -3.1 -1.9 -6.8 -6.5

2005 2006

105,152 127.090 1,589 1,744 6,164 7,033

72.563 82,818 156,993 191,995

2,767 3,291 43,963 57,074 37,666 52,944

2005 2006

166,556 208,420 194,516 240.598 -27,960 -32,178

-5,510 -4.846 24.102 27,195

-9.368 -9,829

23,582 45,164 -14,214 -35,335

150,866 198.710 44.3 45.2

2005 2006

123,123 5,557 6,177

23,363 24.068

24.335 417 597 809 641

1,060 1,421

379 6,598

12,152

1,592 208 2,130 1,787

843 942 1,288 845

384 496 904 349

I

0, "I 01 02 03 04 05

-GDP deflator - 0 - C P i

I Export and import levels (US$ mlll.)

2w.wo

1S0,wo

1w.m

50,Oi)O

0

I mExports inp ports

W 01 02 03

Current account balance to GDP (%)

' T 2

1

0 01 02 03

1

2

ompositlon of 2005 debt (US$ mill.)

A 5,557 G: 8,788

, - IBRD E - Bilateral B - IDA D - Other mltilateml F . Private C ~ IMF G. Short-ten

Note: This table was produced from the Development Economics LDB database. 9/28/07

2

x x

2

m w w m ~ ~ m m ~ o m m m 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 N N N N N N N N N N N N N

I 0 (I)

a .- c! " c

: 7 0 N N

8 co

:c?g m d o m m m

c? W d

m m n l n b o b w m b m a m f - o m c u - t b b 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 N N N N N N N N N N N N N N N N N N N

v) n

II c z

Y

. . v1 e, Y z

MAP SECTION

GOPALGANJGOPALGANJMADHUBANIMADHUBANI

SUPAULSUPAULARARIAARARIA

KISHANGANJKISHANGANJ

KATIHARKATIHAR

MADHEPURAMADHEPURA

SAHARSASAHARSA

BHAGALPURBHAGALPUR

BANKABANKA

KHAGARIAKHAGARIA

JAMUIJAMUI

SAMASTIPURSAMASTIPUR

MUNGERMUNGER

BEGUSARAIBEGUSARAI

DARBHANGADARBHANGA

MUZAFFARPURMUZAFFARPUR

VAISHALIVAISHALI

NALANDANALANDA

NAWADANAWADAGAYAGAYA

AURANGABADAURANGABAD

ROHTASROHTAS

BUXARBUXARBHOJPURBHOJPUR

SARANSARAN

SIWANSIWAN

JEHANABADJEHANABADSHEIKHPURASHEIKHPURA

SHEOHARSHEOHAR

PatnaPatna

LAKHISARAILAKHISARAIBHABUTABHABUTA

SITAMAHARISITAMAHARI

PURNEAPURNEA

WESTWESTCHAMPARAMCHAMPARAM

EASTEASTCHAMPARAMCHAMPARAM

PATNAPATNA

WESTCHAMPARAM

GOPALGANJ

EASTCHAMPARAM SITAMAHARI

MADHUBANI

SUPAULARARIA

KISHANGANJ

PURNEA

KATIHAR

MADHEPURA

SAHARSA

BHAGALPUR

BANKA

KHAGARIA

JAMUI

SAMASTIPUR

LAKHISARAI

MUNGER

BEGUSARAI

DARBHANGA

MUZAFFARPUR

VAISHALI

NALANDA

NAWADAGAYA

AURANGABAD

ROHTASBHABUTA

BUXARBHOJPUR

SARAN

SIWAN

JEHANABAD

PATNA

SHEIKHPURA

SHEOHAR

Patna

Son

Rive

r

Ganga River

Ghaghara River

Gandak River

Ganga River

(Ganges River)

NEPAL

IBRD 35211R

NO

VEM

BER 2007

I N D I ABIHAR STATE

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

DISTRICT BOUNDARIES

STATE BOUNDARIES

INTERNATIONAL BOUNDARIES

RIVERS

STATE CAPITAL