2006

Poverty Reduction and Economic Management UnitSouth Asia Region

Document of the World Bank

The World Bank

RajasthanClosing

the Development

Gap

Report No. 32585-IN

Disclaimer

All rights reserved. The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarilyreflect the views of the Board of Executive Directors of the World Bank or the governments they represent. Copying and/ortransmitting portions or all of this work without prior permission may be violation of applicable law. The World Bank encouragesdissemination of its work and will normally grant permission promptly. Any queries in this regard should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, email: pubrights@worldbank.org

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Photo Courtesy : World Bank, Corel Royalty Free Images, Studio Dharana, Government of Rajasthan Water Resources Department.

ACB Anti-Corruption Bureau

ACR Annual Confidential Reports

ALSSS Agricultural Labor Social SecurityScheme

ANM Auxiliary nurse-midwives

ANC Antenatal Clinics

AWW Anganwadi workers

BOT Build-Operate-Transfer

BPL Below Poverty Line

BRC Block Resource Centers

CAG Comptroller & Audit General

CRC Cluster Resource Centers

CSO Central Statistical Organization

CSS Centrally Sponsored Schemes

CST Central Sales tax

CTD Commercial Tax Department

CTS Child Tracking System

DCCB District Central Cooperative Banks

DCS Dairy Cooperative Societies

DDP Desert Development Program

DEO District Education Officer

DIET District Institute of Education andTraining

DFID Department for InternationalDevelopment

DPAP Drought Prone Areas Program

DPEP District Primary Education Program

DPIP District Poverty Initiative Project

EAC Employment Assurance Scheme

EC European Commission

EGS Employment Guarantee Scheme

EPRC Economic Policy and Reform Council

ERC Expenditure Review Commission

FDI Foreign Direct Investments

FIR First Information Report

FMIS Farmers' Management of IrrigationSystems

FPS Fair Price Shop

FRMBA Fiscal Responsibility and BudgetManagement Act

FRF Fiscal Reform Facility

GASAB Government Accounting StandardsAdvisory Board

GDP Gross Domestic Product

GER Gross Enrollment Rate

GoI Government of India

GoR Government of Rajasthan

ABBREVIATIONS AND ACRONYMS

CURRENCY EQUIVALENTS(Exchange Rate Effective)

Currency unit = Rupees (Rs.)

Rs. 1 = US$ 0.0226

US$ 1 = Rs. 44.20

April 1 - March 31

FISCAL YEAR

Vice President Praful C. Patel, SARVP

Country Director Michael F. Carter, SACIN

Sector Director Sadiq Ahmed, SASPR

Sector Manager Ijaz Nabi, SASPR

Task Managers Ahmad Ahsan (SASPR) Ananya Basu (SASPR)

GSDP Gross State Domestic Product

ICDS Integrated Child Development Scheme

HDI Human Development Index

ICT Information and CommunicationTechnology

IDA Industrial Disputes Act

IEC Information, Education andCommunication

IMFL Indian Made Foreign Liquor

IRDP Integrated Rural Development Program

JSBY Jan Shree Bima Yojna

LBT Land and Building Tax

LTU Large Taxpayer Unit

M&E Monitoring & Evaluation

MDG Millennium Development Goals

MIS Management Information System

MTEF Medium Term Expenditure Framework

MTFP Medium Term Fiscal Program

NABARD National Bank for Agricultural and RuralDevelopment

NFBS National Family Benefit Scheme

NFFW National Food-for-Work

NGO Non-Government Organization

NOAPS National Old Age Pension Scheme

NRHM National Rural Health Mission

NSS National Sample Survey

O&M Operation and Maintenance

PAC Public Accounts Committee

PDS Public Distribution System

PFMA Public Financial Management andAccountability

PHC Primary Health Centers

PMGSY Pradhan Mantri Gram Sadak Yojana

PPP Public Private Partnerships

PRI Panchayati Raj Institution

PSU Public Sector Unit

PTR Pupil-teacher-ratio

RCDF Rajasthan Cooperative Dairy Federation

RERC Rajasthan Electricity RegulatoryCommission

REI Rajasthan Education Initiative

RIDCOR Road Infrastructure DevelopmentCompany of Rajasthan

RoR Records of Rights

RSEB Rajasthan State Electricity Board

RTI Right to Information

RVS Rajasthan Vikas Services

SC/ST Scheduled Caste/ Tribe

SDMC School Development & ManagementCommittees

SGRY Sampoorna Grameen Rozgar Yojana

SGSY Swarnjayanti Gram Swarozgar Yojana

SIEMAT State Institute of EducationalManagement and Training

SIERT State Institute for Education Researchand Training

SIS State Implementation Society

SME Small and Medium Enterprise

SRF State Road Fund

SSA Sarva Shikshya Abhiyan

SWRPD State Water Resource Planning Department

T&D Transmission & Distribution

TFC Twelfth Finance Commission

VAT Value Added Tax

VRS Voluntary Retirement Scheme

WUA Water Users Association

Abbreviations and Acronyms

This Report was prepared by a team led byAhmad Ahsan and Ananya Basu (SASPR)under the guidance of Ijaz Nabi, Sector

Manager. Sadiq Ahmed (SASPR), Michael Carter(SACIN), and Fayez Omar (SACIA) providedoverall guidance. Kapil Kapoor and Stephen Howes(SASPR) provided helpful comments.

Other team members were: Dina Umali-Deninger,Asmeen Khan (SASAR, Agriculture and InformalSector), Priya Basu, Inderbir S. Dhingra, AuroraFerrari (SASFP, Industry and Services), AlanTownsend, Salman Zaheer, Judith Plummer, RohitMittal (SASEI, Power), Alok Bansal, Aniruddha Patil(SASEI, Roads), William McCarten (WBIPR,Fiscal), Upasana Varma (SASPR, Fiscal), Bala B.K.Naidu (SASPR, Research Support), Vinod Sahgal(SARFM, Financial Management), Mam Chand(SARPS, Procurement), Vikram Menon (SASPR,Governance and Service Delivery), Geeta Sethi(SASAR, Local Government), Peter Ellis (SASEI,Urban Development), Kin Bing Wu, Deepa Sankar,Nalin Jena (SASHD, Education), Sadia A.Choudhury, Preeti Kudesia (SASHD, Health), RinkuMurgai (SASPR, Social Protection), Philip B.O´Keefe (SASHD, Social Protection), Vidya Kamath(SASPR, Program Assistant, Document Production),Shahnaz Rana and Rita Soni (SASPR, ProgramAssistants), Thelma Rutledge (SASPR, District DataSet), and Jonny Andersson (DECRG, Maps).

The report was edited by Sheela Bajaj.

The team thanks peer reviewers Lili Liu (PRMED),David Rosenblatt (LCSPR), and Deepak Mishra(SASPR) for their comments on the Report.

The team thanks the Government of Rajasthan for itscooperation, guidance and the documentationprovided to the team. In particular, the team isgrateful to Mr. R. K. Nair and Mr. Anil Vaish,respectively the former and current Chief Secretaries,Government of Rajasthan; Mr. S. Kumar Additional

Chief Secretary, Home and Justice; the late Mr. S. P.Gupta, former Principal Secretary, Finance; Mr. RajivMehrishi, current Principal Secretary, Finance; Dr.Govind Sharma, Mr. B.N. Sharma, Mr. KhemrajChoudhary, and Mr. S. S. Aggarwal, all Secretary,Finance; Mr. Y. Mathur, former Secretary, Financeand current Principal Secretary, Energy; Mr. SiyaramMeena, Secretary, Planning; Mr. D. Upreti,Commissioner, Commercial Tax Department; Mr.M.S. Khan, former Special Secretary Plan; Mr. S.K.Mittal, Director, Budget; Mr. Vinod Pandya, DeputySecretary, Finance; and Mr. P. M. Vyas, DeputyDirector, Planning.

The team also thanks Mr. C.K. Mathew, PrincipalSecretary, Education; Mr. R. Srinivasan, PrincipalSecretary, Industries; Mrs. R.R. Haldea, PrincipalSecretary, Medical Health and Family Welfare; Mr.C.S. Rajan, Principal Secretary, Public Works; Mr. A.Mayaram, Principal Secretary, Training; Mr. A.K.Garg, Principal Secretary, Administrative Reforms;Mrs. A. Kala, Principal Secretary, Women and ChildDevelopment; Mr. M.K. Khanna, PrincipalSecretary, Panchayati Raj and Rural Development;Mrs. K. Singh, Principal Secretary, Social Welfare;Mr. V.S. Singh, Principal Secretary, Labor andEmployment; Mr. S. Ahmad, Chairman andManaging Director, Rajasthan Rajya Vidyut PrasaranNigam Limited; Mrs. M. Mehrishi, Commissioner,Bureau of Investment Promotion; Mr. S. N. Thanvi,Secretary, Irrigation; Mr. B.R. Meena, Secretary,Public Health and Engineering; Mr. D. Sharma,Secretary, Agriculture; Mr. R. Srivastava, Secretary,Mines and Petroleum; Mr. B.S. Sandhu, Secretary,Health and Family Welfare and other officials.Designations of officials denoted are as during thepreparation of the bulk of the report, and may havechanged subsequently.

Finally, the team thanks the Confederation of IndianIndustry, the Institute of Development Studies,Jaipur, and other private sector and civil societyrepresentatives for very helpful discussions.

Report Team and Acknowledgments

Executive Summary i

Chapter 1 : Growth, Human Development, and Poverty Reduction in Rajasthan 1Trends and Patterns in Growth 4

Changes in Employment Structure: Growth in the Non-Farm Sectors 6

Poverty and Human Development: Levels and Trends 7

Rajasthan's Development Challenges 14

Chapter 2 : Reviving Growth in Rajasthan 17

Improving Agricultural Performance and Water Resource Management 20

Unleashing the Potential of the Private Sector: Industry and Services 32

Developing Infrastructure: Power and Roads 42

Chapter 3 : Creating Fiscal Space for Development and Using It Effectively 49

The Challenge of Fiscal Adjustment 51

Sustaining Revenue Growth 56

Trends in Expenditure Composition 61

Increasing the Effectiveness of Public Expenditure 63

Chapter 4 : Improving Governance and Public Service Delivery 71

Weaknesses in Service Delivery 73

Towards a More Effective Civil Service 75

Reinvigorating Local Governments 79

Strengthening Institutions for Accountability and Transparency 80

Moving Forward: Next Steps and Recommendations 83

Chapter 5 : Strengthening Human Development and Social Protection Strategies 85

Education 87

Health 91

Social Protection 96

Strengthening Monitoring and Evaluation 102

Annexures 107

Annex 1: District Maps of Rajasthan for Key Socio-Economic Indicators 109

Annex 2: Medium Term Fiscal Program for Low Growth Scenario 113

References 114

o n t e n t sC

BoxesBox 1.1 : Addressing the Poverty-Income 'Puzzle' in Rajasthan 8Box 2.1 : Some Key Recommendations of the Economic Policy and Reforms Council 19Box 2.2 : The State Water Resource Planning Department 26Box 2.3 : Agricultural Strategy for Rajasthan in the Tenth Five Year Plan 28Box 2.4 : Learning from Maharashtra's Horticulture Program 30Box 2.5 : The Barefoot College in Rajasthan-Innovation for a Better Life 34Box 2.6 : Rajasthan's White Revolution 34Box 2.7 : Tourism-Potential and Constraints 38Box 2.8 : Mining and Quarrying-Potential and Constraints 39Box 2.9 : Developing Textiles-Potential and Constraints 40Box 3.1 : Important Policy Parameters Behind the Medium Term Fiscal Program 56Box 3.2 : Potential Benefits from Adopting the Value Added Tax 58Box 3.3 : Using Public Private Partnerships in Simplifying 59

Property Registration in MaharashtraBox 3.4 : Toward More Performance Orientated Budgets 65Box 3.5 : New Disclosure Items in the Fiscal Responsibility and Budget Management Act 66

and Budget Management ActBox 3.6 : Improving Cash Management in Andhra Pradesh 69Box 4.1 : Key Recommendations of the Shiv Charan Mathur 77

Committee on Administrative ReformBox 4.2 : Making Law More Accessible to the People - Online Case Registration 83Box 5.1 : Government in Global and Local Private Partnership - 91

The Rajasthan Education InitiativeBox 5.2 : Simulated Impact of Introduction of the 101

Rural Employment Guarantee Scheme in Rajasthan

TablesTable 1.1 : Selected Indicators by Social Group 11Table 1.2 : Selected Indicators by Gender 11Table 1.3 : Summary of Millennium Development Goals for Rajasthan 13Table 2.1 : Average Yield of Major Crops (kilograms/hectare) and 23

Use of Inputs in Selected StatesTable 2.2 : Operations and Maintenance Expenditures, and Cost Recovery in Irrigation 27Table 2.3 : Elements of Planning and Implementing Agricultural Diversification Programs 29Table 2.4 : Share of Selected Sub-sectors in Rajasthan's Real GSDP 33Table 3.1 : Normal Growth MTFP Revenue and Expenditure Projections 55Table 3.2 : Major Revenue Receipts (as a percent of GSDP) and Tax Buoyancy 57Table 3.3 : Improving the Effectiveness of Public Expenditures 64Table 4.1 : Comparative Size of the Civil Service in Selected 75

Indian States (per hundred of population)Table 5.1 : Growth in Medical Infrastructure 92Table 5.2 : Program Expenditure on Key Anti-Poverty Programs, 97

Rajasthan, 2001-05 (Rs. Millions)

C o n t e n t s

Figures

Figure 1.1 : GSDP and Per Capita Income: Trends, Fluctuations, and Sectoral Performance 4

Figure 1.2 : Labor and Human Capital Expansion in Rajasthan 5

Figure 1.3 : Factors Contributing to Growth Slowdown in Rajasthan 6

Figure 1.4 : Changing Employment Patterns in Rajasthan 7

Figure 1.5 : Poverty Trends and Levels in Rajasthan 9

Figure 1.6 : Lagging Human Development, and Worsening Child Health Indicators in Rajasthan 10

Figure 1.7 : Rajasthan: Human Development Indicators by Income Quintile 12

Figure 1.8 : Rajasthan: Likelihood of Attaining Selected MDGs 12

Figure 2.1 : Characteristics of Different Production Systems in Rajasthan 21

Figure 2.2 : Recent Performance of Agriculture and Allied Sector 21

Figure 2.3 : Shares of Various Product Categories 22

Figure 2.4 : Levels, Shares, and Composition of Public Expenditure 24on Agriculture and Allied Sector

Figure 2.5 : Sources and Expenditure Composition in the Irrigation Sector 25

Figure 2.6 : Recent Performance in Industry and Services Sectors 33

Figure 2.7 : Selected Indicators of Business Environment in Surveyed Regions of India 35

Figure 2.8 : Financial Crisis in Power Sector 43

Figure 2.9 : Road Length and Connectivity in Major Indian States 45

Figure 3.1 : Fiscal Adjustment in Rajasthan 51

Figure 3.2 : Recent Trends in Selected Fiscal Variables in Rajasthan 52

Figure 3.3 : Normal Growth Deficits under MTFP 56

Figure 3.4 : Composition of Capital Expenditure in Recent Years 61

Figure 3.5 : Trends in Total O&M and Non-Salary Expenditure in 62Social and Infrastructure sectors

Figure 3.6 : Trends in Expenditure on Wages and Salaries as Share of Revenue Expenditures 63

Figure 3.7 : Budget Implementation by Main Heads-Actual as Percentage of Budget 67

Figure 4.1 : Relative Performance of Public Services in Selected Indian States, 2003-04 74

Figure 4.2 : Locational Biases and Transfers in Rajasthan Civil Services 76

Figure 5.1 : Education Spending and Intrasectoral Allocation of Funds 88

Figure 5.2 : Health and Family Welfare Expenditure 92

Figure 5.3 : HIV and AIDS in Rajasthan Relative to Major Indian States 96

Figure 5.4 : Decline in Coverage and Targeting Effectiveness in Recent Years 99

Figure 5.5 : Key District Level Correlations in Rajasthan 104

Figure 5.6 : Higher Plan Outlays in 2001-02 in Districts with 105Better Human Development Indicators

C o n t e n t s

Despite being considered one of India'slagging states, Rajasthan made impressiveprogress during the 1980s and 1990s. The

economy diversified significantly, and the growthrate accelerated to become the second highestamong the major Indian states. School enrollment,literacy, and life expectancy increased markedly,while gender inequity decreased. The povertyheadcount declined by more than half. In fact, bythe end of the 1990s, Rajasthan's poverty rate waslower than that in several richer states—presentingsomewhat of a puzzle. Rajasthan seemed poised toclose the development gap that has existed for a longtime between itself and the Indian average.

New challenges have emerged since 1999, however,threatening the progress in economic growth, socialdevelopment, and poverty reduction. Per capitagrowth rates have nearly halved in the last five yearscompared to the previous two decades. Recurringdrought, a growing crisis in ground water supply,falling investment rates, and fiscal stress thatlowered public investment in infrastructure in thesecond half of the 1990s, have all contributed tolowering growth rates and increasing economicvolatility. Given that large numbers of people livejust above the poverty line, there is danger thatpoverty rates will increase. Further, if Rajasthancannot restore its growth path, it risks being caughtin a low-level development trap, with India's risinginvestment inflows—both domestic and foreign—bypassing it for the faster growing states. In thatcase, the development gap could widen again.

Recognizing these serious challenges, theGovernment of Rajasthan (GoR) has startedimplementing policy reforms to address them. TheChief Minister, in office since December 2003 with

the support of a clear parliamentary majority, hasarticulated an overarching vision framed as "SixIdeals". This vision includes: (i) eliminating hungerand malnutrition; (ii) taking care of disadvantagedgroups; (iii) emphasizing human resourcedevelopment; (iv) creating social and economicinfrastructure; (v) ensuring good governance; (vi)and improving the fiscal position. The governmenthas also been building partnerships with the privatesector and civil society, most clearly manifested inthe Economic Policy and Reforms Council (EPRC)set up last year. Finally, the government is alsoseeking an expanded engagement with externalpartners, such as the European Union and theWorld Bank, in meeting these challenges.

This World Bank Report has been prepared at therequest of the GoR to help identify policy options toaddress these challenges. The report also contributesto the dialogue between the government, privatesector, and civil society on Rajasthan's developmentprospects and priorities during the EPRC'smeetings in 2004 and 2005. Finally, the Reportseeks to inform stakeholders about policy issuesconfronting the state and the assistance strategy thatcan best serve its interest.

Background

Rajasthan has a diverse geography and social structure.With an area of about 350,000 square kilometers, it isIndia's largest state. Its population of 56.5 million andGross State Domestic Product (GSDP) of US$ 23billion place Rajasthan eighth among the Indian statesin terms of both indicators. The state isoverwhelmingly rural, with more than three-quartersof the population still living in rural areas. It has one ofthe highest proportions of Scheduled Caste (SC) and

Executive Summary

iv

RAJASTHAN: Closing the Development Gap

Scheduled Tribe (ST) population among Indianstates—at 17.2 percent and 12.6 percent respectively.1

The Aravalli range runs from the south-west ofRajasthan to the north-east, dividing the state into twodistinct geographical regions. To the west lies the TharDesert, covering over 60 percent of the state's landarea, leaving Rajasthan acutely deficient in watersupply. The state accounts for 10 percent of India'stotal land area, but has only 1 percent of the country'swater resources. Agriculture continues to be largelydependent on rainfall, leaving the state highlyvulnerable to drought-induced volatility.

Rajasthan inherited a feudal history and had a latestart in development. Formed by the union of 19princely states and three chiefships in 1956, nearly adecade after India's independence, Rajasthan faceda substantial development gap compared to othermajor Indian states. For instance, in 1960,Rajasthan generated only a quarter of the electricityof states such as Tamil Nadu, Maharastra or WestBengal. School enrollment rates were half the all-India average.2 The state's population growth rateshave been consistently higher than the nationalaverage. With slower growth rates compared to therest of India during the 1960s and 1970s, Rajasthanfell even further behind.

Progress during the 1980s and 1990s

Overcoming difficult initial conditions and twodecades of slow growth, Rajasthan's developmentaccelerated from the mid-1980s. The GSDP growthrate rose to 6.2 percent during 1980-2000, one ofthe highest in the country—largely propelled byinvestment, labor productivity growth, anddiversification of the economy. With increasingdiversity came reduced volatility. Even thoughagricultural performance was poor in the 1990s,rapid growth in industry and services sustained themomentum from the 1980s. School enrollment,literacy, and life expectancy increased markedly andgender inequity decreased. Poverty declined sharply,

and, at 15.9 percent, was lower than that in some ofthe richer states in the late 1990s. This was largelydue to relatively equal income distribution andclustering of households just above the poverty line.

New Challenges to Growth, PovertyReduction, and Human Development

However, economic growth has faltered markedly since1999. Three droughts in the past five years, rapidlydepleting groundwater levels and aquifers, and fallinginvestment rates have all contributed to deceleratinggrowth rates. Growth has also become more volatileand its decline pervasive—extending even to non-agricultural sectors that drove growth during the pasttwo decades. It is likely that poor agriculturalperformance in the 1990s had spillover effects to othersectors through depressed demand. While a recoveryof growth is under way, economic performanceremains erratic. For instance, after a rebound in 2003-04, per capita growth fell again in 2004-05.

The slowdown in growth threatens Rajasthan'sprospects of achieving the Millennium DevelopmentGoals (MDGs). Even with the progress of the pastdecades, Rajasthan presents a mixed picture in termsof achieving the MDGs. The state appears on trackin its goals of achieving poverty reduction andenvironmental sustainability, but only under theassumption that growth rates and other conditionsremain favorable.3 In education, it is likely that fullprimary enrollment will be achieved before 2015.The state is close to attaining gender equality inlower primary enrollment, even though it has someway to go to bridge the gender gap at higher levelsof education. In health, the goal of reducing infantand child mortality will not be achieved without a"big push" effort. The state is off track in terms ofproviding access to reproductive health services forall. Given that progress in human developmentgoals is closely tied to income levels, Rajasthan'sfaltering growth could thus greatly lower theprospect of attaining the MDGs.

1 Figures from 2001 Census. Comparable national figures are 16.2 percent for SCs and 8.2 percent for STs.2 Government of India Planning Commission, Plan Documents. 3 The monitorable goal for ensuring environmental sustainability is in terms of halving the proportion of population without

access to safe water.

The GoR has started taking steps to meet thesechallenges. Tax reforms leading to robust revenuegrowth and better expenditure management arecreating more fiscal space for public investments anddevelopment expenditures. A new scheme for feederrenovation holds promise for sharply reducing powerlosses and helping the sector attain financialsustainability. Plans are underway to improveagricultural productivity, encourage diversificationinto higher yielding crops, and improve waterresource management. New partnerships are beingforged with the private sector to improve theinvestment climate and service delivery. E-governance programs such as Lok Mitra and JanMitra provide a wide array of government services inurban areas, and are about to be extended to ruralareas. State-level public actions to promote humandevelopment and social protection focus on poorand disadvantaged groups like SC/STs and women.

The Pending Agenda: Building on Rajasthan's Strengths to Meetthe Challenges

Rajasthan has important advantages and strengthsthat can help meet the outstanding challenges. Thestate civil service enjoys a reputation for competence.There is a tradition of responsiveness to civil societyactivism, and an institutional framework foraccountability. Consistent with this tradition,Rajasthan's present and past governments have beenengaged in addressing development issues. A richcultural and historical heritage makes Rajasthan oneof India's most attractive tourist destinations andconference venues. An abundance of small mineralsoffers the promise to provide new sources of growthand attract investment. Important sectors such astextiles, gems, cement, jewelry and handicrafts, arewell established in the state. A long tradition ofentrepreneurship, community and non-governmentorganization (NGO) activism, and resilience of thepeople is emerging in vibrant off-farm economicactivity. This is clearly manifested in the rapidgrowth of a modern dairy sector, for example. Ayoung, better-educated population, waiting to enterthe labor force, can raise growth and productivityrates. The main national highway system crossesJaipur, increasing proximity to fast-growing

neighboring states such as Delhi, Gujarat andMaharastra. This brings the "good neighborhoodeffect" to Rajasthan—in terms of linking it to themanufacturing and information technology (IT)hubs growing in and around these states.

Despite these advantages and strengths, Rajasthanstill has an unfinished development agenda, and thetask ahead will be to implement a well-prioritizedmedium term reform program. This report drawson the analysis of Rajasthan's constraints andstrengths to present policy options centering onfour areas: (i) reviving growth; (ii) creating fiscalspace for development; (iii) strengthening publicservice delivery; and (iv) improving humandevelopment and social protection programs.

Reviving Growth

If Rajasthan is to close its development gap with thenational averages, its economy has to grow at asustained rate of 7-8 percent annually, well abovethe trend of 4-5 percent in recent years. Simplegrowth accounting suggests that, in order to achievethis aggregate growth rate, agriculture needs to growat about 4 percent per year in keeping with thetrend in the 1980s, while the non-agricultural sectorshould grow at about 8-9 percent. To achieve this, itwill be necessary to increase investment—bothprivate and public—from its current level of about13 percent of GSDP to above 20 percent of GSDP,along with some growth in productivity. How canRajasthan achieve these goals?

Agricultural and Allied Sectors

Agricultural diversification, supported by liberalizingagricultural marketing and modernizing researchand extension, will be critical to reviving agriculturalgrowth. Given Rajasthan's growing water scarcity anderratic rainfall, traditional cereal-based agriculture nolonger offers significant growth opportunities.Instead, the focus will need to be on diversifying intohigh-value—but less water-dependent—crops andallied activities such as animal husbandry. It isencouraging to note that a trend towardsdiversification has already emerged with the share ofcereals in agricultural output value dropping to a

v

Executive Summary

third in recent years. This trend needs to besupported by creating marketing channels andpromoting private sector investment in agriculturethrough contract and commercial farming. The keyreforms needed include: (i) amending theAgricultural Produce Regulated Markets Act so thatproducers have the option to directly market theirproduce to commercial buyers who may then beencouraged to enter into contract farming; and (ii)improving the composition of public expenditure inagriculture by focusing on research and disseminationof high-value crop technology and animal husbandry.

In order to address Rajasthan's growing water crisis,policies could focus on moving from groundwater tosurface water irrigation, and on reducing the currenthigh waste in water use. Although agricultureaccounts for 83 percent of water consumption atpresent, future projections to 2025 indicate thatdomestic and industrial demand will increase aboutthree to four times by volume—creating addedpressure on this scarce resource. At present,unsustainable groundwater use has already led tosignificant depletion of aquifers. Under-pricing ofelectricity for irrigation reduces the incentive for theefficient use of water and leads to the overexploitationof groundwater resources. Deteriorating surfaceirrigation infrastructure due to inadequatemaintenance and poor cost recovery leads to morethan one half of surface water being wasted. Keyreform actions include: (i) implementing anintegrated approach to water resources managementby making the newly established State Water ResourcePlanning Department (SWRPD) functional as soonas possible; (ii) improving the composition of publicexpenditure to balance the needs for rehabilitation ofexisting systems versus the completion of existingschemes in irrigation; (iii) actively promotingcommunity-based water user groups who, given ashare in cost recovery revenues, will have incentives toraise revenues and use them for rehabilitation; and (iv)increasing water charges to reflect the scarcity of waterand discourage wastage in water use.

Industry and Services Sectors

Since non-agricultural sectors account for three-quarters of GSDP, restoring and accelerating growth

in these sectors to at least their trend rate of the1990s will be crucial. During the 2000s, major sub-sectors such as construction and manufacturing,and especially textiles, have witnessed a slowdown—with growth rates falling back to the 1970s trend.Although two sectors where Rajasthan has acomparative advantage—mining and tourism—show signs of better performance, they are stillbelow potential. Another dynamic area is the dairyindustry in the rural off-farm, informal sector.Reviving growth in all these sectors will need aconsiderable increase in private investment.

Given its geographical and other disadvantages,Rajasthan can expect to increase private investmentrates significantly only if it offers a better investmentclimate than competing states. The factors that needto be addressed comprise: (i) reducing the number ofsteps required to set up businesses in the formalsector; (ii) decreasing the long time taken to enforcecontracts, transfer property, or declare insolvency;(iii) lowering the high rates of labor-related firminspections compared to other states, and relaxing thestrict rules governing the hiring and retrenching oflabor under the Industrial Disputes Act (IDA); and(iv) adopting more flexible labor laws with clarity incontract labor laws. It is also important to promotepartnership with the private sector. Another areawhere Rajasthan lags behind is credit availability, withper capita credit to industry in Rajasthan beingaround 40 percent lower than the national average.Reforms need to focus on increasing access to creditwhile maintaining the relatively good financial healthof Rajasthan's credit institutions.

Infrastructure: Power, Roads and UrbanDevelopment

Critical policy decisions are required to improveRajasthan's infrastructure situation, one of the mostimportant constraints to growth. AlthoughRajasthan has made significant progress in recentyears in terms of increasing access, lack of reliablesupply of power at reasonable cost and well-maintained roads to facilitate trade and marketingremain key constraints. The power sector faces afinancial crisis—particularly due to aggregatenetwork losses and low rates for agricultural users.

vi

RAJASTHAN: Closing the Development Gap

In order to make the sector financially sustainable,pricing issues will need to be addressed through amulti-pronged approach of improving operationaland commercial efficiency and reducing powerpurchase costs. The scaling up of the feederrenovation program shows promise of lowering thelarge distribution losses. In the interim, the GoRcould ensure that losses incurred by power utilities,caused by government policies to subsidize retailprices, are fully financed through the budget. In theroads sector, there are issues of capacity constraintsand adequate maintenance—although after theTwelfth Finance Commission (TFC) award, thecurrent requirement for maintenance would be metfor the coming five years. While a Roads Fund hasbeen created, it will be important to identify asustainable source of funds for maintenanceexpenditures, and expand the role of the privatesector in engineering, construction, andmaintenance services.

Public private partnership (PPP) in providinginfrastructure needs to be strengthened further. Sinceestimates place Rajasthan's annual infrastructureinvestment requirements at four times thegovernment's present capital outlay, private sectorparticipation is essential.4 Private investment, soughtthrough PPPs, is a route to both attract additionalsources of capital and improve efficiencies in theconstruction, operation and maintenance ofinfrastructure facilities. Rajasthan was, in fact, one ofthe first states to enact a Build Operate Transfer(BOT) policy in 1994, a reform that was enhancedwith the enactment of the Road Development Act in2002 and subsequent amendments in 2004. Thestate has also set aside a project preparation fund andset up a Power Development Corporation as a jointventure with the private sector for projectdevelopment. However, critical issues that remainoutstanding include: (i) developing planning andevaluation capacities to ensure that PPPs that goforward represent priority projects for the state andare best done through the PPP route rather thanthrough traditional public procurement; (ii)strengthening capacities to monitor the fiscal costs of

PPPs, through support including real estatedevelopment rights, tax breaks, and contingentliabilities; and (iii) ensuring that PPPs earn theirreturns from user fees, as far as practical recognizingaffordability issues for some consumers. On this lastpoint, it is important that competition in the awardof the PPP be used to minimize the cost incurred bythe state under PPP contracts. It is also essential todevelop political consensus through an overall policyframework, which sets out the rationale for PPPs andemphasizes that their use will depend on theiroffering efficiencies and a better deal for consumersand taxpayers.

Inadequate urban development, which can hamperRajasthan's growth, needs to be addressed. Sincenon-agricultural sectors will drive most ofRajasthan's future growth, this growth will mainlyshow up in the development of cities and towns.Although Jaipur and some of the major cities havebeen growing rapidly, Rajasthan remains largelyrural, with a low urbanization rate (23.4 percent).Thus, support to urban development assumes ahigh priority. The government budget for this yearhas made amends for a long neglect of urban issuesby increasing the allocation for urban development.Focus will now be required in three areas: (i)reducing the multiplicity of municipal institutionsthat leads to a lack of coherence in citydevelopment; (ii) strengthening weak institutionaland legal frameworks that lead to difficulties inimplementing municipal responsibilities as specifiedin the 74th Constitutional Amendment; and (iii)providing greater financial resources to cities so thatthey can invest in and maintain infrastructure.

Creating Fiscal Space for Developmentand Using It Effectively

After several years of acute fiscal stress, a trendtowards fiscal adjustment has emerged in the pasttwo years. Rajasthan's current fiscal adjustmentstrategy focuses primarily on reducing revenuedeficits and increasing capital expenditures. Fiscalperformance has improved markedly, helped by

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Executive Summary

4 Government of Rajasthan, "Overcoming Investment Climate Constraints," Presentation, 2004.

buoyant revenues and containment of revenueexpenditures. In particular, the GoR's own taxrevenues have grown rapidly at almost 15 percentannually over the last two years due to sustainedadministrative reforms and some recovery fromdrought. Debt restructuring has also helped tocontain current expenditures.

However, Rajasthan's fiscal position still continuesto be fragile. Despite improvement in the fiscalposition over the last two years, major challenges lieahead. For instance, the overall fiscal deficit isalmost 6 percent of GSDP, the debt stock is close to53 percent of GSDP, and interest payments use up29 percent of all revenues.5 Pension payments havealso doubled since 1999, while annual power sectorlosses that create both explicit (on-budget) andimplicit (off-budget and contingent) liabilities areclose to 2 percent of GSDP. Hence, a substantialagenda of reform still lies ahead.

Fiscal Prospects in the Medium Term

The main priority now will be to sustain the fiscaladjustment trend by effectively implementing theFiscal Responsibility and Budget Management Act(FRBMA) recently passed by the RajasthanAssembly. The TFC Award, which has slightlyincreased Rajasthan's share in the revenue pool, and,more importantly, provides strong incentives forreducing deficits, will help the adjustment process.However, the Act can be bolstered in itsimplementation by more attention to three areas: (i)enhancing fiscal transparency by providing publicaccess to information on budget implementationwithin the year; (ii) strengthening guaranteemanagement by imposing clearer rules and caps;and (iii) announcing a Medium Term FiscalProgram (MTFP) that commits the government toa clear fiscal adjustment path.

The credibility of fiscal policy will be greatlyenhanced if the government prepares and publiclycommits itself to a Medium Term Fiscal Plan, and to

the important policy decisions that underlie it. Keyamong these decisions will be continued tax policyand administration reforms—including introductionof the Value Added Tax (VAT)—and increases innon-tax revenue, restructuring debts by successfullymeeting FRBMA annual performance targets,managing off-budget liabilities arising from publicenterprise losses, and deepening pension reforms.Critically, salary increases will need to be contained toa normal creep of about 2.5 percent per annum. Anessential underlying requirement will be to maintainhigh economic growth rates through effective policiesso that revenues can be generated.

Sustaining Revenue Growth

Sustaining the robust growth of Rajasthan's ownrevenues will be an essential element of anyMedium Term Fiscal Plan. Although significant taxadministration reforms and economic recoveryhave helped increase revenue growth, there is stillan unfinished agenda of tax reform. This includes:(i) introduction of the VAT with suitableadministrative reforms to ensure that its potentialbenefits are realized; (ii) improvement of propertyregistration services linked to stamp duties; and (iii)reform in municipal taxes—primarily property,land and building taxes—and their gradualdevolution to urban governments. In addition, theimpressive administrative reforms alreadyundertaken by the Commercial Tax Department(CTD) can be carried forward.

It will be important to introduce the VAT withoutmuch delay. Although the GoR has deferredintroduction because no agreement has been yetreached on abolishing the Central Sales Tax (CST),there are several reasons why a VAT can help thestate.6 First, the tax system will be simplified fromthe current complex system of 11 slabs. Second, itwill lead to an improvement in the business climatefor Rajasthan by eliminating taxes on inputs andenhancing the competitive position of Rajasthan'senterprises. Third, by deferring adoption of the VAT,

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RAJASTHAN: Closing the Development Gap

5 This is according to latest estimates.6 The CST is a non-creditable tax imposed on interstate trade by origin states.

Rajasthan may lose out on the revenue guaranteeoffered by the Government of India (GoI) to VATstates as a backstop for rate rationalization and ratereductions. Finally, by joining the participatingstates, Rajasthan would have a more effective voicein ensuring that the CST is abolished or transformedin such a way as to prevent export of taxes.

Cost recovery provides important opportunities toincrease non-tax revenues, promote more efficientuse of scarce resources, and strengthen municipalgovernments. Auctioning mineral leases in lot sizesfor periods long enough to attract many bidders canbe a major source of non-tax revenue growth.7

Second, a water-rate structure reflecting scarcityvalue is urgently needed not only to achieve costrecovery, but also to foster more efficient andsustainable water use.8 Third, other areas whereunexplored potential exists to raise additionalresources through user charges include highereducation and specialized care in urban hospitals.

Improving Public Expenditure Composition

With larger fiscal space and additional resources tospend, ensuring the quality of public expenditure hasassumed greater importance. The composition ofexpenditure has improved in recent years with higherand more focused capital expenditures, increasedspending on operations and maintenance (O&M),and a better balance between social and economicsectors in government spending. Further, aside fromthe subsidies to the power sector, Rajasthan's othersubsidies appear reasonably well directed. Thecrucial issues that still remain to be addressedinclude: (i) increasing the effectiveness of capitalexpenditures; (ii) ensuring resources for O&M; (iii)and containing the civil service wage bill.

It will be particularly important to ensure that therapidly increasing capital expenditures have highreturns, and are not thinly spread over too manyprograms. Within capital expenditures, the share of

social services has been rising with an increasedemphasis on water supply and sanitation and less oneconomic services such as irrigation and floodcontrol. This appears to represent an explicitstrategy to lessen the previous high concentrationon major irrigation investments with long gestationperiods, and focus instead on less capital-intensiveminor watershed projects. The state will furtherneed to strengthen investment approval andevaluation processes to ensure that investments arewell-directed towards key sectors, on completinghigh-priority programs, and on meeting O&Mrequirements, unlike in the past. There areconsiderable gaps between road and irrigationmaintenance requirements and expenditures thatremain to be addressed. There is also the need forimproving school and health facilities.9

Containing expenditures on salaries will also becrucial for fiscal adjustment. Rajasthan's salary torevenue expenditures (excluding interest paymentsand pensions) ratio, at 48 percent, is higher thanmost other major Indian states and much above thenorm recommended by the TFC. Rajasthan cantackle the problem of the high wage bill in a numberof ways, such as: (i) reducing the number ofemployees; (ii) reducing the average per employeesalary; (iii) increasing the level of revenue receiptswithout increasing the revenue deficit; and (iv) bydevolving services and employment to localgovernments who may be able to supply theseservices more cost effectively. While it may bedifficult to reduce the average per employee salary,there remains scope for improving revenue receiptsand reducing the number of employees in Rajasthanthrough well-designed voluntary retirement schemes.

Increasing Public Expenditure Effectiveness

Using public expenditures effectively will be asimportant as mobilizing and allocating publicresources well. Overall, Rajasthan's Public FinancialManagement and Accountability (PFMA) Systems

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Executive Summary

7 This takes into account the recent liberalization by the GoI to permit foreign participation in mineral exploration and development.8 See Chapter 2.9 Chapter 4 indicates that lack of maintenance of schools and toilets is seen to be a major cause of poor educational service delivery

in Rajasthan.

compare favorably with other states in areas such as:(i) well-defined rules on budget preparation; (ii) anactive and an authoritative Public AccountsCommittee (PAC) and a Public UndertakingsCommittee; (iii) advanced Treasury Computerization;and (iv) presentation of monthly accounts as well asthe Annual Financial Statement (budget documents)including the Appropriation Accounts and theFinance Accounts within 12 months of the close ofthe financial year. In recent years, improvements havealso taken place in budget implementation andenforcement of external audit findings.

The scope for improving effectiveness in publicexpenditure lies mainly in four areas. First, greaterstress could be placed on performance inbudgeting—a point which has been accepted by theGoR in principle. Clearly identifying governmentand departmental objectives and indicators tomeasure progress, and align capital and revenueexpenditures in line with those objectives would bea good step towards achieving better results.Regular, within-year monitoring of budgetimplementation and progress in achieving targetsand making the results public would also increaseincentives for departments to use their budgetseffectively. Second, there is scope to improve thepresent out-moded single entry cash managementsystem through more streamlined release proceduresas well as by including actual and contingentliabilities in reporting accounts. In the mediumterm, the government can consider moving to amodified-accrual accounting system in line with theGoI's guidelines. Third, oversight on publicspending can be strengthened by opening the PACdiscussions to the public and journalists,introducing system based audits, encouraging theComptroller and Auditor General (CAG) toprovide a professional auditor's opinion on thefairness of the overall annual financial statements,and reducing delays in tabling audit reports. Finally,the efficiency and transparency of publicprocurement can be enhanced by amendingprocurement procedures to standardize biddingdocuments and create a supervisory body.

Improving Governance and PublicService Delivery

Despite strengths in some traditional areas ofgovernment, service delivery mechanisms inRajasthan are weak, contributing to poor humandevelopment outcomes. This is clearly evident, forexample, in last year's citizen's survey that assessesservice provisioning in five areas, and placesRajasthan fifteenth among India's 16 major states inuser perceptions of service delivery—just behindOrissa and West Bengal and ahead only of Bihar.10

There is a clear need for measures to improve servicedelivery if Rajasthan is to tackle poverty effectivelyand meet the MDGs.

Towards a More Effective Civil Service

The GoR needs to take steps to improve the skills andcomposition of the civil service, reduce transfers andincrease tenure, and make service providers moreaccountable for better public service delivery.Composition rather than size is the key constraint tothe effectiveness of the civil service. The compositionof the civil service is particularly skewed towards thelower tiers, with less than 6 percent havingmanagerial responsibilities. There are problemsrelated to the concentration of civil servants in better-developed districts, and frequent transfers. It will beimportant to follow the recommendations of the ShivCharan Mathur Committee on AdministrativeReform (2002). Some of the major recommendationsare: (i) restricting most transfers to particular periods;(ii) guaranteeing a minimum stability of tenure ofthree years for all officers; (iii) making posts ofteachers and medical staff non-transferable; (iv)creating separate urban and rural cadres, with betterincentives for rural cadres and disincentives for urbancadres; and (v) delegating powers to allow fordecentralized management of cadres/services and atotal ban on interference from higher authorities.Upgrading the overall human resource managementsystem is another priority, since problems ofabsenteeism, transfers, and civil service performanceand productivity are all linked to the ability of human

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RAJASTHAN: Closing the Development Gap

10 See Paul. et. al. (2004).

resource management systems to manage, discipline,and motivate civil servants.

Reinvigorating Local Governments

It is crucial to reinvigorate decentralization andlocal governments in Rajasthan, perhaps more thanin many other states. The state's large area anddistances, its geographically distinct regions, itsdispersed, ethnically diverse, and primarily ruralpopulation, and its long tradition of communityand NGO activism all create conditions for effectivedecentralization. Although political decentralizationhas made considerable progress in Rajasthan (withmore than 9000 panchayat, block and zilagovernments in place), the potential benefits fromdecentralization still remain largely unrealized.

Fiscal decentralization needs to be strengthened andan effective local government civil service cadreintroduced to realize the full potential of localgovernments. Removing the overlappingjurisdictions between state agencies and localgovernments would be an important first step forthis as it would raise incentives for local governmentsto use their existing tax bases. Further, grants-in-aidto local governments could be increased and madeuntied and devolved on the basis of a well-balancedformula. Remaining conditional grants could bemore broadly banded to the devolved functions andnot to highly disaggregated line items. In the case ofthe civil services, Rajasthan's last budget announcedthat the government would introduce an exclusiveadministrative cadre to serve in local governmentinstitutions: the Rajasthan Vikas Services (RVS). Aproposal on the constitution of the RVS is in theprocess of cabinet approval. While implementingthis measure would be an important step forward,care would be needed to ensure that the RVS staff arerecruited on merit and made more accountable toelected local government representatives rather thanthe state government's bureaucracy.

Strengthening Institutions for Accountabilityand Transparency

The Right to Information (RTI) Act of 2000 was amajor step forward in improving governance and

transparency, but evidence suggests that the Act wasless effective in practice than its potential. In 2005,the GoI has introduced an RTI Act which is widerin scope and ambit. Following central legislation,the state Act has been repealed. The challenge beforethe state is to implement the new RTI Acteffectively. In order to do so, the government could:(i) encourage departments and agencies todisseminate suo motu or on their own initiative,timely and relevant information on their operations;(ii) set up adequate reporting systems withindepartments to monitor progress on right toinformation; and (iii) provide positive incentives toofficials to become more open to the public.

Rajasthan's record on adopting anti-corruptionmeasures presents a mixed picture. The institutionalframework for tackling corruption is relativelystrong, with an Anti-Corruption Bureau (ACB) inplace. It has a good reputation and is perceived to bereasonably independent of political interference.Although the ACB has well-defined procedures andis active in prosecuting corruption cases, it iscomparatively less successful in winningconvictions. Thus the ACB's institutional capacityneeds to be strengthened to help prepare good cases,facilitate speedy disposal, and avoid the buildup ofbacklogs. Going beyond the ACB, it will also beimportant to build up public awareness againstfraud, waste, abuse, and corruption.

Rajasthan's progress in e-governance provides a soundbasis for augmenting public service delivery. The statehas issued an overarching policy document for e-governance, focusing its activities on supportingpublic services, and enhancing transparency andaccountability in rural and urban services. Twoinitiatives—the Lok Mitra and Jan Mitra—have beenparticularly successful in providing a variety of servicesin urban areas, such as computerized land registrationand records, treasury services, and procurement.There are plans to extend services to rural areas.

Promoting Human Development andSocial Protection

While Rajasthan has made substantial progress inexpanding education, challenges remain in enhancing

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Executive Summary

its quality and extending services to disadvantagedgroups. In particular, the primary sub-sector isrelatively well-funded, and has a clear vision. This ispartly due to national policies and programs like theSarva Shikshya Abhiyan (SSA), effective partnershipswith external agencies, and state commitment andpublic action. Outstanding challenges remain for thesector—in terms of overlapping managementstructures and responsibilities arising from multipleinterventions with separate implementation agencies,inadequate human resources in the form of teachervacancies, inefficiencies in the post-elementary sub-sector, and inequities by gender, region, and socialgroups. This calls for measures such as: (i) re-engineering of the business process including moreeffective personnel policy and better managementinformation systems; (ii) devising locally-specificpolicies to reduce dropouts; (iii) focusing on theteaching and learning process to raise studentachievement and strengthening the District Institutesof Education and Training (DIETs); and (iv) anddeveloping more effective partnership with theprivate sector for expansion and better quality ofsecondary education. Policies targeted atdisadvantaged groups should also be strengthened forthe attainment of MDGs.

The health sector is a cause for serious concern, eventhough there have been some improvements in recentyears. Important health indicators, such as maternalmortality rates, are worse than the national average.Furthermore, some child health indicators havedeteriorated during the 1990s, seriouslyjeopardizing the state's chances of achieving MDGsin this area without focused policy action. Theprevalence of HIV-AIDS appears as a threat, eventhough Rajasthan's performance is better than mostSouthern and North-Eastern states. The stateshould focus on better resource allocation withinthe sector, based on disaggregated outcome data atthe district level and below. The human resourcesituation also needs to be addressed, in terms ofimproving location, tackling absenteeism, and thelack of skilled personnel. Involving the localgovernment institutions can help to increase healthcare awareness among communities, strengthenchecks and balances, and ensure accountability ofhealth service personnel. A greater involvement of

communities is also found to be effective outreachagents for change. Special attention is needed forchild health interventions. An emerging priority forthe government is to step up its existinginterventions to fight HIV-AIDS by focusing onincreasing awareness through targeted information,education, and communication (IEC) campaigns,strengthening surveillance through improvedmonitoring and data, and increasing access tovoluntary testing, counseling and treatment atfacilities. Policies targeted to lagging social groupsand regions should be strengthened further.

Given the recurrence of droughts, social protectionhas assumed greater significance in Rajasthan. Inaddition to over 8.6 million poor people, a largenumber of vulnerable people live just above thepoverty line. Both groups are highly prone todrought and falling incomes. Rajasthan has thetypical array of anti-poverty and welfare programsseen in all Indian states. There are a number of areaswhere Rajasthan's performance has been relativelygood—for instance, in the coverage ofdisadvantaged SC/ST groups and activeparticipation of communities through panchayats incertain schemes. At the same time, analysis suggestssignificant scope for better implementation,increased coverage, and improved targeting of someschemes—both at the household and district levels.

Rajasthan's weak monitoring and evaluation(M&E) systems need considerable improvement tohelp achieve the state's human development andsocial protection goals. Without good M&Esystems, it becomes difficult to track progress inhuman development, implement effective targeting,and understand the efficiency of state programs.While data on several indicators of socialdevelopment are available, many are based onoutdated surveys, and current data on indicatorslike maternal mortality and HIV-AIDS incidence isnot yet available—making it difficult to evaluateprogress against MDGs. Evaluation of many keyprograms has not been undertaken, and there isscope to improve targeting and programimplementation through better understanding ofimpacts or expenditure flows. Ultimately, a strongM&E system would help policymakers to increase

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the effectiveness of public spending, and contributeto rationalization of financial and human resourceallocation. In this area, the government could: (i) strengthen M&E institutions in the PlanningDepartment through capacity-building andprovision of better technology; and (ii) identifyselected programs for evaluating impact and findlessons that could influence future program designor mid-course corrections of existing interventions.

The Road Ahead: Medium TermProspects

After two decades of significant progress during the1980s and 1990s, Rajasthan's development prospectsare now under threat from several directions.Growth has faltered significantly. A growing crisis inwater supply and erratic rainfall calls forfundamental changes in agriculture and watermanagement policies. Falling private investmentrates—at a time when investment needs to beincreased—requires urgent attention to improvingthe investment climate. Inadequate publicinvestment in the late 1990s and poor maintenancehave led to a large shortfall in infrastructure. Weakpublic service delivery mechanisms impede furtherprogress in human development, a key requirementfor long term growth.

Rajasthan's medium term prospects will depend onhow effectively the government implements a reform

strategy to address these challenges and achieve thegovernment's "Six Ideals". Rajasthan has valuablestrengths for the government to draw upon todevelop such a strategy: rich cultural heritage,substantial mineral resources, the presence of majorindustries in the state, a young and educated laborforce, proximity to fast growing states such as Delhi,Gujarat and Maharastra, and a tradition ofentrepreneurship and civil society activism. Mostimportant, a proactive government has startedimplementing reforms to address these challenges.The task ahead for the government will be to sustainthe reforms it has launched as well as those initiatedby the previous government.

Drawing on its analysis of Rajasthan'sconstraints, strengths, and ongoing governmentinitiatives, this report recommends a mediumterm reform strategy built around four areas: (i)reviving growth; (ii) creating fiscal space fordevelopment; (iii) strengthening civil service, localgovernments and public accountability; and (iv)sector specific interventions for humandevelopment and social protection. A publicawareness campaign to highlight the benefits ofthe reform program and the trade-offs involved tothe people will be of great value to build supportfor the program. While the rest of the reportprovides detailed recommendations in these areas,key policy recommendations are presented in thefollowing Box.

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Executive Summary

Short Term Policy Options for Restoring GrowthAmending the Agricultural Produce and Regulated Markets Act to allow private sector organizations to set up producemarkets and allow direct sales by farmers in these markets alongside Mandis.

Clarifying and formalizing revenue sharing arrangements between Water Users' Associations (WUAs) and the IrrigationDepartment that allows the WUAs to retain part of revenues; rationalizing water tariffs upwards from the current Rs. 190towards achieving full recovery of O&M cost and encouraging more efficient and sustainable water use; making the StateWater Resources Planning Department (SWRPD) operational by providing staff and budgets.

Setting up an implementation body, with public and private sector representatives, to follow up on the Economic andPolicy Reform Council's (EPRC) recommendations.

Developing and implementing sector-specific time-bound action plans in consultation with industry representatives fortourism, gems and minerals, and textiles, with special emphasis on easing entry and approvals for business; setting up apublic-private Tourism Board to oversee policies and implementation in the sector.

Short Term Policy Reform Options Suggested Time Frame: FY 2006-07

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RAJASTHAN: Closing the Development Gap

Amending Clause 5B of Industrial Disputes Act (IDA) and the Contract Labor (Abolition) Act to increase labor market flexibility;reducing factory inspections on labor issues to only a limited number of days to be carried out jointly with other inspections.

Announcing an overall Public Private Partnership (PPP) policy framework that sets the rationale for pursuing PPPs, andclarifying that PPPs will only be pursued where they prove to be efficient and provide a better deal for consumers and taxpayers.

Adopting and implementing a revised electricity sector Financial Restructuring Plan; supporting implementation of tarifforders by the Rajasthan Electricity Regulatory Commission (RERC); supporting transmission and distribution companies'efforts to reduce network losses.

Introducing a road maintenance prioritization plan based on traffic and road conditions; increasing routine maintenanceto 30 percent of state and rural road; increasing funding for maintenance to 100 percent of requirements; making theRoads Board operational with proper staffing and budgeting.

Short Term Policy Options for Creating Fiscal Space for Development and Using It EffectivelyPublicly committing to a Medium Term Fiscal Program (MTFP) to meet the Fiscal Responsibility and BudgetManagement Act (FRMBA) targets, and to its underlying policies; reporting on quarterly and mid-year progress on budgetand plan target implementation.

Improving debt and pension management; setting clear guidelines to cap guarantees; undertaking a risk weightedclassification of guarantees; making public sector undertaking accounts current; producing medium term projections ofpension spending and estimates of the outstanding pension liability based on data on active workers and current pensionerstock under current rules and reasonable assumptions with regard to future civil service strength and salary adjustments.

Introducing the Value Added Tax (VAT); establishing a physically unified large taxpayer's unit; simplifying propertyregistration, property taxes and other stamp duties; devolving municipal taxes and fees to municipal bodies.

Improving the present accounting system in the areas of contingent and pension liabilities, quasi-fiscal activitiespertaining to public sector undertakings, tax expenditures, and information on geographical spread of expenses to ensureaccuracy and completeness.

Strengthening legislative oversight by opening Public Account Committee (PAC) sessions to the public and media.

Short Term Policy Options for Improving Governance and Public Service DeliveryDeciding on and implementing key recommendations of the Shiv Charan Mathur Commission on AdministrativeReforms, particularly regarding stability of tenure, transfers and local government appointments.

Strengthening the Right to Information (RTI) Act by: (i) encouraging departments and agencies to disseminate on theirown initiative, timely and relevant operational and financial information including quarterly departmental accounts andresponse to external audit and observations of the legislative oversight committees; (ii) clarifying to the public anddepartments and agencies what information can be provided freely, and what information is non-classified and what isclassified; and (iii) providing positive incentives to officials for becoming more open to the public.

Short Term Policy Options for Strengthening Human Development and Social Protection StrategiesPiloting targeted scholarship and stipend program for girls in secondary education to reduce gender inequity.

Improving Education Management Information Systems to ensure accuracy in child tracking and educational indicators,and conduct valid and reliable student assessments to measure outcomes.

Improving mother and child health indicators with a focused program on expanding skilled care at birth by auxiliary nursemidwives (ANM); greater home-based new born care by trained Anganwadi workers; and improving referral services forsick children; increasing the health budget and improving intra-sectoral and inter-district allocation.

Building capacity of the Poverty Monitoring Cell and Evaluation Department through training; identifying particularinterventions, schemes, and policies for evaluation using external experts as required; improving spatial resource allocationin health and education with targeting based on disaggregated outcome data at the district level and below.

Short Term Policy Reform Options (Contd.)

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Medium Term Policy Options for Restoring Growth

Developing a regionally differentiated strategy for marginal dryland areas, moderate to high potential areas, and highpotential irrigated areas to foster increased productivity and agricultural diversification, taking into account diverseconditions, including rainfall availability, agro-ecological potential (e.g. high vs. low fertility), and accessibility of irrigation;promoting drought-resistant crop varieties, appropriate soil and water conservation measures, and technical advice onalternative cropping systems or non-farm income generating activities to mitigate agriculture income risks in areas whereirrigation is not feasible.

Increasing expenditures in research and extension on non-cereal high-value crops, animal husbandry, and forestry,including through PPPs.

Identifying the key factors that constrain access to finance (particularly for rural households, micro enterprises, and smalland medium enterprises) and developing and implementing an action plan to improve the delivery of credit and otherfinancial services to these under-served segments.

Strengthening the PPP cell in government with planning and evaluation capacities to prioritize PPPs, monitor their fiscalcosts of PPPs, and ensuring that they earn their returns from user fees, as far as practical while recognizing affordabilityissues for some consumers; introducing greater competition in the award of PPPs to minimize the cost incurred by the stateunder PPP contracts.

Implementing the Financial Restructuring Plan for the Power Sector; scaling up the feeder renovation scheme to bringdown transmission and distribution losses to 30 percent by FY 2007-08.

Medium Policy Options for Creating Fiscal Space for Development and Using It Effectively

Implementing the FRBMA targets and the MTFP; introducing and implementing Medium Term Expenditure Frameworkfor agriculture, irrigation, roads, education, and health.

Developing and implementing proposals for entitlement reform of the defined benefits scheme in order to ensure long-runactuarial soundness of the system based on pension liability estimates; developing and costing out proposals to revise therules (benefit formula, eligibility conditions etc.) of the civil service pension to eliminate existing inequities and controlmedium term expenditures.

Improving budget presentation and transparency by presenting economic classification alongside functional classification;introducing greater performance orientation in budgets by targeting well-defined indicators for each department andfollowing implementation; gradually moving towards an accrual accounting system.

Introducing a procurement reform law under which standard legal rules are framed, making it mandatory for thedepartments to follow these rules rather than issuing their own rules and regulations; setting up a central agency, followinggood international practices, to produce and revise public procurement norms, policies, procedures and a procurementmanual, and to enforce these in public procurement by all departments; developing standard bidding documents forprocurement of goods and works for all departments.

Medium Term Policy Options for Improving Governance and Public Service Delivery

Implementing the Shiv Charan Mathur Committee's Recommendations, accepted by the government.

Establishing a comprehensive and computerized Human Resource Database aligned with the payroll.

Undertaking functional reviews at the level of the Secretariat and Districts to restructure staffing profile, expand managerialcapacity and re-engineer business processes.

Strengthening local governments by establishing a local government civil service, the Rajasthan Vikas Services (RVS),recruited by the State Public Service Commission accountable to local governments; strengthening capacity of the StateFinance Commission to expand awards to local governments.

Strengthening the anti-corruption function by expanding its preventive and public awareness roles and establishing specialcourts to try anti-corruption cases; making the Lok Ayukta's Office fully functional.

Medium Term Policy Reform OptionsSuggested Time Frame: FY 2007-08 to FY 2008-09

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Medium Term Policy Options for Strengthening Human Development and Social Protection StrategiesDeveloping and implementing an education sector strategy to achieve the dual goals of expanding access and improvingquality in a cost-effective manner; addressing links between different levels; reviewing public and private expenditures toassess whether the resources have been used efficiently; having a high-quality student assessment system in place to trackacademic achievement.

Developing a comprehensive health sector strategy that better integrates family welfare, reproductive and child health,disease control programs and nutrition programs; strengthening governance and institutional management capacity at alllevels of the public health system; forging partnerships with the private sector and communities; and addressing resourceconstraints, especially for the secondary sector.

Improving monitoring of public works programs, with particular attention to quality, economic impact of and clientsatisfaction with assets created, coverage rates at village and households levels, seasonality of employment demand andprogram supply, and participation of communities in planning and monitoring—in particular, with the introduction ofthe Employment Guarantee Scheme (EGS), a full baseline survey can be conducted in selected district(s) to allow for futureevaluation of impacts; completing EGS evaluation and approval of more complete M&E indicators for all public worksprograms (including reporting of actual person days of employment created and quality of asset indicators).

Introducing new social security plans for workers in the unorganized sector; expanding coverage of existing programs andimproving targeting; reviewing the below poverty line (BPL) system and performance indicators.

Piloting and evaluating public distribution system (PDS) reforms, including use of food vouchers in obtaining PDS,measures to improve the financial viability of Fair Price Shops (FPS), and increasing the role of communities in programmonitoring (and delivery through cooperative ownership of FPS); improving the BPL targeting process through: (i)computerization and timely public availability of BPL census results; (ii) strengthening Panchayati Raj Institutions (PRI)and community roles in BPL verification and monitoring; and (iii) reviewing BPL criteria to assess suitability to localconditions and needs for adjustment and/or increased flexibility.

Formulating and implementing on an ongoing basis, a public awareness-raising strategy with respect to public servicesbeing provided by the state and entitlements under anti-poverty programs, including a strategy for inclusion ofcommunities, PRIs, NGOs and other stakeholders in information dissemination.

Building on the Poverty Monitoring and Human Development database to set up integrated data system including datafrom line ministries; institutionalizing evaluations and enhancing policy feedback mechanism from these studies.

Medium Term Policy Reform Options (Contd.)

11 Figures from 2001 Census. Comparable figures nationally are 16.2 percent for SCs and 8.2 percent for STs.12 With 10 percent of India's land area, it has only 1 percent of the water resources. 13 Government of India Planning Commission, Plan Documents.

Rajasthan is India's largest state, with a totalgeographical area of about 0.35 millionsquare kilometers. The population of

Rajasthan is over 56.5 million, and the populationdensity is about 165 persons per square kilometer.The state is overwhelmingly rural, with more thanthree-quarters of the population still residing inrural areas. It has one of the highest proportions ofScheduled Caste (SC) and Scheduled Tribe (ST)population among Indian states—at 17.2 percentand 12.6 percent respectively.11 The Aravalliranges run from the south-west of Rajasthan to thenorth-east. To its west lies the Thar Desert, whichcovers over 60 percent of the state's land area andleaves Rajasthan acutely deficient in watersupply.12 Agriculture continues to be largelydependent on rainfall, leaving the state highlyvulnerable to drought-induced volatility.Rajasthan's development strategy needs to takeinto account wide variations in geographicalterrain and social structure within the state.

Formed by the union of 19 princely states and threechiefships in 1956, nearly a decade after India'sindependence, Rajasthan inherited a feudal historyand had a late start in the development process. Asubstantial development gap existed betweenRajasthan and the other larger Indian states in

education and infrastructure. For instance, in 1960,Rajasthan generated on average a quarter of theelectricity of states such as Tamil Nadu, Maharastraor West Bengal. School enrollment rates were halfthat of national averages.13 With slower growthrates compared to the rest of India during the 1960sand 1970s, Rajasthan fell even further behind.

Rajasthan started to close the development gapduring the 1980s. Growth rates accelerated sharply,poverty fell significantly, and several humandevelopment indicators showed notableimprovements. Indeed, by the end of the 1990s,Rajasthan's low levels of poverty compared to somericher states presented a paradox. Since then,however, Rajasthan's growth performance hasfaltered, threatening the progress over the last twodecades. It is now critical to restore growth rates andactively promote human development to close thedevelopment gap that still exists between Rajasthanand the more developed states.

This chapter examines trends and determinants ofgrowth, along with patterns in employment,poverty reduction, and human developmentoutcomes. Some of the outstanding developmentchallenges that the state could focus on areidentified as well.

Growth, Human Development, andPoverty Reduction in RajasthanPast Performance and Future Prospects1

Trends and Patterns in Growth

The stylized facts concerning Rajasthan's growth since1960 reveal three episodes. In the first episode, afterits late start with difficult initial conditions notedearlier, Rajasthan experienced two decades of slowgrowth during the 1960s and 1970s. With a percapita income growth rate about half of India's, theincome gap between Rajasthan and the rest of Indiaincreased (Figure 1.1). In the second episode, growthrates accelerated significantly and reached 6.2 percentduring 1980-2000, one of the highest among Indianstates. At the same time, the economy became morediversified. In the third episode, Rajasthan's

economic growth faltered markedly in recent years,and per capita income growth has fallen to about 2.2percent compared to 3.4 percent in the 1990s. Notonly have aggregate growth rates declined, they havealso become much more volatile and their declinepervasive (Figure 1.1). While a recovery of growth isunderway, incomes remain highly volatile. Forinstance, after a rebound in 2003-04, per capitagrowth fell again in 2004-05. It is clear that achallenging agenda lies ahead for restoring growth tothe levels of the preceding two decades.

To develop a growth agenda for Rajasthan, it isimportant to address two questions concerning the

4

RAJASTHAN: Closing the Development Gap

Figure 1.1 : GSDP and Per Capita Income: Trends, Fluctuations, and Sectoral Performance

Note: All figures in 1993-94 prices. In the left panels, dotted lines show actuals and solid lines show the smoothed trend, after applyingthe Hodrick-Prescott filter with a lambda (λ) of 10. The right panels include data upto 2003-04, since sectoral breakdown for2004-05 is not yet available. All data from States Database, except for 2004 which are provisional, from the GoR's AnnualEconomic Review.

sources of growth. First, there is need to examinewhy growth rates accelerated in the 1980s. Second,it is necessary to understand why they slowed downat the end of the 1990s.

High growth rates during the 1980s and 1990s weredriven by three key factors. These include the rapidgrowth of industry and services that created a morediversified economy and lowered volatility;investment and the development of infrastructure;and an increase in human capital. The economybecame more diversified, with the share ofagricultural and allied output in GSDP decliningfrom about 55 percent in the 1960s to about justover a quarter in the 2000s, while the shares of bothindustry and services rose steadily (Figure 1.1). Asmost of the volatility in aggregate GSDP comesfrom the agricultural and allied sector, volatilitydeclined along with the importance of the sector. Interms of factors, growth was driven by investmentand significant deepening of capital. During the1990s, when data are available, growth in capital

accounted for almost 50 percent of aggregategrowth.14 Capital deepening took the form of anappreciable increase in infrastructure in irrigation,electricity and road connectivity. Labor forcegrowth contributed about 22 percent, with totalfactor productivity improvements accounting forthe remainder of aggregate growth. Finally, therising trend in years of schooling and increasing sizeof the labor force together contributed to a growthin labor productivity of over 4 percent per annum(Figure 1.2). However, the rapid annual rate ofpopulation growth in Rajasthan of 2.4 percentduring the same period led to a falling worker topopulation ratio, which has hampered per capitaeconomic growth to some extent.15

What led growth rates to decelerate sharply towardsthe end of the 1990s? Two proximate factors arelikely to have been responsible. First, agricultureand allied sector growth, erratic throughout the1990s, turned negative as GSDP in the sectordeclined by almost 11 percent per annum in 1999

5

Growth, Human Development, and Poverty Reduction in Rajasthan

Figure 1.2 : Labor and Human Capital Expansion in Rajasthan

Note: In left panel, data points show average years of schooling and bars show labor force, both based on NSS data. Labor productivitydata is in real terms. The smoothed line applies a Hodrick-Prescott filter with a lambda (λ) of 10.

14 The total factor productivity is estimated using the aggregate inventory method, assuming 4 percent depreciation and a 10percent return to average years of schooling.

15 Over the same period, India's population grew at 2.04 percent per annum. However, Rajasthan's population growth rate hasdeclined since 1960-80, when it was about 2.69 percent annually.

and 2000, on account of severe drought. Followingnormal rainfall in 1998, Rajasthan's economy haswitnessed four successive years of poor rainfall,with some signs of recovery evident only in 2003(Figure 1.3). Poor water resource management andunsustainable water use in agriculture compoundedthe problem. It is likely that the effects of lowagricultural and allied growth rates spilled over toother sectors through depressed demand as well.Second, even though aggregate capital stock wasgrowing at around 6 percent annually in the 1990s,investment rates were low, and, moreover, the trendwas declining. Compared to India's averageinvestment rate of 23 percent, Rajasthan'sinvestment rates have averaged less than 16 percentsince 1980. The fall in investment rates is quitepronounced when we look at state governmentoutlays (Figure 1.3). Whereas public investmentgrew by 6.5 percent per annum in real termsbetween 1986 and 1996, it fell by 1.8 percentannually percent between 1996 and 2002. There issome evidence that the quality of public investmenthas also declined, as critical infrastructureinvestment in irrigation and roads were crowdedout.16 Falling public investment and improvinginvestment climates in other states are likely to have

discouraged private sector investment inRajasthan—which has shown a declining trend aswell (Figure 1.3). It is likely that effects of low anddeclining investment rates started to get stronglyreflected in terms of lower growth rates with somelag during the late 1990s. It showed up particularlyas faltering growth in non-agricultural sectors.

Changes in Employment Structure:Growth in the Non-Farm Sectors

Employment growth in Rajasthan during the 1980sand 1990s largely followed the national employmentgrowth rate, though the sources of growth differed.Employment grew at 2.2 percent per annum in thestate compared to 2.1 percent in India. Consistentwith the pattern of a diversifying economy, the shareof agriculture in total employment droppedconsiderably in Rajasthan, particularly in the 1980s(Figure 1.4). However, agriculture and alliedactivities still provide over 60 percent of all jobs,with industry (mainly construction andmanufacturing) and services (mainly trade andhospitality, and government and communityservices) accounting for the rest of employment inroughly equal proportions.

6

RAJASTHAN: Closing the Development Gap

Figure 1.3 : Factors Contributing to Growth Slowdown in Rajasthan

Note: Rainfall data from www.indiastat.com, various years. Investment data from the GoR's Annual Economic Review. In right panel,dotted lines denote linear trends fitted to actual investment data.

16 See Chapter 2.

The growth in the aggregate number of jobs duringthe past two decades came from agriculture,industry, and services in roughly equal proportions.This is in some contrast to national trends whereindustry provided only about a quarter of the newjobs over the same period. Within industry, however,manufacturing provided only 8 percent of new jobsin Rajasthan compared to 14 percent in India, whileconstruction and mining accounted for 22 percentand 5 percent respectively, compared to nationalfigures of 8 percent and 0.5 percent respectively.

As with national trends, employment grew at about1.1 percent per annum between 1993-94 and 1999-90 in Rajasthan; but in contrast to the rest of India,agriculture and allied activities accounted for thelargest share of new jobs. Given the fluctuatingperformance of the crop sector in the 1990s, thisimplies a greater activity in sectors such livestock,dairy, and forestry and other rural off-farm informalactivities. This is supported by evidence that

agricultural wages and their growth rates wererelatively high—implying demand for labor in ruralareas.17 Also, consumption of dairy and meatproducts has increased, suggesting high levels ofactivity in these areas.18

Poverty and Human Development:Levels and Trends

Significant Progress in Poverty Reduction

The percentage of the population living below thepoverty line has been declining steadily in Rajasthan(Figure 1.5).19 Compared to 13.11 million in 1987-88, an estimated 8.65 million people were livingbelow the poverty line in 1999-2000, makingRajasthan home to about 3.8 percent of India's poor.

The poverty rate in Rajasthan appears to be lower thanwhat per capita income levels would suggest. In termsof real per capita income ranking for the 14 major

7

Growth, Human Development, and Poverty Reduction in Rajasthan

17 See Kijima and Lanjouw (2004).18 Omkar Goswami Presentation (2004).19 The poverty debate that surrounds poverty measurement issues in India affects poverty estimates for Rajasthan as well. While

methodologies differ, all of these measures based on NSS data suggest that Rajasthan has relatively low poverty, and that povertydeclined in the 1990s. For purposes of this Report, the Deaton and Dreze (2002) measures have been used unless specified otherwise.

Figure 1.4 : Changing Employment Patterns in Rajasthan

Note: All data from NSS, previous four thick rounds.

8

RAJASTHAN: Closing the Development Gap

The poverty-income "puzzle" largely reflects low income inequality and clustering of households just above the poverty line inRajasthan.1 Simple inequality measures calculated from National Sample Survey (NSS) data show rural and urban Ginicoefficients for Rajasthan to be 0.21 and 0.28 respectively—compared to 0.26 and 0.34 nationally.2 Even a marginally higherpoverty line cut-off could raise the poverty rate significantly—since there are large proportions of the population who aretechnically non-poor, but clustered above the poverty line at low income levels. Raising the relevant poverty line income by 10percent raises the number of the poor by over 35-36 percent in both rural and urban areas. These clustering patterns are strongerin Rajasthan than observed nationally.3 Thus, given the proneness of the Rajasthan economy to frequent droughts, large numbersof even the non-poor are precariously placed in terms of poverty.

In terms of broad stylized facts, rural Rajasthan fits the pattern, where, while low incomes are prevalent on average, the incidenceof extreme poverty is relatively rare. First, the employment pattern in rural Rajasthan is different from what is observed nationally.The NSS thick rounds confirm this pattern, with the dominant employment category in rural Rajasthan being cultivators whoseaverage expenditures are higher than that of agricultural laborers—though the non-farm and farm regular category offers the best

income-earning opportunities. Second, in terms of rural real wages, Rajasthan is doing quite well—with only Haryana, Keralaand Punjab doing better (see Figure). Hence, the facts are consistent with the data—(i) the dominant category in rural Rajasthanare cultivators whose average incomes are somewhat higher than that of agricultural laborers but lower than other ruralemployment categories; and (ii) even the agricultural laborers in Rajasthan are earning relatively higher real wages than in mostother parts of the country.

Land ownership in the rural economy is more egalitarian than in many other Indian states, partly on account of important landreforms that were enacted during the 1950s and 1960s. Absolute landlessness is rare. NSS data suggest that less than 2 percentof rural households are without access to land in Rajasthan, which is lower than the national average of above 4.5 percent.However, the average holding size among those with access to land is lower in Rajasthan than in the rest of India. Landinequality is lower in Rajasthan than national averages.

Similar employment patterns are noticed even in urban areas—where the poverty-income paradox is less pronounced than in ruralareas to begin with. Compared to 15.4 percent nationally, casual laborers form 11.5 percent of the working population in urbanRajasthan.4 Family and own-account workers form a larger share of employment in urban Rajasthan than in India on average.Casual laborers are the lowest income category, but even casual labor in Rajasthan earns higher than national wage levels.

Box 1.1 : Addressing the Poverty-Income "Puzzle" in Rajasthan

Wages, Poverty, and Employment Patterns in Rural Rajasthan

Note: Agricultural real wage is in 1993-4 prices and employment shares are both from Kijima and Lanjouw (2004). Poverty rates are in percentages, fromDeaton and Dreze (2002), though Kijima and Lanjouw (2004) estimates yield the same broad results.

1 While there does appear to be a paradox in levels, analysis of the data reveals no major inconsistencies in terms of changes in rural poverty. The absolute elasticityof rural poverty with respect to real growth in agriculture and allied output are almost identical between the last three NSS thick rounds—1.06 and 1.02—implyingthat the underlying structural relationship between the two variables stayed largely similar.

2 See India Human Development Report 2001.3 A 10 percent increase in poverty line cut-offs would raise urban poverty by some 34 percent and rural poverty by some 29 percent at the aggregate national level.4 This is for 1999-2000, from NSS data.

9

Growth, Human Development, and Poverty Reduction in Rajasthan

Indian states, Rajasthan is fifth from the bottom.However, only four states have lower poverty rates thanRajasthan (Figure 1.5). The poverty rate is almostseven percentage points lower than national averages,even with below-average per capita income.20

Progress in Human Development

The composite Human Development Index (HDI)measure puts Rajasthan at ninth rank amongIndia's 15 major states for 2001, and showsimprovement over the last two decades.21 Rajasthanis currently ahead of Bihar, Orissa, Madhya Pradesh,Uttar Pradesh, Assam, and Andhra Pradesh in termsof the HDI. This reflects a steady improvement overthe years—in 1981, Rajasthan was ranked twelfth;in 1991, the state had moved up to eleventh rank.

In education, key indicators have been on an upwardtrajectory in recent years, and the gap with national

averages has been closing. For example, the averageyears of schooling for the adult population has risenfrom two years to 3.7 years between 1983-84 and1999-2000 in Rajasthan—though the figure is stillbelow the national average of about 4.5 years.22 Age-specific enrollment and literacy numbers forRajasthan are marginally below all-India numbers,though the state has had the highest proportionateincrease in adult literacy in the 1990s in India (Figure1.6). Rajasthan stands out among Hindi-speakingnorthern states for having made rapid progress inprimary education. Between 1993 and 2002, theprimary gross enrolment ratio (GER) increased from89 percent to 97 percent, slightly above the nationalaverage of 95 percent—and reached 120 percent in2004.23 Girls' GER in primary education grew from56 to 92 percent between 1993 and 2002, and is onlyone percentage point lower than the nationalaverage.24 Gender disparities in primary educationare close to elimination. Rajasthan's progress is all the

Figure 1.5 : Poverty Trends and Levels in Rajasthan

Note: Left panel shows poverty rates from Deaton and Dreze (2002). Right panel shows states plotted according to aggregate povertyrates based on Deaton and Dreze (2002) for 1999-2000, and per capita GSDP are from the States Database, in 1993-94 prices,for 1999-2000.

20 This is true regardless of poverty estimates that are used. The poverty gap index for Rajasthan is also lower than nationalaverages. For rural areas, it is 3.0 and 5.2 for Rajasthan and India respectively, while for urban areas, it is 1.7 and 2.3 respectively.

21 The Human Development Index is based on measures of education, health, and income.22 World Bank staff calculations based on National Sample Survey 55th Round data, for age-group 15-60 years.23 Notwithstanding the under- and over-aged students and repeaters in the system, Rajasthan appeared to be approaching near

universal enrollment in primary education. 24 Based on Ministry of Human Resource Development data.

more remarkable when the physical and culturalconstraints and the population pressure it faces aretaken into account.

However, health outcomes are cause for greaterconcern. Not only do available indicators showRajasthan to be a lagging state, some key indicators ofchild health actually appear to have worsened in the1990s (Figure 1.6)—though things have improvedsubsequently during the 2000s. While someindicators of child mortality and nutrition haveimproved nationally in the 1990s, the same appear tohave declined in Rajasthan—thus suggesting awidening gap with the rest of the country during theprevious decade.25 Other indicators of maternal andchild health are considerably behind nationalaverages. However, there has been a decline in theincidence of diseases like tuberculosis. Blindness

control is another area where there has been success.There has been considerable progress in the controlof communicable diseases such as small pox, malaria,leprosy, and polio. Life expectancy in the state hasgone up, from 56.3 years in the early 1990s to about59.1 years in the late 1990s—though it is still belowthe national average of 60.3 years.26 Thoughpopulation growth rates in Rajasthan are marginallyabove national averages during 1981-2001, theCrude Birth Rate per 1,000 has declined from 37.1to 29.7, and the Crude Death Rate per 1,000 hasfallen from 14.3 to 7.8 over the period.27

Regional, Social, and Equity Dimensionsof Poverty and Human Development

There are clear regional differences in poverty ratesand human development outcomes, which are closely

10

RAJASTHAN: Closing the Development Gap

Figure 1.6 : Lagging Human Development, and Some Worsening Child Health Indicators in the 1990s

Note: Data are for latest available year from the Sample Registration System (1997) for MMR; Sample Registration System (2001) forIMR; Multiple Indicator Survey (2000) for immunization; Census (2001) for literacy; and National Family Health Survey(1998-99) for all others.

25 This is based on NFHS surveys as comparable data after 1998-99 are not yet available. The Report appreciates that this data isold, and the indicators are likely to have improved in subsequent years following concentrated government action in the area ofchild health.

26 See Rajasthan Human Development Report (2002).27 Data from Sample Registration System.

SC ST OBC Other

Mean Monthly Per Capita Consumption Expenditure (Rs.)

Rural 415.03 450.73 512.34 630.69

Urban 768.13 684.88 847.59 1148.61

Enrollment Rates, 6-14 year-olds

Rural 59.3 % 60.8 % 71.3 % 79.0 %

Urban 76.5 % 74.5 % 85.9 % 89.6 %

Mortality Rates

Under 5 15.5 % 14.1 % 12.3 % 10.9 %

Child 6.7 % 4.4 % 3.9 % 3.0 %

related to incomes (Annex 1). Broad NSS region-level data suggests that the rural part of SouthernRajasthan has the highest poverty rate in Rajasthan,at over 35 percent.28 District-level measures ofaggregate human development for Rajasthan's 32districts show that the Northern districts ofGanganagar and Hanumangarh are ranked highestin human development, while the Southern districtsof Dungarpur, Banswara and Barmer lag themost.29 This is broadly in keeping with regionalpoverty patterns observed from NSS data andaverage income levels in these districts. Forindividual indicators, the data identifies particularlagging districts. For instance, districts likeDholpur, Karauli, Sawai Madhopur, and Bharatpurare the worst in infant mortality, and Barmer,Jaisalmer, Jalore, and Nagaur are worst in femaleliteracy. Human development strategies fordecreasing infant mortality and raising femaleliteracy can be specifically targeted to these districts.

Scheduled Castes and Tribes (SC/ST), and womenare particularly disadvantaged as compared to therest of the population. The SC/ST households havepoorer indicators of human development and lower

income compared to other households (Table 1.1).While Rajasthan has made substantial progress innarrowing gender gaps, especially in education,females are still far from catching up with males(Table 1.2). Gender disparities for most indicatorsare higher than national averages. For example, thejuvenile sex ratio for Rajasthan is 909 girls per1,000 boys in the 0-6 year age-group, whichcompares unfavorably with the national average of927 in 2001.30

Income is a strong predictor of human development.Practically all indicators of social development—both outcomes and utilization—vary consistentlyby income quintile, with lower income groupstypically having lower values of the indicator (Figure1.7). This is largely the reason why SC groups havepoorer indicators of human development—as theyalso have low incomes. In fact, household levelregressions based on NSS data suggest no significantindependent effect of caste in Rajasthan, once wecontrol for income. Similarly, better-off districtshave better indicators in general, with the district-level HDI being very strongly and significantlycorrelated with per capita income measures. 31

11

Growth, Human Development, and Poverty Reduction in Rajasthan

28 See Kijima and Lanjouw (2004). Unfortunately, NSS data do not allow disaggregation of poverty below the regional level.29 See Rajasthan Human Development Report (2002).30 See Census (2001).31 Chapter 5 examines correlations between per capita income at the district level and selected indicators of human development,

including female literacy and child health.

Table 1.1Selected Indicators by Social Group

Male Female

Under 5 mortality 11.6 % 13.5 %

Stunting 50.2 % 54.0 %

Undernourishment 49.2 % 52.2 %

Malnourishment 20.6 % 21.0 %

Breastfeeding duration 26.2 months 24.7 months

Literacy 76.5 % 44.3 %

Enrollment (6-10) 87.7 % 69.6 %

Enrollment (11-14) 84.3 % 52.7 %

Years of Schooling 5.2 years 2.0 years

Table 1.2Selected Indicators by Gender

Source: Expenditure, enrollment and years of schooling indicators computed from NSS 1999-2000 by Bank staff. Health indicators fromNFHS 1998-89.

Achieving Millennium DevelopmentGoals

Rajasthan presents a mixed picture in terms ofachieving Millennium Development Goals (MDGs)

in various sectors (Table 1.3). The state appears ontrack to achieve the monitorable goals for povertyreduction (Figure 1.8) and environmentalsustainability.32 In education, it is likely that fullprimary enrollment will be achieved before 2015.12

RAJASTHAN: Closing the Development Gap

Figure 1.7 : Rajasthan: Human Development Indicators by Income Quintile

Note: Data are from latest National Family Health Survey (1998-99) for all indicators, by income quintiles, denoted by Q1-Q5 fromlowest to highest.

Figure 1.8 : Rajasthan: Likelihood of Attaining Selected MDGs

Note: Poverty data from Deaton and Dreze (2002). Enrollment data for lower (age 6-10) and upper (11-14) primary from NFHS 1 and 2.

32 The monitorable goal for ensuring environmental sustainability is in terms of halving the proportion of population withoutaccess to safe water.

However, to universalize primary education, policyneeds to focus on preventing dropouts, and raisingcompletion rates—which are currently projected toreach only about 60 percent in 2015. Gender equalityin lower primary enrollment is close to being attained,but the state has some way to go for higher levels ofeducation (Figure 1.8). In health, the goal of reducinginfant and child mortality will not be achievedwithout a "big push" effort as the state is well behindtarget. The state is off track in terms of providingaccess to reproductive health services for all, andprojections based on latest available trends show thatbirths attended by health professionals would reach

only 70-75 percent by 2015. Unfortunately, there is ashortage of available time series data on other MDG-related health indicators like maternal mortality andincidence of HIV-AIDS, making it difficult to trackprogress and make forecasts.33 Among major diseasesfor which we have incidence data, tuberculosis is likelyto be eradicated before 2015—and tuberculosisincidence is one health indicator where Rajasthanappears to be outperforming national averages.

Particular groups will achieve MDGs sooner thanothers. The data examined for MDG trends areaggregates, from latest available survey data. If we drill

13

Growth, Human Development, and Poverty Reduction in Rajasthan

33 Fresh data on MMR is awaited by the state, and expected shortly from the Sample Registration System.

Table 1.3 Summary of Millennium Development Goals for Rajasthan

MDG Statement Likelihood of Attaining MDGRajasthan's Recent Performance

Note: Likelihood of attaining MDGs based on linear projections from available time series data (National Sample Survey and NationalFamily Health Survey and Sample Registration System).

Halve, between 1990 and 2015,the proportion of the poor

Achieve universal primary educationby 2015

Eliminate gender gaps by 2005

In primary education

In secondary education

Reduce infant and child mortalityrates by two-thirds between 1990and 2015

Reduce maternal mortality ratiosby three quarters between 1990and 2015

Access to reproductive health servicesfor all who require it by 2015

Halt by 2015 and reverse thespread of HIV-AIDS, malaria,and other major diseases

Reduce by half the proportion ofpeople without safe drinkingwater between 1990 and 2015

Poverty has fallen as in Figure 1.8

Lower primary enrollment has risen from 58.5% to 79.1%and upper primary enrollment from 59.3% to 69.1%between 1992-93 and 1998-99. Primary completion raterose from 35.9% to 41.9% over the same years

Gender gap in primary enrollment has fallen as inFigure 1.8

Gender gap in secondary enrollment has fallen

IMR has fallen from 90 per 1,000 in 1992 to 79 per1,000 in 2001.

CMR has risen in the 1990s (Figure 1.6)

Maternal mortality was 677 per 100,000 live births in1998-99

Births attended by a health professional have gone upfrom 21.8% in 1992-3 to 35.8% in 1998-99

Tuberculosis incidence declined from 724 in 1992-93to 397 in 1998-99 (per 100,000)

Population without access to safe water has fallen from42.7% in 1992-93 to 30.2% in 1988-99

Likely

Full enrollment likely, but fullcompletion unlikely

Unlikely by 2005, but likely byabout 2007 for lower primary

Unlikely, even by 2015, thoughgender gap will fall further

Unlikely

Lack of data to calculate trend

Unlikely

Lack of data to calculate trendfor most major diseases, buttuberculosis incidence likely togo to nil before 2015

Likely

down to sub-categories by region, caste, or incomegroups, it is possible to get a more complete picture.To cite an example, even though the MDG for genderequality in primary enrollment is unlikely to beachieved by 2005, gender disparities for non-SC/ST,urban children are likely to be eliminated sooner.Hence, state policy needs to focus more strongly onthe groups that are less likely to progress and catch up.

Rajasthan's Development Challenges

Rajasthan now faces the twin challenges of restoringand accelerating growth, and promoting humandevelopment. While policies to achieve results inthese areas are closely inter-related and reinforcing,specific measures are also warranted.

Restoring growth is critical for Rajasthan for threeimportant reasons. First, given that income isdistributed relatively equally with householdsclustered above the poverty line, growth isparticularly important for poverty reduction.Between 1993-94 and 1999-2000, a 1 percentincrease in per capita income reduced the share ofpeople living in poverty by 0.9 percent. Higherincomes are also associated with better humandevelopment outcomes (Figure 1.7). Hence adecline in per capita growth rates and high volatilitywill hamper progress in poverty reduction and socialdevelopment. Second, unless Rajasthan recovers itsgrowth rate relative to other states, it risks beingtrapped in a low-level equilibrium as in the 1960sand 1970s. Without faster growth, investment—both domestic and foreign—is likely to eludeRajasthan in favor of faster growing states. Third,restoring growth is vital for sustaining the fiscalrecovery currently underway by providing revenuesand reducing the debt burden. In the end, only ahigh rate of growth can create the fiscal space forfinancing development.

The discussion on the sources of growth has revealedseveral strategic priorities. First, agricultural growthhas to be revived from its dormant state in the1990s by reducing the sector's vulnerability todrought. This will require a strategy to diversifyagriculture and make it less water-dependent andcereal-dominated. Water resource management will

need to be improved as a complementary strategy.Second, falling investment trends will need to bereversed through regulatory reforms, deepeningcredit markets, and infrastructure improvements. Awell-focused public investment policy will be thekey to this. Third, human development, essential initself but also for supporting long term growth, willneed to be accelerated.

The rate of progress in human development—particularly in health and gender equity—has tobe accelerated to close the gap with the rest of thecountry, and achieve the MDGs. While growthwill contribute to better outcomes, it appears thatgrowth alone will be insufficient for Rajasthan tocatch up with national averages, and special effortsneed to be focused in this area—especially formore backward groups and regions. AlthoughRajasthan has made noteworthy improvements,there is some ground yet to be covered. Inparticular, service delivery to promote humandevelopment should be enhanced. A moreeducated and healthy labor force will contribute tofaster growth through raising productivity,lowering population growth rates, and improvingoutcomes for future generations.

The new Chief Minister has announced her visionfor the state, which shows a clear appreciation of theoverall challenges. The vision focuses on thefollowing "Six Ideals" that can help guide reforms:

Eliminating hunger, malnutrition, starvation,below-subsistence levels of living, and abjectpoverty;

Providing gainful employment, creatinglivelihoods, and improving economic status;

Creating economic infrastructure;

Emphasizing human resource development,creating capabilities, filling gaps in socialinfrastructure;

Enhancing governance, including fiscalreform;

Taking special care of disadvantaged groups,particularly women.

Rajasthan's prospects for improving growth andhuman development will depend on how effectively

14

RAJASTHAN: Closing the Development Gap

the government can implement a comprehensivemedium term development strategy, incorporatingthe key policy options in the four broad areasdiscussed in this report. The government recognizesthat reforms are necessary, and is alreadyimplementing several key measures. Going forward,existing reforms need to be deepened and newinitiatives introduced where necessary. A key stepwill be to integrate the various measures into a well-articulated program, with close attention tosequencing and prioritization. Reforms in Indianstates have often been hostage to adversarial partypolitics. Thus, the government needs to build

consensus and public support for reform amongstpolitical stakeholders and civil society so thatownership for reforms becomes moreinstitutionalized. In order to sustain and acceleratethe process of change, it is necessary to identifyreform measures that enjoy public and politicalsupport. It should be demonstrated that reforms canlead to better public services and outcomes, byexplaining reform trajectories through a carefullyarticulated public awareness strategy. In the absenceof such a strategy, the development gap betweenRajasthan and the better-performing Indian statescan only widen.

15

Growth, Human Development, and Poverty Reduction in Rajasthan

Reviving Growth in RajasthanAddressing Sector Specific Issues2

Making Rajasthan a favored investment destination through: (i) speeding up government approvals and land allotment;and (ii) revising the 2003 Investment Promotion Scheme to make it more sector-specific.

Enhancing capabilities by: (i) improving the quality of primary education and introducing a vocational education streamat the secondary level; (ii) using NGOs to run schools and train teachers; (iii) introducing self-financing in some highereducation courses to increase employment possibilities; (iv) strengthening qualification and accreditation of educationalinstitutions; and (v) setting up a 100 km long knowledge corridor along the Delhi-Jaipur highway.

Strengthening the infrastructure agenda by: (i) taking remedial actions to deal with the deteriorating water situation; (ii)discouraging water-intensive crops, encouraging micro-irrigation—especially drip irrigation; (iii) using new technologyto raise productivity of crops; (iv) reducing transmission and distribution (T&D) losses in power, rationalizing powertariffs to reduce the burden on industry, privatizing distribution in at least one city; and (v) prioritizing the roadmaintenance program, providing menu of options for Build Operate Transfer (BOT) in roads.

Box 2.1: Some Key Recommendations of the Economic Policy and Reforms Council

If Rajasthan is to close its development gap withnational averages, its economy has to grow atabout 7-8 percent annually. Simple growth

accounting suggests that in order to achieve thisaggregate growth rate, agriculture should grow atabout 4 percent per year, and the non-agriculturalsector at about 8-9 percent. An immediate challengeis to restore growth rates that have fallen sharplysince 1999. On one hand, it is important to increasethe productivity of investment—both public andprivate. On the other, it is also crucial to create anenabling environment that provides the rightincentives for higher investment (particularlyprivate), competition, and better institutions.

The government recognizes that growth is currentlyconstrained by a wide range of bottlenecks. The state'sEconomic Policy Reforms Council (EPRC), set up

last year, comprising Chief Executive Officers (CEOs)of leading corporations, human resource developmentspecialists, and economists, has prepared an importantagenda of reforms. It aims at attracting privateinvestment, enhancing capabilities of the labor forcethrough human development, building upinfrastructure, and improving fiscal health to provideresources for development expenditures (Box 2.1).Although the GoR has begun implementing several ofthese reforms, a substantial agenda remains and thereis a need to set priorities.

This chapter examines how Rajasthan's goals can beachieved by analyzing recent developments andfuture policy challenges in agriculture, industry andservices, as well as in key infrastructure sectors. Thisreport studies recent reforms that have beenundertaken, and makes selective suggestions on how

these can be strengthened, and what new measurescould be considered. It distinguishes betweenimmediate priorities and measures that should beimplemented over a longer time horizon.

Improving Agricultural Performance and Water ResourceManagement

Raising agricultural growth rates will be central toreducing poverty in Rajasthan. In spite of itsdeclining share in GSDP, agriculture continues tobe, by far, the most important source of livelihood inRajasthan, employing about 66 percent of the state'stotal labor force.34 The rural poor account for 84percent of poverty in Rajasthan, and over three-quarters of them are dependent on agriculture.35

Poor performance in agriculture will also havespillover effects on growth in other sectors throughdepressing demand in rural areas for consumer goodsand services and agricultural implements.

Rajasthan's large expanse of deserts, inadequateirrigation facilities, falling ground water levels, andconsequent dependence on monsoons, all act asconstraints to developing traditional cereal-basedagriculture. The state can be divided into twodistinct climatic zones. The region to the west andnorth-west, comprising 11 districts and nearly 61percent of the state's area, is either desert or semi-desert. With low and unpredictable rainfall andlimited access to irrigation, agriculture in these areasis prone to risk, with productivity severelyconstrained by water supply. The south-east andeastern part is more productive, with better soils,higher rainfall, and greater access to irrigation. Atpresent, less than a quarter of the agricultural area inthe state is irrigated, leaving agriculture largely atthe mercy of the monsoons. In this context, themain thrust for growth, as recognized by recentgovernment initiatives, has to be on diversifyingagriculture into less water-dependent but high valuecrops, improving scarce water resourcemanagement, and promoting off-farm activityrelated to agriculture.

Within the state, regions or districts can be classifiedaccording to three broad agricultural productionsystems, which present varying challenges andopportunities (Figure 2.1). In the marginal drylandareas of Western Rajasthan, poor soils, limitedavailability of water, and insufficient access tomarkets impose significant obstacles to raising farmincomes. The production systems favor less waterintensive crops such as jowar and groundnuts.Similarly, hardier livestock, such as sheep and goats,are also concentrated in the marginal more drought-prone areas in the state. Districts with moderate tohigh agricultural potential have good bio-physicalendowments, but maximization of their potential ishampered by constrained access to markets. Limitedcommunications and road connectivity increasetransaction costs, which can in turn lead to lowerfarmgate prices and prohibit diversification to highervalue crops, tying farmers to the production of non-perishable products or food for home consumption.The characteristics of the production systems favormore water intensive crops such as rice, wheat andmaize. In the high-potential irrigated areas,agricultural productivity is better as rainfall-relatedoutput volatility and risks are lower, making multiplecropping and agricultural diversification to highervalue crops more economically viable. Returns tofactors of production, such as seeds, fertilizer, andlabor are also superior—in part due to better access toroads and transport systems, markets, electricity,communications, and other public services.

Improving Productivity andCompetitiveness in Agriculture andAllied Sectors

Recent Sectoral Performance

The need for a change in agricultural strategy isevident due to the significant slowdown in the sector'sgrowth in the 1990s, as well as insufficientagricultural diversification. As discussed above, theaverage growth rate of agriculture and allied GSDPfell from 4.3 percent per year during the 1980s toabout 1.1 percent per year during the 1990s, largely

34 Based on 2001 Census.35 Based on NSS 55th Round.

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RAJASTHAN: Closing the Development Gap

Figure 2.1 : Characteristics of Different Production Systems in Rajasthan

Note: Data from the GoR Agriculture Department. All values are presented as simple averages across districts classified as marginal dryland(marginal soils, limited rainfall and irrigation less than 30%), moderate to high potential (moderate to good soils, moderate rainfall andaccess to irrigation between 30% to 60%), and high potential irrigated areas (good soil, high rainfall or good irrigation over 60%).Rice, wheat, and maize are more water intensive crops, while jowar is less water intensive. Road connectivity data are from 2001.

36 As per Government classification, output from livestock or animal husbandry is included in agriculture.

Figure 2.2 : Recent Performance of Agriculture and Allied Sector

Note: Rainfall data from www.indiastat.com, various years. Sectoral GSDP data from States Database. In right panel, data points showaverage rainfall and bars show agricultural and allied sector output. Correlation between average rainfall and agricultural and alliedsector output is 0.6 and statistically significant.

on account of low and erratic rainfall (Figure 2.2).Growth in the last five years has also been highlyvolatile due to recurrent drought, and output isclosely correlated with monsoons (Figure 2.2).

Though fisheries show signs of better performance,the sector overall remains highly undiversified.36 Theshare of the allied sectors in GSDP has risen from 1.1percent in 1980 to merely 1.4 percent in 2003.

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Reviving Growth in Rajasthan

The livestock sector is growing in importance as amajor contributor to agricultural GSDP growth.Animal husbandry is important not only as a sourceof livelihood, especially in the arid and semi-aridareas, but also as a means of insurance againstfrequently occurring scarcity conditions. Incomefrom livestock accounts on average for 30-50 percentof household incomes. Livestock management is alsovery labor intensive, with a high concentration ofwomen contributing to it. The value of real livestockoutput grew at an annual average of 4.7 percent inthe 1990s. Meat, milk, and egg output also grewrapidly over the period. In 2001-02 Rajasthanaccounted for 9.2 percent of milk production and1.7 percent of egg production in the country.

Structural Constraints and Policy Challenges

Predominance of cereals. Cereals continue to dominatecrop production in Rajasthan, even though theyaccount for a low share of the value of output (Figure2.3). These are particularly important in areas outsidethe marginal drylands, as discussed above. However, itis encouraging to note that new sources of growth areemerging—like high-value fruits, vegetables, and spiceproducts. The livestock sector has become anothermajor driver of agricultural growth, accounting forabout 33 percent of the total value of agriculturaloutput in the state in the triennium ending 2001-02(Figure 2.3). These changes represent the emergingpotential that can be realized through the right policies.

Low yields and input use. For most crops, yields inRajasthan are close to or below that of the nationalaverages (Table 2.1). Farmers on average tend touse less inputs in Rajasthan compared to otherstates (Table 2.1). Even in states like Karnataka andMaharashtra, which have considerably lowerirrigated cropped area, fertilizer consumption ismore than double that of Rajasthan's. This is likelyto contribute to the lower productivity levels in thestate. Within the state, both yields and input useare lower in the marginal drylands of the West(Figure 2.1).

Constraints to livestock growth. Despite itsimmense potential, more rapid growth of thelivestock sector is constrained by: (i) lowproductivity of animals—about 60 percent of thecattle and 80 percent of buffaloes having low milkoutput; (ii) increasing deficit in feed supply,exacerbated by the large numbers of less productiveanimals; (iii) limited availability of livestock services,including animal health, veterinarian, and artificialinsemination services that could play a critical role inupgrading the livestock base; and (iv) inadequatelivestock extension services to farmers, hamperingtheir ability to learn about modern livestock animalhusbandry practices and technologies.

Restrictions on agricultural marketing. Trade inalmost all agricultural commodities is carried outthrough regulated markets, as in the case of other

Figure 2.3 : Shares of Various Product Categories

Note: Data from the GoR, for triennium ending 2001-02.

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RAJASTHAN: Closing the Development Gap

Crop Rajasthan Maharashtra Punjab Karnataka AP UP All India

Wheat 2,477 1,304 3,335 2,034 2,692

Rice 1,140 1541 3335 2532 2779 1989 1913

Jowar 266 875 906 779 837 772

Bajra 400 702 933 668 926 1023 720

Maize 1,057 1409 2552 3021 3239 3254 1840

Gram 673 594 907 589 708 836 720

Groundnut 994 1092 944 818 927 867 924

Cotton 262 134 317 255 247 153 191

Input Use

Percent Irrigated Area 36.0 16.6 95.6 26.1 44.1 66.5 40.8

Fertilizer Use kg/ha. 36.9 76.3 173.4 101.5 143.5 130.4 90.1

Table 2.1Average Yield of Major Crops (kilograms/hectare) and Use of Inputs in Selected States

Source: Percent irrigated area shows percentage of gross cropped area irrigated, 1999-2000. Fertilizer use for triennium ending 2001-02. Other data for triennium ending 2000-01. All data from Center for Monitoring Indian Economy (CMIE).

37 These notified commodities (fresh and processed) include cereals, pulses, oilseeds, fibers (both kapas and ginned cotton),sugarcane and processed gur and sugar, fruits, vegetables, animal husbandry produce (egg, poultry, cattle, milk, ghee, wool, etc),fish, honey and tobacco.

Indian states. Under the Rajasthan ProduceMarketing Law of 1961, notified agriculturalcommodities grown within the designated area ofthe regulated market, if sold wholesale, have to bemarketed through mandis.37 While there areadvantages in this system—like protection tofarmers from exploitation by middlemen, provisionof facilities for marketing, and access to marketinformation through computerization under theMarket Information Network Scheme of the GoI—the Act restricts the development of markets andopen competition. Consequently, it also limitsmarket opportunities for farmers, and the efficiencyof agricultural marketing, since it does not allowfarmers to choose the best option in terms of pricesto sell their produce.

Inappropriate levels and composition of publicexpenditures. Public expenditures in the agricultureand allied services as a share of aggregate publicexpenditures declined markedly during the 1990s(Figure 2.4). Moreover, revenue expendituresaccounted for a large proportion of agricultural andallied expenditures. With the exception of the mid-to-late 1990s, capital expenditures accounted for

less than 10 percent of total expenditures. Withinthe sector, public expenditures concentrate on crophusbandry, forestry, soil and water conservation,and cooperation. The current levels andcomposition of expenditure are cause for concern.The decline in expenditures is weakening thedelivery of key agricultural services, such as research,extension and livestock services, and thereforehampering the government's goal of achievinghigher growth rates in the agricultural sector. This isillustrated by the fact that expenditures onagricultural research and education in Rajasthan aresignificantly lower than many other states, though ithas risen in the 1990s (Figure 2.4).

Government Reform Measures

Several measures have been undertaken to reducethe negative impacts of shortfalls in rainfall. These"drought proofing" measures include investments inwater harvesting structures, revival of traditionalwater resources, afforestation, and watersheddevelopment and management, though expandingthe reach and improving the effectiveness of theseprograms is a challenge.

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Reviving Growth in Rajasthan

The government has taken steps to amend theAgricultural Produce Regulated Markets Act in orderto promote competition, and improve the returns tofarming. The proposed amendments includeprovisions for contract farming and direct purchaseto farmers, private management of markets, andborrowing by the Agricultural Marketing Board.These amendments will benefit the approximately13.1 million farmers in Rajasthan. They will havethe freedom to choose those buyers who can offerthem the best price for their produce and otherservices, whether in the mandi or through othermarketing channels. Different marketingarrangements could reduce marketing costs andmargins, thus enabling farmers to receive a betterprice while lowering prices for consumers.

The government is placing considerable emphasis onenhancing access to improved technologies, andpromoting increased diversification to higher-valuecrops as a means to enhance agricultural productivityand growth. The government recognizes that it isimportant to take an integrated view of developmentfor the sector. The issues of limited access toirrigation, the high concentration of lower valueagricultural crops, and their low productivity shouldbe tackled simultaneously to achieve a higheragricultural growth trajectory.

In order to sustain the growth of the high-potentiallivestock sector, the GoR is taking several steps toaddress constraints faced by the sector. Under thePlan, priority is being given to: (i) promotinginstitutions and establishing mechanisms to ensurequality consciousness, encouraging research andinnovations to enhance sector-level efficiency inproduction, processing, and marketing of alllivestock products particularly value addition; (ii)reducing the gap between demand and supply forfeed and fodder; (iii) strengthening breedingmanagement through a restructured artificialinsemination program comprising input generationand delivery systems; (iv) ensuring the activeparticipation of NGOs in livestock developmentprograms; and (v) educating animal owners on themodern scientific methods of livestockmanagement, by strengthening extension services.

Improving Management of WaterResources and Irrigation

Recent Developments and Policy Challenges

Rajasthan faces serious problems of water scarcitydue to insufficient water resources and recurrentdrought. The state accounts for 10 percent of thetotal land area in India, but has only 1 percent of

Figure 2.4 : Levels, Shares, and Composition of Public Expenditure on Agriculture and Allied Sector

Note: Data from the GoR, for triennium ending 2001-02.

24

RAJASTHAN: Closing the Development Gap

Figure 2.5 : Sources and Expenditure Composition in the Irrigation Sector

Note: Data for left panel from the GoR Irrigation Department for 2002-03. Data for right panel from States Database. In the right panel,the bars represent revenue and capital expenditures in billions of 1993-94 rupees (left axis), while the data points represent share ofirrigation capital expenditure in total public capital expenditure (right axis).

the country's water resources. At present, theagriculture sector is the major user of water,accounting for 83 percent of aggregateconsumption. Future projections up to 2025indicate a rapid rise in non-irrigation use, withdomestic and industrial demand set to increaseabout three to four times in volume. In addition,deterioration of water quality (due to highconcentrations of naturally occurring elements suchas fluoride and increasing surface pollution) is alsorestricting the use of water for domestic andirrigation supply, putting further stress on the state'savailable water resources.

In recent years, there has been a growing crisis ingroundwater management due to unsustainabledemand. Groundwater from wells and tubewells hasbecome the main source of water for agriculture inthe state (Figure 2.5). More than 90 percent ofgroundwater is used for agriculture. Today, thesustainable use of groundwater is threatened byover-exploitation in many areas. Of the 237 blocksin the state, 86 blocks were already over-exploited(utilization rate greater than 100 percent) in 2003,with another 80 blocks at the critical level(utilization rates 90-100 percent). Only 49 blocksare at safe levels of utilization (utilization rate below70 percent). The under-pricing of electricity foragriculture—and thus of groundwater—reduces the

incentives for efficient use of water and in turn leadsto the over-exploitation of groundwater resources.

The last decade saw some deterioration of surfaceirrigation infrastructure due to inadequatemaintenance and poor quality. Capital expenditurefor the development and rehabilitation of irrigationinfrastructure remains a major component of totalgovernment capital expenditures, although its sharehas declined (Figure 2.5). Inadequate priority andfunding for operations and maintenance (O&M)led to the rapid deterioration of canal systems,resulting in poor quality of services. Efficiency ofwater use in most irrigation systems has been low.System deterioration reduced productivity andsupply of water to tail-enders. Institutionalweaknesses in the Irrigation Department combinedwith minimal involvement of farmers and otherusers impeded greater improvement in quality and"user-orientation" of service delivery. The poorquality of services reduced farmers' incentive to paywater charges. With limited ability to raise fundsdirectly, exacerbated by the tightening fiscalsituation, the Irrigation Department was unable toprovide adequate funding for O&M. Overstaffingof the Irrigation Department further drewresources away from essential physical works,because funding for salaries took priority. The FifthPay Commission's generous wage hike in 1997-98

25

Reviving Growth in Rajasthan

A Government Order was issued in March 2005 establishing a separate State Water Resource Planning Department (SWRPD)within the GoR. The Order defines the objectives, functions, responsibilities and organizational structure of the SWRPD. Itsmain functions are the strategic and coordinated planning, development, and management of the state's water resources.Previously, these functions were performed by the Irrigation Department, which poses a conflict of interest, since it is also thelargest user of water for agriculture. The SWRPD has a separate budget head and will be headed by an officer with the rank ofSecretary or Principal Secretary.

It is expected that the SWRPD could play an important role in fostering greater inter-departmental coordination. At present,coordination between departments on water resource development and usage continues to be ineffective. For example, thePower Department will provide an additional 170,000 electricity connections for pump-sets in view of the rapid groundwaterdepletion in the state. To mitigate the drought crisis, the Irrigation Department has been charged with constructing 47,000check dams, of which 16,000 have been completed. However, there is no institutional provision for their maintenance.

Box 2.2 : The State Water Resource Planning Department

aggravated the situation. Under-pricing of wateralso reduced farmers' incentive to save and usewater efficiently, leading to over-application ofwater, and eventually resulting in water-loggingand salinity problems.

Government Reform Measures

Development of overall water resource managementis one of the key pillars of the government's strategyfor fostering agricultural and rural development,food security, and poverty reduction. In recent years,the government has taken two important steps inthis direction.

In May 1999, the government adopted aState Water Policy that outlined thedevelopment framework for the longer termsustainable development of water resources.Specifically, the Policy emphasizes: (i)adoption of multi-disciplinary, multi-sectoral water planning, allocation, andmanagement; (ii) establishment of aregulatory framework for managing waterresources, including the full range of sectorenvironmental issues; (iii) reorientation ofgovernment water institutions, combinedwith increased participation of the privatesector through farmer managed Water UsersAssociations (WUAs) and other privatesector entities; (iv) adoption of modernmanagement functions such as financialmanagement, programming, and budgeting;and (v) improvement in water and water-related service delivery with increased focus

on better quality, cost-effective, andfinancially sustainable irrigation anddrainage services through commercially-oriented farmer managed entities. In orderto meet the goals of the Water Policy, aseparate State Water Resource PlanningDepartment (SWRPD) has also beenestablished by a Government Order issuedin March 2005 (Box 2.2).

In addition, the government has establishedan Expert Committee on Water ResourceManagement in June 2004 to examine ingreater depth water resources issues andpropose an action plan. The task force,composed of representatives fromgovernment, NGOs, academia, and otherexperts, has four sub-committees, namelyIrrigation, Groundwater, Water Harvesting,and Drinking Water. It is expected thatrecommendations from the task force willlead to a more integrated vision for waterresource management in the state.

In order to address the specific constraints ingroundwater and surface water management andirrigation, the government has taken a number ofmeasures recently.

The Farmers' Management of Irrigation Systems(FMIS) Act was passed in 2000. It provided alegal framework for enabling the participationof farmers in systems management as a meansof improving the delivery of irrigation servicesto them. The Act provides for the transfer ofresponsibility for management of the lower

26

RAJASTHAN: Closing the Development Gap

38 With support from the World Bank assisted Rajasthan Water Sector Restructuring Project, the Irrigation Department hadorganized 506 WUAs, 77 Distributory Committees, and two Project Committees in 90 schemes in the state till 2004.

end of irrigation schemes to farmers, whoorganized into WUAs.38 These farmer-managed institutions will, in partnership withthe Irrigation Department, take on an addedresponsibility of managing the systems underthem. Currently, the Irrigation Departmentcollects water charges, but the FMIS Actincludes provisions for the transfer of watercharge collection to WUAs. A necessary stepas part of the transfer of water chargecollection responsibilities to WUAs is theamendment to the FMIS Act to clarify therevenue sharing arrangements between theWUAs and the Irrigation Department. Theseare currently being drafted by the IrrigationDepartment, after which they will besubmitted to the Cabinet, and thereafter tothe Assembly for approval.

The government is taking steps to fostergreater financial sustainability in the sector.First, there are efforts to right-size theIrrigation Department. The first phase of staffreduction has been implemented throughcutting 30 percent (8,000) staff throughvoluntary retirement and redeployment toother departments in 2001. The IrrigationDepartment further aims to reduce its stafffrom about 55,000 to 38,500. Second, there

are efforts to increase cost recovery from userstowards O&M requirements andrehabilitation costs. In 1999, the IrrigationDepartment raised water charges for variouscrops by as much as 330-500 percent. Onaverage, this translated to about Rs. 191 perhectare of irrigated area, insufficient to coverO&M requirements estimated at Rs. 781 perhectare in 1999-2000. Although thegovernment anticipated raising water chargerates in a phased manner thereafter, there hasbeen no change since 1999. Total watercharges demanded cover about 3 percent ofO&M required in 2003-04 (Table 2.2).

The government has continued to supportthe increased adoption of drip and sprinklerirrigation systems. These systems have a waterdelivery efficiency of up to 60-80 percent.Currently, about 510,000 hectares are underdrip and sprinkler irrigation systems, makingthe coverage level one of the highest amongIndian states.

Agenda for the Future

The government's overarching goal is to raiseagricultural and rural employment and incomes, whileensuring equity and the sustainable use of resources,

27

Reviving Growth in Rajasthan

Category 1999-2000 2000-01 2001-02 2002-03 2003-04

Potential Irrigated Area Created, million hectares 2.82 2.83 2.96 3.04 3.11

O&M Requirement, Rs. million 1551 1556.5 1628 1672 1710.5

O&M Expenditures, Rs. million 399.9 464.3 506.9 380.1 362.8

Water Charges Demanded, Rs. million 251.9 251.8 206.2 18.0 59.6

As share of O&M Requirement 16.24% 16.18% 12.67% 1.08% 3.48%

Water Charges Collected, Rs. million 244.3 224.1 59.8 14.6 50.1

As share of water charge demanded 96.98% 89.00% 29.00% 81.11% 84.06%

As share of O&M Requirement 15.75% 14.40% 3.67% 0.87% 2.93%

As share of O&M Expenditures 61.09% 48.27% 11.80% 3.84% 13.81%

Table 2.2Operations and Maintenance Expenditures, and Cost Recovery in Irrigation

Note: Data from the GoR Irrigation Department.

The government's strategy for achieving equitable development of agriculture and sustainable growth places priority on thefollowing:

Attracting larger public and private investments for the development of natural resources and building up communityinfrastructure support, through:

Facilitating private entrepreneurs to setup agro-industry, technology parks, high-tech demonstration and production farms;

Supporting collaborative area-specific extension support to new firms and units entering into the promotion ofagricultural marketing, agro-industries and value addition;

Encouraging private sector to take over the delivery of goods and services and production of non-traditional inputslike bio-fertilizers, bio-agents, gypsum;

Encouraging financial institutions to take over the administration of supplies available for on-farm infrastructure development.

Mobilizing large-scale credit flow to operators on farm infrastructural development and expanding pledging facilities onfarm produce and other crop loan, and institutional support mechanisms.

Encouraging programs addressing the needs of resource-poor farmers for equity with greater focus on small, marginal,and women farmers.

Strengthening the agricultural extension and delivery system, agriculture information management, education and co-ordination system through:

Involving local people and NGOs in extension activities and core areas of development;

Strengthening institutional infrastructure for skill up-gradation and training of farming community, extensionmachinery and technical manpower, and using multi-media in agricultural extension;

Strengthening seed village and seed production programs to ensure production and availability of quality andimproved seeds both in the private and public sector;

Maintaining strict vigil on the quality aspect of supply of inputs;

Undertaking collaborative and contractual research on location-specific and crop-specific technology, indigenoustechnological knowledge, and gender-specific technology to improve extension services provided to farmers.

particularly land and water. In order to achieve thisgoal, the state aims at raising and maintaining theagricultural growth rate at a minimum of 4 percent. Thiscan be achieved primarily through programs that willraise agricultural productivity and foster agriculturaldiversification by introducing higher-value crops andlivestock. In this regard, the government has outlined itsagricultural strategy in its Tenth Five Year Plan (Box2.3). The strategy takes a comprehensive view of thechallenges facing the agricultural sector, and recognizesthe need for a coordinated effort along variousdimensions. As indicated in the strategy, bringingagriculture to a higher growth trajectory will requireincreased productivity-enhancing investments by boththe government and the private sector in rural areas.

Over the short to medium term, the governmentneeds to focus on the following reforms:

Amending the Agricultural Produce RegulatedMarkets Act to allow for direct sales and

contract farming, and implement the same, inorder to foster a commercial, market drivenand diversified agricultural sector.

Supporting efforts to diversify agriculture intohigh-value crops such as fruits, vegetables, spices,oilseeds, and medicinal plants. This can beachieved through public and privateinvestments in improving rural infrastructure(e.g. roads, markets, and electrification), andstrengthening the delivery systems for research,extension, credit, and market support servicesto increase productivity and meet the morecomplex needs of diversified agriculture. Thiswill require complementary institutionalreforms in the state agricultural research andextension agencies to enhance client orientationand delivery effectiveness, and foster innovativemechanisms for linking farmers to the markets,such as producer associations, outgrowerschemes and contract farming (Table 2.3).

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RAJASTHAN: Closing the Development Gap

Box 2.3 : Agricultural Strategy for Rajasthan in the Tenth Five Year Plan

Focusing on appropriate roles of the public andprivate sector in implementing the state'slivestock sector strategy. Special emphasisshould be placed on ensuring both theavailability and good quality of animalhusbandry and livestock services to farmers.Given the growing needs for livestock servicesand the increasing competition for publicresources, encouraging greater participationand entry of NGOs and the private sector toprovide some of these services will be essential.Lessons from international experience indicatethat government services should concentrate onpublic good activities such as livestock researchand extension, veterinary surveillance, andquality control of drugs. Increased participationof the private sector should be encouraged inthe delivery of other services, such as preventiveand curative treatments, artificial insemination,and non-compulsory vaccinations.

Rationalizing the composition of publicexpenditure in both the agriculture andirrigation sectors, and improving its quality.This would involve careful expenditure

prioritization to effectively and productivelybalance the needs for rehabilitation versuscompletion of existing schemes in irrigation,and examination of the intra-sectoralallocation within agriculture and alliedexpenditures to meet requirements of researchand extension, and O&M.

Making the SWRPD operational as soon aspossible. This will necessarily involveappointing officials and staff to operate theSWRPD. Recommendations expected fromthe Expert Committee on Water ResourceManagement, available in June 2005, shouldalso be taken on board.

Amending the FMIS Act to clarify revenuesharing arrangements between WUAs andthe Irrigation Department. Continuedcommitment to the capacity building of thefarmer-managed institutions will be crucialfor ensuring the longer term sustainability ofthe irrigation infrastructure in the state.

Continuing with the phased adjustment ofwater charges towards full cost recovery will

29

Reviving Growth in Rajasthan

Main activity areas Specific elements

Diversification feasibility SWOT (strengths, weaknesses, opportunities, threats) analysis, including evaluation ofconsumer demand, and analysis of available agronomic resources and off-farmemployment opportunities.

Policy environment Land and water policies, food security, price support and input subsidy policies, policyenvironment that is crop-neutral, equality of access to assets, vulnerabilitymanagement, economic and market liberalization, and decentralization.

Input markets, infrastructure systems, Systems for meeting quality and safety requirements, investment in processing and and market access value adding, investment on transporting and food preserving technologies, options for

contract farming, venture capital, credit markets, fertilizer, seed, and technology supply,irrigation and drainage.

Private sector participation and supply Cooperation with NGOs, investment by and participation of the private sector, rural chain coordination producer organizations and community groups, risk management tools, communication

and logistical systems.

Research and extension systems Integrated management systems and conservation tillage, demand-driven site-specificresearch on wide-ranging agricultural products, increasing productivity, crop/livestockintegration, natural resource management, resource use efficiency, intensification, andsystems for market, technology, and grading system information flow.

Natural resources Sustainable land and water management systems, protection of biodiversity, biosecurity,government regulation, taxes and incentive systems to internalize externalities,appropriate technologies to conserve environment.

Table 2.3 Elements of Planning and Implementing Agricultural Diversification Programs

Source: Shawki Barghouti, Samuel Kane and Kristina Sorby. "Implementing Pro-Poor Agricultural Diversification: Practical Guidancefrom Past Experience", 2004.

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RAJASTHAN: Closing the Development Gap

be critical. Ensuring financial sustainabilitywill require further improvement in thecollection efficiency of water charges as well.

In the medium to long term, the government shouldadopt a comprehensive strategy, based on two

elements. First, an integrated public privatepartnership (PPP) approach will be needed tointroduce high-value crops. Maharashtra'ssuccessful horticulture program provides a goodmodel to learn from (Box 2.4). Second, it would beimportant to formulate differentiated regional

The Horticulture Development Program is aimed at accelerating the expansion of horticultural production and generatingadditional employment in rural areas. The program was applied to 25 fruit crops, spices inter-cropped in coconut plantations,and medicinal and aromatic plants. The scheme was open to all farmers, with a minimum required area per project of 0.2hectares to a maximum of 4 hectares (0.1-10 ha in the Konkan region). The scheme provided full subsidy on wages and materialinputs (planting materials, fertilizers, agrochemicals) to small and marginal farmers, and SC/ST and other ethnic minorities, ona declining scale and to be phased out by the third year. Other farmers received a subsidy of 100 percent on wages and 75 percenton material inputs on a declining scale over three years. Wages were given in cash, while the material inputs were supplied inkind. The "grant" or subsidy received averaged Rs. 7,709 ($161) per farmer beneficiary.

The Government of Maharashtra (GoM) arranged the supply of inputs and services. The public extension service providedintensive technical support to farmers. During the first seven years, 140 government nurseries and 24 nurseries in the fouragricultural universities were established to supply high-quality planting materials. The supply of planting material was furtherexpanded by the entry of approximately 1,670 private nurseries. By 2002, the state was self-sufficient in planting materials.Pesticide residue testing laboratories with international standards were established in Pune and Nagpur. A website"agri.mah.nic.in" on agriculture-horticulture was launched by the GoM's Agriculture Department to disseminate informationabout the program. A GoI centrally sponsored scheme for sprinkler and drip irrigation facilitated the expansion of horticultureand floriculture production. In view of water scarcity conditions in many areas, the scheme aimed at increasing efficiency in wateruse. The drip/sprinkler scheme provided a subsidy equivalent to 75 percent of costs for all farmers and 90 percent of costs forSC/ST, up to a limit of Rs. 32,000, the cost of which was shared between the central and state governments at a ratio of 75:25.

Complementary public and private investments further supported the growth of the sector. The GoM's investments ininfrastructure, such as building the Pune-Mumbai expressway and other roads and upgrading airport and port facilities, reducedtransportation costs and helped to increase the competitiveness of Maharashtra's products domestically and in the export market.Private sector initiatives and investments also contributed to the growth of the sector. Large farmers and corporate investors inhorticulture and floriculture, who have invested in supporting marketing infrastructure, such as pre-cooling facilities, coldstorage, refrigerated transport, and agro-processing, promoted production and organized supply from other (smaller) farmers tomeet the bulk requirements for export and local demand and provided technical advice to meet export quality requirements.Some private companies also have been instrumental in introducing new technologies in the state and in providing combinedtechnology and advisory packages. Commodity marketing organizations including Mahagrapes, Mahamangoes, and theWestern India Floriculture Association were instrumental in promoting exports of local products.

The program has been a success from both the horticulture and employment perspectives. Of the one million hectare increasein area planted with fruits in the state between 1989-90 and 2000-01, 96 percent was supported through the horticulture-linkedEmployment Guarantee Scheme (EGS). Since the program's inception in 1990, approximately 1.28 million farmers covering35,525 villages have availed of the program. Approximately 7 percent and 11 percent of the beneficiaries were SC and STrespectively. It appears that the scheme has also generated considerable economic benefits. Assuming conservatively that only10 percent of the fruits and vegetable GSDP was due to the horticulture-linked EGS program, and taking costs as equivalent tothe total subsidies for the program during the same period (Rs 6.44 billion, constant 2000-01 rupees), the benefit-cost ratio cameto approximately 7:1. In addition, over the last decade, it directly created an estimated 213 million person days of work orapproximately 8,07,000 person years (assuming 220 days work per year). Moreover, as the fruit orchards, once initiated, wouldnormally require continuous employment to meet day-to-day labor needs, the scheme also opened opportunities for permanentfull-time employment for agricultural laborers. In addition, the increased fruit production generated positive multiplier effectsin terms of higher labor demand arising from increased demand for inputs and marketing services (transport, storage, packaging,processing, and trading). In the future, in view of the rapid uptake of technologies, the challenge will be to more exclusivelytarget assistance to poor and small and marginal farmers, who have limited capital.

Box 2.4 : Learning from Maharashtra's Horticulture Program

Source: World Bank (2004).

agricultural strategies for the different ecological andproduction systems that characterize the state,namely, the marginal dryland areas, the moderate tohigh potential areas, and the high potential irrigatedareas. As examined above, these three regions offerdifferent opportunities and challenges, andaccordingly, require different policy interventions.39

In terms of promoting a regionally differentiatedagricultural strategy, the government could focus oninterventions as discussed below.

Clearly the potential for the adoption ofhigher yielding varieties and diversificationto higher value crops will be greater wherewater supply is assured—that is, in the highpotential irrigated areas. New institutionalmechanisms will be needed to promoteagricultural diversification, includingprovision of better agricultural supportservices to farmers. There is also a need tobuild on the growing consensus to furtherreform land policy, particularly land tenancypolicy, and the land administration system atthe state level. A more holistic approach toland administration policies, regulations, andinstitutions is necessary to ensure security oftenure, reduce costs, and ensure fairness andsustainability of the system—and, ultimately,to improve the investment climate in ruralareas. Moreover, with increasing competitionfor water expected in the future and moreacutely in high potential irrigated areas,improved water resource management will beessential. However, increased priority toagricultural diversification does not implyphasing out support to foster furtherimprovements in the productivity oftraditional crops. At the same time, givenchanging consumer demand patterns withhigher demand for processed goods, therewill be opportunities to move up the valuechain in terms of agro-processing and relatedservices. The potential for off-farmemployment will increase, and exit strategiesfrom farm employment along with

development of the non-farm rural economyshould be encouraged.

In the moderate to high potential areas,intensification to increase output anddiversification into higher value and lesswater-reliant crops are two importantstrategies for fostering more rapidagricultural growth. This requires substantialpublic and private investments to increaseproductivity per worker and output per unitof land farmed. A high priority is to improvethe productivity, quality, and seasonalavailability of food crops, because householdsdepend so heavily on producing crops forhome consumption. A correspondingpriority is to raise farm profitability byimproving access to markets for inputs andoutputs, as well as access to technologies thatcan enhance the productivity of labor.Support will be needed for institutionalinnovations that facilitate coordination alongthe supply chain, including contract farming,outgrower schemes, and farmers' and traders'association. Capacity building is required forregulation and monitoring, which are crucialinstitutional elements for agriculturalmarkets to function well. New technologiesand advisory services that focus on issuesrelating to marketing policy, post-harvesttechnologies and practices, livestock andhigh-value commodities with strong marketdemand, and cost-saving technologies willimprove profitability and expandsmallholders' awareness of marketopportunities. As the productivity andprofitability of food crop productionincreases, priority should also be given todiversification. Further diversification toproducts requiring more inputs, processing,and handling, will present opportunities fordeveloping the non-farm economy.Expansion of irrigation where economicallyfeasible in moderate potential areas cancontribute significantly to increasingincomes and generating employment.

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Reviving Growth in Rajasthan

39 The discussion of regionally differentiated strategies is adapted from World Bank (2005).

The strategy for improving livelihoods inmarginal dryland areas will need to putpriority to maximizing agricultural andnon-farm income gains from existingnatural endowments in the medium term,and also to giving household the means tobuild human capital to explore other betterand more stable income opportunitiesoutside of agriculture over the longer term.This involves improving the current cropand livestock systems in locations withsomewhat higher potential, and sustainingthem in the rest. It calls for increasedpriority to the research and development onmore drought-tolerant crop varieties andlivestock feed and fodder, appropriate soiland water conservation measures, andtechnical advice on alternative croppingsystems that can mitigate low rainfall and itsassociated agriculture production risks.Given the critical role of livestock, efforts toreduce the effects of inter-annual and inter-seasonal variation in feed availabilitythrough strategic fodder production, rangemanagement, and livestock marketing arecritical. For livestock producers to gainaccess to regional markets, they requireaccess to veterinary services, animal healthproducts, and more developed marketchannels, including provisions forcompliance with sanitary and food safetystandards. At the same time, without moresustainable land use practices, people inmarginal drylands will be hard pressed tomake the best use of scarce water resources,reduce soil erosion and water runoff, andconserve natural pastures and vegetation.Over the longer term, an importantpathway to reducing poverty is to exitagriculture by encouraging the shift to otherhigher-paying employment locally or inother areas. Also, it is important to promotemore profitable non-farm uses for land,such as manufacturing and services, toconserve natural resources and promote off-farm employment. In order to ensure asmooth transition for rural households,there should be a combination of riskmanagement at the farm level, safety nets atthe household level, and other forms oftransitional support.

Unleashing the Potential of thePrivate Sector: Industry and Services

Rajasthan's strong economic performance duringthe 1980s and 1990s was largely driven by robustgrowth in the industry and services sectors. Thisgrowth was stimulated by a wide range of structuralreforms introduced by the GoI in 1991 as part of abroader economic reform program. However, muchremains to be done to accelerate growth in thesesectors to reverse the slowdown and realize thestate's potential more fully. A key thrust area ofgovernment policy, going forward, will need to beon improving the climate for private investment.Special emphasis should be placed on sectors such asmining and quarrying, textiles, and tourism, whereRajasthan has a strong comparative advantage.

Recent Sectoral Performance

The marked slowdown in the industry and servicessectors since the late 1990s has taken growth rates inthese sectors almost back to that of the 1970s. Growthin both these sectors has seen a significant deceleration(Chapter 1). In industry, an intra-sectoral breakdownsuggests that this was mainly due to a slowdown inconstruction activity and a decline in manufacturinggrowth. On the other hand, mining and quarrying,where Rajasthan has a strong comparative advantagegiven its rich endowment of mineral resources, saw asharp increase in growth rates even in the 2000s whenother sectors were faltering. For the services sector, theslowdown was largely due to lower growth rates in realestate and transport services (Figure 2.6).

Though the overall share of industry and services inRajasthan's GSDP has increased, the share of high-potential sub-sectors remains disappointing (Table2.4). Compared to a national share of below 27percent, industry accounted for almost 30 percent ofGSDP in Rajasthan in 2003-04. However, a majordisappointment in Rajasthan has been the modestcontribution of mining and quarrying to GSDP,despite the state's abundant mineral resources. In2003-04, this sub-sector contributed just over 3percent of GSDP in Rajasthan—compared to 14 percent in Chhattisgarh and Jharkhand, and eight percent in Orissa. In services, the promising tourism

32

RAJASTHAN: Closing the Development Gap

sector accounted for just 14 per cent of Rajasthan'sGSDP in 2003-04 compared to 21 percent in Kerala.

The informal sector is particularly important inRajasthan, and may be partly responsible for lowpoverty rates. Off-farm activities, particularly intransport, storage, trade and hospitality, provideimportant sources of employment and help raiseincomes. These activities are reflected, for example, inthe private sector and NGO initiatives that helpcommunities address public service problems andtrain entrepreneurs. The Barefoot College ofRajasthan (Box 2.5), the successor of the well-knownNGO, the Social Welfare Research Center, provides

an illustration of community initiatives in informalactivities and entrepreneurship. They are alsoreflected in the rapid growth of informal sectors suchas the dairy industry in Rajasthan (Box 2.6). Theimportant challenge will be to help these informalfirms to grow sufficiently in scale to become formalsector firms. Addressing key investment climateconstraints can help in this effort.

Cross-Cutting Investment ClimateConstraints

To date, Rajasthan's record in attracting privateinvestment has been rather modest, but what is of

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Reviving Growth in Rajasthan

1980-81 1990-91 2003-04

Industry 20.93% 22.24% 29.62%

Mining & Quarrying 2.07% 1.88% 3.17%

Manufacturing 11.83% 11.94% 14.22%

Construction 5.33% 6.06% 8.14%

Electricity, Gas and Water Supply 1.70% 2.36% 4.09%

Services 30.16% 32.77% 42.82%

Transport, Storage & Communication 3.40% 3.13% 6.31%

Trade, Hotels, Restaurants 11.01% 13.84% 14.20%

Real Estate & Ownership of Dwellings 5.72% 3.93% 6.12%

Banking & Insurance 2.16% 4.29% 3.84%

Public Administration 3.13% 3.34% 4.03%

Table 2.4Share of Selected Sub-sectors in Rajasthan's Real GSDP

Note: States Database

Figure 2.6 : Recent Performance in Industry and Services Sectors

Note: Data from States Database. All growth rates from logarithmic functions. Data for 2000s goes up to 2003-04.

more serious concern is that private investmentrates have been falling since the early 1990s.Private investment in Rajasthan stood only at lessthan 6 percent of GSDP in 2002-03 (as against15.7 percent nationally), while public sectorinvestment stood at 5.7 percent of GSDP (asagainst 6.3 per cent nationally). There has beenvirtually no Foreign Direct Investment (FDI) inindustry, with the notable exception of thepetroleum sector.

Private investment and productivity across sectorsin Rajasthan continue to be constrained by severalfactors. Key among them are: (i) legal andregulatory inefficiencies and red tape that restrictthe entry, exit and efficient operation ofbusinesses, particularly small and medium firms;(ii) insufficient access to credit; and (iii)infrastructure shortages. In addition, slow urbandevelopment is another constraint to growth.These are discussed below.

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RAJASTHAN: Closing the Development Gap

The innovative Barefoot College in the village of Tilonia, Rajasthan, was set up for villagers in search of traditional and new ways to bettertheir lives. The college gives simple school lessons in reading, writing and accounting to adults and children. Much of the teaching, bypeople from the local villages, takes place in night schools because students, including children, are too busy during the day.

The prime function of the college is to impart skills people need in their everyday lives. More than education, for example,people in Tilonia need water. The Barefoot College first took the regular approach of digging wells and hand-pumps but soonsaw them run dry. It then set up a system of diverting rainwater to dry wells. By a natural system of percolation, this broughtclean water back through hand-pumps. Rainwater flowing down gutters from roofs is trapped in underground tanks. TraditionalRajasthan puppetry is another skill the college promotes strongly.

Women are very active in the college. Girls heavily outnumber boys in the night schools and many of the engineers trained in thecollege are women. One of the most successful solar lamps in use in villages in the area was designed by a woman using local wastematerial. Women have been going from village to village to gather support for developmental measures such as building local dams.

The Barefoot College's work now extends well beyond Rajasthan. For instance, 300 villages in Ladakh, high up on the Tibetanplateau, have received solar panels from the college. Such projects extend all the way along the Himalayas to Sikkim in the east.Though the Barefoot College began in Rajasthan, it has spread out in recent years. There are now 20 such colleges in 13 statesin India. They draw up their own local priorities, but the fundamental principles remain the same—people in the college mustbelong to the villages, live there and work on developing skills that will improve the quality of everyday life. The college is nowalso involved in training villages from other countries, including Afghanistan, Ethiopia, Bhutan, Senegal and Sierra Leone.

Box 2.5 : The Barefoot College in Rajasthan—Innovation for a Better Life

In Rajasthan, the dairy industry currently contributes 40 percent of India's wool and 10 percent of milk production, and issteadily growing in importance. With large parts of the state classified as desert and the rest prone to drought, livestock providesthe poor with a source of security, income, food, and is an asset in times of need.

The Rajasthan Cooperative Dairy Federation (RCDF), established in 1977, has been a prime mover behind dairy development.It is a three-tier system working with registered dairy cooperative societies (DCS), who receive technical support, improved feed,and veterinary services, in exchange for competitively priced milk procurement through dairy unions. The RCDF providesmarketing outlets for milk products, and overall planning and programming. It has been actively promoting the Saras brand ofmilk products, and has 12,000 outlets selling 26 diversified milk products ranging from milk to butter and ice cream. Thegrowth of DCS from 5,200 in 1998-99 to 8,500 in 2005 has resulted in sales of Rs. 50 billion for the cooperative to date.

The RCDF has also actively linked up with programs targeted at the poor, such as the Rajasthan's District Poverty InitiativeProject (DPIP). It proposes to support 32,000 poor BPL households, help them establish cooperative societies, provide training,cattle insurance and improved feed and care—in exchange for the procurement of 200,000 litres of milk per day or dailypayments of Rs. 2.2 million to poor households for milk. The society is investing in new milk routes and chilling plants toincrease its milk procurement and meet the rapidly increasing demand both within and outside the state. The RCDF has set atarget of increasing household income by 70 percent through access to these new milk routes.

Box 2.6 : Rajasthan's White Revolution

Legal and Regulatory Barriers

Rajasthan presents a mixed picture as regards keyindicators of the business environment (Figure2.7).40 There are notable areas in which Rajasthanperforms comparatively well. For instance, starting abusiness is less time consuming in Jaipur, where ittakes about 59 days compared to 89 in Mumbai.41

The costs of enforcing a contract in Rajasthan are thelowest among the regions surveyed. Transferringproperty titles from a buyer to a seller in Jaipur takes61 days compared to 67 days in Mumbai and 142days in Chandigarh. However, there are areas whereRajasthan is lagging behind other regions. For instance,even if entry takes less time, the costs of entry inRajasthan are the highest among the regionssurveyed. Also the costs of registering property inJaipur are nearly 14 percent of the property value—one of the highest among the regions surveyed. The

time taken to go through insolvency is about 10years in Jaipur, compared to about 8 years inBangalore and Chandigarh, or about 9 years inChennai and Hyderabad. This reflects the state'scomplex bankruptcy laws. Enforcement of contracts,which is indicative the efficiency of courts to someextent, takes 875 days in Jaipur on average,compared to 425 days in Mumbai, or about 700days in Chennai or Hyderabad.

According to industry representatives, easing labormarket rigidities can improve the investment climatein Rajasthan. Firms have to contend with severalmarket rigidities at present.42 First, labor lawsimpose onerous regulations on employment inregistered firms in the state. Any registered firm hiringmore than 100 workers can retrench labor only withthe permission of the state government.43 This isespecially burdensome for exporters who have to

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Reviving Growth in Rajasthan

40 All the indicators presented in this section are based on data from the World Bank's Doing Business database. See DoingBusiness in 2005: India Regional Profile, World Bank, November 2004.

41 This has happened largely due to the elimination of registration for professions tax that has reduced the number of steps requiredfrom 11 to 10.

42 Confederation of Indian Industry (2004).43 Clause 5B of the IDA (1947, Amendment)

Figure 2.7 : Selected Indicators of Business Environment in Surveyed Regions of India(The Survey covered only Particular Cities in the States Indicated)

Note: Data from Doing Business database. For each state, regions surveyed are Jaipur (RJ), Mumbai (MH), Chandigarh (PJ), Bangalore(KN), Lucknow (UP), Kolkata (WB), Hyderabad (AP), and Bhubaneshwar (OR). For recovery rate, higher value indicates betterperformance. For all other indicators, lower value indicates better performance.

36

RAJASTHAN: Closing the Development Gap

compete with producers in other exporting countriesand have to adjust to changing demand. Ultimately,such laws motivate firms to avoid hiring permanentlabor and to use more capital-intensive methods.Alternatively, it also provides incentives for small andinformal sector firms to maintain the same status.Second, laws prohibiting the use of contract labor areanother major cause of uncertainty for firms.Although the use of contract labor has beenincreasing significantly in Rajasthan as in otherstates, firms face considerable uncertainty arising dueto the presence of Contract Labor (Abolition) Act,which can affect investment adversely. Under theAct, firms face the risk of being compelled to hirelabor under the "ultimate employer" provision. InRajasthan this could mean that, on average, firmsmay be compelled by law to increase theirpermanent labor force by over 30 percent. Third,labor market-related inspections and prosecutions aremarkedly higher in Rajasthan compared to states likeWest Bengal or Tamil Nadu—with about 75 percentof firms or registered firms being inspected. This canprovide opportunities for harassment, rents, andbribes that can deter investment.

Although labor market regulations are a concurrentsubject with the union government, stategovernments have the authority to amend the law.Rajasthan could examine recent reforms by UttarPradesh where amendments to the IDA allow firmsto hire up to 200 workers, while retaining labormarket flexibility. There are also lessons to be drawnfrom Andhra Pradesh which has amended itsContract Labor law, under which firms can hireclearly defined non-core workers withoutuncertainty. Clarifying labor laws could help toreduce the harassment, rents, and bribes thatinspections can create.

Insufficient Access to Credit

Accessing credit from commercial banks in Rajasthanappears to be a problem for industry in general, andsmall and medium enterprises (SMEs) andhousehold firms in particular—though this may be

partly mitigated by the better financial health ofrural credit cooperatives. Overall, per capita credit toindustry in Rajasthan is less than half the nationalaverage.44 Although rural areas fare relatively betterin terms of credit penetration, data indicate thatRajasthan also performs below the national averagein the availability of rural banking services. At thesame time, the rural credit cooperative banks whichhave been established to provide credit to smallerborrowers in Rajasthan are in better financialhealth—compared with other Indian states likeBihar and Orissa, where the credit cooperativesystem is in a state of deep financial distress. Theaverage capital adequacy ratio of Rajasthan's 26District Central Cooperative Banks (DCCBs), with396 branches across the state, was the highest amongthe Indian states. Nevertheless, the problem ofinadequate credit in Rajasthan remains andgovernment will need to consider introducinginnovative financing and risk- bearing schemes forthe "missing" middle segment of farmers and smallenterprises that are the most deprived. Such schemesmay include using warehouse receipts, securing ruraland urban land titles, and providing technicalassistance alongside credit to help small enterprisesand farmers develop good business plans.

Inadequate Infrastructure

Perhaps the single most important obstacle toincreased private investment and productivity acrosssectors is the relatively poor quality of Rajasthan'sinfrastructure, particularly power and transport.45

Although the situation has improved recently, theprivate sector has long suffered from unreliablepower supply. Poor connectivity to ports by thelandlocked state imposes a serious constraint oncompetitiveness in manufacturing. Rajasthan's poorroad infrastructure and inadequate rail connectivityresult in higher delivery time for exporters. Inlandcontainer depot facilities in Rajasthan are severelystretched, resulting in an unduly long waiting timefor clearing finished goods. This problem is furtherexacerbated by congestion in the ports to whichindustry in Rajasthan has access (Nava Sheva,

44 CMIE, District Level Indicators in India, 2000. 45 See next section.

Pipavav, and Mundra). This is largely due toincreased container traffic from Rajasthan. Thestate's acute water problem also implies that firmsoften have to source their water from privatetankers. This has significant cost implications forfirms in sectors (such as textiles) where water is a keyinput, or in tourism (where drought affects thebiodiversity of Rajasthan's eco-reserves).

Slow Urban Growth

The slow development of cities and towns can alsoprove to be a hindrance to economic growth. Non-agricultural sectors are likely to drive Rajasthan'sfuture growth, which will be reflected mainly in theexpansion of cities. Thus, supporting urbandevelopment should be accorded a high priority.Although Jaipur and some of the major cities havebeen growing rapidly, Rajasthan remains largelyrural, with an urbanization rate (23.4 percent) thatis slightly below the national average (27.8 percent).More importantly, urban growth in the 1990s, at2.7 percent per annum, is half a percentage pointslower than what it was in the 1980s, and barelyabove the overall population growth rate of 2.5percent annually. Inadequate urbanization alsosuggests that there are only a few cities withsufficient scale and benefits of agglomeration thatare important sources of growth.

After a period of neglect, the government hasturned its attention to urban development whereseveral issues need to be addressed. Havingincreased the financing for urban development inits last budget, the government will now have tosustain it. Further, focus will be required in threebroad areas: (i) reducing the multiplicity ofmunicipal functions and institutions that leads toa lack of coherence in city development; (ii)strengthening weak institutional and legalframeworks that lead to difficulties inimplementing municipal responsibilities asspecified in the 74th Constitutional Amendment;and (iii) providing cities with greater financialresources as well as tax bases to raise revenues so

that they can invest in and maintaininfrastructure. At present, municipal governmentsin India have an own revenue collection of merely0.6 percent of GDP compared to 7.9 percent inBrazil and 5.3 percent in South Africa. Thesefiscal issues are addressed in more detail insubsequent chapters.

Investment Climate Obstacles FacingKey Economic Sectors

A host of bottlenecks have held back the growth andpotential of three important sectors in Rajasthan:tourism, mining and quarrying, and textiles. Thereis considerable potential for growth in mining andminerals, given Rajasthan's resources. Its historyand natural beauty makes Rajasthan one of India'smost sought after tourist destinations and a favoredplace for conventions. Another sector withenormous potential is textiles (particularly syntheticand blended yarn), where Rajasthan has a historicadvantage as the bulk of industrial licenses to thissector were granted post-Independence. However,several constraints hamper the development of thesethree sectors as discussed below (Boxes 2.7-2.9).

Government Reform Measures

In recent years, the GoR has introduced severalmeasures to improve the investment climate. Itrecognizes that success in attracting and sustaininghigher private investment and increasingproductivity in industry and services will requireaggressive efforts to improve the state's investmentclimate. The focus should be on betterinfrastructure, removing legal and regulatorybarriers to business and enhancing access tofinance for firms.

Given that Rajasthan's annual infrastructureinvestment requirements are estimated to beat around US$ 4 billion annually, or fourtimes the government's entire annual capitaloutlay, private sector participation ininfrastructure will be essential in meeting theserequirements.46 Rajasthan was, in fact, one of

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Reviving Growth in Rajasthan

46 Mira Mehrisihi, Presentation.

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RAJASTHAN: Closing the Development Gap

the first states to enact a Build OperateTransfer (BOT) policy in 1994, a reformfurther deepened with the enactment of theRoad Development Act in 2002 andsubsequent amendments in 2004. The statehas also set aside a project preparation fundand set up a Power DevelopmentCorporation as a joint venture with theprivate sector for project development.

The government has taken some steps toreduce bureaucratic hassles and red tape for newinvestors. To facilitate interface with privateinvestors, the government has recently set upan office in Delhi. A single-window clearancesystem to facilitate approvals for newbusinesses has recently been introduced.

A number of measures have also beenannounced to encourage the growth of SMEs,which are viewed by the government as a keyengine of growth, job creation and poverty

reduction. In particular, the government hasfocused on training, technology and marketingsupport to SMEs in sectors such as handlooms,handicrafts and other rural non-farm activities(e.g. wool, leather, ceramics, etc.).

An EPRC was established in 2004,comprising CEOs of leading firms andeconomists. A thrust area of the council is tosuggest reforms that could help attractinvestment (particularly from the privatesector), generate employment, andaccelerate growth.

The government continues to placeconsiderable faith in the ability of specialincentives and state-sponsored schemes toboost private investment. For instance, an"Investment Incentive" policy was announcedlast year, which provides for a 100 percentrebate on luxury tax and a 50 percent rebateon stamp duty and conversion fees on new

Rajasthan has all the ingredients to become the brand state for cultural tourism in India, as well as the potential to developnature-based tourism. About 80 percent of the Indian heritage properties are located in Rajasthan. Moreover the state has overa dozen natural sanctuaries, two reserves and two national parks, one of which (Keoladeo National Park) is one of only fourIndian parks listed as UNESCO heritage sites. In recent years the number of both domestic and foreign tourists has beenincreasing sharply. Rajasthan received 8.3 million domestic and international tourists in 2001 (3 percent of India's tourists),13.1 million tourists in 2003 (4 percent of India's tourists), and an estimated 17 million tourists in 2004. The number oftourists is expected to continue to increase and reach almost 20 million by 2010. Moreover, it is estimated that tourism directlyand indirectly employs 15 million people or 24 percent of the state's population. However, the contribution of tourism inRajasthan's GSDP is still far below its potential: the 2003 receipts from foreign tourists amounted only to US$ 200 million orless than 1 percent of the state's GSDP. The sector faces some major bottlenecks.

Obstacles to the expansion of the supply of hotels. As in the case in the rest of India, the expansion of Rajasthan'stourism industry is severely hampered by limited hotel infrastructural facilities. In comparison, Shanghai has a largernumber of hotel rooms than the 4,500 currently available in the entire state. In 2002, Rajasthan had 7 percent of India'shotels and 5 percent of India's hotel rooms, with a concentration in the heritage segment (49 percent of the nationaltotal) and in the five-star category (11 percent of the national total). If Rajasthan is to keep pace with the projectedincrease to 43 million tourists by 2020, it needs an additional 160,000 hotel rooms across the whole spectrum. Themajor obstacles in the expansion of the supply of hotel rooms include: (i) cumbersome processes required to startoperating a hotel, like obtaining 15-17 licenses that can take 8-14 months; (ii) lack of comprehensive biddingarrangements for leasing and licensing; (iii) inadequate access to finance as banks require a 60:40 ratio of equity toexternal financing. Although the latter is common in India where the hotel industry is relatively young, the issue isparticularly acute in Rajasthan, as many of the potential new entrants are small and do not have access to equity.

Obstacles to the expansion of nature-based and eco-tourism. The wetlands of Rajatshan's renowned parks (KeoladeoNational Park and Lake Pichola in Udaipur) and tiger reserves (Sariska and Ranthambhore) are under threat due to watershortages.

Inadequate consultations and coordination. Unlike many other emerging or already established tourist economies,Rajasthan has no permanent forum where the government and private industry representatives can discuss policyformulation and implementation.

Box 2.7 : Tourism—Potential and Constraints

industrial investments, and also for themodernization/extension of existingindustrial units. In addition, theseinvestments also benefit from a rebate of 50 percent on electricity, mandi andentertainment tax for the first seven years.The government has also announced the

establishment of various special economiczones and industrial parks to promoteinvestment in industry. Several specialschemes have also been announced to providefinancial assistance to entrepreneurs,including assistance through the RajasthanFinancial Corporation.

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Reviving Growth in Rajasthan

Rajasthan is a state rich in minerals, with a virtual monopoly in the production of 25 minerals including zinc, lead, and calcitein the country. The state has 20 percent of major minerals being worked in India, and ranks fifth in terms of value of majormineral production. In the case of minor minerals, Rajasthan ranks first in the country, accounting for 30 percent of nationalproduction. The state has large resources of other minerals such as limestone, marble, sandstone, and copper that make it anattractive manufacturing location for industries based on these minerals. In fact, Rajasthan is the largest producer of cement inthe country, accounting for over 15 percent of national production.

However, despite a high rate of growth in recent years, the sector's contribution to GSDP remains modest (3 percent), especiallyrelative to the mineral base in the state. Furthermore, in the recent past, the growth trend in minerals in the state has not beenvery encouraging. According to CMIE data, the total value of mineral production in Rajasthan actually declined marginally inthe financial year ended March 2004. Further, for the seven-month period up to November 2004, the total mineral productionincreased negligibly (0.4 percent) compared to the same period last year. While fuel minerals continue to register a very highrate of growth, the production of non-fuel minerals has declined.

In terms of future growth prospects, the state is witnessing interest in investment (proposed and under-implementation) in the cementand non-ferrous metals sector, possibly attributable to the upswing in the end-user markets. Further, as the state benefits from thecommercial production of petroleum and natural gas, the contribution of mining to GSDP is likely to improve. An analysis of theproject investment data provided by CMIE indicates that of the "proposed" investments in the state, 12 percent is in the mining andmineral-based industries (including metal products). Cement accounts for two-thirds of this proposed investment and the miningsector accounts for the remaining third. Of the total value of "projects under implementation", the mining and mineral-basedindustries sector accounts for 15 percent of the value. According to CMIE data, as of April 2005, all the projects currently"announced", "proposed", or "under-implementation" in the mining sector are by public state undertakings and not the privatesector. Going forward, base metals, non-ferrous and allied metals, and fuel minerals represent significant growth opportunities.

The key problems faced by the sector faces are mentioned below:

Business regulation and red tape. This includes: (i) lengthy and onerous procedures for starting a mining operation andextending a lease that involve clearances and no-objection certificates from several departments; the process is conduciveto rent-seeking; (ii) uneven application of environmental and forest laws; (iii) inadequate information on mineralresources and their availability so that they cannot be used as basis for any commercial decision-making; (iv) historical"land grabbing" of mining leases that has resulted in the cornering of potential mining areas by the early movers as a pre-emption strategy—leading to under-utilization of mining due to the continual extensions of such inactive leases; and (iv) ineffective enforcement of laws against illegal mining.

Infrastructure bottlenecks. They are: (i) limited access to regular power supply since mines and quarries are often locatedin rural areas where electricity from the grid is not available, forcing firms to invest in high-cost captive power generation;further, even for mines that have a connection to the grid, power supply is unreliable, and, consequently the industryestimates that the cost of power generation for the mining sector, especially the smaller mines, is 20-50 percent more thanthe cost of obtaining power from the grid; (ii) the location of the mines and quarries in rural areas that often not connectedto the existing state road network, implying that the mine owners have to invest in building road connections to the neareststate road, thereby increasing the cost of doing business. Additionally, the poor quality of roads results in higher per-unittransportation cost through its impact on optimum lot sizes and dimensions of minerals transported. Similarly, forexporters, the land-locked geography of Rajasthan adversely impacts the transportation cost and lead time for delivery.

Access to finance. This is a serious bottleneck for mine owners, especially the SMEs, more so than for other sectors sincemining leases do not qualify as collateral in obtaining finance from banks and financial institutions. This is because ofthe tenure of the lease as well as the "tenancy" nature of the lessees" rights that allow for cancellation at short notice.Non-recourse and non-transferability of leases contribute to the unwillingness of banks in accepting the lease as collateral.

Box 2.8 : Mining and Quarrying—Potential and Constraints

Agenda for the Future

Despite recent efforts, the state's entrepreneurialpotential is yet to be fully realized. There is anurgent need for the GoR to revisit the state's

private sector and industrial developmentpolicies to reduce the current emphasis onspecial incentives and schemes, while focusingon creating a better climate for privateinvestment.

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RAJASTHAN: Closing the Development Gap

Though known largely for its unorganized textile sector, Rajasthan is also the fourth largest producer of spun (synthetic andblended) yarn in the country, accounting for about 7.5 percent of the national production (November 2004) and the fifth largestproducer in the country of mill-made fabrics, accounting for 5.4 percent of all-India output. The textile industry, includingyarn and fabric production, is the second largest employer in the state after mining and quarrying.

During the period April 2004-November 2005, Rajasthan's spun yarn production grew by about 9 percent, compared to 6.6percent in the corresponding period in 2003-04. With the end of the Multi Fibre Arrangement in January 2005 and the liftingof quotas on textile exports from developing countries, Rajasthan, like the rest of India, can look forward to a significant increasein textile exports to developed countries. To exploit this potential, Rajasthan needs to improve the investment climate fortextiles. Firms complain that they currently face the following key investment climate bottlenecks:

High cost of power, which appears to be the single most important constraint to firm-level profitability andcompetitiveness, since firms cannot rely on power from the grid and have to install their own generators.

Connectivity to ports is another problem for these firms, particularly those that are export-oriented.

Delays at ports have increased, and the waiting time for a container to enter the port is usually 8-10 days. This is largelybecause the number of containers reaching ports each month has increased almost tenfold over the last three years evenwhile the number of terminals has not kept pace with the increased volume.

Water shortage raises costs, since water is a key input, and firms have to rely on private tankers in the water-deficient state.

Rigid labor laws, which make it difficult for the larger firms (employing more than 100 workers) to lay-off surplus laborand also to hire contract workers.

The government needs to address these bottlenecks urgently. Firms, too, can take steps to better exploit the potential offered bythe liberalized environment. One textile company that is meeting the new challenge is Rajasthan Spinning, one of the leadingmanufacturers of polyester (along with Indo-Rama and Reliance). The company is making two big moves—capacity expansionand garment manufacturing—that makes it worth consideration in a deregulated scenario. It is expanding its yarn capacity by60 percent. What sets Rajasthan Spinning apart from the other two big polyester manufacturers is its forward foray intogarments. Exports have been increasing, going up from Rs. 1.62 billion in 2002-03 to Rs. 2.50 billion in 2003-04, or 38 percentof turnover; the company expects this to increase to 50 percent by 2005-06. At Rs. 54, the stock discounts its projected 2006-07 earnings 4.3 times. Unless high crude prices send raw material prices soaring and polyester manufacturers are unable to passon these hikes, the stock looks tailored to deliver good returns. Other textile firms in Rajasthan should follow this example.

Box 2.9 : Developing Textiles—Potential and Constraints

'000 tons % share

Tamil Nadu 838.3 39.22

Punjab 220.4 10.31

Maharashtra 208.0 9.73

Rajasthan 160.5 7.51

Gujarat 150.3 7.03

Madhya Pradesh 113.9 5.33

Andhra Pradesh 105.4 4.93

Himachal Pradesh 69.6 3.26

Other States 271.2 12.67

All-India 2137.5 100.00

Spun Yarn production: April-November 2004

Million sq. meters % share

Gujarat 250.0 33.12

Maharashtra 248.3 32.88

Punjab 76.4 10.12

Tamil Nadu 55.3 7.32

Rajasthan 40.8 5.40

Other States 84.3 11.16

All-India 755.1 100.0

Fabric (Mill Made) production: April-November 2004

Over the short to medium term, the governmentshould focus on the following reform measures:

Prioritize and implement the recommendationsof the EPRC. Accordingly, the machinery forthe implementation, involving private sectormembers, needs to be put in place as soon as possible.

Further improve the legal and regulatoryframework for doing business. As a firststep, it may be useful for Rajasthan tolearn from the experience of other stateswhich, according to the Doing Businesssurveys, have been more successful instreamlining critical business procedures.This would require comparing businessprocedures and looking for lessons thatcan be implemented.

Adopt more flexible labor laws. Firms hiringmore than 100 workers (say, up to 300workers) need to be granted the flexibility toretrench labor without seeking thepermission of the state government. Greaterclarity in contract labor laws is required toreduce uncertainty faced by firms.

Encourage PPPs in infrastructure. The keypriorities in the near future are toimplement BOT projects with transparencyand credibility that can create ademonstration effect, and to set up adedicated, cross-sectoral PPP unit that canbroaden the PPP program by transferringlessons and experiences across sectors. Theimportant next steps include: (i) developingplanning and evaluation capacities to ensurethat the PPPs that go forward representpriority projects for the state and are bestdone through the PPP route rather thanthrough traditional public procurement; (ii)strengthening capacities to monitor thefiscal costs of PPPs, including forms ofsupport such as real estate developmentrights, tax breaks, and contingent liabilities;and (iii) ensuring that these PPPs earn theirreturns from user fees, as far as practical,while recognizing affordability issues forsome consumers. On this last point, it isimportant that competition in the award ofthe PPP be used to minimize the costincurred by the state under PPP contracts.

An overall policy framework that sets outthe rationale for PPPs and specifies thatPPPs will only be pursued where they canoffer efficiencies and a better deal forconsumers and taxpayers, will be importantin developing political commitment.

Encourage the high potential tourism sector. Thegovernment could create a TourismDevelopment Board with strongrepresentation from the private sector. The"20-Year Perspective Plan for Tourism"should be taken to the next level and adetailed implementation plan with associatedtimeline should be formulated.

Encourage the mining and quarrying sector.The government could: (i) reduce the timetaken to obtain a new mining lease and/orextend a lease by considering a "singlewindow system" for the mining sector; (ii) setup specialized cells within the MiningDepartment dealing with major minerals tohelp facilitate the approval process—especially with the various departments andoffices at the state level, develop mineralresources in the state, act as the interfacebetween the private sector and othergovernment departments, and help in sortingout legal issues emerging out of the frequentlitigation against the industry; (iii) ensure amore uniform and transparent application ofenvironmental and forest laws that wouldfacilitate new entry and reduce the incidenceof illegal mining; (iv) generate and providebetter information on mining resources andtheir availability (location and magnitude) tohelp lower the costs for obtaining a mininglease and reduce the incidence of "landgrabbing"; and (v) ensure better enforcementof laws to curb illegal mining.

Over the medium to long term, the governmentshould focus on removing the constraints toinvestment as discussed above. A comprehensive viewof development should be adopted, including theidentification of and focus on engines of growth.Key issues that can be addressed by the GoR includeinfrastructural bottlenecks such as: (i) reducing powersector bottlenecks so that firms have access to reliable

41

Reviving Growth in Rajasthan

power supply at reasonable costs; (ii) improvingconnectivity to ports, which would requireimprovements in the in-state rail infrastructure (acentral government concern) as well as in-state roadinfrastructure (a joint concern of the center and thestate government); and (iii) addressing the watershortage problem through better water managementand measures such as water harvesting. WhileRajasthan's rural credit cooperatives are in betterfinancial health than those in many other states,efforts are nevertheless needed to further improvethe financial and operational performance of theseinstitutions. This would facilitate better access tofinance, particularly for smaller enterprises.

Developing Infrastructure: Powerand Roads

The above discussion has drawn attention to theimportance of infrastructure in raising overallgrowth rates in the state. In particular, well-developed infrastructure facilities can improve theinvestment climate for the private sector and help inrural development through accessibility to marketsand better connectivity of villages. This sectionlooks at recent developments in the power and roadssectors, and possible measures to addressoutstanding challenges.

Power

Rajasthan's power sector is positioned to become akey driver of the state's economic growth but hasseveral outstanding constraints to overcome. Thestate has developed its electricity infrastructure,restructured the Rajasthan State Electricity Board(RSEB), improved commercial management(especially through metering and sustained increasesin collections), and implemented a new regulatoryframework overseen by a specialist regulator.Installed capacity in the state has risen by 25 percentover the period 1999-2004, and payments to powerproducers have become timely and transparent.Utilization of thermal plants has increased fromaround 65 percent in 2000-01 to above 85 percentat present. The fundamental challenge in the sectoris to improve the efficiency of the electricitydistribution operators and manage the demand

from agricultural consumers more effectively. Inparallel, there is a need to increase power supply,expand access, and improve reliability.

Rajasthan has undertaken impressive reforms in thepower sector in recent years. It was the first Indianstate to implement the multi-buyer model (April2004), and is one of the first states preparing tointroduce competition through open access totransmission and distribution (T&D) facilities, arequirement of India's Electricity Act 2003. TheRajasthan Power Sector Reforms Act (effective June2000) unbundled RSEB into one generationcompany, a transmission and bulk supply company,and three regional distribution companies (discoms)at Jaipur, Ajmer, and Jodhpur. It also established theRajasthan Electricity Regulatory Commission(RERC). Rajasthan was also the first state in Indiato unbundle in a single stage, and, more recently,devolved bulk power purchasing responsibilities todistribution companies. The state is one of India'smost advanced in terms of metering (more than 95percent of electricity is metered, including 50percent of agricultural customers) and collections(sustained rates of about 95 percent). The RERChas given two tariff orders till date. The reliability offinancial information has improved, and thecompanies have finalized the annual accounts andaudits on time. The total investment flows sinceunbundling have exceeded Rs. 53 billion, andpower supply has stabilized.

Sector Issues

Despite growth in connectivity at the town andvillage level, there are issues like unconnectedhouseholds and low average consumption ofelectricity that need to be addressed. Agricultureaccounts for over 29 percent and industry for over33 percent of total consumption of electricity in thestate. Though almost three-quarters of electricityconsumers are domestic, they account for only 22percent of the total consumption. Overall, 55percent of the households in the state have access toelectricity. Around 91 percent of villages areconnected, but electrification has not penetratedadequately at the household level with 56 percent ofrural households still unconnected. Customer rolls

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RAJASTHAN: Closing the Development Gap

have been growing slowly since unbundling, andnow stand at 3.85 million. This track recordunderscores the challenge of expansion into ruralareas, where most of those who do not have accessto electricity reside. Net per capita consumption inthe state is only 294 kwh per annum, well below theall-India average of 390 kwh/person/year.

The power sector faces serious financial problems,with rising losses in recent years (Figure 2.8). About45 percent of the revenue had gone into servicingthe mounting debt during FY2004 (as compared to36 percent in FY2001). Financial losses are drivenpartly by aggregate network losses. In 2004-05, salesin Rajasthan were 16,653 gwh. Bulk powerpurchases by the three distribution companiesamounted to 29,697 gwh—implying losses of13,044 gwh, or almost 44 percent of purchases.Distribution losses have remained stubbornly high,and went up after the severe drought in 2002-03, inresponse to increased demand from the agriculturalsector that strained already over-burdenednetworks. Transmission losses have come downsomewhat over this period, from over 8 percent to6.2 percent. Also, financial losses are driven partlyby very low prices for agricultural users—who accountfor only 14 percent of the revenues whileconsuming about 29 percent of total electricity

supply. The reform program has not stemmedfinancial losses. Accumulated losses sinceunbundling amount to Rs. 60 billion, almost all ofwhich has been covered by subsidies from the stategovernment or by borrowing by the Rajasthan RajyaVidyut Prasaran Nigam (RVPN) Limited that isguaranteed by the state. Audited financialstatements of all companies in the sector remainqualified since inception. Corporate governanceissues such as the role and effectiveness of the auditcommittee need attention.

Recent Policy Initiatives

The state has taken two important steps recently tohelp develop the power sector in Rajasthan. First, atariff hike was announced by RERC, with effectfrom January 1, 2005, to raise power tariffs by 10percent on average, after a gap of about four years.Tariffs were held steady for industrial users but forothers were increased typically, in the range of 15-20 percent. The aim was to bring about somefinancial relief to the sector. The state governmentannounced the implementation of the tariff revisionfor domestic and agricultural consumers from May,2005 after putting in place a subsidy schemetargeting agriculture and BPL consumers, whileagreeing to provide compensation to the companies

43

Reviving Growth in Rajasthan

Figure 2.8 : Financial Crisis in Power Sector

Note: In the left panel, data for 2005 denote provisional and for 2006 denote budget estimates. In the right panel, distribution losses are shownon the right axis as a share of discom purchases. Average cost and revenue are denoted on the left axis, with the bar denoting the revenuegap. Data from the GoR.

for revenue loss on this account. However, despiteimplementation of the tariff hike, there remains asignificant gap of about Rs.1.40 per kwh betweenaverage revenue and the average cost of supply ofRs. 4.68 per kwh in 2004 (Figure 2.8). Meteredelectricity rates in agriculture remain very low, atonly 110 paise per kwh. Serving this category willtherefore be a continued source of loss requiringconsiderable subsidy from the state. Second, thegovernment has taken various measures to reducelosses in distribution to a target of about 15-20percent over the next three years. Recentdevelopments include progress in the feederrenovation program to provide power to ruralfarmers, remove scope for pilfering, and improvereliability of supply, while reducing losses andtransformer burnouts. Complementary programs toreduce urban and industrial losses are alsounderway.

Agenda for the Future

The development of the power sector will beconstrained unless Rajasthan is able to devise andimplement a lasting financial solution. Subsidieswill continue at least into the next decade, but willneed to be progressively better targeted andtransparently accounted for in the budget. Theintroduction of private distribution operators willnot solve the financial problem, which is a political-economic issue related to pricing. A furthercomplication is that an increase in the average costof supply has affected the power sector in Indiaadversely. This situation is of immediate concern toRajasthan, given its relative paucity of in-stateenergy resources.

Over the short to medium term, the governmentcould focus on the following reform measures:

Loss reduction programs could be pursuedaggressively, as could complementaryinitiatives, such as full metering of agriculturalcustomers to strengthen commercialmanagement and the governance of energyflows. It is critical to scale-up feederrenovations so the discoms can move closer tothe regulatory loss target of 29 percent by

2006, complementing this largely investment-driven program with incentives for betterperformance, and suitable monitoring,evaluation and reporting arrangements.

The pricing issues need to be addressed in amanner consistent with the Electricity Actand prevailing regulatory arrangements.While political and social realities dictate thatno rapid rise in prices can be tolerated,Rajasthan will nonetheless need to exploreways of filling the financial gap. This gap willremain during the transition period in whichoperating efficiency is raised to acceptablelevels and tariffs are adjusted in a politicallyand socially acceptable manner. The RERC,the companies, and the GoR should followthe law and undertake an annual review ofrevenue requirements. They need to providenecessary support to meet the revenue gap,and take appropriate actions against theutilities for any failures in performance. Theearly adoption of a balanced financialrecovery plan, after due consultation withkey stakeholders, would be a usefulinstrument for monitoring the performanceof each of the major stakeholders—theutilities, the government and the regulator.

An immediate challenge is to make therationing regime more predictable andaffordable to the power sector (given itspower capacity and financial constraints) andthe consumers (taking into account theirincome constraints and access to irrigationwater supply). Given the enormouselectricity demand from farmers connectedto the power network (over 3,000 MW in asystem where the peak supply is about 4,500MW), power supply to farmers will berationed in the foreseeable future. Over themedium term, Rajasthan will need to exploremechanisms for reducing energy and waterintensity in agriculture.

In order to meet the increasing demand forpower, Rajasthan could look at options toexpand generation in a least-cost manner,with clear allocation of risks, and use scarcefiscal "headroom" to leverage private capital.

44

RAJASTHAN: Closing the Development Gap

The state could also consider the strategy ofaccelerating implementation of open accessfor industrial and other energy-intensiveconsumers.

The reform road map should be revisited toreflect current financial recovery andtechnical loss reduction scenarios, with aperformance monitoring mechanism in placefor the same. The reliability of financialinformation provided by the companies tostakeholders could be further enhanced. Theroad map should encompass a strategy forfull compliance with the Electricity Act 2003and introduction of appropriate forms ofPPPs—to make governance, utilityperformance and customer services better.

Over the medium to long term, it is important tomove towards more integrated and comprehensivepolicies that reflect agricultural and ruraldevelopment realities. Increased access for poorlyconnected areas must not impose additional losseson distribution companies. Alternative ruralsupplier models should be fully assessed, and if apromising model is identified, it should be piloted.Better synergies between power and water pricingpolicies need to be developed. An integrated

strategy is needed that: (i) limits the agriculturaltariff rate only to irrigation, and only for certaintimes of the day; (ii) provides for full metering of allagricultural customers; (iii) addresses critical waterand power pricing issues in unison; and (iv)introduces technologies to reduce water use byfarmers without reducing yields.

Roads

Despite considerable expansion in the road networkduring the past decade, Rajasthan continues to faceserious challenges in the form of inadequate coverageand connectivity. An effective roads network is aprerequisite for developing trade and markets,improving access to public services, and the all-round development of a region. Rajasthan, however,has the lowest road length per unit area of the majorIndian states and a high share of unconnected ruralhabitations (Figure 2.9). Although about three-fourths of Rajasthan's 161,777 km long roadnetwork are village roads, more than half of therural habitations still remain unconnected.47

However, the state is at the forefront inimplementing the rural connectivity program underthe Pradhan Mantri Gram Sadak Yojana (PMGSY),and, by the end of 2005, it will achieve about 60

45

Reviving Growth in Rajasthan

Figure 2.9 : Road Length and Connectivity in Major Indian States

Note: All data from Ministry of Rural Development, GoI. The left panel shows data from 1999, and the right panel from 2001. In left panel,data points show road length per population and bars show road length per 100 square kilometers.

47 As of 30th November 2004; Source: Public Works Department, GoR. This comprises of 5,655 km of National Highways(NHs), 10,729 km of State Highways (SHs), 6,502 km of major district roads (MDRs), 18,742 km of other district roads(ODRs) and 120,149 km of village roads (VRs).

percent connectivity. Also, while the road length perpopulation unit places Rajasthan ahead of severalstates like Bihar, Haryana, West Bengal, UttarPradesh, and Gujarat, the road length relative toarea is low, reflecting the large size of the state andthe presence of the Thar desert.

Sector Issues

The state highways in Rajasthan face two majorproblems. First, there are serious capacity constraints,with steady traffic growth of more than 10 percentper year in the last decade leading to increasedcongestion. Over 70 percent of the state highwaysare single lane or narrower roads. Second, there areinadequate funds for maintenance of state highways,with the funds available for routine maintenanceunder the budget being only around Rs. 16,000 perkm for 2004-05—which is approximately 53percent of the requirement. In 2004-05, theallocation for periodic maintenance of statehighways is Rs. 1 billion.48 With a renewal cycle ofsix years, this translates to about 550,000 per km—or about 55 percent of the requirement. Thescenario with regard to maintenance funding haschanged significantly after the award of TwelfthFinance Commission (TFC) under which thefunding for maintenance would double for the nextfive years, though the issue would need to beaddressed subsequently.

The expansion of rural roads in Rajasthan facesseveral challenges. First, the extent of all-weathermotorized rural access is low, with an estimated22,000 rural habitations of the 37,900 beingunconnected. This limits economic activity in ruralareas, and prevents the poor from being fullyintegrated into the economy or able to accessessential services. Second, in the past, the planningof investment has been poor, without a clearframework for road use, management, andownership of rural roads in the state. Third, lack ofadequate maintenance of the existing rural roadsnetwork continues to threaten the long termsustainability of further investment. In 2003-04,

only 10 per cent of the core rural roads network inthe state was subjected to routine maintenance. Theactual maintenance expenditure (routine andperiodic) for the core rural roads network in thestate was 25 percent of the requirement. However,for 2004-05, the state has made a provision foraround Rs. 0.25 billion for maintenance of the corerural roads network—which is about 70 percent ofthe estimated requirement. Though a significantimprovement from the previous year, it should benoted that most of the maintenance funds will besourced from a Rs. 1.42 billion loan from theNational Bank for Agricultural and RuralDevelopment (NABARD).

Recent Policy Initiatives

The state has taken some important steps in recentyears to help develop the roads sector in Rajasthan.The key steps include the following:

To reduce capacity constraints, there areongoing efforts to complete four-laning ofhigh density traffic corridors. Under a MegaHighways Project, the state is seeking to two-lane five state highways, with paved shoulders.

For fiscal year 2005-06, funds available forroutine maintenance of state highways andmajor districts roads are more thanadequate.49 However, there is no provisionfor strengthening of roads in terms ofaugmentation of capacity.

An accelerated program of rural connectivity isin place to connect four villages per daybetween 2004 and 2005. Under the PMGSY,the state is undertaking a large number ofworks to connect rural villages, and there areplans to connect another 3200 villages by theend of this year.

The government has issued the RajasthanRoad Development Ordinance, 2002, whichmodifies the Road Development Policy,framed in 1994, to encourage private sectorparticipation in the development of the roadsector. In 2004, the government and

46

RAJASTHAN: Closing the Development Gap

48 Under Plan head 5054 A (V): Central Road Fund.49 This includes Non-Plan and NABARD funds.

Infrastructure Leasing & Financial ServicesLimited (IL&FS) have formed a 50:50 jointventure company named Road InfrastructureDevelopment Company of Rajasthan(RIDCOR) to undertake development ofstate highways on a BOT basis.

The state legislature has passed the RajasthanRoad Development Fund Act, 2004, in orderto address the shortfall in roads sectorfunding. As per this Act, a Rs. 0.50 cess hasbeen levied on petrol and diesel fromSeptember 2004. The non-lapsable state roadfunds are to be used exclusively for thedevelopment of state roads—mainly formaintenance but also for construction,upgradation, strengthening, widening andimprovement, and to provide support toBOT projects in the road sector. The stateexpects to collect about Rs. 1.8 billion perannum through this cess. A State RoadDevelopment Fund Management Board willbe constituted for managing the Road Fund.

In order to improve investment planning inthe sector, the state is enforcing the use ofmore rational and transparent planning anddesign tools, as well as helping to streamlinefunding flows for the sector, with theintroduction of the PMGSY scheme in 2001.

A four-year Road Development Plan is beingput in place to prioritize based on trafficdensities, age of road, and population criteria.

Agenda for the Future

In order to strengthen road sector, Rajasthan needsto reduce several bottlenecks. Important stepsinclude: (i) identifying a sustainable source of fundsfor maintenance expenditures; and (ii) furtherfacilitating and expanding the role of the privatesector in engineering, construction, andmaintenance services. The government hasrecognized these challenges. In order to identifyfunding for maintenance, the state is taking severalsteps like introduction of a cess on petroleumproducts that could net up to Rs. 4 billion in thefuture, creation of a dedicated and non-lapsableState Road Fund (SRF) for maintenanceexpenditures along with an SRF ManagementBoard, and a four-year Road Development Plan. Inorder to work with the private sector, the state hasformed a 50:50 joint venture company calledRIDCOR with the IL&FS for the Mega HighwaysProject—where engineering, construction andmaintenance will be done through the privatesector. These measures are steps in the correctdirection, and could be strengthened and deepened.

47

Reviving Growth in Rajasthan

Creating Fiscal Space forDevelopment and Using It Effectively3

After several years of acute fiscal stress, a fiscaladjustment trend has emerged in Rajasthanduring the past two years. Sustaining this

trend will be essential, since only good fiscalperformance can create the fiscal space fordevelopmental expenditure in a sustainable manner.This chapter discusses developments that led tohigh fiscal deficits at the end of the 1990s, theadjustment process that started during the last twoyears, and a medium term fiscal adjustment paththat could help the government deepen its reformprocess. It also analyzes some key revenue policy andexpenditure allocation issues. Finally, it examinesthe challenges faced in increasing public

expenditure effectiveness, asset management, andrevenue collection efficiency.

The Challenge of FiscalAdjustment

Rajasthan's current fiscal adjustment strategy isfocused primarily on reducing the revenue deficitand increasing capital expenditure. The revenuedeficit has declined from 4.6 percent of GSDP in2003-04 to 2.4 percent in 2004-05, and isbudgeted to fall further to 1.3 percent in 2005-06(Figure 3.1). Recognizing this effort, the GoI hasawarded the Fiscal Reform Facility (FRF) grant to

Figure 3.1 : Fiscal Adjustment in Rajasthan

Note: All deficits and debt as a share of GSDP. Data from the GoR budgets.

the state in 2003-04 and 2004-05. Further, the2005-06 budget and the Financial Responsibilityand Budget Management Act (FRBMA) enactedduring the March-April 2005 session of theLegislative Assembly commits the government toa fiscally sustainable adjustment path byeliminating the revenue deficit and sharplylowering the overall deficit by 2008-09. Alongwith decreasing the revenue deficit, the GoR islaying stress on increasing capital expenditure,doubling it over the last three years.

Notwithstanding the encouraging performanceover the past two years, a significant fiscaladjustment agenda remains unfinished. Sharplyrising capital expenditure has meant that theoverall and primary deficits have been falling moregradually than the revenue deficit (Figure 3.1).Public debt, already high, continues to increase.Care needs to be taken to ensure that the increasein capital spending produces the desired impact ongrowth, instead of only adding to the debt burden,and that mounting off-budget liabilities,principally in the power sector, are managedefficiently. Also, a rise in project spending impliesthe need for increased allocation for maintenancein the future. In spite of this, however, the currentposition represents a considerable improvementfrom the acute fiscal stress that Rajasthan faced afew years ago.

Fiscal Performance in Recent Years

Fiscal stress became acute at the end of the 1990s(Figure 3.1). While the deficits of all statesincreased in the late 1990s due to the increase insalaries by the Fifth Pay Commission, Rajasthanfaced a double crisis: that of wage increases andrepeated drought. Real wages increased by about 30percent, with salary and wages accounting for nearly8 percent of GSDP in 2000-01 (Figure 3.2).Indexed to real wages, pensions doubled in the fiveyears following the wage increase. At the same time,Rajasthan had to endure three droughts in 1999-2000, 2000-01 and 2002-03. The combined impactof these supply shocks, coupled with increasedinterest payments on a rising debt stock, raiseddeficits by more than 3 percent of GSDP between1997-98 and 2002-03, despite improvement in owntax revenue performance. Capital expenditures borethe brunt of the adjustment—falling by halfbetween 1997-98 and 2000-01, to less than 2percent of GSDP. Indicating the deep fiscal stress,the GoR was in overdraft during one of every threedays in the five years ending in 2002-03.

Fiscal performance has improved markedly over thelast two years, helped by buoyant revenues andcontainment of revenue expenditures (Figure 3.2).The government's own tax revenues have beenbuoyant due to both sustained administrative

52

RAJASTHAN: Closing the Development Gap

Figure 3.2 : Recent Trends in Selected Fiscal Variables in Rajasthan

Note: All data as a share of GSDP. Data from the GoR budgets.

reforms, discussed below, and some recovery fromdrought conditions leading to additional spendingand higher tax revenues. As a result, own revenuesincreased by over 15 percent in the past two years,and, over a longer term, by 14 percent in the pastfive years. The government made successful effortsto contain revenue expenditures as well.

Debt restructuring and pension reforms have alsohelped to contain current expenditures. Interestpayments have been lowered through the aggressiveuse of a debt-swap program instituted by the GoI forsmall savings loans, as well as through swapping ofhigh-cost institutional debt with domestic long-termlending agencies for cheaper market borrowing.Over the past three years, the GoR has swapped Rs.72 billion of high-cost debt, saving Rs. 4 billion ininterest payments. Rajasthan has a debt stock of Rs.73 billion with the central government as of endMarch 2005. In future, under the new interestrestructuring scheme proposed by the TFC, therestructured interest on these central loans will yieldsavings of more than Rs.2 billion per annum (0.2percent of GSDP in 2005-06). To lower pensionliabilities in the future, the GoR has introduced aDefined Pension Contribution Scheme as onJanuary 1, 2004, applicable to employees joining thestate service after this date. Pensions are fully fundedwith the employee contributing 10 percent ofmonthly basic pay and dearness allowance, and theGoR making a matching contribution. In addition,pension costs in Rajasthan are already lower due tomore cost-efficient parameters than many otherstates—for instance only a third of the pension isnow commutable compared to 40 percent elsewhere.In order to be eligible for full pension, the qualifyinglength of service is 33 years, and pension is based onthe average of the last ten months of the basic pay ofthe employee rather than on the last salary drawn.While there is scope to deepen them, pensionreforms have brought down existing and futurepension payments.

Easing fiscal constraints have allowed the governmentto raise development expenditure and improve cash

management. This easing of fiscal stress is indicatedby the fact that the GoR was not in overdraft for asingle day in 2004-05, compared to the 704 days ofoverdraft from December 1998 to December 2003.Consequently, the government has greater discretionto determine its spending priorities. It also has theopportunity to improve monthly cash managementboth centrally and release funds to line departments.The smoothing of monthly cash releases that reducesbunching towards the end of the year would have thepotential to significantly increase the productivity ofcapital expenditure allocations that have increasedsharply. Rising from 2.2 percent of GSDP in 1999-2000 to 4.0 percent in 2004-05, the bulk of capitalexpenditure have been directed mainly to watersupply and sanitation, urban development, irrigationand flood control, power and transport. Ensuringthat this rapid increase in capital expenditure leads togrowth instead of an increase in debt will be anotherimportant challenge.

Guarantees, debts, and large overall deficits, however,still remain a concern. The outstanding amount ofguarantees as on March 31, 2004, stood at Rs.170billion, or about 16 percent of GSDP. The guaranteespolicy of the GoR has been quite liberal in the past,with the government limiting outstanding guaranteesto the estimated receipts in the consolidated fund ofthe state at the end of the year. Guarantees onaccount of the power sector make up about 54percent of the total outstanding guarantees. With adebt to GSDP ratio of around 53 percent, Rajasthanis among India's most indebted states. While theoverall fiscal deficit has declined last year, it is stillhigh at almost 6 percent of GSDP.50 In combinationwith high indebtedness and primary deficits, thismakes Rajasthan's fiscal position fragile andvulnerable to exogenous shocks such as droughts. Asubstantial fiscal adjustment agenda still lies ahead.

The 2005-06 Budget and FiscalProspects in the Medium Term

The 2005-06 budget deepens the fiscal adjustmentprocess. Over the next year, the budget targets major

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Creating Fiscal Space for Development and Using It Effectively

50 This is according to latest estimates.

reductions in the revenue deficit, and to a lesserextent, the overall deficit as a share of GSDP. This isso even after making provisions for the increase inthe wage bill arising from new recruitment ofteachers, health workers and policemen, and asizeable increase in capital expenditure (Figure 3.2).The bulk of capital expenditure, estimated to beabout 4.5 percent of GSDP in 2005-06, is directedto the social sectors, water supply and sanitation and,urban development—a sector which was relativelyneglected in budget allocations during the late1990s. On the revenue side, the GoR continues withits trend of improving tax administration that hasyielded substantial growth in revenues in the past.Own tax revenues are budgeted to grow to 7.9percent of GSDP in 2005-06, a growth of 15percent over the previous year. However, Rajasthanhas decided to postpone the introduction of theValue Added Tax (VAT) beyond April 1, 2005. Overthe medium term, the government has committed toa fiscally sustainable adjustment path under the newFRBMA during its March-April 2005 session. ThisAct follows the guidelines set out under the TFC.

The TFC's Award will help fiscal adjustment. Theshare of Rajasthan in the pool of taxes that can beshared has increased (from 5.5 percent to 5.6percent of the total) providing a gain of about 0.5percent of GSDP in central taxes every year.51 Inaddition, the TFC award has provided forconditional grants in support of social sectorexpenditure, road maintenance and other areas,which could result in an increase in public resourcesin Rajasthan. The GoI has introduced a debt reliefprogram based on the recommendations of theTFC. Under this program, the quantum of write-offof repayment is linked to the amount by whichrevenue deficit is reduced in each successive year forthe next five years. The amount of deficit reductionwill be multiplied by a ratio of 0.45 to calculate therepayments written-off every year. This couldpotentially entitle the state to more than Rs.3billion of repayments being written-off every year.However, the debt reduction program is conditional

upon the state government enacting andimplementing a Fiscal Responsibility Act.

The FRBMA, recently passed by the RajasthanAssembly, will be the main instrument for guidingthe implementation of fiscal adjustment over themedium term. The Act commits the government toa fiscally prudent path by progressively reducingrevenue and overall deficits, improving debtmanagement, and enhancing fiscal transparency. Italso commits the government to a Medium TermFiscal Policy Statement each year that clearlyarticulates the government's fiscal anddevelopmental objectives, its strategic priorities, andthe means through which it will attain these goals.Similarly, an annual Fiscal Policy Strategy Statementwill transparently lay down the details of fiscalpolicies on revenues, cost recovery, expenditures,borrowing, and other liabilities includingguarantees. It also makes the budget morecomprehensive by requiring the government topresent the contingent liabilities that can be createdby PSUs. Finally, it commits the state governmentto eliminating the revenue deficit by 2008-09 andcapping the fiscal deficit at the 2004-05 level. Thepassage of the FRBMA entitles the state to accessthe interest-restructuring scheme of the TFC.

Although the FRBMA is a good step forward inimproving fiscal management, its implementation isof utmost priority. The Act can be bolstered by moreattention to three areas.

First, fiscal transparency should be enhancedby providing public access to information onbudget implementation within the year.Quarterly reports with data on budgetimplementation and a commentary on majorfiscal developments posted in the FinanceDepartment's website could help to increaseaccountability and public confidence in themanagement of the state's resources.

Second, guarantee management needs to bestrengthened by imposing clearer rules and

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RAJASTHAN: Closing the Development Gap

51 The weights attached to the fiscal award criteria (population, income distance, area, tax effort, fiscal discipline and index ofinfrastructure) have been changed.

caps. In the light of the state's mounting off-budget debt, guidelines for guaranteemanagement and capping rules should bereviewed. In general, guarantees should belimited to the financing of actual capitalprojects funded by the private sector. Here,there is legitimate expectation that theprivate sector would be able to achieve aprofit without calling the guarantee. Henceguarantees should not be used to financedeficit positions of state enterprises.Guarantees should also be explicitly includedin the state capital budget, and provisionmade to fund a fraction of the guarantees ina sinking fund or external insurance account,with the funding level tied to the probabilityof the guarantee being called. The guaranteeportfolio also needs to be explicitly classifiedby risk.

Third, a Medium Term Fiscal Program(MTFP) that commits the GoR to a clearfiscal adjustment path will enhance thecredibility of the fiscal adjustment

program. Although the FRBMA commitsthe government to explicit deficit targets,provides formulae for some of thevariables, and requires that assumptions onwhich targets are based be clarified, it doesnot stipulate that the state prepare aMedium Term Fiscal Plan laying out theplan of how targets will be achieved. Amedium term program that clearlyidentifies the medium term adjustmentpath, based on well-articulated fiscaladjustment policies, will help to make thegovernment's commitment to fiscalreforms more credible.

The government has been considering differentoptions for the MTFP. Table 3.1 presents oneoption for a medium term fiscal adjustment path toreach the FRBMA's targets of attaining revenuebalance and reducing overall fiscal deficits by 2008-09. In addition, this plan would also enableRajasthan to attain a primary surplus by helping tostabilize debts (Figure 3.3).52 However, significant

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Creating Fiscal Space for Development and Using It Effectively

52 Bank staff thank officials from the Finance Department, GoR, for their guidance in preparing this program in March 2005.Latest fiscal estimates show that Rajasthan's fiscal deficit last year (5.7 percent of GSDP) was lower than originally projected.As per the FRBMA, the GoR's deficit is now capped at Rs. 61.6 billion-the deficit of the previous year. This will imply a fasterpace of adjustment than shown in this scenario.

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Revenue 14.8 16.1 16.8 17.1 17.1 17.1 17.1

Own revenue 8.9 9.6 9.9 10.0 10.1 10.2 10.3

Central resources 5.8 6.5 6.9 7.1 7.0 6.9 6.9

Non-interest expenditure 17.2 17.8 18.3 17.8 17.4 16.9 16.9

Non-interest revenue expenditure 13.5 13.7 14.1 13.7 13.4 12.9 12.9

Salary and pensions 8.3 8.3 8.5 8.1 7.6 7.2 6.8

Subsidies (Power, Local Governments, etc.) 1.8 2.6 2.4 2.4 2.4 2.4 2.5

Infrastructure O&M 1.4 1.4 1.5 1.5 1.5 1.5 1.6

Expenditure on key social sectors 0.8 0.9 1.0 1.0 1.1 1.1 1.2

Other revenue expenditure 1.2 0.6 0.7 0.7 0.7 0.7 0.8

Capital outlay 3.7 4.1 4.1 4.1 4.0 4.0 4.0

Interest Payments 4.6 4.8 4.4 4.3 4.2 4.1 3.9

Table 3.1Normal Growth MTFP Revenue and Expenditure Projections

Note: MTFP constructed by Bank staff based on close discussions with the GoR. All figures as percentage of GSDP. Numbers for 2003-04 are actual, 2004-05 are RE, and the remainder are projections.

policy decisions will be critical to implementing theadjustment path (Box 3.1).

Sustaining Revenue Growth

Rajasthan's own revenue receipts have registeredsignificant improvement in recent years, movingfrom 7.8 percent of GSDP in 1999-2000 to 9.6percent in 2004-05. Improvements in taxadministration have led to a robust tax revenuegrowth in recent years. The GoR's own tax revenueincreased from 5.8 percent of GSDP in 1999-2000to 7.7 percent of GSDP in 2004-05 (Figure 3.2),implying an annual growth rate of 14 percent overthis period. Sales tax receipts have risen, particularlyin recent years (Table 3.2). Rajasthan was the firststate to introduce a system of universal self-assessment for all sales tax dealers. Direct interactionbetween the sales tax officials and dealers has beenreduced, lowering the scope for leakages. Taxpayerservices were improved to facilitate greater voluntarycompliance. The Rajasthan Commercial TaxDepartment (CTD) has displayed impressiveleadership in administrative reforms, which can bebuilt upon. However, there remains scope fordeepening tax administration reforms if Rajasthanhas to achieve the revenue growth envisaged underthe Medium Term Fiscal Plan. Non-tax revenue hasremained largely stable over the period, and there isscope for improvement and rationalization.

The unfinished agenda of tax reform consistsprimarily of the following elements: (i) introductionof the VAT with administrative reforms to ensurethat its potential benefits are realized; (ii) betterproperty registration services linked to stamp duties;(iii) excise tax reform; and (iv) reform in municipal

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RAJASTHAN: Closing the Development Gap

Reforms that increase private investment rates and enhance productivity due to high-quality public investments areexpected to result in economic growth of about 6 percent per annum.1

Improvements in tax administration that maintain buoyancy will enable revenues to grow by 12 percent per annum inline with the growth in the past three years. The introduction of the VAT, along with other tax reforms discussed below,can facilitate this growth.

Non-tax revenue growth is faster than before due to increasing cost recovery.

The government can successfully implement fiscal adjustment, allowing it to access the GoI's debt relief scheme andpermitting the share of interest payments in GSDP to fall significantly, creating fiscal space.

Salary increases are contained—that is they are confined to a normal 2.5 percent salary creep combined with a netattrition rate of one percent. This scenario assumes no new Pay Commission Awards.

Pension reforms continue. Subsidies are allowed to increase to finance power sector reforms, while other non-powersubsidies are directed to helping municipal corporations and Panchayati Raj Insititutions (PRIs).

1 Given that droughts may lower Rajasthan's growth rates, an alternative medium term adjustment path, based on stronger fiscal adjustment measures, are

presented in the appendix.

Box 3.1: Important Policy Parameters Behind the Medium Term Fiscal Program

Figure 3.3 : Normal Growth Deficits under MTFP

Note: MTFP constructed by Bank staff based on close discussionswith the GoR. All figures as percentage of GSDP.Numbers for 2003-04 are actual, 2004-05 are RE, andthe remainder are projections.

taxes—primarily property, land and building taxes—and their gradual devolution to urban governments.In addition, the impressive administrative reformsalready undertaken by the CTD can be deepenedand strengthened. Finally, there exists scope toincrease collections from non-tax revenue sources.

Introducing the Value Added Tax

A state-level VAT commenced in India in April 2005with the participation of most states, but with thenotable absence of a few major ones, includingRajasthan. The VAT is levied at two basic rates of 4percent and 12.5 percent, with substantialuniformity in the rate schedules across the states.The relative simplicity of the VAT plan lies inproviding participating states with the opportunityto build new competency in audit, reduce the scopefor final negotiation of tax liability, and reorganizeadministrative practice based on self-assessment. TheVAT should foster greater efficiency in productionand lower the prices of final consumer goods.

Although the GoR has expressed reservations about theintroduction of the VAT because there is no agreementregarding abolition of the central sales tax (CST),there are several reasons why VAT will benefitRajasthan.53 The state rightly perceives that theimposition of the CST exports taxation from stateswith large manufacturing bases to those that arepredominantly agricultural—like Rajasthan itself.

Nevertheless, there are several reasons why a newsystem with two positive rates and an offset ofintermediate tax paid will be less distorting and willalso reduce non-compliance in taxation relative to thesales tax system that it replaces (Box 3.2). The longerRajasthan postpones the adoption of the VAT, thefarther it will fall behind other states in the cumulativelearning-by-doing experiences. Furthermore,Rajasthan's Commercial Tax Department (CTD) hasinvested in a considerable build up of skills toimplement VAT. Rajasthan's planning process hasmade it one of the best prepared states to implementit. It would be unfortunate if these skills were notavailed of due to delay in adoption.

Improving Property Registration Services

Stamp duties provide a significant untapped source ofrevenue. Revenue generation from stamp duties haveimproved in the late 1990s as reflected in a buoyancyof 1.42. The factors responsible for this include: (i)institution of a zone system of land valuation andadoption of conveyance valuations based on marketvalue rather than the recorded "consideration"identified by the purchaser; and (ii) reduction in thebasic rate from 12 percent to 8 percent (5.5 percentfor women) following the recommendations of theChelliah Committee Report of the mid-1990s. Thegovernment's general policy direction for stampduties appears to be driven by a sound desire toreduce complexity and distortions in the economy.

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Creating Fiscal Space for Development and Using It Effectively

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Buoyancy Buoyancy

Actual Actual Actual Actual RE BE 1996-2005 Long term

Own tax revenue 6.7 6.4 7.3 6.9 7.7 7.9 1.08 1.38

Sales tax 3.6 3.5 4.0 3.8 4.3 4.5 1.51 1.05

Excise duty 1.4 1.3 1.3 1.1 1.2 1.2 0.71 1.13

Motor vehicle tax 0.6 0.6 0.8 0.9 0.7 0.7 1.61 1.07

Stamp duty 0.6 0.5 0.6 0.6 0.7 0.8 1.42 1.34

Electricity duty 0.3 0.3 0.3 0.3 0.4 0.4 2.17 1.16

Own non-tax revenue 2.1 1.7 1.8 2.0 1.9 2.0 NA NA

Table 3.2Major Revenue Receipts (as a percent of GSDP) and Tax Buoyancy

Note: Based on the GoR budgets, various years.

53 The CST is a non-creditable tax imposed on interstate trade by origin states.

Simplifying property registration and property taxes—which is the main source of revenue among stampduties—is another area for reforms. The mostpragmatic way forward, taking into account multipleconstraints, would be to return to the ChelliahCommittee rate ceiling of 8 percent inclusive of cess,rapidly bring about a modernization of the registrationprocess, and revitalize the work of fixing presumptivenorms for the base, which would encompass bothwhite and black money considerations in the purchaseprices. Special concession under the stamp duties thathave been a source of abuse—as in the case ofcooperative societies—should be abolished to broadenthe base and to remove discretion in the hands of thetax administrator. Rajasthan will also gain fromstudying the administrative reforms in Maharashtraand Andhra Pradesh, and drawing up its ownmodernization plans (Box 3.3).

Excise Tax Reform

The options for increasing excise tax revenues,which account for over 15 percent of own taxescollected in Rajasthan, are not very clear. Exciserevenue on alcoholic beverages is collectedprimarily from the auction of unique economiczones to franchised contractors who submit thehighest bid. The amount of revenue generatedthrough this system depends critically on thecompetitiveness of the auction system and anyregulatory guideline for the sale of liquor. Somestates in India have partially reduced theirreliance on the auction system. They collect someportion of the potential revenue through theimposition of explicit unit rated excises on Indianmade foreign liquor (IMFL) as well as by holdingseparate auctions for individual retail outlets in

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RAJASTHAN: Closing the Development Gap

Substantial international evidence shows that, after adopting VAT, countries have experienced a positive revenue trend, whichincreases with the length of time. 54 Revenues are likely to grow faster under the VAT for a variety of reasons listed below.

Under the VAT regime, the tax system will be simplified. Within the mixed tax environment which began in April 2005,states that levy a VAT are likely to be net gainers and experience less uncertainty in revenue generation. The states levyingthe VAT as present now have over 275 commodities subject to the tax at 4 percent. As a result of ineffectiveadministration and the adverse impact of the CST, the non-VAT states will come under pressure to reduce their rates onthese commodities or suffer trade diversion in favor of the VAT states. Anticipating a problem of implementing the VATfor small dealers, the VAT plan also provides for a simple 1 percent levy for small dealers instead of a VAT. 55 In contrast,even after the most recent budget, Rajasthan retains a complex system of 11 slabs for its sales tax.

The VAT will lead to an improvement in Rajasthan's business climate. The elimination of tax on most business inputswill lower the costs of exports and enhance the competitive position of Rajasthan's enterprises both in international andinterstate trade. The system of self-assessment of tax will reduce business compliance costs and clarify the responsibilityof businesses. The VAT rate structure should result in a substantial reduction in classification disputes.56

Rajasthan may lose out on the revenue guarantee offered by the GoI by deferring the adoption of the VAT. While theVAT states have a revenue guarantee from the central government as a backstop for their rate rationalization and ratereductions, the non-VAT states do not. Even though non-VAT states may be impelled by competitive pressure to followtheir neighbors, they will not be able to avail of the guarantee, if they experience revenue shortfalls in transition. Nonparticipating states may also come under pressure for ad hoc concessions from industry, but such concessions will lead todistortions and complexity because they will not be part of a general framework.

By joining the participating states, Rajasthan would have a more effective voice in ensuring that the CST is abolished ortransformed in such a way as to prevent tax exporting.

Box 3.2 : Potential Benefits from Adopting the Value Added Tax

54 Agha,and Haughton (1996) "Designing VAT Systems: Some Efficiency Considerations " Review of Economics and StatisticsVol 78. pp. 303- 08.

55 It is estimated that 94 per cent of the traders in rural India have a turnover of Rs. 5 million or less. 56 At the same time offsets through comprehensive crediting makes the VAT vulnerable to fraud when net rebates are paid to

export-oriented enterprise or those undertaking capital investment, unless an effective audit system is place with a scientific auditselection process.

).

major cities for IMFL and beer. Given theimportance of excise taxes, Rajasthan couldexamine these options.

Municipal Tax Reform

Municipal tax revenues are another major under-utilized source of revenues for the state and localbodies. There is need for greater cost recovery tomeet the growing needs of urban infrastructure asa result of rapid population growth. In order toachieve more effective service delivery, the stateshould devolve more responsibilities tomunicipalities while insisting on much greatercost recovery for infrastructure services providedby state agencies. The administration of the Landand Building Tax (LBT) by the state governmentrather than by municipal governments, as goodpractice would suggest, has been a majorconstraint in realizing the full potential ofmunicipal tax revenues in the past. This is in spiteof the fact that the practice was based on soundreasons, taking into account administrativecapacities and functions. Recently, a decision hasbeen taken to abolish all LBT and to consolidateproperty tax under a single presumptive house tax.With this simplification, the GoR could nowconsider the option of devolving municipal taxesand user fees entirely to urban municipalities.This would help the process of urbandecentralization as well.

Administrative Reforms forCommercial Taxes

The Rajasthan CTD has taken the lead inadministrative reforms with regard to the VAT. Ithas embraced the concept of re-engineering of thetax administration related to business processes,updating enabling technologies as well as managingchange in human resources development andtraining, and overall capacity building.57 Forexample, it has developed formal training modulesand extensive plans for automation. Drawing onprevious technical assistance, it has initially selected28 risk parameters to guide audit selection.58

However, in part due to the current limitation onautomation, it has opted to use only sevenparameters in audit selection. Detailed plans andprocedures have been developed to improvemonitoring of tax collection, handling litigation,and electronic data exchange. However, fullimplementation has not commenced pending theconversion to VAT. Similarly, ahead of many otherstates, Rajasthan's CTD has begun an intensivemonitoring of large taxpayers with a type of"virtual" large taxpayer unit (LTU). However, thisgeographically dispersed tax unit prevents the CTDfrom deriving the full benefits of a LTU, asdemonstrated in many countries.

The government has chosen the right direction foradministrative reform, but it needs to take

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Creating Fiscal Space for Development and Using It Effectively

57 VAT - A Presentation By Commercial Tax Department, GoR, December 1, 2004; and Capacity Building for VATImplementation Commercial Tax Department December 1, 2004

58 This was provided through the Canadian Revenue Agency.

Maharashtra has made dramatic improvements in public service delivery by simplifying and automating the registration processfor property conveyance. The key elements of the Maharashtra model are as follows:

Using PPPs and clear accountability rules for both the public, as well as the administrative structure;

Making public commitments for improved service by senior managers, frontline workers, and private sector operators;

Establishing an innovative computer-based performance tracking system, which provides new sources of performanceinformation to senior managers;

Using this information to hold frontline workers and contracted private sector operators accountable for responsiveservice provision.

Box 3.3 : Using Public Private Partnerships in Simplifying Property Registration in Maharashtra

further measures if these reforms are to yieldsustained benefits. These measures could be thefollowing:

Adopt a functional organization augmented bya special LTU concentrated at a singlelocation to serve large taxpayers. Such a unitwould take responsibilities for all servicesincluding auditing and collections forbetween the largest 1,000 to 1,500 dealers byturnover or book value of assets. To theextent possible, the CTD should try to secureadditional technical assistance in support ofthis initiative.

Plan strategically for development of amature VAT, utilizing modern audit andinformation technology tools to ensurecompliance.

Test, operate, evaluate, and refine the risk-based package of audit selection, build auditperformance skills, adopt modern businessprocedures, and develop core computercompetencies.59

Move to an information-based and formalprocedural-based system of administration inwhich full self-assessment plays a critical role.

Change the skill mix of staff and implementselected measures to effectively utilize humanresource skills.

Cost Recovery Measures to ImproveNon-Tax Revenue Performance

Cost recovery provides important opportunities forincreasing non-tax revenues. The MTFP assumes asubstantial growth in non-tax revenues. Improvingcost recovery in non-tax user charges can be startedby carrying out a detailed review of the gapbetween the cost of supply of government servicesand infrastructure and payments, and identifyingareas where consumers would be willing to payhigher user charges to get better services.

The government could consider some specificoptions for cost recovery. First, auctioning mineralleases in lot sizes for a period of time long enoughto attract many bidders can be a major source ofnon-tax revenue growth.60 Second, a water-ratestructure reflecting scarcity value is urgentlyneeded, not only for cost recovery but also forgreater efficiency in water use.61 Cost recoveryfrom surface irrigation defrays only a smallproportion of the recurring cost of supply and afeasible strategy for cost recovery linked to O&Mand institutional reforms deserves urgentattention. Cost recovery is higher in the case ofdrinking water supply systems, where about 23percent of recurrent costs are recovered throughuser charges, though previous FinanceCommissions have set a target of 50 percent by1999-2000. Involving the private sector in urbanareas could also enable adequate user charges to becollected to cover the cost of provision. Third,other areas where unexplored potential exists forraising additional resources through user chargesinclude higher education and specialized care inurban hospitals. Tuition fees for such technicaldegrees as engineering, where private returns toeducation are high, remain low. As in some otherstates, the GoR could consider setting higher ratesof tuition fees for non-exempt categories ofstudents in engineering and medical colleges andother higher educational and professionalinstitutions. User charges for specialized curativecare services (including x-ray and sophisticatedtests) could be initiated in large tertiary hospitalsand selected secondary hospitals.

The government can diffuse political opposition tocost recovery measures by explicitly dedicating thehigher revenues for pro-poor services. This couldinclude preventive care or public services such asinfrastructure maintenance. It can also increaseincentives for such cost recovery by introducingrevenue sharing mechanisms with community groupssuch as WUAs, and higher education institutions.

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RAJASTHAN: Closing the Development Gap

59 This may involve technical assistance from a recognized expert on risk-based audit. 60 This takes into account the recent liberalization by the GoI to permit foreign participation in mineral exploration and

development.61 See Chapter 2.

Trends in Expenditure Composition

Recent trends suggest that there have beenimprovements in the composition of governmentexpenditure over the last few years. Capitalexpenditure has risen significantly; spending onO&M also increased, though less rapidly; and thereis a more even balance between social and economicsectors in government spending.

Five important issues remain: (i) increasing theeffectiveness of capital expenditure in translating inputsinto outputs and outcomes; (ii) ensuring resources forO&M, (iii) containing the civil service wage bill; (iv)improving cross-sectoral allocation; and (v) ensuringadequate allocation to local governments that can be atthe front line in delivering services. This sectiondiscusses trends in the first three areas. The institutionalreforms and policy measures to address these issues arediscussed in greater detail in the next section. Theremaining two issues will require more research and thedevelopment of sectoral plans in a medium termexpenditure framework context. The FRBMArecommends setting up an Expenditure ReviewCommittee, which can look into these issues in greaterdepth, perhaps with the benefit of expert advice.

Capital Expenditure

There has been an increasing emphasis on capitalexpenditure in recent years. Total expenditure as a

percent of GSDP has increased very slightly from 22.5percent of GSDP in 2002-03 to 22.6 percent of GSDPin 2004-05. However, within the total envelope ofresources available, the allocation on capital expenditurehas risen sharply from 11 percent to 20 percent.

Within capital expenditure, the share of social servicesis rising with greater emphasis on water supply andsanitation (Figure 3.4). Incremental capital spendingis now concentrated on water supply, sanitation, andurban development, a component that has long beenunder-funded. The importance of economic serviceshas been declining, with irrigation and flood controlaccounting for a large share of the decline. The socialservices component is budgeted to rise further to 43percent of capital expenditure and the share ofeconomic services is budgeted to fall further to 54percent in 2005-06, representing a more balancedexpenditure strategy. Hence Rajasthan is movingaway from incremental budgeting in search of abetter spending strategy. This changing investmentcomposition appears to represent an explicit strategyto diversify the state's public investment portfolioand lessen the previous high concentration on majorirrigation investments with long gestation periods,thereby reducing its overall risk.

Operations and Maintenance Expenditure

Operations and maintenance expenditure has risenacross all sectors from the level of the late 1990s,

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Creating Fiscal Space for Development and Using It Effectively

Figure 3.4 : Composition of Capital Expenditure in Recent Years

Note: All data as a share of total capital expenditure. Data from the GoR budgets.

though its share of GSDP fell in 2004-05 (Figure3.5). Non-salary current expenditure in social andinfrastructure sectors show a healthy trend, and, inkey sectors such as education, health, and nutrition,shares as a percent of GSDP are maintained orincreasing. However, the expenditure in theinfrastructure sectors needs to be strengthened or atleast protected. Rising capital expenditure is boundto produce the need for increased maintenancerequirements for infrastructure in the future.

Notwithstanding these recent improvements,maintaining O&M expenditures at the appropriatelevel will be a major challenge for Rajasthan. Althoughthe TFC Awards provide incentives for O&M in theform of conditional grants, the government will have tomake a strategic choice in trading off new capitalexpenditures for O&M. Further, the TFC does notprovide conditional grants-based incentive schemes forirrigation. The state will have to ensure that irrigationmaintenance requirements are met. Similarly, gaps inroad maintenance expenditures, and requirements forhealth and education facilities and supplies, as discussedelsewhere in this report, have to be addressed.62

Containing the Wage Bill

Containing the growth in wages and salaries will bea crucial requirement for the MTFP, since, at

current levels, the civil service wage bill absorbs alarge share of revenue expenditure. The salaries ofemployees in the GoR increased by an average of 54percent following the Pay Commission of 1995. Acomparison of expenditures on salaries relative torevenue expenditures (excluding interest paymentsand pensions) across a number of major Indianstates indicates that Rajasthan ranks fairly high at 48percent when compared to states like Karnataka,Punjab and Tamil Nadu, and much above the 35percent norm recommended by the TFC (Figure3.6). The share of wages and salaries, at about 7percent of GSDP, is also among the highest ofIndian states.

Rajasthan can tackle the problem the problem of thehigh wage bill in a number of ways. The TFC hassuggested three possible routes: (i) reducing thenumber of employees; (ii) reducing the average peremployee salary; and (iii) increasing the level ofrevenue receipts without increasing the revenuedeficit. While it may be difficult to reduce theaverage per employee salary, there remains scope forincreasing revenue receipts and for reducing thenumber of employees in Rajasthan through well-designed voluntary retirement schemes. Anotheroption for reducing the wage bill is devolvingservices, with proper funding, to local governments.Local governments will have greater flexibility in

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RAJASTHAN: Closing the Development Gap

Figure 3.5 : Trends in Total O&M and Non-Salary Expenditure in Social and Infrastructure Sectors

Note: All data as a share of GSDP. In left panel, data points show O&M as GSDP shares and bars show absolute O&M expenditures.Data from past GoR budgets.

62 As Chapter 4 indicates, lack of school maintenance is seen to be a major cause of poor educational service delivery in Rajasthan.

hiring, at competitive salaries, employees who canalso be made more accountable in providing services.

Increasing the Effectiveness ofPublic Expenditure

Using public expenditures effectively is as importantas it is to mobilize and allocate public resources well.Sound Public Financial Management andAccountability systems (PFMAs) ensure that publicresources are spent efficiently and effectively ontheir intended purpose. Good PFMAs help ensureorderly, transparent, and accountable mechanismsfor mobilization of revenue, expenditure planning,and management of assets and liabilities. The goalsof PFMAs include supporting aggregate fiscaldiscipline, allocating funds strategically, minimizingdevelopment and fiduciary risks, and maximizingvalue for money and probity in the use of publicfunds.63 Rajasthan has recently enacted theFRBMA whose goals include strengthening budgetand financial management systems in the state. Thechallenge now will be to implement the measuresunder this act. This section outlines the current

status of the PFMA system in Rajasthan, pendingissues, and makes preliminary recommendations toaddress them.64

Rajasthan's PFMA present a mixed picture.Although a well-established system in severalrespects, there are outstanding issues in currentsystems that stand in the way of increasing publicexpenditure effectiveness (Table 3.3). This sectiondiscusses the main challenges of financialmanagement in budget preparation, budgetimplementation, improving internal controls andaccounts, auditing and legislative oversight, andprocurement.

Budget Preparation

The government follows well-defined procedures onbudget preparation. These allow for adequatereflection of government policies and objectivesincluding fiscal targets, appropriate involvement ofline departments, and disclosure requirements thatare generally consistent with prevailing goodpractices in India. Recently budget preparation has

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Creating Fiscal Space for Development and Using It Effectively

63 The last study of financial administration in Rajasthan was undertaken by the Administrative Reforms Committee of the stategovernment in the mid-1990s. It recommended simplification of procedures in the secretariat and the departments of the state,greater decentralization of powers to the various departments, and transfer of account keeping from the Accountant GeneralRajasthan (CAG official from the center) in order to strengthen "ownership" by the state government.

64 A deeper analysis of Rajasthan's financial management, accountability and public procurement systems by the World Bank iscurrently underway as part of the Bank's engagement with the state.

Figure 3.6 : Trends in Expenditure on Wages and Salaries as Share of Revenue Expenditures

Note: All data as a share of revenue expenditures, from state budgets.

further improved—there was, for instance, animprovement in estimation of tax revenues since2002-03. There are continuing improvements indisclosure practices in line with recommendationsof the Reserve Bank of India.

There is scope, however, to improve budgetpreparation practices in the following areas:

Setting priorities. Although budgetallocations in practice appear to bereasonably well focused on infrastructure andsocial development, the processes todetermine priorities appear to be ad hoc. Twoprocess changes can be introduced to ensurethat public expenditures are directed to high-return areas: (i) budget circulars shouldclearly specify rules for prioritizing publicexpenditures such as emphasizing "last mileprojects" and rehabilitation work over newprojects; and (ii) periodic exercises in "zero-based budgeting", where all schemes andprograms are scrutinized for theireffectiveness and results, should be carried

out, but within a feasible framework, byselecting a few departments for review eachyear on a rotating basis.

Performance budgeting. This approach hasbeen accepted in principle by thegovernment, and departments are expectedto develop their performance budgetsannually. Performance information on"actuals" (against budget) could be presentedon a timely basis to facilitate more effectivescrutiny of the demands for grants during thecommittee stage at the legislature (Box 3.4).

Budget presentation. Budget presentationsthat clearly show budgets by functions andschemes, whose goals and targets are clearlystated, and then are cross-linked toexpenditure by economic classification, cangreatly enhance transparency. The FinanceDepartment could present, alongside thebudget, a new document providing clearmission and objectives statements by eachdepartment as well as a few outcomeindicators that the department is targeting. A

64

RAJASTHAN: Closing the Development Gap

Table 3.3Improving the Effectiveness of Public Expenditures

What Has Been Accomplished

The Government Financial and Accounts rulesset out well-defined procedures for budgetpreparation and implementation and legislativeconsideration.

The Annual Financial Statement (budgetdocument) is presented before thecommencement of the financial year.

The Appropriation Accounts and the FinanceAccounts are being presented within 12 monthsof the close of the financial year.

Treasury computerization is advanced.

The CAG's annual reports are not as alarming asthose in many other comparable jurisdictionsalthough similar kinds of irregularities are oftenbeing reported repeatedly.

There is an active and an authoritative PublicAccounts Committee and a Public UndertakingsCommittee.

A good Right to Information Act places the statein a strong position vis-à-vis accountability andtransparency in comparison to many Indian states

What More Can be Done

Changing incremental budget preparation to more policy and resultsoriented budgets, by linking them to intermediate service deliveryoutputs or to ultimate social and economic impacts and by clearlystating objectives and anticipated results for each program.

Reducing the emphasis on new investment over the efficient use,maintenance, and rehabilitation of existing assets.

Improving accounting systems and policies by greater compliancewith contemporary standards (IFAC-PSC) and adoption of a gradualapproach to modified and full accrual accounting and departmentalfinancial statements.

Making state accounts comprehensive by incorporating off-budgetand contingent liabilities, particularly in the power sector, andachieving consistency in treatment of related party transactionsbetween state accounts and the accounts of public sectorundertakings.

Making audit and oversight work more systems and performanceoriented rather than procedure and compliance focused as at present.

Taking a more active suo motu approach to transparency and publicaccess to financial information by providing quarterly fiscal accounts,and publishing periodic performance reports on costs and benefitsassociated with service delivery at agencies and departments such asHealth, Education, Water and Power.

good practice already exists in thepublication of the Economics and StatisticsDepartment's Economic and PurposeClassification of State Government Budget.One way forward could be for the FinanceDepartment to own and issue a similardocument on the following year's budget. Asecond area where presentation can beimproved is by a statement recording forwardcommitments to raise the visibility of futurecosts and the likely impact of recurrent costsassociated with new capital projects.

Enhancing comprehensiveness. The FRBMhas introduced several measures to make thebudget more comprehensive (Box 3.5). Morecan be done in this area by providingadditional information on arrears, fullamount of subsidies and their rationales,explanations for conversion of state debtassets into equity explicit and implicit to thepower sector, and liabilities both contingentand those for past pension obligations, andforeign aid. Similarly, disclosure of taxexpenditures, long term commitments andexplanations for variances between budgetand actual would also be in line with bestpractice. Finally, as a medium term target forimproving budgets, all expendituresincluding amounts transferred by the central

government directly to district-level agenciesfor Centrally Sponsored Schemes could alsobe included in the budget.

A key next step in improving budget presentation is toplace the budget in a medium term framework.Presenting an MTFP alongside the budget, providinga multi-year framework for aggregate fiscal disciplinegrounded in realistic macroeconomic assumptionsand linked to a feasible debt and deficit financingplan, will enhance the credibility of the budget.65

The government has shown commitment to betterprioritization and implementation through theintroduction of the FRBMA, covering medium termadjustment targets. However, an important step herewill be to present the MTFP on an annual, rollingbasis, as several states like Karnataka and Tamil Naduhave already done. Rajasthan has already constructeda version of an aggregate MTFP as part of itsparticipation in the former FRF. However, the initialMTFP can be strengthened by more detailedmodeling of potentially volatile but predictablecomponents such as pensions, wages, interest andguarantee obligations. Through public disclosure inbudget documents, the MTFP could become morebinding on political decision- making. It could alsobecome an additional tool for multi-year planning,linking the strategic initiative of the five-year stateplan to realistic resource projections constraints.

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Creating Fiscal Space for Development and Using It Effectively

Performance or results-oriented public expenditure management approaches are being increasingly adopted across the world toimprove public service delivery. A performance budgeting system for the state would establish as its main tasks:

A clear statement of each department's or agency's mission based on the government's overall development objectives;

A parsimonious set of intermediate and outcome indicators to measure the department's success in achieving its mission;

Report on progress informing budget decisions including mid-year changes;

Program budgeting, with allocations based on performance and desired results;

Transparency—providing the public access to information on results on a suo motu basis.

Performance indicators can be of different types: bottom-up administrative data and results linked to the accountability of headsof departments, as exemplified by the approach of Andhra Pradesh; or externally generated survey results and macro indicators,as exemplified by the approach of the Planning Commission in India. Both approaches should be pursued bearing in mind thateach had its strengths and weaknesses. A set of indicators for monitoring the performance of the PFMA system would be anotheruseful way to enhance its productivity.

Box 3.4 : Toward More Performance Orientated Budgets

65 See discussion of MTFP above.

In the medium term, Rajasthan could also improvethe quality of its fiscal adjustment by preparing aperformance-oriented departmentally orfunctionally focused Medium Term ExpenditureFramework (MTEF). Such a framework wouldexplicitly link expenditure choices to performanceoutcomes, and one that combines plan and non-plan expenditures in a program budget. An exerciseto this end has already started with the IrrigationDepartment.66 An MTEF would permit hardbudget ceilings to be set for the line departments, atthe beginning of the budget process. The increase inresource flows associated with the TFC awards andimproved revenue performance should be used as awindow of opportunity in which to reorganizeapproaches to cash management and re-prioritizeexpenditure through the development of indicatorsfor performance-based budgeting. A squeeze onstate funding for Plan projects and on non-wageO&M, through delays in project completion and

inadequate maintenance can undermine theproductivity of past and present investment inpublic assets. Today the state has an opportunity toescape from this dilemma by adopting newbudgetary preparation and implementationframeworks.

The budget should provide for adequate flexibilityin implementation. For this, the government couldredesign its budget cycle to accommodate FRBMtargets. There needs to be a judicious balancebetween avoiding unnecessary and ad hocsupplementary budgets with arrangements forreallocating expenditures to adjust to resourceshortfalls or to take into account that differentschemes will have different rates of progress.Although the GoR's Budget Manual provides forvirement rules and a mid-term budget review, mid-year corrections to achieve compliance with boththe new FRBM and an outcome oriented budget

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RAJASTHAN: Closing the Development Gap

Provision has been made in the FRBM rules for the budget to provide disclosure of the following:

Gross fiscal deficit as percentage of GSDP;

Revenue deficit as percentage of total revenue receipt;

Total liabilities as percentage of GSDP;

Outstanding public debt and risk-weighted outstanding guarantees as percentage of total revenue receipt;

Own revenue receipts as percentage of revenue expenditure;

Capital outlay as percentage of gross fiscal deficit;

Interest payment as percentage of revenue receipt;

Interest payment as percentage of revenue expenditure;

Guarantees given by the government;

Outstanding risk-weighted guarantees;

Position of Guarantee Redemption Fund;

Details of tax demands in arrears;

Statement of significant changes in the accounting standards, policies and practices affecting or likely to affect thecomputation of prescribed fiscal indicators;

Details of state borrowings and other liabilities;

Details of ways and means advance and overdraft availed of from RBI;

Statement of estimated yearly pension liabilities.

Box 3.5 : New Disclosure Items in the Fiscal Responsibility and Budget Management Act

66 The MTEF for the Irrigation Department has been prepared with technical assistance from the European Commission.

could be formally built into these reviews. Ingeneral, the hard budget constraint approach toexpenditure ceilings in the main budget fordepartments and agencies should support a futureclimate of public managerial accountability, whereheads of departments are expected to live within their initial spending allocations whileattempting to achieve the departments' stateddevelopment goals.

Budget Implementation

Budget implementation, which was markedlydifficult in the last few years when the state cameunder acute fiscal stress, has improved over the lasttwo years. The GoR was not in overdraft a singleday in 2004-05 compared to the 704 days ofoverdraft from December 1998 till December2003. Similarly, the amount of expenditureaffected by year-end rush has been progressivelydeclining, though there are a few "account heads"under which year-end rush of expenditure seems tooccur regularly. The GoR should look into theunderlying causes leading to year-end rush ofexpenditure and bookings to the public account toensure that the government's rules are not beingunnecessarily violated. Finally, the improvement inbudget implementation is also evident in thatdeviations of actual own revenue and mainexpenditure items from their budgets havedeclined significantly—to less than 10 percent—inthe past two years (Figure 3.7).

Improving Internal Controls and Accounts

Good internal control and audit systems, at the heartof good budget implementation, are underutilized asa management tool. The government has beenmaking progress in this area through regularmonthly accounts of revenues, and monitoring ofrevenue and capital expenditures by departmentsand development schemes. However, the emphasisneeds to move from statements of cash transactionsand reviews of procedural controls, to their use asmanagerial tools for bettering operationalperformance and achieving development objectives.Also, departments should carry out the prescribedmonthly reconciliation with the books of theAccountant General, on a timely basis, to avoidundermining the reliability of these reports.

In accounting, although the GoR's outmoded singleentry cash basis system scores well on quality asmeasured by a number of parameters set in theIFAC-PSC standard, there are some drawbacks. Theexisting accounting system enables capture ofinformation on receipts and payments during theyear in substantial detail: cash balances; stock of thestate's debts and liabilities; the government's debtguarantees; loans and advances made, and overdueloans and interest; the government's financialinvestments; and expenditure vis-à-vis budgetedappropriations for the year. Further, Rajasthan hasalso made significant progress in computerization,with all treasuries being computerized. However,

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Creating Fiscal Space for Development and Using It Effectively

Figure 3.7 : Budget Implementation by Main Heads—Actual as Percentage of Budget

Note: Data from Reserve Bank of India.

there is no clear statement of accounting policiesand accounts can be incomplete. Financial assetsand financial liabilities are disclosed as additionalstatements, and not an integral part of accounts,leading to possible inaccuracies absent regularreconciliations. Each department within thegovernment maintains a separate Receipt andExpenditure Account. Timeliness of accounts isanother issue—while the Finance Accounts of thestate are prepared regularly and within six months ofthe closure of the financial year, they are not tabledin the legislature immediately due to the legislaturenot being in session. The Finance Accounts of2002-03 and 2003-04, for instance, were onlypresented to the state legislature in January 2004and March 2005 respectively.

In the short term, the GoR could undertake aprogram to improve the present accounting system tomake it more comprehensive. Such accounts couldinclude contingent and pension liabilities,accounting for all transfer payments including fundsfrom the GoI supporting centrally sponsoredschemes in the state, quasi-fiscal activities pertainingto public sector undertakings, tax expenditures, andinformation on geographical spread of expenses toensure accuracy and completeness. Given the cashaccounting system's limitations—for instance,liabilities are understated, physical asset accountingis absent, full cost of services cannot be ascertainedand commercial services cannot be pricedcorrectly—a progressive shift to accrual accountingis recommended in line with the CentralGovernment policy directives.67 The GoR couldstart the process by maintaining accounts both oncash and accrual basis. While the GoI and theGovernment Accounting Standards Advisory Board(GASAB) will drive the changes in introducingaccounting and financial reporting standards in thefuture, Rajasthan will have to enter into a dialoguewith the central government to understand andimplement the proposed changes. In this context, itmight be helpful to depute one or more senior

officials in the Finance Department to lead the effortrequired for a strengthened public financialaccountability reform and to develop a roadmap formoving towards accrual-based accounting and anoutcome-based system. It will also help to strengthenthe dialogue with the Accountants General on issuesof accounting policies, treatment of personal ledgeraccounts, and elimination of suspense accounts.

There is opportunity to make cash managementbetter by easing the fiscal situation. Although thesituation has improved, Rajasthan should reviewmechanisms to streamline cash management and, inparticular, its monthly release performance with aview to avoiding bunching of capital expenditurerelease towards the end of the year. Existing cashmanagement practices indicate a lack of confidencein the government's ability achieve smoothexpenditure flows throughout the year. The largestportion of funding for capital projects is typicallyreleased during the last quarter of the year, which inturn makes its impossible to achieve desiredspending targets and physical construction targetsin capital works. Cash management is complicatedby external constraints such as lumpiness in majorinflows from the GoI. However without somecontractual certainty on releases, managers in linedepartments cannot plan their work with anyassurances that they will be able to deliver what hasbeen promised in the budget. Recent reforms inAndhra Pradesh provide some guidance onimproving cash management (Box 3.6).

External Audit and Legislative Scrutiny

Although external audit is mainly a uniongovernment or CAG area of concern, there isconsiderable scope for more benefits to the statethrough increasing accountability and legislativeoversight. The lack of rigorous follow up by thegovernment to audit reports and PAC reports is amajor problem, one that severely diminishes theeffectiveness of audit and the legislative review

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RAJASTHAN: Closing the Development Gap

67 The TFC in their Report submitted to the GoI has recommended the introduction of accrual based system of accounting. TheFinance Minister in his explanatory memorandum to Parliament dated February 26, 2005 has stated, "the Government hasaccepted this recommendation in principle. The Government Accounting Standards Board in the office of the Comptroller and AuditorGeneral of India would be asked to draw detailed road map and operational framework for its implementation".

processes. Inspection reports issued by the CAG arenot publicly available. As many as 9,637 inspectionreports (civil expenditure) reportedly remainedunsettled in September 2003. In addition,refinements in audit methodology could lead tobetter reporting on the quality of financialstatements and on systemic control issues. An areawith high potential for innovation is improvingcorporate governance of state public sectorundertakings such as those in the road and powersectors. Another way to increase accountability andtransparency would be to have greater publicparticipation by civic groups, the media and thepublic in legislative discussions on audit reports andoverall financial performance. For starters, the PACcan be made open to the public and journalists canbe encouraged to attend its deliberations. A numberof countries with similar governance andaccountability frameworks have opened up theirlegislative oversight processes to the publicconsistent with the wider interest of transparencyand accountability. Rajasthan could take the lead inIndia in this regard.

The state can also enhance its oversight on publicspending and effectiveness by expanding its dialoguewith the GoI's Accountant General in Rajasthan. Inthis dialogue the state can emphasize its demands onseveral issues.

Introducing system based audits embodying amore formal assessment of risk. Historically,there has been an overemphasis on"compliance" and a check on the validity ofindividual transactions; and issues ofefficiency and effectiveness have not alwaysbeen the focus of prime attention. The new

performance audit guidelines issued by CAG(centrally) are designed to overcome suchdeficiencies. They are being piloted across thecountry, including Rajasthan.

Encouraging the CAG to provide aprofessional auditor's opinion on the fairness ofthe overall annual financial statementspresented to the legislature (and in line withacceptable accounting standards) as in thecase of more advanced countries andpresently being provided by Indian privatesector auditors in the case of public sectorundertakings. The CAG has recentlyembarked on a program to strengthen thisaudit aspect in line with best internationalpractice. A proposal has been developed tointroduce a more modern approach to thefinancial attest audit by bringing the auditmethodology in line with contemporarygenerally accepted audit standards in Indiaand internationally. Rajasthan could facilitatethe field testing for the new methodology.

Insisting on remedial actions on a timely basison its audit recommendations. There isinsufficient response from the government—for example, departments did not provide aresponse to 15 out of the 30 cases included inthe Audit Report (civil) for the year endedMarch 2003, while there was no response atall to the three extended complianceappraisals that relate to aspects ofdepartmental performance. Fraud, waste andabuse of public funds could go unattendedfor extended periods of time in thisenvironment. The private auditors too seemto have little impact at public sector

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Creating Fiscal Space for Development and Using It Effectively

Andhra Pradesh has recently implemented several measures to streamline cash management. These include entering intocommitments with spending departments to achieve a more even monthly release of funds throughout the year. Morespecifically, a commitment to hard budget constraints and reduced fiscal stress has enabled the Finance Department to make 6-month budget releases at the beginning of the financial year, and to make credible commitment to quarterly releases in thesecond half of the year. In 2003-04 releases at the beginning of the year were for the first nine months. This is a criticaldevelopment in increasing the predictability of flow of funds to line departments. Discussions with six line departmentsprovided a strong indication that the system is viewed as highly beneficial in providing a predictable flow of funds which isconsistent with the budget and with the progress in implementing schemes.

Box 3.6 : Improving Cash Management in Andhra Pradesh

undertakings where accounting deficiencieshave remained unresolved for several years.

Reducing delays in tabling audit reports. Forinstance audit reports for the year endedMarch 31, 2004 had not been tabled byMarch 2005 The audit report for civildepartments had not been tabled even as ofMay 2005. Delays may occur in the publicavailability of the Audit Reports if theLegislative Assembly is not in session whenthese reports are submitted to thegovernment.

Modernizing Public ProcurementSystems

Modernizing Rajasthan's public procurementpolicies in line with international best practiceprovides another opportunity to increase publicexpenditure effectiveness. The state has taken animportant step forward by getting ready to provideelectronic or e-tendering and e-procurementservices, which will help create a more effectiveand transparent process. As a medium termoption, the government can consider preparing anew public procurement law that may incorporatethree other options to strengthen the publicprocurement system.

First, it can standardize rules and processes,including bidding documents. At presentprocurement practices vary across differentdepartments. They issue their own rulesbroadly based on the state's procurementpolicy presented in the General Financial andAccounts Rules (GF&AR) and the Public

Works Department Financial and AccountsRules. Various circulars are issued from timeto time to clarify and elaborate certainaspects of public procurement, governed bythe GF&AR, but as yet there is no manual ofprocurement procedures to guide theprocurement officers in their day-to-dayactivities. This creates ambiguity andinefficiencies in procurement that can bereduced by standardizing rules and biddingdocuments for all departments.

Second, the state can set a up a central agencyin the GoR responsible for formulating andrevising procurement procedures, rules andthe procurement manual and enforcingthese in public procurement by alldepartments. Such a body can bringdiscipline into the system.

Finally, the government could considerremoving preferences from procurement thatcurrent rules allow. Although allprocurement for the government is to bemade through public invitation of tenders,current rules allow preference to public sectorundertakings, small-scale industries and theindustries located in Rajasthan even if theprices quoted by such organizations arehigher than the other competitors. Similarly,drugs are required to be procured exclusivelyfrom Central PSUs for the drugsmanufactured by them and only those drugswhich are not manufactured by these PSUscan be purchased from private sectormanufacturers. Such preferences represent aloss for the state and need to be reviewed.

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RAJASTHAN: Closing the Development Gap

Improving Governance and Public Service Delivery4

Rajasthan can draw upon a number ofstrengths in advancing its governance andpublic management reform agenda. It has a

strong tradition of responsiveness to civil societyactivism, an institutional framework foraccountability, and is adopting important measuresto enhance transparency and public awareness.Progress in e-governance has been encouraging. Thecurrent government has announced a vision for thestate focusing on six important ideals, one of whichis the need to ensure good governance. Bureaucraticsupport for introducing reforms is evident in manysectors. In fact, a Center for Good Governance(CGG) has been set up to guide and support thegovernment's reform agenda.

However, there are also challenges that have to bemet, as manifested in the state's weak service deliveryrecord. The ability of the civil service to deliver itsdevelopmental tasks is hampered by a combination ofinappropriate skills mix, absenteeism, fragmentation,and frequent transfers. Although the state's civilservice enjoys a reputation for competence, itoperates largely in the traditional paradigm of publicadministration, and is being increasingly challengedby new demands for service delivery that require it tochange its roles and develop new capacities. Hence, itis necessary to enhance the effectiveness of the civil

services and to strengthen institutions foraccountability and transparency. This will helpimprove the delivery of services, especially to the poorand marginalized sections of the community. Thischapter analyzes cross-cutting issues in strengtheningservice delivery systems, while the next chapter dealswith specific issues in improving education, health,and social protection services.

Weaknesses in Service Delivery

Service delivery mechanisms in Rajasthan appear tobe particularly weak, contributing to poor humandevelopment outcomes. Though several humandevelopment indicators have improved, some keyindicators have declined and several others are laggingbehind national averages.68 There is a substantialneed to improve service delivery if Rajasthan is totackle poverty effectively and meet the MDGs.

Direct evidence for weak service delivery comesfrom an assessment of user perspectives. A recentcitizen's survey assessed the provision of servicesin the areas of drinking water, health care, thePublic Distribution System (PDS), publictransport, and primary education along multipledimensions across Indian states.69 Combiningdata on access, reliability, and user satisfaction,

68 See Chapter 1.69 See Paul. et. al. (2004).

the survey places Rajasthan fifteenth amongIndia's 16 major states in the delivery of theseservices, just behind Orissa and West Bengal andahead only of Bihar. An examination of individualperceptions of specific services and dimensionssuggests that user satisfaction in Rajasthan isparticularly low (Figure 4.1). The results showthat Rajasthan ranks fairly low in public servicequality owing to factors such as unreliability ofservices caused largely by absenteeism, poorbehavior of service providers like teachers, doctorsand para-medical staff, insufficient attention tothe maintenance of water supply, school buildingsand facilities, and the unavailability of foodrations in Fair Price Shops (FPS). This suggests

that there is a substantial need for the civil serviceto improve its performance in delivering servicesto citizens.

How can Rajasthan improve its service deliverymechanisms and institutions? The first requirementfor doing so will be to make the civil service—whichis the key instrument for implementing governmentpolicies—more effective. The second importantmeasure will be to reinvigorate local governments.The third requirement is to strengthen the broaderinstitutions of accountability and transparency,including those independent or external institutionsthat monitor the performance of the civil serviceand hold it accountable.

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RAJASTHAN: Closing the Development Gap

Figure 4.1 : Relative Performance of Public Services in Selected Indian States, 2003-04

Note: Paul, S., et. al, "The State of India's Public Services", Economic and Political Weekly (2004).

States are ranked by the perceived quality of their public services, with a lower number indicating a higher rank.

Poor maintenance: 45% and60% of Rajasthan householdsreport breakdowns in water tapsand pumps, compared to 24%and 20% nationally.

Inadequate piped water: 9%and 23% of Rajasthanhouseholds report full satisfactionwith piped water adequacy andquality, compared to 20% and27% nationally.

Absenteeism: 41% and 27% ofRajasthan households reportedthat doctors and paramedics wereabsent, compared to 30% and17% nationally (and 95% inGujarat).

Bad behavior: Only 5% ofRajasthan households reportedfull satisfaction with of doctorsand paramedics, compared to14% and 12% nationally.

Unreliable andinfrequent serviceand bad behavior ofconductor: 9-10% ofRajasthanhouseholds expressedfull satisfaction,compared to 20-21% nationally.

Unreliability: 6% ofRajasthanhouseholds expressedsatisfaction withPDS availability,compared to 23%nationally (and 73%in Tamil Nadu).

Unreliability and poor behavior ofteacher: 6% of Rajasthan householdsexpressed satisfaction, compared to 16%nationally (and 38% in Tamil Nadu)

Poor quality buildings and toilets: 6%and 2% of Rajasthan householdsexpressed satisfaction, compared to 14%and 6% nationally (and 30% and 8% inTamil Nadu).

Drinking Water Health Transport PDS Education

Key perceived causes behind Rajasthan's poor performance

Towards a More EffectiveCivil Service

Enhancing the effectiveness of Rajasthan's civil servicebroadly depends on two inter-related aspects: (i)improving its composition and skills base, and (ii)increasing the incentives for service delivery. A modernhuman resource management system that promotesskills, merit, and professionalism, while penalizingindiscipline, absenteeism, and non-performance, willbe the main ingredient in such a strategy.

Composition rather than size is the key constraint tothe effectiveness of the civil service. With approximately1.24 civil servants per 100 of the population,Rajasthan's civil service is not particularly overstaffedcompared to other states (Table 4.1). Neither isRajasthan an irresponsible pay master, in that theaverage salary for a civil servant is substantially lowerthan in many other states including Himachal Pradesh,Gujarat, Madhya Pradesh, and Uttar Pradesh. In alllikelihood, this reflects the disproportionately largernumbers of low-paid unskilled staff in Rajasthan. Themain problem, thus, lies in inappropriate skills mixand low productivity. The composition of the civilservice is particularly skewed towards the lower tiers—with 90 percent of the civil service in Rajasthan

comprising of non-gazetted employees, and only asmall number of senior administrative staff havingtechnical or professional skills. Of the total number ofemployees in the state public sector enterprises, lessthan 6 percent have managerial responsibilities. Thetasks of many non-gazetted employees have becomeredundant through devolution of functions to lowerlevels, privatization, and advances in informationtechnology in Rajasthan. The largest part of the civilservice is geared to non-managerial functions. Policymaking, financial and economic management, andmonitoring and evaluation—all essential for improvedservice delivery—remain weak.

Although Rajasthan is not an irresponsible paymaster,wage costs continue to constitute a large part of revenueexpenditure. The salaries of GoR employees increasedby an average of 54 percent following the PayCommission of 1995. A comparison of expenditureson salaries relative to revenue expenditure (excludinginterest payments and pensions) across a number ofmajor Indian states indicates that Rajasthan ranks fairlyhigh at 48 percent—when compared to states likeKarnataka, Punjab, and Tamil Nadu. In fact,comparative data from 22 Indian states indicate thatRajasthan has the ninth highest salary expenditurerelative to revenue expenditure.70

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Improving Governance and Public Service Delivery

State Population Core Civil Ratio Total Govt Ratio Total Public Ratio

Service Employees less Sector

SOE's Employment

Andhra Pradesh 75,727,541 553,972 0.73 965,892 1.27 1,315,204 1.73

Karnataka 52,733,958 240,969 0.45 530,984 1.00 693,246 1.31

Orissa 36,706,920 480,000 1.30 581,400 1.58 660,928 1.80

Gujarat 50,596,992 206,000 0.40 502,000 0.99 800,000 1.58

Uttar Pradesh 166,052,859 880,000 0.52 1,576,226 0.94 1,730,093 1.04

Punjab 24,289,296 376,222 1.54 431,662 1.77 535,840 2.20

Tamil Nadu 62,110,839 696,700 1.12 1,092,731 1.75 1,317,512 2.12

Rajasthan 56,473,122 529,319 0.93 615,744 1.09 701,362 1.24

Table 4.1Comparative Size of the Civil Service in Selected Indian States (per hundred of population)

Note: Gujarat and Tamil Nadu data pertain to 2002-03 and Rajasthan data pertain to 2003-04. Total public sector employmentincludes core civil service, work charged and daily wage employees, grant-in-aid institutions, state-owned enterprises and local bodies.

70 Source: TFC. The Finance Commission report notes that the data on salary expenditure has been provided by stategovernments and has not been independently verified.

The government's recent decision to rescind therecruitment freeze, which had been instituted tokeep civil service numbers down, may help toimprove composition but has associated risks. Withnatural attrition at about 2.7 percent, theexpectation was that the government would be ableto deal with overstaffing through a halt inrecruitment. This approach however, risks freezingexisting structures, distorting the age profile of thecivil service, and ultimately does not resolve theproblem of composition. On the other hand,rescinding the freeze also brings risks of politicallymotivated future recruitment especially in the non-professional lower grades. This is in spite of the factthat the government has sought to mitigate this riskby providing clear guidelines that allow recruitmentinto explicitly identified priority areas.

One way to mitigate the risk of excess employment inthe future is to implement an active policy ofredeploying staff to focus areas, abolishing non-essentialpositions among the 60,000 vacancies that currentlyexist, and providing an equitable option for less skilledstaff to separate. Given that surplus manpower andaround 60,000 vacancies exist alongside critical

shortages of manpower in frontline operations—particularly in health, education, and police services—there is the need to both reduce and restructure thecivil service. This can be done by decreasing thenumber of lower-level staff, restructuring the staffingprofile of districts so that surplus staff can be located inneedy areas, and changing the profile of the civil serviceto increase the number of managerial positions toimprove policy coordination. The GoR may need toconsider providing existing surplus staff an option toseparate based on an equitable and well-consideredVoluntary Retirement Scheme (VRS) whichincorporates a social safety net program.

Improving the composition of the civil service needsto be accompanied by measures to rationalizelocation. Locating human resources in areas whereservice delivery is particularly weak is an importantconsideration for a large and predominantly ruralstate like Rajasthan. When civil service numbers aredisaggregated to the district level, wide variations areseen. In particular, underdeveloped districts asmeasured by a low Human Development Index(HDI) also have a low share of the total civil servicestrength in the state (Figure 4.2).71 The 10 districts

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71 This correlation coefficient is significant at 10 percent.

Figure 4.2 : Locational Biases and Transfers in Rajasthan Civil Services

Note: Left panel shows data for 31 districts in Rajasthan, excluding Jaipur which alone accounts for over 14 percent of civil servants in thestate on account of being the capital city. The inclusion of Jaipur makes the positive relationship between HDI and civil service sharestronger. Right panel shows transfer rates for IAS officers by year, with spikes after elections. HDI data from the Rajasthan HumanDevelopment Report (2002). Data on civil servants and transfers from the GoR.

Positive Correlation between HDI and Civil Service Share Likelihood of Transfer of IAS Officers

with the best human development indicatorsaccount for 41 percent of the civil service, while the10 poorest performing districts account for only 23percent. The Jaipur district which ranks fourth onthe HDI has a ratio of 1.15 civil servants per 100 ofpopulation, while Barmer, which ranks second fromthe bottom in terms of human development, has acivil servant per 100 population ratio of only 0.45.72

Over 51 percent of the entire civil service is based inthe nine districts of Ajmer, Alwar, Bharatpur,Bhilwara, Bikaner, Jaipur, Jodhpur, Kota, andUdaipur. The incentives for officers to work inremote areas are limited and Rajasthan shouldconsider how to create such incentives through anappropriately managed system of postings, grade andsalary increments, or, as a recent AdministrativeReforms Committee recommends, through thesetting up of a distinct cadre of rural officers.

Frequent transfers constrain the effectiveness of thecivil service. Rajasthan, like most Indian states, facesthe problem of frequent transfers of officers at alllevels-particularly in service delivery sectors anddepartments such as Health and Education whererural Rajasthan suffers from a bias towards moredesirable urban postings. In addition, transfers alsoappear to be motivated by election cycles (Figure4.2). Changes in elected governments in 1999 and2003 were followed by a huge increase in thetransfers of IAS officers. However, the proportion of

IAS officers transferred remained well over 50percent even during the intervening years. Whiledisaggregated data is not available, most sourceswould agree that the bulk of postings occur at thelower levels where, sometimes, District Collectorscould have tenures of only 3-6 months.

Recognizing the costs entailed by these transfers, thegovernment has taken steps to address this issue. TheShiv Charan Mathur Committee on AdministrativeReform, 2002, appointed by the previous government,clearly noted that most of the time and energy ofpolicy makers was wasted on "long and unending"exercises of transfers and postings rather than aconcentration on policy formulation—and that this,in turn, led to corruption and harassment of citizens.The Committee recommended the adoption of amodel transfer policy backed by law, regulating transferand postings of all government employees (Box 4.1).Although the Shiv Charan Mathur Committee reportwas released in 2001-02, there has not been muchmovement on implementing its recommendations.The present government has established a Cabinetsub-committee to look into the proposed modeltransfer policy. Finalizing and implementing thispolicy is an important priority for the government.

Rajasthan has a major problem of absenteeismcompared to other states—particularly in sectors suchas health and education, as shown by various surveys.73

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72 Data drawn from the Rajasthan Human Development Report (2002) and the Census of Rajasthan State GovernmentEmployees (2002), Directorate of Economics and Statistics, Rajasthan.

73 For example, Section A discusses the results of the Public Affairs Center survey.

All transfers be restricted to the period between 1st April and 31st May except in specific cases of need;

A minimum tenure of three years for all officers;

Making posts of teachers and medical staff non-transferable;

Lower scale employees and ministerial staff should be retained within districts and divisions;

The creation of separate urban and rural cadres with better incentives for rural cadres;

Posting requests to be prioritized on the basis of clear criteria with over riding priority given to track record and performance;

Delegation of powers to allow for decentralized management of cadres and services and a total ban on interference fromhigher authorities.

Box 4.1 : Key Recommendations of the Shiv Charan MathurCommittee on Administrative Reform

Recent evidence from a survey of government healthfacilities and primary schools shows that nearly 46percent of doctors and 37 percent of general staff(including nurses, health workers and technicians)were absent from the medical facilities they wereallocated to, and nearly 24 percent teachers wereabsent from primary schools.74 Given that the largestpart of the civil service in Rajasthan comprises of staffin the Health and Education Departments, this wouldtranslate into large sections of the civil service notattending work.

Curbing absenteeism could be one of the mostimportant ways of improving service delivery, and thegovernment needs to view absenteeism as a seriousdisciplinary offence. In the medium term, absenteeismcan be checked by making local service providersemployees of and accountable to local governments orof the service center in which they serve. Empoweringthe community to take action against absentee serviceproviders may be the only sustainable solution. In theshort term, though, the government can attackabsenteeism by streamlining complicated disciplinaryprocedures, which make it difficult to expeditiouslysanction staff for poor performance.

Improving employee performance and productivity isa challenge that Rajasthan, like other Indian states,will have to face. The current system of performancemanagement on the basis of Annual ConfidentialReports (ACR) is formalized, document-based, andlacks transparency. Clear job descriptions do notexist against which performance can be measuredand there are no systems for providing feedback.Performance management has virtually no role inany human resource function beyond promotions. Ithas very limited implications for other areas such astransfers, compensation, and career development. Arelated problem lies in the complicated disciplinaryprocedures that exist within the civil service whichmake it difficult to expeditiously sanction staff formalfeasance or poor performance. Although robuststatistics are hard to find, preliminary informationindicates that only 128 cases were referred to Headsof Department by the Anti-Corruption Bureau

(ACB) in the ten years between 1995 and 2005—yielding an average of about 12 cases a year.Streamlining disciplinary processes within the civilservice to allow for swifter deterrent action is apriority for better performance management.

Mechanisms for policy co-ordination are weakand fragmented, and characterized by excessivescrutiny and diffused responsibility. In this,Rajasthan is no different from most Indian states.There are over 50 departments in the GoR, andmost senior officials admit that their ability tomanage and effectively translate policy intopractice is undermined by fragmented andmultiple levels of authority and archaic systems ofmanagement. The problem is compounded at thedistrict level with multiple agencies, schemes, andprograms working in silos. This lack ofintegration and convergence results in aninefficient use of human and financial resourcesand fails to tap the potential synergies acrosssectors. This substantially limits the effectivenessof service delivery.

Improving the overall human resource managementsystem is a critical priority. Ultimately, problems ofabsenteeism, frequent transfers, and civil serviceperformance and productivity are all linked to theability of human resource management systems tomanage, discipline and motivate civil servants. Atpresent, the human resource management functionis fragmented, and the authority for managingpersonnel is scattered across a number ofdepartments. A multiplicity of cadres exist—withtheir own set of rules—and this makes it extremelydifficult to manage performance, track posts,vacancies, transfers, and forecast future salaryliabilities, let alone allow for accurate, real-timeinformation on the size and composition of the civilservice. Creating a comprehensive human resourcedatabase linked with payroll would be an importantfirst step towards better management of the civilservice. Establishing an integrated human resourcefunction placed within the Personnel Departmentwould be a further step in this direction.

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74 Provider Absence Project Research Team, World Bank, 2004.

Reinvigorating Local Governments

Local governments are likely to be critical for theimprovement of public services in Rajasthan,perhaps more than in many other Indian states.Rajasthan's large area and distances, itsgeographically distinct regions, its dispersed,ethnically diverse, and primarily rural population,and its long tradition of community and NGOactivism all help to create conditions for effectivedecentralization. The weaknesses in traditional civilservice delivery mechanisms make the case fordecentralization stronger. Recognizing these factors,Rajasthan made an early start in 1959 inintroducing local governments long beforedecentralization became a national agenda whenIndia adopted the 73rd and 74th Constitutionalamendments in 1994.

Political decentralization has made considerableprogress in Rajasthan. The state legislationmandates a three-tier rural local governmentstructure: the gram panchayat at the village level;the Panchayat Samiti at the block level; and the ZilaParishad at the district level. Besides, for everyvillage, there is a provision for constituting anassembly of all voters called the gram sabha. Seats arealso reserved for SC/ST groups, backward classes,and for women at each level of the panchayats. Since1994, three successful local government/PanchayatiRaj Institution (PRI) elections have been held, thelast in January 2005. About 9,189 PRIgovernments, 237 block governments, and 32 zilagovernments are functioning in Rajasthan. In fact,the zila pramukhs and gram pradhans are vested withthe administrative authority of Reporting Officerfor filling the Annual Performance AppraisalReports of Chief Executive Officers, AdditionalChief Executive Officers, and Block DevelopmentOfficers in order to make them more accountable toelected local Government representatives.

The potential benefits from decentralization stillremain largely unrealized owing to two factors:inadequate fiscal decentralization and the lack of alocal government civil service. Despite fiscal awardsfrom two State Finance Commissions, and despite29 functions and some revenue bases being formally

devolved, fund flows to local governments and theirown financial resources are meager. The transferredbudgets provided are mostly tied, and do notcorrespond to the functions devolved to them. Thebudgets are almost wholly taken up by non-discretionary items such as salaries and wages orother rigidly defined expenditures. Further, becausethe devolved functions are still imprecise, there isconsiderable overlap and, de facto, most functionsare handled by state departments and agencies withtheir much larger budgets. Finally, the absence of areasonably well-trained local government civilservice that is accountable to them implies that PRIslack the means to implement their policies and endup depending on the state civil servants. At present,officials overseeing PRIs are sent on deputationfrom different government departments but theirloyalty essentially remains with the stategovernment. Ultimately, thus, local governmentsend up largely as an arm of the state civil service.

It is important to strengthen fiscal decentralizationthrough the award of the Third State FinanceCommission that will soon be constituted. TheCommission needs to urgently address three issuesin its new awards. First, the financial position of thelocal governments could be substantially improved.The First State Finance Commission'srecommendation of 2.18 percent of net tax proceedsto be distributed to local bodies as additionaldevolution was increased by the Second FinanceCommission. However, there is evidence to showthat PRIs get less, largely due to the fiscallyconstrained position of the state. Second, grants-in-aid could be increased and made untied anddevolved on the basis of a well-balanced formula.Third, remaining conditional grants could be morebroadly banded to the devolved functions and notto highly disaggregated line items.

In order to address the lack of a local governmentcivil service, Rajasthan appears ready to introducean exclusive administrative cadre to serve in self-government institutions: the Rajasthan VikasServices (RVS). This service will specifically handlematters relating to PRIs or local governmentinstitutions. The appointments to RVS would bemade only through the Rajasthan Public Service

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Commission, and they would not be deputed inany department other than the PRI. The lastbudget of the state government had announcedsetting up of such an administrative cadre. Afterthe formation of the RVS, all services relating tolocal self government issues would come under it,thus reducing interference from otherdepartments. The constitution of the RVS is in theprocess of cabinet approval.

Strengthening Institutions forAccountability and Transparency

The Right to Information Act

The GoR passed a Right to Information (RTI) Act in2000 as part of its effort to strengthen goodgovernance, service delivery, and publicaccountability. Rajasthan's strong civil society hashelped to bring about advances in accountabilityand transparency, with the RTI Act being asignificant step forward. The fact that the law waspassed reflects both the strength of collective actionin forcing governments to be more focused as wellas the attitude towards utilizing civil society ideasand initiatives in expanding the debate aroundpublic governance. However, service delivery underthis Act had not been fully satisfactory. Also, therewas insufficient monitoring by departments andagencies of the government.

In 2005, the GoI passed the RTI Act which is muchwider in its ambit and scope. The provisions of thisAct have come into effect from October. The Actnarrowly defines the exclusions with the over-ridingproviso that information that cannot be denied to amember of the State legislature shall also not bedenied to any person. It prescribes a whole range ofsuo motu disclosures. The power to levy penalties forviolating the provisions of the Act has been vested inthe independent State Information Commissioner.The Act also contains provision for the propagationof the right to information.

This central legislation applies across the country,and accordingly, the previous state legislation isbeing repealed. The framework of the centrallegislation covers all government department and

agencies, and the steps to be taken for itsimplementation have been spelled out andcommunicated widely within government. TheGoR has already taken several measures toimplement this Act. By and large, all publicauthorities have appointed State (and/or Assistant)Public Information Officers, and there areappropriate Appellate Authorities. All publicauthorities have been asked to publish informationas required under the Act. The State InformationCommission is to be constituted shortly, and theprocess for the appointment of a State ChiefInformation Commissioner is under activeconsideration.

The success of this initiative rests now on how farofficials embrace the intent of this legislation and,most importantly, on how aware the public becomeof its provisions. A number of steps in the short runcould enhance the effectiveness of the Act.

First, an immediate step towards increasingthe Act's effectiveness would be to encouragedepartments and agencies to suo motu publishon the web timely and relevant information ontheir operations. Constructive use of publiclyavailable reports on the internet could help toaddress a number of the accountability andresponsibility problems associated with publicfinancial accountability. For example,information on budgeted versus actual cost ofadministering government programs andoperations, periodic accounts, transferpayments to other levels of government,information on the performance of delivery ofservices to the public (in line with Citizens'Charters that have been promulgated), andperformance audit and evaluation reports onlessons learned could be provided on a timelybasis. Other relevant information such as thecost of subsidizing power and the relatedefforts being made to reduce T&D lossescould be routinely provided to the public aswell. The GoR also needs to issue generalinstructions for the guidance of staff; impartthe necessary training; and promote a cultureof transparency in order to change the mindsetof bureaucracy so that it recognizes thatinformation is not its monopoly. This will

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allow for greater accountability with regard toactions, processes, and results. Regularorientation programs could be held for officerswith the specific purposes of training themabout better record management; improvedaccess to information; and benefits oftransparency and accountability. Widespreadpublicity must be provided to the new Act.

Second, in view of this new Act, the GoRneeds to streamline its records managementand information systems using computerizationas required. The initiatives already under wayin the areas of E-Mitra, land recordcomputerization, and computerization ofservice delivery processes in citizen-focuseddepartments such as Commercial Taxes,Excise, Transport, and Stamps andRegistration can be expedited and leveraged.

Third, the GoR should ensure thatdepartments adequately monitor the effectivenessof the RTI Act by providing clear monitoring,tracking, and reporting formats against whichinformation can be provided. Officials wouldneed to be better equipped and empowered totake informed and quick decisions. At thesame time, the risk of being perceived aswithholding information unnecessarily needsto be minimized.

Fourth, there is need to provide positiveincentives to officials to become more open to thepublic. Civil servants who proactivelypromote the objectives of the RTI legislationshould be publicly recognized by thegovernment, at least on an annual basis, fortheir contribution to expanding transparencyand accountability in the functioning of stategovernment, public sector undertakings, andlocal bodies.

Anti-Corruption Institutions

Although Rajasthan's service delivery record isperceived to be poor, the institutional framework fortackling corruption is relatively strong, with oneimportant exception. The ACB has a goodreputation and is perceived as reasonablyindependent of political interference. Information

about progress on cases is made freely available tothe Legislative Assembly and the AdditionalDirector General of the Bureau reports to the HomeSecretary, who is also the Head of Vigilance. Thisreporting line makes decision-making and access tofunds easier. On the other hand, although Rajasthanhad a Lok Ayukta established in the mid-1970s thisoffice is not fully functional, and remains without ahead. The institution of the Lok Ayukta has not hadany substantial impact because it has limitedindependent investigative powers, and the report ofthe Lok Ayukta has only the status of a preliminaryinquiry report. Empowering the Lok Ayukta is animportant priority and needs political sanction.

The ACB's capacity could also be strengthened.Going by the number of cases brought forward, theACB has clearly been active. It has, however, beenless effective compared to states such as Tamil Naduor Karnataka, which have lower rates ofprosecutions but higher conviction rates. Forexample, in 2002-03, Tamil Nadu had a convictionrate of just under 85 percent—compared toRajasthan's rate of under 35 percent. This couldimply that the Rajasthan ACB's capacity to preparecases is weak, or that other states are restrictingprosecutions to only the most serious cases, or itcould be the result of differences in judicialsystems—for instance delays in processing caseswhich weakens the evidence base—over which theACB has little control. Either way, increasing theconviction rate remains a challenge for Rajasthan.Further, whether in comparison or in absoluteterms, 411 convictions over 10 years is not a largenumber given the number of civil servants in thestate and the perception of corruption. Thus, whilethe ACB and the Police and Vigilance Departmentsappear committed to their roles and obligations,there is a need to strengthen these institutions toincrease their capacity to enquire into instances ofcorruption and organize evidence.

Tackling corruption effectively will also require thatthe caseload be effectively managed within the ACBand the judicial system. These institutions need to bestrengthened to enable quick and speedy disposal ofcases. At present, a large number of cases remainpending every year with the ACB: for example, in

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2004, of the 342 registered cases with the ACB, only105 cases were relevant to that year. The number ofpending civil cases in Rajasthan at the end of 1999were over 0.3 million and the number of criminalcases were nearly 0.6 million. Recognizing theseissues, other Indian states have created new specialcourts to try cases under the Prevention ofCorruption Act. If the government is to focus onresolving anti-corruption cases and sending out astrong message on this issue, the setting up of specialcourts or benches to deal with anti-corruption casesis essential.

Setting up systems of deterrence and publicawareness is necessary to make the anti-corruptionfunction sustainable. Corruption cannot merely beapproached through the enforcement framework.Rajasthan will need to invest much more on publicawareness and it has a strong advantage in this area,given the nature of civil society. As far as preventionis concerned, the state government needs toexamine in greater detail rules, systems andcorruption-prone processes in each department inorder to judge the systemic causes of corruptionand tackle them meaningfully. As a start, the majordepartments of Transport, Irrigation, PWD, Healthand Mines need to be examined through this lens.Some important beginnings have been made by thegovernment by focusing on e-governance as a statedtool to increase transparency and reducecorruption. However in order to institutionalizeanti-corruption initiatives at the departmentallevel, the state needs to strengthen both theinstitution of the Chief Vigilance Commissionerthrough legislation that provides for independenceof authority and organizational support, andthe network of Chief Vigilance Officers inthe departments.

E-Governance

Rajasthan has made considerable progress in usinginformation technology (IT) to re-engineer businessprocesses. IT is an important tool for ensuringtransparency, simplifying government process andreducing the scope for corruption. The ITDepartment has a strong vision and a mandate forreform. It is clear that that the benefits of e-

governance should flow to citizens and thegovernment is taking forward a number of innovativeprograms in support of better service delivery.

Progress in expanding e-governance has beenparticularly impressive. The state has issued anoverarching policy document for e-governance,focusing its activities on supporting public services,and enhancing transparency and accountability inrural and urban services. There has been an 80percent increase in outlays for e-governance projectsduring 2004-05, and a high level IT Task forcewhich includes eminent national personalities hasbeen set up. Some of the major e-governanceinitiatives of the Rajasthan government include:

Lok Mitra, launched in four cities (Jaipur,Ajmer, Bikaner and Udaipur) in Rajasthan,offers facilities for payment of electricity andwater bills, and various other municipal dues,as well on-line bus ticketing, and births anddeath certificates. A recent review suggeststhat the success of this initiative can bejudged by the fact that the time taken forcompleting transactions has come down andthe trends show that the cost per transactionis also diminishing. Revenues have doubledand the state government has recovered thecosts of computerization within six monthsof the service becoming operational. Thestate government is now consideringexpanding the project across Rajasthan.

Jan Mitra, on the other hand is essentially arural service delivery system being pilotedsuccessfully in Jahlawar and Jaipur through apublic private partnership (PPP) model. It hasprovided direct employment to 350 rural youthand has served around 4.5 million citizens sinceits inception in 2002. The services offered byJan Mitra include public grievance redressal,on-line submission of application forms forvarious government services, access to land andrevenue records, the BPL list, agriculturalinformation and mandi lists among others. Thisscheme is particularly important given that over75 percent of Rajasthan's population live inrural areas, and can directly benefit from rurale-governance projects.

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Recognizing the success of these two models, the ITDepartment is now designing an ambitious projectcalled E-Mitra. This project seeks to integrate thefeatures of Lok Mitra and Jan Mitra, and will bringtogether various services offered by differentdepartments and provide a unified e-servicesplatform, minimizing the multiple interactionpoints for the citizen. Over 60 departmental serviceswill be provided through these counters includingRegistration and Stamps, and services from thePolice, Agriculture, Land and Building Taxes, andPanchayati Raj Departments. Importantly, theDistrict Collectorates will also be brought into thenetwork. E-Mitra counters will enable citizens tosubmit applications for old age pensions, BPL andration cards, and copies of land records.

In order to support the process of citizen-friendlygovernance, the Rajasthan government is also takingforward an ambitious program of back-endcomputerization, with priority being given torevenue-earning and service delivery departments.These include the Excise Department, where a web-based system links the department with 32 districtoffices and where 99 percent of documents aregenerated on-line—including documents related topermits and licenses; wholesale contractor invoicingand dues recovery; the Commercial Tax Departmentwhere a sales tax accounting system has beenimplemented linking all the zonal headquarterswhich includes registration of dealers and

maintenance of revenue collection registers; and theRegistration and Stamps Department which hastaken forward an ambitious program ofcomputerization to simplify the registrationprocedures and reduce leakage of revenues. Further,in line with national policies, Rajasthan has adoptedan ambitious program of land recordscomputerization covering all 32 districts and 241tehsils. A database of Records of Rights (RoR)covering 6.8 million landowners has been completedin all the tehsils. Ledgers entries have beencomputerized at the tehsil level and copies of recordshave been given to landowners who arepredominantly farmers. A website offers land ownersthe facility to view their records online. Given thedifficulties of the geography and demography ofRajasthan, this is a particularly important measureand, given the success of this initiative, thestate government is now planning furthercomputerization at the sub-tehsil level and processre-engineering to enable citizens to access records ofrights through the proposed E-Mitra counters.Rajasthan's online First Information Report (FIR)registration program is one of the most innovativeexamples of using e-governance (Box 4.2).

Moving Forward: Next Steps andRecommendations

Major administrative reforms are difficult toimplement even under the best of circumstances.

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An important initiative taken by the GoR is the introduction of e-governance into the Police Department. A fundamental pointof interaction between citizens and the government is the area of law and justice, and the point of filing a case (called FirstInformation Report, or FIR) in a police station is fraught with opportunities for coercion and corruption. The poor are oftendenied justice even before they enter the formal justice system.

Rajasthan has introduced an innovative project called Aarakshi that aims to improve the efficiency of police procedures andfacilitate faster exchange of critical information between various departments and police stations. Citizens can access theapplications through the websites of the department and field offices connect through the internet. Each complainant is given atoken number to track the application. Once the application is registered and the formalities completed within the department,an FIR registration number is generated and -mailed to the complainant—if no e-mail address is available, the original tokennumber can be used.

The government plans to extend the system to further enhance interactivity and to computerize back-end operations of policestations through archiving FIRs, maintaining public inventories of theft and criminal data and an online inventory ofrecovered goods in police stations. For the first time, monitoring and supervision of pending cases and complaints can becarried out systematically.

Box 4.2 : Making Law More Accessible to the People—Online Case Registration

Rajasthan will need to focus implementation alonga number of key dimensions over the short term.These include:

Enhancing the capacity to vision, manageand monitor reform. This can be done bydrawing up a clear road map for reform basedon the government's vision for goodgovernance, and widely communicating thisreform program. The Shiv Charan MathurCommittee Report on AdministrativeReforms provides a substantive forward-looking strategy and can be the basis of thisreform plan. This needs to be accompaniedby efforts to strengthen the AdministrativeReforms Department and the CGG tomanage, implement and monitor reforms.

Improving the composition and location ofthe civil service. This can be achieved byreducing the number of lower-level staff,restructuring staffing at the district level sothat districts with low human developmentindicators are well staffed, and by changingthe profile of the civil service to increase thenumber of managerial positions as required.

Reducing the frequency of transfers. Thiscould be accomplished by developing an

effective public database to track transfers bycadre, group and department over time, andby finalizing and implementing therecommendations of the Shiv CharanMathur Committee Report in this regard.

Improving Human Resource ManagementInformation Systems. This will provide thegovernment with accurate, real-timeinformation on the size and composition ofthe civil service.

Implementing the central RTI Act of 2005effectively. This can be done throughpublishing timely and relevantinformation, providing incentives toencourage openness, and close monitoringby concerned departments.

Strengthening anti-corruption institutions.These include the Lok Ayukta, the ChiefVigilance Commissioner, and other keyagencies responsible for enforcement andprevention. At the same time, it is important toexpanding public awareness about corruption.

Maintaining the focus on e-governance.This has emerged as an important toolfor re-engineering processes to ensurebetter accountability.

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Strengthening Human Developmentand Social Protection Strategies5

Rajasthan's performance in reducing povertyand promoting human developmentpresents a picture of both success and

failure.75 Educational outcomes have improvedsubstantially over the last decade, assisted bynational policies and state support, even thoughindicators of gender equity and secondaryenrollment are still behind national averages. Inhealth, however, progress has been much lessimpressive. While selected indicators such as lifeexpectancy and incidence of communicable diseaseshave shown progress, some child health outcomeshave actually worsened during the 1990s. Allimportant health variables continue to lag behindnational averages. Even as poverty has declined,social protection measures remain critical both forthe 8.65 million poor who reside in the state, as wellas for vulnerable non-poor groups in the face ofrecurrent drought and other shocks.

The state's future prospects depend largely on howit makes the critical policy choices that it faces. Awell-focused sector reform agenda addressing issuessuch as regional and social inequity, humanresource constraints, and inadequate partnershipwith private sector will greatly aid the GoR'sprogress towards achieving its economic and socialdevelopment objectives. This chapter examines therecent developments in education, health, and

social protection from a policy perspective, alongwith outstanding challenges and selected reformmeasures. It also discusses the role of an integratedmonitoring and evaluation system in promotingpoverty alleviation and human development.

Education

Recent Developments

Rajasthan has made substantial progress ineducation in recent years. Key indicators ofeducation have improved (Chapter 1). The state'sperformance has been particularly impressive inprimary education and closing gender gaps—though there are still outstanding issues relating toinequities across social groups, genders, and regions.

Rajasthan's progress in primary education duringthe last decade was made possible by the interactionof a number of factors. The key factors include:

Progressive national policies that mandatedstate actions, starting with the landmarkNational Educational Policy of 1986 whichset up the framework for partnershipbetween the union and state governments;

Strong civil society and NGO activism tochampion the causes of women and socially

75 See Chapter 1 for details.

disadvantaged groups, that led to thedevelopment of innovative models toaddress issues in education (such as LokJumbish or community education projectand Shiksha Karmi or para-teachers forremote communities) in partnership withthe state. These successful models werescaled up by Centrally Sponsored Schemes(CSS) like the District Primary EducationProgram (DPEP) of the 1990s and NationalProgram for Universal ElementaryEducation (Sarva Shiksha Abhiyan or SSA)of the 2000s;

Effective partnership with externalagencies that provides exchange of ideas,support and additional financing; withthree external partners—the World Bank,United Kingdom Department forInternational Development (DFID), andEuropean Commission (EC)—pooling theirfunds with the union and state governmentsto support the SSA;

State commitment and federal fiscal transferto fund elementary education through CSSthat enable rapid scaling up of interventionsin elementary education.

The patterns in public spending on educationpresent an encouraging picture. ThoughRajasthan's per capita income is relatively low, itspends around 4.5 percent of GSDP on education,and this ratio has been increasing over the pastdecade (Figure 5.1).76 Furthermore, Rajasthanallocates more than half of its education budget toelementary education, with a strong pro-poorfocus, and this share has gone up in recent years(Figure 5.1).77 Plan expenditure, in particular, ispro-poor, with elementary education accountingfor 91 percent of Plan spending on education in2002-03. Currently, the SSA provides significanttransfer of funds, in a matching formula of 75percent from the union government and 25percent from the state. Salaries account for about85 percent of the total expenditure on education.Per child spending on elementary educationincreased by almost 75 percent in real termsbetween 1993 and 2002, and was about Rs. 1600per student in 1993-94 prices in 2002. Thisincreased spending is associated with increasedaccess to primary schools—about 89 percent and81 percent of all habitations had a primary andupper primary school respectively within adistance of one kilometer in 2002, as against 75percent and 64 percent respectively in 1993.

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Figure 5.1 : Education Spending and Intrasectoral Allocation of Funds

Note: Left panel shows data from States Database, complied from various state budgets, with linear trendlines fitted. Right panel shows datafrom Ministry of Human Resource Development.

76 As a share of public expenditure, education has been largely stagnant over the same years.77 Elementary education includes primary and upper primary, combining Grades I through VIII.

Outstanding Challenges and SuggestedReform Measures

Rajasthan has made enormous progress ineducation. However, to sustain the momentum andachieve the MDGs, and to raise overall studentachievement, there is room for strengthening theoverall sectoral management and developing acomprehensive strategy to address key areas in thesystem as describe below.

Sectoral management and accountabilityframework. Rajasthan faces several challenges insectoral management. First, largely due to litigationover recruitment, several teacher and administrativepositions were vacant till recently. With theresolution of court cases in 2005, about 38,000teacher vacancies have been filled to bring downthe pupil-teacher-ratio (PTR) in primary educationto the norm of 40:1 in nearly half the districts. Newrules have been introduced to expedite the filling ofvacancies in District Institutes for Teacher Training(DIETs). The vacancies of management andadministrative positions at District EducationOffices, Block Resource Centers, and ClusterResource Centers are expected to be filled in 2006.With staff in place, the next challenge is tostrengthen their capacity and upgrade their skills.Second, providing well-defined and transparentperformance criteria, incentives, and accountabilityframeworks for teachers and administrators areessential to improve service delivery. Recently, therewas a proposal to modify the annual confidentialreports on teachers to include importantparameters such as enrollment, retention, andpercentage of posts to provide objective criteria forperformance evaluation. It would be important tomonitor whether this leads to better teacherperformance. Third, there are overlappingmanagement structures and responsibilities whichpose challenges of coordination. Historically, dueto the implementation of DPEP by the StateImplementation Society (SIS), a parallel

management structure had developed alongside theEducation Department. However, due to SSA'sstatewide implementation of education reform, thegovernment is merging the SIS with the main linedepartment. It is important to prepare guidelinesthat define the roles and responsibilities of differentoffices and functionaries, improve coordinationacross units, develop staff skills, and provide bettertechnology and connectivity. Fourth, datamanagement in the Education Department has tobe strengthened. In particular, strengthening thecapacity for student assessment is necessary formonitoring student performance. Despitefunctioning for the last six years, the DPEP has yetto produce reliable and consistent indicators onenrollment, internal efficiency, completion rates,and student achievement.78 Further strengtheningof data collection and management at the districtand sub-district levels is fundamental to improvingthe database for monitoring education indicators.Fifth, schools should be supervised much more closelyand frequently in order to improve accountabilityand quality. Empowering the School Developmentand Management Committees (SDMC) to manageand monitor school performance is critical toensure local participation and public oversight.79

Providing information on rights andresponsibilities of the SDMC, on teacher andstudent attendance, and on their performance isessential to enable the SDMC to monitor schoolseffectively. Providing adequate budget forsupervision travel is the basic starting point. Thenew norms for inspection of schools, along withproforma for reporting such inspections, couldhave some impact on school instruction quality.

Dropout prevention. Since two-thirds ofRajasthan's out-of-school 6-14 year-olds aredropouts, focusing on dropout prevention isessential to reach the goals of SSA. Since dropoutproblems are usually locally specific, so must be thesolution. To address the issue, it is necessary to focusefforts and resources, including mobilizing

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78 The new proposal for computerization of the department, along with the central data server, is a key step in the right direction. 79 The government is planning to introduce a Bill for Compulsory and Free Elementary Education, and to make a parent the

chairperson of the SDMC.

communities. In 2005, the GoR has mounted aspecial campaign to enroll those who have neverenrolled and to re-enroll the dropouts. At the sametime, it is also probable that many "dropouts" fromgovernment schools are actually transferees toprivate schools which offer English as a medium ofinstruction. Improvement in the precision of datacollection to track repetition, promotion, anddropout rates by government, aided, and unaidedschools would clarify the extent to which dropoutsare actually lateral moves to private schools.

Improvement of student achievement. Ultimately,what matters is whether students have learned therequisite skills. A strong focus on teacherdevelopment and learning skills of students wouldbe essential to improve performance. This requiresstrengthening of the DIETs, improving classroomtransactions, and getting children to pass assessmenttests periodically. It would be advisable tosystematically measure learning outcomes andmonitor progress over time. The government hastaken a new initiative for assessment andimprovement of learning processes through aMemorandum of Understanding with the AzimPremji Foundation. It is also trying to integrate thevarious training institutions—for example, the StateInstitute for Education Research and Training(SIERT), DIET, and the like—to work towards aunified philosophy for the teacher trainingprogrammes. It has recently begun the process ofidentification of key resource personnel for thetraining programme. About 100 personnel perdistrict shall be selected and duly trained to serve asmaster trainers.

Partnership with the private sector. Rajasthan has avery sizable private sector dealing with post-primaryeducation.80 Expansion and improvement ofquality of education at the post-elementary levelcould be accomplished by continuing to rely on thepartnership with the private sector.81 A majority ofstudents who complete elementary education are

from better-off families that can afford theopportunity cost of schooling and are willing to paytuition fees. Measures to promote the partnershipwith the private sector could include the use ofcapitation grants per student enrolled in order tofoster competition and provide incentives forschools to increase enrollment. Vocationaleducation could be made responsive to the needs ofemployers, by encouraging the private sector toprovide demand-driven training. The EducationDepartment has recently introduced the RajasthanEducation Initiative (REI), which is based on a PPPto bring about technological interventions, as wellas non-technological improvements (Box 5.1). Thisinnovation may serve as a model for PPPs in otherstates or in other sectors.

Gender parity and efficiency of resource use insecondary education. Not only are genderdisparities higher in secondary education, perpupil spending in secondary is about 3.3 timesthat of elementary—largely reflective of lowenrolment and PTRs of about 28-29. This suggeststhat there is room to increase the intake of studentswithout significant deterioration of quality.Measures to address these issues could includestipend programs for girl students, and conversionof male secondary schools into co-educationalones. The state has provided incentives such as freebus passes, special bridge courses, scholarships forall disabled girl children, but a more systematicand well-targeted scheme for demand-sidefinancing may be needed. A recent survey hashighlighted concerns about the poor conditions ofschool buildings, and lack of sanitation andmaintenance of toilets.82 This poses a particularproblem for girls, possibly discouragingattendance—and suggests the need for betterfacilities. The government has recently mountedthe Total Sanitation Campaign and the SchoolSanitation Project whereby about 41,000 schoolsare to be provided with water and sanitationfacilities within the next two years.

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80 In 2002, 11 percent of primary schools, 45 percent of upper primary schools, 46 percent of secondary schools, and 34 percentof senior secondary schools were private.

81 For example, in 2003, attendance rates of students were 62 percent in public and 81 percent in private schools.82 See Chapter 4.

The Road Ahead

Over the longer term, it is important to have a sectorstrategy that addresses the challenge of achieving thedual goals of expanding access and improving qualityin a cost-effective manner. The strategy shouldstrengthen: (i) the links between early childhoodeducation and primary education; (ii) the transitionto upper primary education; (iii) the articulation ofsecondary education with vocational education; and(iv) the expansion and improvement of tertiaryeducation. A more dynamic partnership with theprivate sector needs to be developed. There could bea review of public and private expenditures at alllevels of education, and an assessment of whether theresources have been used efficiently by looking at thecost per graduate, rather than cost per student. Atthe same time, it would also be important to put inplace a system to measure the value-added ofeducation to provide accountability. This would

entail having a high-quality student assessmentsystem in place to track the academic achievement ofa cohort in two or three key subjects over time.

Health

Recent Developments

Despite some progress over the last decade inimproving health status and outcomes, Rajasthanremains a state whose health indicators remainbelow the national average. In particular, focusedpolicy action is required if the state is to achieve theMDGs for maternal and child health (Chapter 1).Also, health indicators vary across social groups,genders, and regions—reflecting inequities in accessto and utilization of services.

Rajasthan has recognized its health challenges andthe need to accelerate progress. The policy directions

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Strengthening Human Development and Social Protection Strategies

In 2005, the GoR has launched the Rajasthan Education Initiative (REI) with global and local partners from the private sector,foundations, and non-government organizations to support education. The four core partners are: the GoR, the Geneva-basedWorld Economic Forum, the Confederation of Indian Industry, and the Global e-Schools and Communities Initiative, which isan agency of the UN Information and Communication Technology (ICT) Task Force. They agree upon the vision for andobjectives of education in Rajasthan, and invite other partners to join with financial and/or other forms of support in order toscale up the intervention. The three core private partners will assist the GoR in the implementation, monitoring, and reportingof individual projects within REI, and evaluate their impact.

The objectives of REI are: achieving universal enrollment and retention in elementary education by 2010 and in secondaryeducation by 2020; bridging the gender gap in both levels of education; increasing student achievement, particularly inmathematics, science and English; and providing ICT skills to secondary students to take advantage of the global knowledgeeconomy. This PPP aims to enhance resource flows to deploy new technologies for modernizing educational service delivery,accelerating skill development, and providing quality teaching and learning—particularly among under-privileged communitiesand learners with special needs.

The REI envisages an integrated strategy involving two work-streams: using technological innovations for effective delivery ofeducation, and creating an enabling environment for learning to take place. The seven potential ICT interventions are: (i) girlsof Rajasthan and Computer Education (Project GRACE) to support girls' schooling in the backward blocks of the state; (ii)district computer training centers, school computer education programs, computer-aided learning program; (iii) EducationSatellite (EDUSAT) to extend locations for teacher training; (iv) teacher training technology academies; (v) departmentalcomputerization; (vi) using ICT in primary schools especially to promote retention; (vii) mobile ICT labs, and distance learningfor teachers. Non-ICT interventions include: development of learning skills (e.g. Hole in the Wall); adoption of schools;scholarships for indigent children; improvement in quality of the mid-day meal program; assistance to children with specialneeds; better sanitation; upgradation of curriculum; and effective teacher training.

Since the launching of the REI this year, about 11 Memoranda of Understanding have been signed, some of which are withmultinational corporations such as Microsoft and Cisco.

Source: Presentation by Principal Secretary of Education, Mr. C. K. Mathew, November 2005.

Box 5.1 : Government in Global and Local Private Partnership—the Rajasthan Education Initiative

detailed below provides evidence of progress madeover the recent years in this regard:

Formulation of State Population Policy in2000 to address the challenges in the sectorby optimally utilizing the new opportunitiescreated through Panchayati Raj Institutions(PRIs), promoting greater public privatepartnership (PPP), and increasingparticipation of NGOs and voluntaryorganizations for improving availability andaccessibility of health care services to people;

Formulation of the Health Vision forRajasthan 2025 to provide universal accessto primary health care and focus onstrengthening disease prevention andincreasing family welfare with particularattention on health of women, children andthe disadvantaged groups to enhance theperformance effectiveness and efficiency ofthe overall public health system;83

Formulation of a policy for partnership withthe private sector, especially at the secondarylevel, to promote private sector participationin augmenting the medical services in thestate by providing a liberal regime ofallotment of land for hospitals along with aninvestment subsidy;

Creation of autonomous societies underSection 20 of the Rajasthan Societies Act atprimary and secondary hospitals to collect userfees, which are retained for maintenance ofhealth care facilities as well as for subsidizinghealth care to below poverty line (BPL) families.According to government guidelines, 25 percentof the revenue is to be directly spent on BPLfamilies.

In terms of public spending, Rajasthan has shownsome commitment to health and family welfare.Health spending as a share of GSDP has been risingover the 1990s, and the state does better relative toother states (Figure 5.2). This has been accompaniedby considerable expansion in health and medicalinfrastructure, particularly in rural areas (Table 5.1).At the same time, hospital beds available andnumbers of patients treated at government modernmedical facilities have been on the rise. Budgetaryinvestment allocation per person has gone up fromRs. 181 in the Ninth Plan to Rs. 202.6 in 2004-05.

Important reform initiatives are under considerationto improve sectoral performance. The government iscognizant of the challenges in the sector, and this isreflected in several policy measures. Efforts atpromoting intra-sectoral convergence have been

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83 The Health Vision statement sets targets for health that are in some cases more ambitious than the MDGs.

Figure 5.2 : Health and Family Welfare Expenditure

Note: Left panel shows data from States Database, complied from various state budgets, with linear trend lines fitted. Table 5.1 shows datafrom the GoR, Statistical Abstracts, various years, for Primary Healthcare Centers and total Modern Medical Institutions.

Year PHCs Total Institutions

1990-91 1,323 9,932

1991-92 1,373 9,993

1992-93 1,413 10,045

1993-94 1,453 10,085

1994-95 1,507 10,129

1995-96 1,596 10,924

1996-97 n.a. n.a.

1997-98 1,646 11,934

1998-99 1,662 12,155

1999-00 1,674 12,247

Table 5.1Growth in Medical Infrastructure

started through the National Rural Health Mission(NRHM)—with an initiative to collude the Health,Family Welfare, and Disease Control Programs. Inorder to improve maternal and child health—andattain MDGs in this area—steps that have beentaken include initiation of the Janani SurakshaYojana Scheme through the establishment of basicand comprehensive Emergency Obstetric Care and24-hour facilities providing delivery care. There is aplan to upgrade two Primary Healthcare Centers(PHCs) in each district to First Referral Units inaddition to developing 96 model PHCs in the state.Moreover, efforts will also focus on strengtheningroutine immunization services. The state plans topromote partnership with the private sector toenhance access to health care in remote tribal anddesert districts. One strategy under consideration isthe adoption and management of health institutionsand centers in these remote areas by the privatesector. An increased number of family healthworkers and doctors are being recruited to fill theexisting vacancies, and the state has also madeprovisions to hire contractual managerial and criticalclinical personnel.

Outstanding Challenges and SuggestedReform Measures

Achieving the MDGs in health remains asubstantial challenge for Rajasthan, as thegovernment is aware. The overall strengthening ofpolicy and sectoral management will need to be thepriority over the next few years. Several policyinitiatives have been undertaken with a view tostrengthening the sector. The current initiatives maybe unified into a comprehensive and coherentpolicy to address the following key areas in thesystem as described below.

Financial resources. While the trend in publicspending on health as a share of GSDP has beenrising, the share of resources that the health sectorreceives as a fraction of the total governmentexpenditure has declined from about 8 percent in1980-81 to about 6 percent in 2000-01. The

allocation of resources has gone disproportionatelytowards salaries and wages (80 percent), comparedto drugs and medicines, which received only 4.3percent in 1999.84 This expenditure translated intoa per capita allocation by the public sector of Rs.170 at 1998-99 rupees, which is an amount belowboth the GoI and World Bank norms required toadequately address the health needs of thepopulation. It is estimated that to (only) provideuniversal primary care as per the GoI norms wouldcost the state Rs. 8.6 billion annually compared tothe current expenditure of Rs. 5.4 billion. In fact,based on all-India norms, the secondary level, whichprovides the link between preventive and curativecare, would appear to be the most under-fundedcomponent. This under-funding has underminedthe ability of the health system to provide effectivecare and referral services, especially for themarginalized population, including women andchildren. User fees were introduced through thedevelopment of Medicare Relief Societies to thwartthe operational deficiencies that threatened theprovision of services by the pubic sector and tomake available resources to be spent per BPLpatient. However, this is not adequate and needs tobe supplemented by enhanced public spending.There is also need for greater rationality in resourceallocation, based on disaggregated outcome data atthe district level and below. This requires theestablishment of an effective review system forpublic expenditure in health, which would set abaseline and also track the change in both budgetaryallocation and expenditure in the various levels ofhealth care in the state.

Human resources. The provision of health servicesis dependent on the availability of adequately skilledhealth personnel. The human resource situation inRajasthan is generally worse than the nationalaverage at an aggregate level—for example, skilledattendance at birth in Rajasthan was 35.8 percent in1999 compared to the national average of 42.3percent. Overall shortages of health personnel inRajasthan are further complicated by a geographicalimbalance of personnel as there is a strong

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Strengthening Human Development and Social Protection Strategies

84 The GoR is making provisions for increasing the procurement of drugs.

preference for employment in urban areas over ruraland marginalized areas where health outcomes areworse. There is insufficient data on issues related tohuman resource management, such as absenteeism,recruitment, and retention. More research in theseareas should be carried out in order to make thesector more effective and efficient while ensuringaccountability and transparency. The government isin the process of developing initiatives to address thedistribution of health care professionals, and thesemeasures need to be supported and implemented.85

Community participation. Decentralization andinterventions that strengthen the ability of the poorto participate in local governance are beingpromoted in Rajasthan. Every panchayat has aStanding Committee to look into social services andsocial justice, including rural water supply, healthand sanitation, communication, welfare of weakersections, and allied subjects. Also promotion ofhealth and nutrition is a function of the gram sabha.However, preventive health care is not tackled bythe panchayats as a priority. Local bodies functionlargely in mobilization campaigns or duringdisasters and epidemics. Involving the localgovernment institutions further could helpdemystify health care by spreading messagesamongst communities, strengthening checks andbalances, and ensuring accountability of healthservice personnel. The greater involvement ofcommunities is found to be an effective outreachagent for change. For instance, the GoR'scommitment to community participation is evidentin the Jan Mangal Scheme, which was launched in1992 to reduce infant and maternal mortality, andto stabilize population growth. In this scheme, theJan Mangal couples function as Depot Holders inthe village distributing contraceptives, providinginformation on basic curative care, and functioningas agents of change. This innovation needs to bestrengthened and replicated widely, especially in theremote tribal and desert districts, to achieveimproved coverage in essential health care. TheHealth Department is embarking on a training

program for communication in health for the PRIs,which will need to be supervised and monitoredwell to assess effectiveness. The District Health Planunder the second Reproductive and Child HealthProject will also enhance the involvement of thecommunity through Village Health and SanitationCommittees.

Special focus on child health. In view of the factthat child health indicators have not progressed inline with MDG targets, this should be a particularfocus area for the state. The state needs to furtherpromote: (i) safe motherhood interventions likeexpanding skilled care at birth by attendants withmidwifery training, improving access to basic andemergency obstetric services, and improving post-partum and post-abortion care; (ii) home-basednewborn care through well-trained Anganwadiworkers (AWWs), link volunteers, and auxiliarynurse-midwives (ANMs), and better managementof the sick newborns at home and at facilities; (iii)better immunization services based on a strategicframework of strengthened community outreach,including better linkages between the AWWs andANMs for increased awareness and coverage ofimmunization; and (iv) improved referral services forsick children to health care facilities.86

Reducing regional inequities. Access to andutilization of health care in Rajasthan differs greatlyby region. The government should strengthen andcontinue its focus on these lagging regions byenacting suitable policies. Proposed government-sponsored interventions include the developmentand implementation of: (i) an Information,Education and Communication (IEC) strategyconsisting inter aloa of health care facility-basedactivities targeted at the providers and patients,inter-personal and outreach activities targeted at thetribal and poor population; (ii) a new strategy toimprove health services among the tribal populationof Rajasthan, focusing inter alia on strengtheningservice delivery, organizing and operating healthcamps, introducing a package of non-financial

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RAJASTHAN: Closing the Development Gap

85 The numbers of Family Health Workers and doctors have gone up to 12,271 and 6,122 in 2005, as per estimates from the GoR.86 Strengthening of routine immunization is being addressed through intensive training and additional inputs.

incentives for medical professionals to serve in tribalareas, contracting of local private doctors, andintegrating the tribal medical system in theprovision of essential medical services; and (iii)innovative mechanisms to diminish financialbarriers to health care by disadvantaged populationincluding improving the existing schemes,establishing a health care fund, and piloting thedevelopment of sustainable community-basedhealth insurance schemes. The Tribal Health Plan,developed as part of the State's Tribal DevelopmentPlan, is expected to ensure that appropriateinterventions are in place to increase access to healthcare in tribal areas. The focus is on empowerment oftribal populations (especially women) to demandbetter health services, and community-driveninterventions in conformity with local conditionstargeting remote and hard-to-reach areas throughinnovative schemes such as contracting of NGOsfor service delivery. It has also been identified thatthere is shortage of 153 PHCs and 1793 sub-centersin tribal areas (based on national norms). Similarefforts to identify shortages in desert areas areongoing.

Reducing gender gaps in health outcomes. Womendo not have equal access to health care. Thissituation urgently flags the need for both: (i)improvement of access to formal and non-formaleducation for girls in poor families in order to delayearly child bearing; and (ii) contribution towardswomen's empowerment in the long run, as well asspecial measures for women in the short run.

Reducing wealth gaps in access and utilization.Given that health outcomes and access differ bywealth and income group, special measures areneeded for the poor. This could take the form ofidentification of appropriate indicators and toolsthat will provide information on the poor, such as:(i) differentiated process indicators and maternalaudits at health facility and at the community level;(ii) implementation of benefit-incidence analyses to

understand how public expenditure on health isbenefiting the poor versus the rich; and (iii)mitigation of the effects of low income on maternaland child health outcomes by providing affordableand pro-poor services through fee-waivers,introduction of health insurance, communityfinancing schemes, health cards and vouchers, andpolicies that reduce the cost of drugs and medicines.

HIV-AIDS incidence. As has been flagged earlier, itis difficult to analyze the trends in incidence of HIV-AIDS in Rajasthan—as in other Indian states—dueto paucity of data.87 Data collected during screeningof women attending Antenatal Clinics (ANCs)suggest that Rajasthan still has a lower incidence ofHIV than many other Indian states—especially inthe South (Figure 5.3).88 In terms of cumulativeAIDS cases reported so far, Rajasthan accounts forabout 1 percent in March, 2005 (Figure 5.3).However, given the size of the population involved,even these low ratios translate into large numbers.Moreover, there is potential for substantial increasein prevalence rates if this is left unchecked, especiallyin a state like Rajasthan with relatively largemigration flows. Accordingly, the government'sexisting interventions to fight AIDS could bestepped up to focus on increasing awareness throughtargeted IEC campaigns, strengthening surveillancethrough improved monitoring and data, andincreasing access to voluntary testing, counseling,and treatment at facilities.

Partnerships with private sector. The role of theprivate sector and NGOs in providing healthcoverage needs more emphasis all over India, butmore so in Rajasthan where the private sector isconspicuously absent in rural areas. Not only canthe private sector bring in more resources for healthservices, it can also raise efficiency if properlymonitored. The state's policy to contract out thediagnostic facilities in hospitals has paved the wayfor partnership with the private sector. The state isalso issuing directives for adoption of health

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Strengthening Human Development and Social Protection Strategies

87 See Chapter 1.88 See http://www.avert.org/indiaaids.htm for details. In areas that report an HIV prevalence rate of zero in ANCs, it does not

necessarily mean that there is no HIV in the area, as some of them report the presence of the virus at STD clinics and amongstinjecting drug users. It is also possible that higher rates are reflective of better surveillance systems.

institutions and management of health centre byprivate parties. Possible mechanisms for promotinggreater private partnerships could includestrengthening of measures like: (i) contracting outBehavior Change and Communication Services toNGOs or private parties; (ii) contracting out socialmobilization to NGOs; (iii) contracting inmanagement of health services; and (iv) socialfranchising, especially of family planning services.Other important requirements would includehaving credible accreditation schemes for privateservice providers on the supply side, and innovativefinancing schemes such as the piloting of vouchersand social risk funds on the demand side.

The Road Ahead

Over the longer term, it is important to have acomprehensive and coherent sector strategy thataddresses the issues of intra-sectoral linkages. Thiswould involve: (i) facilitating better integrationamong family welfare, reproductive and childhealth, disease control programs and nutritionprograms; (ii) strengthening governance and

institutional management capacity at all levels of thepublic health system, and coordinating with otheraspects of community health, such as water,sanitation and environmental health interventions;(iii) forging partnerships with the private sector andcommunities; (iv) rationalizing the human resourcesituation; and (v) addressing resource constraints,especially for the secondary sector. It will thus beimportant to develop and implement holistic stateand district level plans that are reflective of therecommendations of the NRHM and Health Vision2025. The government has already taken severalsteps in the right direction. These measures need tobe strengthened and supplemented.

Social Protection

Rajasthan has the typical array of anti-poverty andwelfare programs seen in all Indian states. Thispresents a mix of interventions focused on thechronically poor, on those who predictably orotherwise fall temporarily into poverty due toshocks, and on programs to promote sustainableabove poverty livelihoods.89 This section looks

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RAJASTHAN: Closing the Development Gap

Figure 5.3 : HIV and AIDS in Rajasthan Relative to Major Indian States

Note: Left panel shows data from States Database, complied from various state budgets, with linear trendlines fitted. Right panel shows datafrom Ministry of Human Resource Development.

89 These are the three pillars of social risk management. Risk reduction reduces the probability of negative shocks occurring. Riskmitigation prospectively reduces the negative impact of a shock if it does occur. Risk coping tries to reduce the impact of a givenshock once it has occurred.

selectively at some of the key schemes operating inthe state. There are a number of areas whereRajasthan's performance has been relatively good—like in the coverage of disadvantaged SC/ST groupsand active participation of communities throughpanchayats in certain schemes. At the same time, theanalysis suggests significant scope for betterimplementation, increased coverage, and improvedtargeting of some schemes.

Trends in Expenditures on Anti-Poverty Programs

Though spending on core anti-poverty programs hasbeen increasing in recent years, program spendingboth as a share of total expenditure and of GSDPhas remained fairly constant at a low level (Table5.2). For 2001-02, Rajasthan's spending on theseprograms as a percent of GSDP is lower than thenational figure of around 0.67 percent of GDP.Among anti-poverty programs, the share of safetynet spending on social pensions and drought-relatedworks programs is considerably higher than nationalaverages. As in the rest of India, the Public

Distribution System (PDS) remains the largest anti-poverty intervention for the poor (though not interms of state budgetary outlays), operating through20,893 Fair Price Shops (FPS) at end-2004, ofwhich three-quarters are in rural areas and 80percent are private sector operations.90 In addition,public works programs have been increasing inimportance in recent years and look set to continueto do so. On the other hand, the importance ofSwarnjayanti Gram Swarozgar Yojana (SGSY)—which is a key program for credit to the rural poor,merging Integrated Rural Development Program(IRDP) and several smaller schemes—has declinedin recent years in terms of expenditure and its sharein total public spending.

Recent Performance and MajorOutstanding Challenges

Access and coverage. The coverage for most majoranti-poverty programs in Rajasthan is generally lowcompared to the national averages—even thoughRajasthan usually performs well in terms of coverageof SC/ST groups. 97

Strengthening Human Development and Social Protection Strategies

90 Economic Review of the GoR (2004-05).

Table 5.2Program Expenditure on Key Anti-Poverty Programs, Rajasthan, 2001-05 (Rs. Millions)

Note: (a) 2001/02 for Employment Assurance Scheme and Jawahar Gram Samridhi Yojana; (b) 2004/05 extrapolates from threequarter program spending data; (c) NFFW from 11/2004 to 01/2005 only (d) till 12/04; (e) includes National Old Age PensionScheme (NOAPS), widows and disabled.

Program Intervention Type 2001-02 2002-03 2003-04 2004-05 (b)

Public Distribution System Subsidized Food TBC 242.9 263.4 290.3

Sampoorna Grameen Rozgar Yojana (SGRY) Public works 1,756.6 (a) 2,051.4 2,196.3 1,990.4

Food-for-Work (NFFW) Public works - - - 8.87 (c)

Swarnjayanti Gram Swarozgar Yojana (SGSY) Credit to BPL Families 346.2 291.7 242.8 243.9

Desert Development Program (DDP) Desert works 720.6 882.9 914.3 1,293.8

Drought Prone Areas Program (DPAP) Drought works 138.3 192.1 282.1 220.6

Social pensions (e) Cash transfer 1,186.9 1,141.9 1,130.5 792.7

National Family Benefit Scheme (NFBS) Cash transfer 33.5 103.8 134.7 69.4 (d)

Integrated Child Development Scheme (ICDS) Early Child/Nutrition TBC

Total Spending 4,182.1 4,663.8 4,990.7 4,630.1

Total as Share of Public Spending 2.34% 2.56% 2.31% 2.36%

Total as Share of GSDP 0.47% 0.58% 0.51% [0.60%]

There is scope to improve coverage of most majorschemes in Rajasthan. The share of BPLhouseholds using the Public DistributionSystem (PDS) is low, and only about two-thirds the average of major states, mainly dueto irregular availability.91 Other researchsuggests that access is even lower, with 46percent of rural households (though 90percent of urban) reporting PDS access—almost one quarter lower than the all-Indiaaverages.92 Offtake of central PDS allocationsremains a concern, with offtake in both 2002-03 and 2003-04 only around 24 percent ofallocation.93 Household reliance on publicworks as a significant employment strategydeclined significantly during the early 1990s,though coverage in Rajasthan is notdramatically out of line with all-Indiaaverages and trends (Figure 5.4). During the1990s, Rajasthan also had one of the lowesteffective coverage rates of villages for theEmployment Assurance Scheme (EAS), withonly 17 percent of villages covered annually,against an average of 32 percent across majorstates.94 However, Rajasthan performs verywell in terms of SC/ST participation in publicworks. The usage of Integrated ChildDevelopment Scheme (ICDS) services in allareas of Rajasthan is very low, at around 10percent. This is partly driven by inadequatecoverage, though the coverage deficit is farless pronounced than the usage deficit,suggesting scope for significant efficiencyimprovements in ICDS service delivery.

Penetration under rural credit schemes and socialinsurance for the unorganized sector could alsoimprove. Survey and administrative data showcoverage rates for the Integrated Rural

Development Program (IRDP) in Rajasthan tobe consistently below the national average,and somewhat below the average for majorstates. With respect to SGSY, the numbers ondistrict-wise coverage were not available,though the authorities report around 97,000Self Help Groups formed. Rajasthan hasachieved minimal penetration of socialinsurance for the unorganized sector, though inrecent years there has been a proliferation ofschemes (e.g. under the Chief Ministers' fundfor health, on a pilot basis in DPIP districts).Two public social security schemes forunorganized workers in Rajasthan are the JanShree Bima Yojna (JSBY) and the AgriculturalLabor Social Security Scheme (ALSSS).95 Asin the rest of India, the schemes have notachieved significant coverage, in part due toproblems in the collection of contributionsand delays in claim payment. Whilepenetration under a range of other schemesappears better, there is an issue of multiplicityof small schemes failing to achieve criticalmass in coverage, which is likely to result insub-optimal pooling even among theparticipating population.

In the case of social assistance schemes, althoughRajasthan has the highest shares of women andSC beneficiaries among major states, coverage ofgeneral population is less impressive.96 Despitethe relatively strong emphasis on socialassistance, the current coverage rate ofdisability pensions is around 5.3 percent of thedisabled population—which is less than halfthe poverty rate for the general populationfor a group that would be expected to havehigher than average poverty rates.97 Similarlyfor widow pensions, the coverage has been just

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RAJASTHAN: Closing the Development Gap

91 See Planning Commission Evaluation (2005).92 See Paul et al. (2004). 93 See Ministry of Consumer Affairs, Food and Public Distribution website.94 Unfortunately, the NSS does not capture households participating for less than 60 days in public works. See Planning

Commission evaluation of the EAS, which reports official mandays per participant in EAS between 1993 and 1997 forRajasthan of 41 days, but a survey estimate of only 17 days per participant (against national average of 31 days). There was noparticipant employed for more than 30 days on public works in the survey.

95 JSBY covers death and permanent or partial disability. ALSSS covers death, old age, and disability. 96 See Rajan (2001).97 See Deaton and Dreze (2002).

over 8 percent—well below general povertyrates for a group with high poverty rates.These comparisons need to be treated withcaution, as poverty is not the only screeningcriterion for eligibility (e.g. there must alsobe no direct family support available), butsuggest a need for closer examination ofprogramme incidence.

Community participation. This is an area wheresafety net programs in Rajasthan perform well, ingeneral. The involvement of panchayats in PDSimplementation is high, with Rajasthan ranking asthe best performing state along an index ofindicators.98 All sampled panchayats in Rajasthanreported involvement in BPL identification, andaround 88 percent reported regular review of thefunctioning of FPS—against national averages of 45percent and 26 percent respectively. Similarly, theGoI evaluations report relatively strongparticipation of gram sabhas in the identification ofpublic works.99

Implementation issues. Administratively, the pictureon implementation of key programs is mixed. In thecase of public works, there are positive findings likerelatively timely and complete payment of wages, andimproved expenditure execution at about 95 percent.On the other hand, evaluations have consistentlyidentified areas where Rajasthan is either among a(large) group of poorly performing states or standsout as a laggard—such as: (i) poor performance interms of direct employment generation relative tospending;100 (ii) poor maintenance of records; (iii) weak monitoring and evaluation; (iv) andconcentration of work during January-March—when opportunity costs of labor are high, withreduced poverty impact. Expenditure tracking workalso raises concerns about SGRY, finding gapsbetween allocated and actual cash transfers to grampanchayats, and significant divergence in the GoI, theGoR and district figures on food grain transfers. Forthe SGSY, implementation shortcomings includelack of state plans on program implementation,inadequate monitoring, slowness in release of funds,

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Strengthening Human Development and Social Protection Strategies

98 Planning Commission Evaluation for 1997-2001.99 See Planning Commission (2000) report on EAS.100 For example, under EAS, the wage component was 33 percent from 1993-97, against a large state average of 48 percent. See

EAS evaluation, PC for 1993-97 and IDS for analysis of 1995-2001 works.

Figure 5.4 : Decline in Coverage and Targeting Effectiveness in Recent Years

Note: Left panel shows (i) share of households with 60+ days employment on public works in previous year from last three NSS thick rounds;and (ii) IRDP coverage for households. Right panel shows simple correlation between per capita spending at district level on SGRY andSGSY and share of rural Below Poverty Line families from 1997 BPL Census, which is latest available. Spending data from the GoR.

limited formation of self-help groups, costly training,and lack of market support.101 As regards socialassistance, expenditure execution against the CSSallocation for the National Old Age Pension Scheme(NOAPS) improved dramatically from 50 percent ofallocation spent in 1995-96 to 96 percent in 1999-2000.

Targeting at the district level. Expenditures onpublic works and rural credit programs are progressiveat the district level, but there remains scope forimproved targeting. Correlation coefficients revealthat spending on Sampoorna Grameen Rozgar Yojana(SGRY) and SGSY has been progressive in terms ofBPL population, with higher spending per capita indistricts with higher rural BPL shares.102 Similarconclusions hold for correlations between district-level allocations and HDI values, with generallyhigher funding for districts with low levels ofhuman development. Though district-leveltargeting improved sharply between 2002-03 and2003-04 for SGSY, SGRY has stabilized at muchless progressive spending patterns in recent years(Figure 5.4). A complete picture of spatial targetingneeds to be complemented with spending on reliefworks, not addressed here, but which play anunusually important role in Rajasthan.

Targeting at the household level. On a positivenote, Rajasthan appears to have a good PDStargeting performance. It has easily the lowestinclusion errors of any major state (only 5 percent)and an exclusion error rate of below 17 percent—over a third below the average of major states.103

However, NSS analysis of where the householdsparticipating in public works fell in the incomedistribution indicates that program incidence hasbecome significantly less pro-poor during the1990s. This trend is seen for nearly all states, so itis unclear whether this reflects implementation or

policy factors.104 Nonetheless, public works havebeen more pro-poor than IRDP, though this is tobe expected given the self-selection bias of a creditprogram. More importantly, targeting of thepoorest has deteriorated over time.

Household impact. While formal impactevaluations are rare, departmental data andadministrative studies reveal a relatively smallimpact of the programs on proxy indicators of thewell-being of households who participate in theprograms. For the PDS, the effective income gainper BPL household is around a third below thecross-state average, at Rs. 384.105 At current ratesof employment generation, workfare programs areunable to generate sufficient employment atcurrent spending levels to act as a serious employerof last resort. Despite a significant increase inworkdays generated in recent years, a total acrossSGRY, the Desert Development Program, and theFood-for-Work Program of only just over 30million days comes to around 5 days ofemployment per rural household, and just over 15days per rural BPL household (against a programtarget of 100 days for SGRY alone). While reliefworks would add to total employment generated inselected districts, the shortfall of major workfareprogrammes is such that the broad conclusionappears to hold. Simulations suggest that there canbe considerable benefits to expanding theEmployment Guarantee Scheme (EGS) in accordancewith national guidelines, assuming effectiveimplementation (Box 5.2). In the area of socialpensions, the NOAPs, widows and disabilitypensions are likely to have had higher than averageimpact in recent years, given that the monthlybenefit of Rs. 200 is high (and to be supplementedby 10 kg of wheat per beneficiary as per the 2005-06 budget), with most other states paying half tothree-quarters of that.

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RAJASTHAN: Closing the Development Gap

101 This is according to the national evaluation of SGSY for 1999-2002 done by CAG. 102 For 2004-05, the correlation coefficient between district-level HDI values and allocations for SGRY and SGSY respectively are

-0.39 and -0.38.103 Statewide findings are supported by research in poor districts such as Udaipur finding higher dependence of BPL households

on PDS grains and higher dependence on PDS grains (IDS study). 104 The most obvious policy change could be the shift from geographically targeted to universal coverage EAS between the 50th

and 55th rounds.105 Planning Commission Evaluation.

The Road Ahead

Given the reliance on CSS in anti-poverty programs,Rajasthan's room for maneuver in policy reforms issomewhat limited. This is because the rigidity ofcentral guidelines is, to a large extent, beyond thecontrol of state officials. Sensible choices seem tohave been made in the emphasis on area-targetedprograms and high spending on social pensions forthe most vulnerable. More fundamental strategicchoices will emerge as poverty continues to decline,and the need and possibilities for programs whichhelp households manage volatility in incomesbecome more pronounced. For the present, thereremains substantial scope to improveimplementation and facilitate risk management atthe household and community levels. The areas thatappear to warrant attention in these efforts include.

Expanding coverage of key programs such asPDS, SGRY, SGSY and ICDS. Given fiscaldemands, this is not straightforward, and willrequire consolidation in other public spending.It would also require improved efficiency inresource use and expenditure monitoring to

ensure that fiscal allocations to poor andvulnerable areas match commitments.107 Inaddition, there is scope for program-specificimprovements which have worked in otherstates, such as: (i) improved offtake of PDSallocations; (ii) more effective implementationof door delivery of PDS grains to FPS;108 (iii)improved oversight of PDS functioning; (iv)greater direct involvement of communities inICDS implementation (which has led toimproved implementation in states such asBihar and where efforts are being increased inRajasthan through around 1,000 mothers'committees); and (v) better coordinated effortsat intermediation between banks and BPLclients under SGSY. The latter will continue torely on Block Development Officers workingwith village level workers and NGO facilitators.NABARD's work with branch managers underDPIP may provide useful lessons.

Increasing the effectiveness ofimplementation. As NFFW funding isexpanded and EGS introduced, thesimulations summarized in Box 5.2 indicate

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Strengthening Human Development and Social Protection Strategies

The GoI has committed to a major expansion of public works spending in coming years, with large increases in budgetaryallocations already in 2005-06. This is expected to increase further if—as expected—the draft national rural EGS is approvedduring 2005. This would legally guarantee 100 days of employment per year to every rural household.

Simulations based on NSS data of the potential impacts of such an expansion of the EGS (implemented in lean season),assuming a program wage rate around the official minimum wage, show considerable potential in terms of smoothing incomesof the poor. The findings for Rajasthan are:106

Casual labor supply during the lean season would increase overall by only around one percentage point, but by around5 percentage points among the poorest quintile.

The lean season poverty rate would fall by 5.7 percentage points at a program wage rate around the official minimumwage for Rajasthan. The annualized reduction would be around 1.4 percentage points.

The estimated lean season gains for poor households would be high and strongly pro-poor, at around 33 percent of pre-EGS consumption for the poorest quintile, falling to 0.5 percent increase for the richest quintile.

The pro-poor incidence of benefits and the scale of potential impacts suggest that an expanded program could help protect theconsumption of the poor. How far this potential can be realized depends, of course, on effective implementation.

Box 5.2 : Simulated Impact of Introduction of the Rural Employment Guarantee Scheme in Rajasthan

106 Details of the analysis are provided in the background paper on social protection, and Murgai and Ravallion (2005).107 This applies particularly to works programs, where universal access-even if within a limited geographical area-is key to ensuring

effective self-targeting and promoting second order impacts for non-participants such as the insurance function.108 The GoI evaluations indicate that the policy is implemented only partially in Rajasthan to date.

the potential for significantly improvedoutcomes for the poorest. However tomaximize such gains in practice, furtherattention is needed to implementation issuesin works programs, including greater effortsto match seasonality in labor demand withpeak provision of program employment, andstrengthening of linkages between program-specific project identification and local areaplanning. Enhanced measures to monitorexpenditure down to the gram panchayat levelare also needed, as well as more structuredinitiatives to promote communitymonitoring of performance such ascommunity/citizens' scorecards. Experienceto date with social audits strongly suggeststhat third party facilitation by respectedNGOs is needed to make communitymonitoring effective.

Paying greater attention to the socialsecurity needs of households in theunorganized sector. While modestexpectations are in order, the experience ofsouthern states and West Bengal suggeststhat focusing on institutions such as welfareboards and facilitating the work of non-government providers such as SEWARajasthan could support a gradualexpansion of informal sector coverage. Thestrong emphasis of the national governmenton a new and expanded social securityscheme for unorganized workers suggeststhat Rajasthan will need to moveaggressively in this area in the coming fewyears. An important first step is anintegrated overview of existing socialinsurance initiatives in the state. Thisshould ascertain where schemes haveoverlapping target groups, suggestconsolidation of schemes to minimize theproblem of fragmented insurance pools, andhighlight good practices in use ofintermediaries in contribution collection inorder to control transactions costs. Theauthorities would also benefit from a reviewof welfare and/or provident funds in stateswhich appear to be having more success inexpanding coverage of social insurance to

the unorganized sector (e.g. the West BengalProvident Fund for unorganized sectorworkers).

Improving functioning of the BPL system,given its importance in targeting severalanti-poverty programs. This is not only atechnical issue, but one involving complexpolitical economy. Some initial measuresworth considering are: (i) release of 2002BPL census data, and review of current BPLconcentrations and cross-mapping againstdistrict poverty levels and HDI indexes; (ii)more actively involving gram sabhas in theBPL identification process, and ensuringopen access to BPL lists; and (iii) placing afreeze on issuance of new BPL cards for someperiod prior to major elections.

Reviewing performance indicators for majorprograms and the system for their collectionand reporting. Periodic state-level evaluationsshould be deepened, and done on a morerigorous basis, at a minimum with collectionof timely and credible baseline data. A usefulfirst step would be a basic benchmarkingexercise on major anti-poverty programs toidentify where Rajasthan is performingrelatively poorly.

Strengthening Monitoring andEvaluationThe preceding discussion highlights generalproblems in tracking progress in humandevelopment, effective targeting, andunderstanding the efficiency of state programs.While data on several indicators of socialdevelopment are available, many are based on out-dated surveys. Reliable data on indicators likematernal mortality and HIV-AIDS incidence is notavailable—making it difficult to evaluate progressagainst MDGs (Chapter 1). As noted above, formalevaluations of many key programs have not beenundertaken, and there is scope to improve targetingand program implementation through betterunderstanding of impacts or expenditure flows.Ultimately, a strong monitoring and evaluationsystem would help policy-makers to increase theeffectiveness of public spending.

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Potential Benefits from an IntegratedData System

Rajasthan lacks an integrated data system, thoughthere are recent efforts to develop one. Currently, asin most states, different departments collect theirown data, and data from various departments arenot integrated fully, though the Economics andStatistics Department collates some of it in itsannual publications. A central HumanDevelopment Monitoring Cell has been recentlyestablished under the Planning Department, withassistance from the United Nations DevelopmentProgram (UNDP)—but this is not fully staffed.The capacity of existing staff also needsstrengthening through access to training and bettercomputational facilities.

Rajasthan has a wealth of data both from surveysand as collected by various departments. Thereare various sources of data for the state, each withits advantages and drawbacks—for example, theNSS central sample has information onexpenditures and occupation, but does not allowdisaggregation below the regional level, and lacksdata on indicators of health and women'sempowerment; on the other hand, while NFHSdata allows the latter, it lacks detailed data onexpenditure. There are other rich data sourceslike the BPL Census, though they remain, asthroughout India, under-exploited. Finally,departments collect their own data on variousindicators of inputs, outputs, and outcomes atboth the state and district level. In fact, thequality of departmental data could be furtherimproved in terms of reliability and regularity.

Data from existing surveys can be further analyzedto gain better understanding of the determinants ofpoverty. Some disaggregated information at thelevel of gender, social groups, districts, and regionsas available in existing surveys have been analyzedalready. However, disaggregation beyond thesebroad heads is rare. For example, while thickrounds of the NSS data can yield estimates ofpoverty at the regional level, the data has to becombined with the state sample to yield estimatesof district-level poverty. Investment in analyzing

existing datasets to a greater extent, andimproving/combining data sources could yielduseful additional information on householdcharacteristics, including income, asset ownership,occupational and demographic characteristics.Addition of modules to existing surveys could alsoyield specific information as required. This canhelp to target policies ex ante to specific groups andsub-groups.

There is considerable scope to integrate survey andadministrative data, in order to gain deeper insightsinto development. For the purpose of this report,selected data from the GoR was merged with datafrom existing surveys. Even very preliminary analysisconfirms, for example, statistically significantrelationships between indicators of humandevelopment, income, and infrastructure at thedistrict level (Figure 5.5). While it is not possible todraw causality conclusions from such limited data,this does indicate that these variables move together,and that further probing can reveal causalconnections that could be exploited for policypurposes. It is also interesting to note that rainfall inthe preceding season is correlated with per capitaincomes at the district level—indicating that rainfallis an important correlate of prosperity, and policesshould focus on drought-prone areas (Figure 5.5). Asexpected, districts with higher rainfall on averagealso tend to score higher on income and humandevelopment. While the data compiled is notdetailed enough for a comprehensive analysis, thisdoes suggest that compiling longer time series oradding more variables can yield valuable policy-relevant information.

An integrated data system can be useful forgeographical targeting and rationalization ofexpenditures across districts. In particular, publicexpenditures—especially on new schemes forpoverty reduction and promotion of humandevelopment outcomes—should logically betargeted to districts which are most lagging (asproposed, for example, in the initial stages of theEGS). Preliminary analysis suggests that there maybe scope for rationalization of outlays under thePlan. For example, total Plan outlays per capita tendto be higher in districts with better HDI values

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Strengthening Human Development and Social Protection Strategies

(Figure 5.6).109 Though not illustrated, Planexpenditures are also positively correlated with percapita income at the district level. While thissimplified analysis does not take into accountcausality, path dependency issues, and absorptivecapacity, it certainly points to the need to furtheranalyze whether the government is adequatelyconcentrating public expenditures in backwarddistricts.110 In fact, an integrated data system canalso track trends in incidence of public spending tosee whether geographical targeting is improvingover time (Figure 5.4).

Potential Benefits from Evaluation

Systematic evaluations of key government programsand projects can help improve targeting andimplementation efficiency of these initiatives. Forexample, process evaluations could identify bottlenecksand in implementation and administration;expenditure tracking could determine leakages in fundflows; beneficiary assessments could yield informationon targeting of programs; and impact evaluationscould examine whether programs are making asignificant difference in measures of welfare. Lessons

from these evaluations could be built into the design offuture programs or introduced in existing programs inthe form of mid-course corrections.

At present, rigorous and comprehensive evaluationsof programs and policies are not regularlyundertaken. Rajasthan has a variety of programsaimed at reducing poverty and improving humandevelopment. Program evaluations are notinstitutionalized, and are undertaken at the requestof specific departments. There is a Directorate ofEvaluation that conducts evaluations of process andimpact. The Directorate has experience inundertaking surveys and collecting data at variouslevels, and provides recommendations onimprovements in program design andimplementation. However, it does have capacityconstraints in the form of latest technology andsoftware, computing equipment, and training.

The Road Ahead

Over the short to medium term, the governmentcould focus on the following reforms to strengthenthe monitoring and evaluation system:

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RAJASTHAN: Closing the Development Gap

Figure 5.5 : Key District Level Correlations in Rajasthan

Note: Left panel shows data for 32 districts of Rajasthan, on income per capita from the GoR, infrastructure index from CMIE, infant mortalityfrom NSS, and female literacy from Census. All correlations are statistically significant at 5 percent, except for IMR. Right panel showsdata on 32 districts of Rajasthan on income per capita from the GoR and rainfall from the Meteorological Department of India.

109 The correlation between total Plan outlays per capita and income per capita is even stronger, with a correlation of 0.47.110 Per capita Plan outlay also appears to be regressive when compared to BPL shares across districts.

It is important to focus on the staffing andcapacity-building needs of the newlyestablished Human DevelopmentMonitoring Cell in the Directorate ofEconomics and Statistics, and theDirectorate of Evaluation. This could involvea combination of exposure visits to otherstates where such initiatives have beensuccessful, participation in training coursesin modern techniques of data analysis, andlocation of external trainers in Rajasthan towork with existing staff over a period of time.

The government could identify specificinterventions where evaluations could help infuture policy design or the introduction ofmid-course corrections. Evaluations of theseinterventions could be taken up with theinvolvement of external experts, as necessary.

Over the longer term, the government shouldintensify efforts to build up the system, and thefeedback mechanism to influence policy. It would be

helpful to further develop an integrated monitoringsystem to track development against MDG targetsand the state's own vision for poverty and humandevelopment. However, this database need not beconfined to human development indicators alone,but could also include data on variables like publicexpenditure and infrastructure. Department specificdata can be combined into a common database forready reference and an integrated vision. Theestablishment of such a system would allow forsynergies, and a common database will facilitatepolicy feedback on poverty-reduction interventions.Further analysis of existing data could be undertakenwith external advice as necessary to furtherunderstand the determinants of poverty. Also,evaluations could be institutionalized, with a certainshare of program funds earmarked upfront for expost studies to improve the effectiveness of theprogram. These could be undertaken in housewhere adequate capacity exists, or external advisorsand evaluators could be contracted under the overallguidance and supervision of government staff.

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Strengthening Human Development and Social Protection Strategies

Figure 5.6 : Higher Plan Outlays in 2001-02 in Districts with Better Human Development Indicators

Note: Left panel shows data for 32 districts of Rajasthan, on income per capita from the GoR, infrastructure index from CMIE, infantmortality from NSS, and female literacy from Census. All correlations are statistically significant at 5 percent, except for IMR.Right panel shows data on 32 districts of Rajasthan on income per capita from the GoR and rainfall from the MeteorologicalDepartment of India.

Annex 1 District Maps of Rajasthan for Key Socio-Economic Indicators

Rajasthan – Per Capita Income by District (1999/00 in current prices)

Rajasthan – Share of Manufacturing and Minerals in the Economy (Percentage)

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RAJASTHAN: Closing the Development Gap

Rajasthan – Share of Agriculture in the Economy (Percentage)

Rajasthan – Power Consumption (million Kwh)

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Annex

Rajasthan – Total Roads (kilometers)

Rajasthan – Student/Teacher Ratios

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RAJASTHAN: Closing the Development Gap

Rajasthan – Infant Mortality Ratio

Rajasthan – Female to Male Ratio

The incentives offered by the TFC are strongenough to support all states in achievingsubstantial deficit reduction in the medium term.A base case scenario would not differ from thereform scenario in terms of the deficit path thatthe state would follow in the medium term. A basecase scenario would only imply a lower growth inthe state's and centre's domestic product andconsequently lead to lower revenues accruing tothe state. However, state's expenditures wouldneed to be adjusted accordingly, to arrive at a

deficit path that eliminates the revenue deficit infour years. This would mean a slower growth ofexpenditure and have associated implications forthe composition of expenditure. Rajasthan wouldnevertheless still have to bear fixed committedexpenditure in terms of salaries, pensions andinterest payments under a lower growth base case.However, the reduced fiscal space for O&M andother current expenditure would restrict the state'sscope to fully implement its changes in strategicspending patterns.

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Annex

Annex 2Medium Term Fiscal Program for Low Growth Scenario

2005/06 2006/07 2007/08 2008/09 2009/10Projected Projected Projected Projected Projected

Growth in total revenue

Reform case 17% 13% 12% 12% 12%

Base case 14% 10% 10% 10% 10%

Growth in state's revenue

Reform case 15% 12% 12% 12% 12%

Base case 12% 10% 10% 10% 10%

Growth in central revenue

Reform case 18% 15% 10% 10% 11%

Base case 16% 10% 10% 10% 10%

Growth in total expenditure

Reform case 12% 9% 9% 8% 10%

Base case 9% 6% 7% 6% 8%

Growth in current expenditure

Reform case 11% 9% 9% 8% 10%

Base case 8% 5% 7% 6% 8%

Growth in capital expenditure

Reform case 15% 10% 10% 10% 11%

Base case 12% 8% 8% 8% 9%

Annual Growth Rates: Revenue and Expenditure in the Reform Case vs. Base Case

Agha, Ali and Jonathan Haughton (1996),"Designing VAT Systems: Some EfficiencyConsiderations", Review of Economics and StatisticsVolume 78 pp. 303- 08.

Confederation of Indian Industry (2004), DrivingGrowth through Reforms: A Comparative Analysis ofLabor Practices in Select Northern Region States,Northern Region, July.

Deaton, Angus and Jean Dreze (2002), "Povertyand Inequality in India: A Re-Examination",Economic and Political Weekly of India, September 7, pp 3729-3748.

Government of Rajasthan (2002), RajasthanHuman Development Report 2002, Jaipur.

Kijima, Yoko and Peter Lanjouw (2004),"Agricultural Wages, Employment Shares andPoverty in Rural India", Draft, World Bank.

Paul, Samuel, Suresh Balakrishnan, K. Gopakumar,Sita Sekhar and M. Vivekananda (2004), "The Stateof India's Public Services: Benchmarks for theStates", Economic and Political Weekly of India,February 28, pp 920-933.

Rajan, S.I. (2001), "Social Assistance for the PoorElderly: How Effective?", Economic and PoliticalWeekly of India, February 24, pp 613-617.

Planning Commission (2002), India National HumanDevelopment Report 2001, Government of India.

World Bank (2004), Re-energizing the AgriculturalSector to Sustain Growth and Reduce Poverty,Washington DC.

World Bank (2005), Agricultural Growth for the Poor- An Agenda for Development, Washington DC.

The following documents have also been used in theanalysis, and for background information and data:

Acharya, S.S. and Surjeet Singh (1999), "EconomicPerformance of Rajasthan", Institute of DevelopmentStudies, Jaipur, June.

Basu, S.R. (2004), "Economic Growth, Well-Beingand Governance under Economic Reforms:Evidence from Indian States", Graduate School ofInternational Studies, Geneva, mimeo.

Besley, T., Burgess. R. and B. Esteve-Volart (2005),"Operationalising Pro-Poor Growth: India CaseStudy", Department of Economics, London School ofEconomics, mimeo.

Bhattacharya, B.B. and S. Satkhivel (2004),"Regional Growth and Disparity in India:Comparison of Pre- and Post-Reform Decades",Economic and Political Weekly of India, March 6, pp. 1071-2077.

Centre for Monitoring Indian Economy (2000),Profiles of Districts, New Delhi, India.

Confederation of Indian Industry, Northern Region(2003), Rajasthan: An Agenda for Growth, September.

Government of Rajasthan, Budget Documents,2005-06 and various years.

Government of Rajasthan, (2005-06) Budget Speech.

Government of Rajasthan, Draft Annual Plan,2005-2006, (Volume - I), Planning Department.

Government of Rajasthan, Draft Annual Plan,2005-2006, (Volume - II), Planning Department.

Government of Rajasthan, Draft Annual Plan,2004-2005, (Volume - I), Planning Department.

Government of Rajasthan, Modified Budget Study,2004-05.

Government of Rajasthan, (2004), Statistical Abstract,2002, Directorate of Economics & Statistics.

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References

Government of Rajasthan (2004), Economic &Purpose Classification of State Government Budget,(2001-02 A/C, 2002-03 R.E. & 2003-04 B.E),Directorate of Economics & Statistics

Government of Rajasthan (2004), "Presentation onWater Sector", Spetember 24.

Government of Rajasthan (2004), "Presentation onState Finance," September 24.

Government of Rajasthan (2004), "SectoralPresentation for World Bank on Rural Development",September 24.

Government of Rajasthan (2004), "OvercomingInvestment Climate Constraints", Presentation.

Government of Rajasthan (2003), AgriculturalStatistics of Rajasthan, 1973-74 to 2001-02,Directorate of Economics & Statistics.

Government of Rajasthan (2003), Estimates ofNet District Domestic Product of Rajasthan, 1991-92 to 1999-2000, Directorate of Economics &Statistics.

Government of Rajasthan (2002), Index ofIndustrial Production 1998-2001, (Base Year - 1970),Directorate of Economics & Statistics.

Government of Rajasthan (2002), Rajasthan in IndianEconomy, Directorate of Economics & Statistics.

Government of Rajasthan (2000), Estimates of GrossFixed Capital Formation in Rajasthan (1990-91 to1998-99), Directorate of Economics & Statistics.

Jha, R, B. Fiswar and U. D. Biswal (2000), "AnEmpirical Analysis of the Impact of PublicExpenditures on Education and Health on Povertyin Indian States", Australia South Asia ResearchCentre, Australian National University, mimeo.

Nagaraj, R., A Varoudakis, and M. Veganzones(1998), “Long-Run Growth Trends and ConvergenceAcross Indian States”, Working Paper No. 131,OECD Development Centre.

Shetty, S.L. (2003), “Growth of SDP and StructuralChange in State Economies: Interstate Comparisons”,Economic and Political Weekly of India, December, pp. 5189-5200.

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References