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Sub-National Development Policy Lending (DPL) in South Asia
Deepak Mishra
South Asia PREM (SASPR) Unit
The Rationale for Sub-National DPLsin South Asia
I. Legislative power vs. Revenue allocation between
Center and States*
II. In the late 1990s, the States were in a fiscal crisis; Public finance
of the Center was weak
III. Impact worse in poorer states; Can MDGs be met?
WB/ADB stepped in to fill the fiscal
gap of SGs
*Note on terminologyIndia: Center and StatesPakistan: Federation and Provinces
I. Separation of Legislative Powers
Union or Federal
List
Concurrentor Joint
List
State or Province
List
Legislative powers of the government, that is the power to make laws on a specific subject, are separated by means of the three lists - union list, state list and concurrent list. Local Government
India: 97 subjects in UL; 66 in SL and 47 in CL Pakistan: 57 subjects in FL; 47 in CL and rest in the PL
I. Vertical Imbalance: revenue allocation vs. the legislative division of power
Expenditure and Revenue Position of India's Central Government
0%
2%
4%
6%
8%
10%
12%
14%
16%
1985
–86
1987
–88
1989
–90
1991
-92
1993
–94
1995
–96
1997
–98
1999
-00
2001
-02
2003
-04
Center's Revenue / GDP
Center's Expenditure / GDP
Expenditure and Own Revenue Position of Indian State Governments
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1985
–86
1987
–88
1989
–90
1991
-92
1993
–94
1995
–96
1997
–98
1999
-00
2001
-02
2003
-04
State's Ow n Revenue / GSDP
State's Expenditure / GSDP
Need for a Fiscal Transfer (India)
The vertical imbalance is more pronounced in Pakistan as its provinces don’t have access to VAT/GST.
II. Indian States faced a fiscal crisis in the late nineties……
State fiscal deficit: poor and 11 major states
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
85-8
6
86-8
7
87-8
8
88-8
9
89-9
0
90-9
1
91-9
2
92-9
3
93-9
4
94-9
5
95-9
6
96-9
7
97-9
8
98-9
9
99-0
0
00-0
1
01-0
2
02-0
3 R
E
Per
cen
t o
f G
DP
Poor States
O ther States
II. This reduced the developmental role of the state governments…
Aggregate expenditure trends for India’s states as a percentage of GDP
9
10
11
12
13
14
15
16
91-9
2
92-9
3
93
-94
94
-95
95
-96
96-9
7
97-9
8
98-9
9
99-0
0
00
-01
01
-02
Pe
rce
nt
Total expenditureExpenditure excluding interes t and pensionsExp. Excl. in t., pensions & cost of 5th CPC
II. The situation was not too different in the Pakistani Provinces
Pakistani Provinces: Expenditure in Social and Community Services(% of GSDP)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1990
/91
1991
/92
1992
/93
1993
/94
1994
/95
1995
/96
1996
/97
1997
/98
1998
/99
1999
/00
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
Punjab
Sindh
III. The developmental impact of the crisis felt disproportionately in the poorer states…
Low Income States Other States 1990/91- 1996/97 1996/97- 2000/01 1990/91- 1996/97 1996/97- 2000/01 Education 2.8% -0.2% 3.3% 2.6% Health 2.2% -2.6% 2.8% 0.3% Irrigation maintenance 2.6% -2.0% 6.0% 4.5% Roads maintenance 1.5% 1.0% 0.4% 5.0% Capital Expenditure -4.4% 2.9% 3.8% 7.6%
Average real growth rates of expenditures in some key sectors
(Low-income and other major India States)
Notes: Education and health expenditure also adjusted for cost of 5 th Pay Commission Salary Increases
Experience so far ….
Sub-National DPLs in India
Uttar Pradesh -2000; $250m
Karnataka – 2001 & 2002, $150m & $100m
AP- 2001 & 2004; $250m & $220 m
Orissa - 2005; $200m
ADBWB
Sub-National DPLs in Pakistan
Sindh -2001; $100m
North West Frontier Province2002, 2004, 2006
$90m, $90m, $90m
WBADB
Overarching ObjectiveCreate a conducive environment
for rapid and sustained growth with poverty reduction
I. Fiscal Adjustment and Reforms
V. SectoralReforms, e.g.
power/education
IV. Public Sector
Reforms
II.ImprovingInvestment
Climate
Objective and Program Coverage of DPLs•Tax policy & administration•Budget management•Expenditure rationalization•Protection of social sec. expd.•Financial management
•Disinvestments / Privatization
•Entry and Exit restrictions•Agricultural marketing
•Labor market reform
•Civil service reforms: (VRS, Transfers, Anti-corruption)•Service delivery: (Right to information, e-governance, procurement reforms)
•Reducing Cross-subsidy•Unbundling / Corporatization•Metering and reducing T&D losses
III. Poverty Monitoring
•Monitoring &Evaluation•Quarterly IIP •GSDP forecasting
Indian Experience
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
T-3 T-2 T-1 T T+1 T+2 T+3
Post-SALPre-SAL
UP: 2000
Karnataka: 2001
Andhra Pradesh: 2001
Beginning of Bank's involvement in the State(I.e. one year priorto the actual
disbursement of the loan)
•Sharp increase in consolidated deficit prior to the DPLs•Gradual but systematic reduction afterwards•In the medium-term, the size of fiscal corrections in AP and KN are almost identical
1. Significant and Systematic Reduction in Consolidated Deficit to GSDP ratio in All SAL States
UP: 2.46%
KN:2.94%AP: 2.07%
0%
1%
2%
3%
4%
5%
6%
7%
8%
T-3 T-2 T-1 T T+1 T+2 T+3
Post-SALPre-SAL
Consolidated Deficit to GSDP
Beginning of Bank's involvement in the State(I.e. one year prior to the actual
disbursement of the loan)
Fiscal Deficit to GSDP
Primary Deficit to GSDP
Revenue Deficitto GSDP
2. Considerable Decline in All Forms of Deficit Between the Pre- and Post-DPL Periods
• Sharp correction in consolidated (fall in power sector borrowing) and primary deficits • The decline in revenue and fiscal deficit is less steep due to growing interest payments and conscious decision to protect capital expenditure
Capital Expenditure to GSDP
Interest Payments to GSDP
3. Impressive Gains in Power Sector Reform
5.0
2.0
5.0
7.3
6.8
3.5
4.5
12.6
8.5
13.0
10.0
12.5
13.5
8.0
0.0
13.0
10.0
15.0
2.0
2.0
11.5
11.0
16.0
16.0
15.0
18.0
6.5
11.0
8.0
8.6
8.5
16.0
18.0
14.1
15.0
13.5
14.5
14.0
19.0
10.0
18.5
7.0
6.5
10.6
19.5
19.5
11.3
22.0
17.0
19.5
22.0
17.0
2.0
1.0
0.0
3.5
2.0
4.0
3.5
2.0
3.5
4.5
4.0
4.5
4.0
0 10 20 30 40 50 60 70 80
MP
Kerala
Orissa
WB
UP
Punjab
Tamil nadu
Gujarat
Maharashtra
Haryana
Rajsthan
Karantaka
AP
State government related parameters
SERC-related parameters
Business risk analysis
Financial risk analysis
Others
(Power Sector Ratings of Selected States)
Source: ICRA-CRISIL Study commissioned by Ministry of Power, GoI
Substantial increase and rebalancing of power tariff rates; Unbundling in KN; Anti-theft drive in AP
4. Less Tangible Benefits of DPLs: Higher Credit Ratings
0
2
4
6
8
10
12
14
16
1996 1997 1998 1999 2000 2001 2002
Maharashtra
Gujarat
AP
Karnataka
CRISILRatings
(Default )
AAA
AA
A+
BBB
BB+
BB-
C
Credit Ratings of Selected Indian States, 1996-2002
Source: CRISIL
States with DPLs
States without DPLs
5. Some of the Major Policy changes brought about by the DPLs
Fiscal Sustainability MeasuresFiscal Responsibility Act (Karnataka, later emulated by Tamil Nadu, Punjab and Kerala; similar decision has also been announced in UP )
Fully developed MTFPs; Departmental MTEFs (Karnataka)
Improvements in budget execution (e.g. timely cash release in AP, public investment spending reallocation in Orissa)
Parametric pension reforms (TN and KN) and defined contribution pension scheme for new staff (TN)
5 (contd.). Some of the Major Policy changes brought about by the DPLs
Investment Climate MeasuresSingle Window Clearance Act (AP)
Amendment to Contract Labor Act (AP)
Karnataka Industry Facilitation Act (Karnataka)
Public transport deregulation (Karnataka)
Governance reformsRight to Information Act made effective (Karnataka)
Strengthened anti-corruption enforcement (AP)
Criticism of Sub-national DPLs
Can’t deal with aggregate / national-level shocks?
Unwieldy in coverage of sectors / areas
Difficult to undertake a pure technical assessment of all triggers
Pushing neo-liberal policies through backdoor
Political fall-out: SGs that were the most active borrowers of DPLs in India lost elections
Summary (India)
Pros
Significant and systematic fiscal improvements
Benefits go beyond fiscal adjustment - Impressive gains in power sector reform; Other benefits
Major policy / legislative changes brought about by the DPLs that are expected to make state-level reforms in India more durable
Cons
Not everyone is convinced about the superiority of DPLs vs. Investment loans.
Policy reforms supported by DPLs are highly unpopular
Victim of its own success!
Pakistani Experience
Considerably Different Experience than India
DPLs enjoy high political support
Three successive DPLs to NWFP is some sort of a record in the Bank’s history
Almost 70 percent of loans / credits to Pakistan are now being channeled through DPLs
DPLs / DPCs in education, irrigation, health sector etc.
Sindh experience however shows that change of government continues to remain one of the main risk to the sustainability of DPLs
Lessons from Sub-National DPLs
Have full clarity in the division of legislative power between different layers of government
Need for greater transparency and objectivity in policy-based budget support instruments
Work across both sides of the political aisle to get bipartisan support for policies being supported by DPLs