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Report No 19471-IN India Policies to Reduce Povertyand Public Disclosure Authorized Accelerate Sustainable Development January31, 2000 PovertyReduction and EconomicManagement Unit SouthAsia Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Documentof the World Bank CURRENCY Rs/ US$ Currency Official Unified Market a Prior to June 1966 4.76 June 6, 1966 to mid-December 1971 7.50 Mid-December 1971 to end-June 1972 7.28 1971-72 7.44 1972-73 7.71 1973-74 7.79 1974-75 7.98 1975-76 8.65 1976-77 8.94 1977-78 8.56 1978-79 8.21 1979-80 8.08 1980-81 7.89 1981-82 8.93 1982-83 9.63 1983-84 10.31 1984-85 11.89 1985-86 12.24 1986-87 12.79 1987-88 12.97 1988-89 14.48 1989-90 16.66 1990-91 17.95 1991-92 24.52 1992-93 26.41 30.65 1993-94 31.36 1994-95 31.40 1995-96 33.46 1996-97 35.50 1997-98 37.16 1998-99 42.00 September 1999 43.54 October 1999 43.45 November 1999 43.39 Note: The Indian fiscal year runs from April 1 through March 31. Source: IMF, International Finance Statistics (IFS), line "rf"; Reserve Bank of India. a A dual exchange rate system was created in March 1992, with a free market for about 60 percent of foreign exchange transactions. The exchange rate was reunified at the beginning of March 1993 at the free market rate. Vice President Mieko Nishimizu Country Director Edwin Lim Sector Director Roberto Zagha Staff Members Sanjay Kathuria, James Hanson ii TABLE OF CONTENTS C urrency ........................................................................ i Acknowledgements ....................................................................... vii Abbreviations and Acronyms ....................................................................... viii Economic Development Data ....................................................................... ix India Social Indicators ....................................................................... xi EXECUTIVE SUMMARY ....................................................................... xiii CHAPTER 1: POVERTY REDUCTION: PROGRESS AND CHALLENGES A. Overview.................................................. I B. Poverty Reduction: The long view from the 1950s to the early 1990s........................... I C. Reduction in Poverty in the Mid-i 990s: A Mixed Picture............................................ 5 D. Macroeconomic Concerns: Inflation and Agricultural Performance............................. 7 E. Divergence in Poverty Reduction between States................................................... 9 F. Summary.................................................. 10 CHAPTER 2: IMPROVING HEALTH AND EDUCATION FOR THE POOR A. Overview.......................................................... 13 B. Education and Health Outcomes in India .......................................................... 13 C. Characteristics of Education and Health Services....................................................... 16 D. A Similar Story in Health and Education Services for the Poor ...................................20 E. Solutions Being Found in Education and Health.......................................................... 22 F. A Way Forward: Delivering More and Better Education and Health to the Poor......... 24 CHAPTER 3: REDUCING POVERTY FASTER: THE ROLE OF STATE FISCAL AND SECTOR REFORMS A. Overview.......................................................... 27 B. Differential Growth and Widening Disparities Among States ................................... 28 C. State-Level Reforns to Reduce Poverty .......................................................... 31 D. Cutting the States' Fiscal Deficits and Raising Their Development Spending............ 31 E. Reforming Power and Irrigation at the State Level ......................................................35 F. Decentralization: Emerging Issues and The 1 l'hFinance Commission........................ 36 CHAPTER 4: GOOD GOVERNANCE: THE BUSINESS OF GOVERNMENT A. Overview......................................................... 41 B. Rule of law, contract enforcement, and the business environment............................... 43 C. Improving Public Administration: Strengthening Performance Incentives and Accountability in a Downsized Civil Service ......................................................... 46 D. Sound Budgetary and Financial Management......................................................... 47 E. Improving Public Services through Effective Decentralization.................................... 52 iii CHAPTER 5: IMPROVING INFRASTRUCTURE TO REDUCE POVERTY AND SUPPORT GROWTH A. Overview..................................................... 57 B. India's Public Provision of Infrastructure ........................ ......... ____...... 58 C. Attracting Private Investment in Infrastructure - Evolving Policies............................ 61 D. Developing Specialist Regulatory Agencies..................................................... 64 CHAPTER 6: INCREASING THE DEMAND FOR LABOR: DEREGULATION TO INCREASE EXPORT GROWTH, AGRICULTURAL GROWTH AND LABOR MARKET FLEXIBILITY A. Overview..................................................... 67 B. Deregulationto Increase Trade, Growth and Labor Demand .......................................68 C. Improving Labor Market Flexibility..................................................... 76 D. Improving Agriculture's Contributionto Development............................................... 79 CHAPTER 7: RAISING AND USING CAPITAL WELL: THE FINANCIAL SYSTEM AND CORPORATE GOVERNANCE A. Sound Financial System to Allocate Credit and Produce Vulnerability....................... 83 B. Strengthening the Framework for Corporate Governance............................................ 93 CHAPTER 8: GROWTH, MACROECONOMIC DEVELOPMENTSAND POLICIES A. Overview .97 B. Economic Growth in 1998-99 and Over the Longer Run.97 C. Inflation and Monetary Policy.101 D. Reducing the Fiscal Deficit and Realigning Government to Speed-up Development and reduce vulnerability .105 E. Balance of Payments .115 CHAPTER 9: INDIA'S DEVELOPMENTPROSPECTS .119 List of Text Tables Table 1.1 Annual Average Growth in Price Indices .................................................................... 7 Table 1.2 Annual Average Growth in Wage Rates of Unskilled Agriculture Male Laborers....................... 8 Table 3.1 Indian States' (14 Largest) Real per Capita Income (Rs.1980-81 prices) ....................................29 Table 3.2 Standard Deviation of States' Per Capita Output................................................................... 29 Table 3.3 State Poverty and Social Indicators and Their Standard Deviations........................................... 30 Table 3.4 Main Fiscal Trends in All States (percent of GDP)................................................................... 32 Table 3.5 Financing of All States Fiscal Deficit (percent of GDP)............................................................. 33 Table 5.1 India - Investments in Infrastructure (percent of GDP), 1981-97............................................... 59 Table 6.1 India's Regulation of Agricultural Markets and Agro-Industry.................................................. 81 Table 8.1 GDP Growth (percent per year), 1981-99................................................................... 98 Table 8.2 India and High-Growth East Asia: A Statistical Comparison.................................................... 101 Table 8.3 Fiscal Slippage, 1998-99.107 Table 8.4 Fiscal Deficit in the New Accounting Framework: 1990-2000.108 Table 8.5 Change in Social and Economic Infrastructure and Interest Spending (1991/92 & 1997/98).111 Table 8.6 Finances of Central Public Enterprises: 1990-00.111 Table 8.7 Balance of payments (US $ Million), 1990-2001.118 iv Boxes Box 1.1 National Sample Survey versus National Accounts......................................................................... 6 Box 1.2 Reforms in India's Anti-Poverty Programs.......................................................................... 11 Box 2.1 India's District Primary Education Program.......................................................................... 17 Box 2.2 Himachal Pradesh: A Successful Experiment in Improving Primary Education ...........................22 Box 3.1 Financing State Governments' Deficit: Borrowing and Guarantees............................................... 33 Box 3.2 India's Experience with State Level VAT.......................................................................... 34 Box 3.3 The Growing Importance of Small Savings in State Finances...................................................... 38 Box 4.1 Project LARGE.......................................................................... 43 Box 4.2 Public Enterprise Governance- A System that has not Delivered ...............................................48 Box 4.3 The Effectiveness of Voice .......................................................................... 52 Box 4.4 Improving Environmental Governance.......................................................................... 53 Box 5.1 Progress in Infrastructure Provision.......................................................................... 58 Box 5.2 The Perverse Impact of Subsidies.......................................................................... 61 Box 5.3 Privatizing Distribution in Orissa.......................................................................... 63 Box 5.4 Design of Regulatory Agency Powers - Lessons from Telecoms.................................................