Report No. 34580-IN India Inclusive Growth and Service Delivery: Building on India’s Success India’s on Building Delivery: Service and 34580-IN Growth No. Report Inclusive India Public Bank World Document of the Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized 15, 2006 June Review Policy Development Success PublicBuilding on India’s and Service Delivery: Growth Inclusive DisclosureIndia AuthorizedReport No. 34580-IN Report Team and Acknowledgments This Report was prepared by a Team led by Rinku Murgai, Lant Pritchett, and Marina Wes, under the overall guidance of Sadiq Ahmed, Michael Carter, Ijaz Nabi and Kapil Kapoor. The peer reviewers were Gaurav Datt, Manuela Ferro, Ricardo Hausmann, Ajay Shah, and Michael Walton. The team received helphl feedback from Shankar Acharya, Suman Bery, and N.C. Saxena, and from key government officials. The DPR Team received valuable comments on the draft report from Government of India. A large number of comments were also received from other Bank colleagues. Major contributors to the report were Brian Pinto, Farah Zahir, and Gaobo Pang on fiscal policy, Priya Basu on the investment climate for industry and services and the financial sector, Dina Umali-Deininger on agriculture and rural development, Clive Harris on infrastructure, Ahmad Ahsan on labor markets, Geeta Sethi and Yamini Aiyar on decentralization, Philip O’Keefe on Social Protection, Sumir La1 on the political economy ofreform, Christine Allison on human development, Maitreyi Das on caste and gender, R.R Mohan on tribals, Salimah Samji on rural livelihoods, Joel Turkewitz on procurement and Smita Misra on rural water supply. Arindam Nandi and Arpita Chakraborty provided research assistance. A background paper on market integration was prepared by ICRIER in New Delhi. Bhaskar Naidu provided statistical support. Administrative support was provided by Shiny Jaison and Rita Soni. This report was edited by Bruce Ross-Larson and his team at Communications Development Inc., Washington DC. i TABLE OF CONTENTS Introduction................................................................................................................................... x Chapter 1. Overview of India’s development progress and pressing challenges.................... 1 India’s growth patterns: a star performer ................................................................. 2 Recent growth experience .............................................................................. 5 Clues from the patterns of growth ................................................................. 9 Core public services: implementation is everything .............................................. 10 Urban and rural water supply ..................................................................... 13 Health ........................................................................................................... 14 Elementary education .................................................................................. 16 A booming economy with growing gaps ............................................................... 17 Differences across states and regions .......................................................... 18 Differences a cross h ouseho Ids and individua1s ........................................... 24 Guide to the rest ofthe report ................................................................................ 27 Introduction to Part I: Improved accountability for better services .................................... 29 Chapter 2. Service Delivery: A Diagnostic ............................................................................... 31 A framework for understanding service delivery outcomes .................................. 31 The state ofservice delivery and diagnosis ........................................................... 36 Service delivery: access and satisfaction ..................................................... 36 State of service delivery: providers .............................................................. 38 State of service delivery: assets ................................................................... 41 Improving service delivery performance: more than business as usual ................44 Increased budgets: business as usual with more money .............................. 46 Greater electoral competition ...................................................................... 49 Piecemeal reform and “recapture” ............................................................. 50 Chapter 3 . Improving internal accountability: ....................................................................... 52 Strengthening accountability for service delivery: Three Rs of information ........53 Improved compact: unbundling the roles ofgovernment ...................................... 55 Using technology to strengthen services by process engineering .......................... 59 Handling the political economy ofinternal and administrative reform ................. 61 Chapter 4 . Local governments and service delivery in India ................................................. 64 The three F’s of decentralization: funds. functions. and functionaries ..................65 fund^ ............................................................................................................ 65 Functions: blurred delegation ..................................................................... 68 Functionaries ............................................................................................... 69 Status of the three F’s in PRI decentralization....................................................... 69 Aligning the three F’s for more effective services from local governments .........70 Functions...................................................................................................... 70 Funds ............................................................................................................ 73 Functionaries ............................................................................................... 74 Capacity building for accounting and accountability with social inclusion .......... 75 Accounting: capacity building for financial management ........................... 76 Strengthening accountability ....................................................................... 77 Strengthening the “synapse” between communities and governments for better local governance .................................................................................................... 78 ... 111 Reservations ................................................................................................. 78 Local governance and user and community groups .................................... 80 Convergence for better.. local governance .............................................................. 82 Handling the transition........................................................................................... 83 Chapter 5: Community and Private Sector as Providers: Infrastructure and More........... 85 A focus on infrastructure services .......................................................................... 85 Three modes ofexternal reform: communities. contracting out. and PPPs ..........87 Unbundling. delegation. autonomy ........................................................................ 90 Enforceability: Subsidies and user fees ................................................................ 91 External accountability and information................................................................ 94 Political economy ofexternal reforms of service provision .................................. 96 The role of the center in promoting-or delaying.. reform .......................... 98 Introduction to Part I1.............................................................................................................. 101 Chapter 6 . Easing constraints to sustain rapid growth ......................................................... 103 Infrastructure as a binding constraint ................................................................... 105 The fiscal deficit as a binding constraint ............................................................. 109 Continuingfiscal adjustment ..................................................................... 109 Increasing priority developmental spending ............................................. 112 Prospects and risks ............................................................................................... 116 Chapter 7. Accelerators to equalize the benefits of growth .................................................. 120 Labor laws............................................................................................................ 120 The financial sector .............................................................................................. 123 Chapter 8 . Reforming agriculture to combat rural poverty ................................................. 126 Agricultural productivity and growth .................................................................. 129 Development pathways for growth ...................................................................... 131 Intenszjkation ............................................................................................ 131 Diverszjkation ............................................................................................ 132 Nonfarm linkages ......................................................................................