Download Deepak Mishra - Sub-National Development Policy

Sub-National Development Policy
Lending (DPL) in South Asia
Deepak Mishra
South Asia PREM (SASPR) Unit
The Rationale for Sub-National DPLs
in 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 terminology
India: Center and States
Pakistan: Federation and Provinces
I. Separation of Legislative Powers
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.
Union or
Federal
List
Concurrent
or Joint
List
State or
Province
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
Need for a Fiscal Transfer (India)
Expenditure and Revenue Position of India's
Central Government
Expenditure and Own Revenue Position of
Indian State Governments
16%
14%
20%
18%
Center's Revenue / GDP
16%
State's Expenditure / GSDP
12%
14%
10%
12%
10%
8%
Center's Expenditure / GDP
8%
6%
6%
State's Ow n Revenue / GSDP
4%
4%
2%
2%
2003-04
2001-02
1999-00
1997–98
1995–96
1993–94
1991-92
1989–90
1987–88
2003-04
2001-02
1999-00
1997–98
1995–96
1993–94
1991-92
1989–90
1987–88
1985–86
1985–86
0%
0%
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
9.0%
7.0%
6.0%
5.0%
Poor State s
4.0%
3.0%
01-02
00-01
99-00
98-99
97-98
96-97
95-96
94-95
93-94
92-93
91-92
90-91
89-90
88-89
87-88
86-87
1.0%
02-03 RE
O the r State s
2.0%
85-86
Percent of GDP
8.0%
II. This reduced the developmental role
of the state governments…
Aggregate expenditure trends for India’s states as a percentage of GDP
16
15
13
12
11
10
Total expenditure
Expenditure excluding interes t and pensions
Exp. Excl. int., pensions & cost of 5t h CPC
01-02
00-01
99-00
98-99
97-98
96-97
95-96
94-95
93-94
92-93
9
91-92
Percent
14
II. The situation was not too different in
the Pakistani Provinces
Pakistani Provinces: Expenditure in Social and Community Services
(% of GSDP)
3.5
3.0
Punjab
2.5
2.0
Sindh
1.5
1.0
0.5
2004/05
2003/04
2002/03
2001/02
2000/01
1999/00
1998/99
1997/98
1996/97
1995/96
1994/95
1993/94
1992/93
1991/92
1990/91
0.0
III. The developmental impact of the crisis felt
disproportionately in the poorer states…
Average real growth rates of expenditures in some key sectors
(Low-income and other major India States)
Education
Health
Irrigation maintenance
Roads maintenance
Capital Expenditure
Low Income States
Other States
1990/91- 1996/97 1996/97- 2000/01 1990/91- 1996/97 1996/97- 2000/01
2.8%
-0.2%
3.3%
2.6%
2.2%
-2.6%
2.8%
0.3%
2.6%
-2.0%
6.0%
4.5%
1.5%
1.0%
0.4%
5.0%
-4.4%
2.9%
3.8%
7.6%
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
Orissa - 2005; $200m
AP- 2001 & 2004; $250m
& $220 m
WB
ADB
Karnataka – 2001 &
2002, $150m & $100m
Sub-National DPLs in Pakistan
North West Frontier Province
2002, 2004, 2006
$90m, $90m, $90m
Sindh -2001; $100m
WB
ADB
Objective and Program Coverage of DPLs
•Tax policy & administration
•Budget management
•Expenditure rationalization
•Protection of social sec. expd.
•Financial management
•Reducing Cross-subsidy
•Unbundling / Corporatization
•Metering and reducing T&D losses
V. Sectoral
Reforms, e.g.
power/education
I. Fiscal
Adjustment
and Reforms
Overarching Objective
Create a conducive environment
for rapid and sustained
growth with poverty reduction
IV. Public
Sector
Reforms
•Civil service reforms: (VRS,
Transfers, Anti-corruption)
•Service delivery: (Right to
information, e-governance,
procurement reforms)
III. Poverty
Monitoring
II.Improving
Investment
Climate
•Disinvestments /
Privatization
•Entry and Exit restrictions
•Monitoring &Evaluation •Agricultural marketing
•Quarterly IIP
•Labor market reform
•GSDP forecasting
Indian Experience
1. Significant and Systematic Reduction in
Consolidated Deficit to GSDP ratio in All SAL States
10%
Pre-SAL
Post-SAL
9%
8%
UP: 2.46%
7%
UP: 2000
6%
Andhra Pradesh: 2001
5%
AP: 2.07%
KN:2.94%
4%
3%
Karnataka: 2001
2%
Beginning of Bank's involvement in the State
(I.e. one year priorto the actual
disbursement of the loan)
1%
0%
T-3
T-2
T-1
T
T+1
T+2
T+3
•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
2. Considerable Decline in All Forms of Deficit
Between the Pre- and Post-DPL Periods
8%
Pre-SAL
Post-SAL
7%
Consolidated
Deficit to GSDP
6%
5%
4%
Capital Expenditure
to GSDP
Fiscal Deficit
to GSDP
Interest Payments
to GSDP
3%
2%
Revenue Deficit
to GSDP
1%
Beginning of Bank's involvement in the State
(I.e. one year prior to the actual
disbursement of the loan)
Primary Deficit
to GSDP
0%
T-3
T-2
T-1
T
T+1
T+2
T+3
• 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
3. Impressive Gains in Power Sector Reform
(Power Sector Ratings of Selected States)
AP
13.5
Karantaka
18.0
12.5
Rajsthan
15.0
10.0
Haryana
Gujarat
Tamil nadu
4.5
Punjab
11.5
2.0
UP
6.8
WB
7.3
22.0
14.1
18.0
3.5 2.0
11.3
19.5
16.0
4.5
Substantial increase
and rebalancing of
power tariff rates;
Unbundling in KN;
Anti-theft drive in AP
3.5
2.0
3.5
19.5
15.0
4.0
17.0
15.0
12.6
4.5
19.5
13.5
11.0
4.0
22.0
14.5
16.0
8.5
17.0
14.0
16.0
13.0
Maharashtra
19.0
4.0
8.5
10.6
2.0
State government related parameters
SERC-related parameters
10.0
8.6
6.5
8.0
7.0
3.5
Business risk analysis
Financial risk analysis
Orissa
5.0
Kerala 2.0
0.0
MP
5.0
0
13.0
11.0
18.5
8.0
10
6.5
10.0
20
0.0
Others
1.0
2.0
30
Source: ICRA-CRISIL Study commissioned by Ministry of Power, GoI
40
50
60
70
80
4. Less Tangible Benefits of DPLs:
Higher Credit Ratings
Credit Ratings of Selected Indian States, 1996-2002
AAA
AA
16
Karnataka
A+
12
BBB
10
BB+
States with DPLs
14
AP
8
6
Gujarat
BB4
Maharashtra
(Default )
C
2
States without DPLs
CRISIL 0
Ratings
Source: CRISIL
1996
1997
1998
1999
2000
2001
2002
5. Some of the Major Policy changes
brought about by the DPLs
Fiscal Sustainability Measures
Fiscal 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 Measures
Single Window Clearance Act (AP)
Amendment to Contract Labor Act (AP)
Karnataka Industry Facilitation Act (Karnataka)
Public transport deregulation (Karnataka)
Governance reforms
Right 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