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Sub-National Development Policy Lending (DPL) in South Asia

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

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Sub-National Development Policy Lending (DPL) in South Asia

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  1. Sub-National Development Policy Lending (DPL) in South Asia Deepak Mishra South Asia PREM (SASPR) Unit

  2. 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 WB/ADB stepped in to fill the fiscal gap of SGs III. Impact worse in poorer states; Can MDGs be met? *Note on terminology India: Center and States Pakistan: Federation and Provinces

  3. 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. State or Province List Union or Federal List Concurrent or Joint 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

  4. I. Vertical Imbalance: revenue allocation vs. the legislative division of power Need for a Fiscal Transfer (India) • The vertical imbalance is more pronounced in Pakistan as its provinces don’t have access to VAT/GST.

  5. II. Indian States faced a fiscal crisis in the late nineties……

  6. Aggregate expenditure trends for India’s states as a percentage of GDP II. This reduced the developmental role of the state governments…

  7. II. The situation was not too different in the Pakistani Provinces

  8. Average real growth rates of expenditures in some key sectors (Low-income and other major India States) III. The developmental impact of the crisis felt disproportionately in the poorer states… Notes: Education and health expenditure also adjusted for cost of 5th Pay Commission Salary Increases

  9. Experience so far ….

  10. Sub-National DPLs in India Uttar Pradesh -2000; $250m Orissa - 2005; $200m AP- 2001 & 2004; $250m & $220 m Karnataka – 2001 & 2002, $150m & $100m WB ADB

  11. Sub-National DPLs in Pakistan North West Frontier Province 2002, 2004, 2006 $90m, $90m, $90m Sindh -2001; $100m WB ADB

  12. 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 II.Improving Investment Climate IV. Public Sector Reforms III. Poverty Monitoring • 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) • Monitoring &Evaluation • Quarterly IIP • GSDP forecasting

  13. Indian Experience

  14. 1. Significant and Systematic Reduction in Consolidated Deficit to GSDP ratio in All SAL States UP: 2.46% AP: 2.07% KN:2.94% • 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

  15. 2. Considerable Decline in All Forms of Deficit Between the Pre- and Post-DPL Periods Capital Expenditure to GSDP Interest Payments to GSDP • 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

  16. 3. Impressive Gains in Power Sector Reform (Power Sector Ratings of Selected States) • Substantial increase and rebalancing of power tariff rates; Unbundling in KN; Anti-theft drive in AP Source: ICRA-CRISIL Study commissioned by Ministry of Power, GoI

  17. 4. Less Tangible Benefits of DPLs: Higher Credit Ratings Credit Ratings of Selected Indian States, 1996-2002 States with DPLs States without DPLs Source: CRISIL

  18. 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)

  19. 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)

  20. 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

  21. 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!

  22. Pakistani Experience

  23. 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

  24. 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

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