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

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

• Deepak Mishra
• South Asia PREM (SASPR) Unit

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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
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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

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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 dont have access to
  VAT/GST.

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

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• II. This reduced the developmental role
  of the state governments

Aggregate expenditure trends for Indias states
as a percentage of GDP
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• II. The situation was not too different in the
  Pakistani Provinces

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• 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)
Notes Education and health expenditure also
adjusted for cost of 5th Pay Commission Salary
Increases
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Experience so far .
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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
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Sub-National DPLs in Pakistan
North West Frontier Province 2002, 2004,
2006 90m, 90m, 90m
Sindh -2001 100m
WB
ADB
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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 TD 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

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Indian Experience
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1. Significant and Systematic Reduction in
Consolidated Deficit to GSDP ratio in All SAL
States
UP 2.46
AP 2.07
KN2.94

• 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

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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

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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
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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
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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)

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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)

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Criticism of Sub-national DPLs

• Cant 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

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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!

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Pakistani Experience
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Considerably Different Experience than India

• DPLs enjoy high political support
• Three successive DPLs to NWFP is some sort of a
  record in the Banks 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

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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