Report No. 44612-IN India Orissa in Transition Challenges for 2006­2010 November 21, 2008 Poverty Reduction and Economic Management India Country Management Unit South Asia Region Document of the World Bank Team and Acknawledgements This Economic Report was prepared by a team ledby V.J Ravishankar. Individual chapters were contributed by Deepak K. Mishra (economic growth), Marina Wes (fiscal turnaround), Clive G. Harris (infrastructure), Lant Pritchett (human development), and Vikram Menon (accountability for service delivery). Other staff who contributed are: Manivannan Pathy (agriculture), Varsha Marathe (investment climate), Srikumar Tadimalla (power and PPPs), Nupur Gupta (transport), Deepak Ahluwalia and Prabir Joardar (irrigation), &chard Clifford and Smita Misra (urban), Sangeeta Goyal (education), Peter Berman (health), Philip O'Keefe and Md.IhsanAjwad (social protection), MaitreyiDas (social impact and benefit sharing), Elena Glinskaya (poverty and employment trends), Pooja Churamani (economic and fiscal data ana1ysis)kta Soni and Shiny Jaison (document production). The work was camed out under the overall direction and management of Sadiq Ahmed (former Director, SASPR), Fayez Omar (SACIA), and Kapil Kapoor (former manager SASPR). The team is particularly grateful for valuable formal peer review comments from Professor Suresh Tendulkar (external), Mona Haddad (EASPR) and Sanjay Kathuria (ECSPE). The Report could not have been prepared without the close cooperation o f the Government o f Orissa (GOO),including and especially Ajit Kumar Tripathy, chief secretary; R. N.Bohidar, development commissioner; Subas Pani, former chief secretary; U.Sarat Chandran, former principal secretary, finance; B. K.Patnaik, principal secretary to chef minister and department o f public enterprises; R. N.Senapati, principal secretary, finance; Chinmoy Basu, former principal secretary, health; R. V. Singh, special secretary, planning and coordination; K. C. Badu, former special secretary, finance; N. C. Vasudevan, former principal secretary, housing and urban development, and presently principal secretary, science and technology; S. N. Tripathi, secretary, rural development and information technology; Madhur Sarangi, principal secretary, cooperation; I.Srinivas, former secretary, industries; S. P. Nanda, former principal secretary, forest and environment, and presently apculture production commissioner; H. S. Chahar, former principal secretary, agriculture, and presently principal secretary, forest and environment; A. K. Tripathy, former secretary, energy, and presently secretary, tourism; Mona Sharma, secretary, women and child development; R. K. Sharma, secretary, food supply and consumer welfare; Raja Lakshmi, former principal secretary, science and technology; G. C. Nanda, former director, vigilance; D. K.Dey, former secretary, works; A. K.Meena, managing director, IDCO, NitinChandra, former special secretary, general administration department; V.Tyagarajan, ex-inspector general, vigilance, L.N.Gupta, ex-secretary, steel and mines, G.V.V Sharma, secretary, revenue and disaster management, S.C. Patnaik, secretary, school and mass education, K.C. Mohanty, director, panchayati raj and B.C. Mohapatra, additional secretary, finance. The Team i s grateful to Dr. Saki Padhi, Director, Naba Krushna Choudhury Centre for Development Studies and representatives of civil society, nongovernmental organizations, academics and private sector firms in Onssa with whom wide range of consultations were undertaken. The report has been discussed with the Government o f India but does not necessarily bear their approval for all its contents, especially where the Bank has stated its judgments/opinions/policy recommendations. Table:ofContents QVERYIEW .................................................................................................................................................. i CHAPTER1:FRQMANAAEWICPASTTOA DYNAMICFUTURE.. ......................................... 14 A. Onssa's Long-Term Growth Prospects.......................................................................................... 15 B. The Implicationsfor Povertyand HumanDevelopment................................................................ 19 D. C. Conclusions .................................................................................................................................... 27 Sustaining the Growth Momentum ................................................................................................ 23 CHAPTER2: THEFISCAL TURNAROUND ...................................................................................... 28 A. Fiscal Consolidation....................................................................................................................... 29 B. Reforms inTax Policy and Administration.................................................................................... 31 D. C. ExpenditureRestructuring.............................................................................................................. 34 E. DebtRestructuring......................................................................................................................... 37 Public Expenditure and Financial Management............................................................................. 38 CXHPTm3:ADDRESSINGTHEINFRASTRUCTUREGAP ..................................................... 41 A. e +. 42 B. Transport ........................................................................................................................................ C. Power.............................................................................................................................................. 43 hgation......................................................................................................................................... 46 D. Urban Infrastructure....................................................................................................................... 47 E. Public-PrivatePartnerships............................................................................................................ 50 ...................... .............................. A. CHAPTER4: ADDRESSINGHUMANDEVELOPMENTNEEDS 53 Basic Education.............................................................................................................................. 53 B. Slull Development .......................................................................................................................... 58 C. Health............................................................................................................................................. 59 D. E. Social Protection ............................................................................................................................ 63 Conclusions .................................................................................................................................... 66 .......................................................... A. CHAPTER 5: ACCOUNTABIUTYFORSERVICEDEUVERY 67 B. Policy Makers and Service Providers............................................................................................. 67 C. Service Providers and the Public.................................................................................................... 70 Conclusions .................................................................................................................................... 72 CHAPTER 6: CONCLUSIONSFOR PRIORZTYSETTINGAND SEQUENCING ............................. 73 Figure A: Industryhas led the accelerated growth inOrissa since 2003 ...................................................... 3 Figure B: Rural poverty has declined faster inOnssa than inall o f India since 2000 .................................. 4 Figure C: Among Onssa's rural population. middle- and higher-income groups prospered........................ 5 Figure D: Orissa achieved the strongest fiscal correctionamong India's states in2000-06 ........................ 6 Figure 1. 1: Economic growth i s broadbased and faster than the national average .................................. 14 Figure 1.2: Orissa's share innational output has moved to a higher growth .......................................... Figure 1. 3: Orissa hadpoorly exploited its geographical advantages inthe past...................................... 16 17 Figure 1.4: Past policiesledto expansion o fthe miningsector butlittle industrialization ....................... 17 Figure 1.5: Onssa's regions vary markedly intheir percapita income ........................................ Figure 1.6: Orissa's poverty headcount ratio, compared with other Indian states ................................... 23 21 Figure 1.7: The cost o f doing business inOnssa has declined over time ......................................... 24 Figure 1.8: Orissa continues to lagbehind states with better investment climates ................................... Figure 1.9: A typical agricultural supply chain inOnssa i s highly fragmented.............................. 25 26 Figure 2. 1: Fiscal corrections were higher inOrissa than inany other Indian state in 1999-2006 ...........29 Figure 2. 3: Onssa i s the only state with significant contribution from all three sources Figure 2.2: Onssa has made large and consistent fiscal corrections ......................................................... 30 ..................31 Figure 2.4: Onssa's own tax revenues have risen from a wide variety o f sources ................................... Figure 2. 5: Figure 2. 6: Orissa's debt is becoming sustainable as it declines inrelation to revenue ........................... Significant fiscal savings have come from containingthe public sector salary bill ..............32 35 38 Figure 3. 1: Urban households inOnssa have poorer access to tap water ................................................ 48 Figure 4. 1: Students inOnssa test far behind those inother countries .................................................... 54 Figure 4. 3: Thousands of students in Orissa are able to meet .................................................................. Figure 4. 2: The vast majority o fyouth in Onssa do not reach the standard ............................................ 55 Figure 4. 4: Students from many kmds o f schools in Onssa show only modest gains ....................... 56 56 Figure 4.5: Reducingthe gaps .................................................................................................................. Figure 4.6: Private training institutions inOrissa .................................................................................... 57 59 Figure 4. 7: Onssa's households are vulnerable to a wide variety ofrisks ................................................ 65 ListofTables Table 1. 1: Selected Human Development Outcomes inOnssa, 1992/93-2005/06 .................................. 20 Table 2. 1:Contributionsto Fiscal Correction inOrissa, 1999/2000- 2007/08 .......................................... 30 Table 2. 2: Debt Swappedby the Government o f Orissa, 2002/03-2006/07 ............................................ 37 Table 3. 1: Key Infrastructure Indicators for Orissa and All India............................................................. 41 Table 3. 2: Rural Road Connectivity inOnssa, by Village Population...................................................... 42 Table 3. 3: Percentage o f Households with Access to Electricity ............................................................. 44 Table 3. 4: Aggregate Technical and Commercial Losses andAnnual Growtho f Sales........................... 44 Table 3. 5: Public-Private Partnership Projects inOnssa, by Stage o fDevelopment................................ 50 Table 4. 1: School Drop-out Rates, 2004-05 ............................................................................................ 55 Table 4. 2: Inputsand Outputs inPublic Health System, 2005-06 ............................................................ 60 Table 4. 3: Poverty Headcount Index inRegions o f Orissa, by Social Group, 1999-2000 ....................... 64 Table 4. 4: HouseholdreportedPDS off-take as share o f officially reported,2003/2004 .......................... 65 Table 4. 5: Average Spending on Poor Households by Antipoverty Programs ....................................... .66 Table 6. 1: Possible Sequencing o f Reforms and Investments, 2007-17 ................................................... 74 Table A. 1: Gross State Domestic Product o f Orissa at Current Pnces, by Sector, 2000-07 ........................ i Table A. 2: Gross State Domestic Product o f Onssa at Constant Pnces, by Sector, 1999- ........................ 111 ... ii Table A. 3:Incidenceo fPoverty in Orissa and All-India, 1993/94-2004/05 ............................................. Table B. 1: Fiscal Summary for Onssa, 1999/00-2007/08 .......................................................................... iv Table B.2: Fiscal Summary for Onssa, 1999/00-2007/08 (as % o f GSDP) ................................................ v Table B. 3: Debt and Guarantees as a Share o f Revenue inIndian States, .................................................. vi Table B.4: OwnTax Revenues inOnssa, by Source, 2000/01-2005/06 .................................................... vi Table C. 1:Village ElectrificationinIndia, by State, as o fMarch 2006 ................................................... vii Table C. 2: Index o f Social and Economic Infrastructure inIndia, by State............................................. viii Table C. 3: RoadDensity inIndia, by State, 1971-72 to 1996-97 .............................................................. ix Table D. 1: Key Indicatorso f Human Development inOrissa, 2005-06 ..................................................... x Table D.2: HumanDevelopment Index for India, by State......................................................................... x i Table D. 3: Coping Strategies Adopted by Households, by Type o f Risk and Income Group .................. xii Table D.4: Awareness o f Antipoverty Programs, by Selected Groups and States................................... Table D.5: Proportion o f Households Benefiting from Antipoverty Programs inOrissa and All-India ...xiii xiv ListofBoxes Box 1. 1: The Changing Onya Society: Views ofTwo Generations......................................................... 18 Box 2. 1:Administrative ReformsinOrissa's CommercialTax Department............................................. 33 Box 2. 2: Treasury Computerization.......................................................................................................... 39 Box 4. 1: The Frameworkfor UnderstandingChildMortality: Actors andActions................................ ..62 Box 4. 2: SevenStrategic Thrusts ofthe Onssa HealthSector Plan.......................................................... 62 Box 5. 1: Transformingthe Way inwhich CitizensPerceivethe State .................................................... .69 Box 5. 2: InformationTechnologySolutionsfor Better Accountability.................................................... 70 ANNEXA: ECOIYOIWCGROWTHAWPOVERTX.... ...................................................................... i GMv%xB:FISCAL,PQSJTIiXX ............................................................................................................. iii ANNEX C:INFRASTRUCTURE ............................................................................................................ vi ANNEX D:HUMANDElrELQPMEM .................................................................................................... ix References.,................................................................................................................................................ .. xi1 OVERVIEW 1. Since 2000 Orissa, a seriously lagging state in the nineties, has become a state in transition. Rapid economic growth, spurred by investment in metal industries, has had a multiplier effect throughout the economy. Opportunities for nonagricultural self-employment, as well as wage employment, have expanded. A remarkable fiscal turnaround, achieved throughthe state's own efforts and complemented by performance-linked support from the central government and external donors, has created space for developmental initiatives and high-priority public investments by the Government o f Orissa (GOO).Although agnculture has performed below its potential, growing at the same rate as inrest o f India, there are some welcome signs o f diversification and dynamism in various parts o f the state, pointing to large potential for further growth. 2. Change has given rise to hopes as well as anxiety. The acceleration o f Orissa's economic growth to a rate faster than the rest o f India during 2002-07 brings hope that the state may at last be able to catch up with the rest o f the country. Expectations o f the younger generation have begun to change. A recent survey o f high school children in the capital city of Bhubaneswar revealed that only one in seven looked forward to a career in public service, compared with one in every two in their parents' generation. Nonetheless, a nagging concern remains about whether the poor and hitherto excluded, such as the scheduled tribes (STs) (22 percent o f the population and 40 percent o f the poor) who live inremote villages located in hilly terrain, will gain or lose from the market-driven growth process. Will those who live in the mineral-rich districts benefit adequately from mineral-based industrial growth? Orissa's growing civil society movement has already voiced its concern on such issues. The necessity and urgency o f addressing the inclusion agenda has been highlighted by recent controversies over land acquisition for industries. It has prompted the Onssa government to adopt a consultative process steered by a Group o f Ministers, before undertaking a progressive resettlement and rehabilitation policy. 3. Several inequalities have begun to narrow, while some remain key outstanding challenges. The gap between Onssa and the rest o f India in per-capita income narrowed during ` 2000-06, after having widened during the past five decades. Regional inequalities within Onssa have also narrowed between 1999/2000 and 2004/05, according to latest available National Sample Survey (NSS) data on household consumption expenditures. A wide cross-section o f the population, including scheduled castes (SCs), has gained from the expansion in income-earning opportunities since 2000. However, the poorest 40 percent o f the populationhas gained much less than the better-off 60 percent, most o f the scheduled tribes are part of this poorest 40 percent and continue to lagbehind. 4. Compared with the fiscal stress and liquidity crisis that prevailed in 1999/2000,the fiscal outcomesachieved as of 2006/07 present a remarkable success to build on. That Orissa was headed for a fiscal crisis was known inthe late 1990s, which ended with the heavy impact o f the pay hike awarded to government employees-raising the ratio of salaries, pensions, and interest payments to above 100 percent of total revenue. The policy stance o f the government o f Ollssa changed after the election in 2000 of the present incumbent government headed by Shri Naveen Patnaik. The government issued a white paper in 2001 on the pathetic condition o f the state's finances and signed a memorandum o f understanding (MoU) with the Government o f India (GoI) to undertake fiscal r e f o m measures. The state government built up public acceptance and government ownership o f the fiscal reform program through a consultative and transparent process. Over the past seven years, the primary fiscal balance has been converted from a deficit o f 5.9 percent o f gross state domestic prices to a surplus o f 2.8 percent-a correction by 8.7 percentage points, stronger than inany other Indian state. 5. Fiscal turnaround and economic acceleration have assisted and contributed to one another. The reforms began with the necessity for fiscal correction. However, such a strong fiscal correction would not have been possible without the acceleration o f market-oriented growth. Without employment and livelihood opportunities expanding in the private sector, the Orissa government would not have been able to win public support and move ahead with rightsizing the civil service and retrenching employees o f public enterprises. Nor would revenue growth have been as buoyant as it hasbeen since 2004105. Inturn, fiscal reforms have contributed to economic growth by speeding up the completion o f capital investment projects, such as long- pending construction o f roads, bridges, and irrigation canals. The improved financial situation and the end o f liquidity constraints also enhanced the willingness of private firms and external donors to place their faith in Orissa's future. For instance, the World Bank postponed approval o f a State Roads Project in 2002, due to the acute fiscal stress, and is now moving ahead toward approving a bigger version o f that project in2008, as a result o fthe fiscal turnaround. 6. National economic reforms have been important for Orissa, and in turn the success of economic transition in Orissa has been important for inclusive growth in India as a whole. Orissa's accelerated growth in private industrial investments has been triggered by the India-level reform that eliminated the freight equalization subsidy, a policy that had annulled the state's comparative advantage as the location for metal industries. The private investment boom today i s led by metal industries, including Indian and international majors in steel, aluminium, and chrome products. Entry o f major Indian information technology companies into Orissa i s a spillover effect o f the rapid growth o f that sector at the all-India level, with the saturation o f Bangalore, Chennai, Hyderabad, and other preferred locations. Inturn, the success o f accelerated economic growth and poverty reduction in Onssa has had an important demonstrative impact on the rest o f Eastern India and on other poor repons and states inthe country. Against the backdrop o f widening interstate disparities during the 1990s, catching up by one of the poorest heralds a welcome change toward convergence among Indian states. 7. This Report assesses the ongoing transition in Orissa. It examines how and why the successes were achieved. It attempts to outline the dimensions o f the challenge ahead, as Onssa marches forward into the second phase o f policy and institutional reforms, building on its improved fiscal position to deliver rapid and inclusive growth. It highlights key issues and bindingor soon-to-be bindingconstraints. The concluding section identifies priorities for public expenditure and public policy outcomes inthe immediate, medium-term, and long-term future. 8. The Report is intended as a contribution to the public debate and consultation initiated by Government of Orissa on the state's long-term vision and development strategy until2020. The first two chapters focus respectively on economic growth performance and fiscal performance during the past 5-6 years. The subsequent three chapters focus respectively on key aspects o f the outstanding challenge facing the state, namely: infrastructure, human development, and public accountability for service delivery. The final chapter summarizes the main findings and recommendations and poses considerations about priorities and sequencing. A. Growth and Poverty Reduction since 2000 9. Accelerated growth since 2000 has been broadly based and more robust than seems to be generally perceived. The general perception in the Indian media seems to be that the economic boom in Orissa is narrowly focused on the mining sector. Facts show otherwise. According to the updated official data on gross state domestic prices, growth during 2002103- 2006/07, the period o f the Tenth Five-Year Plan, has averaged 8.5 percent annually as compared to 7.8 percent for India as a whole. Industryhas grown at around 15 percent inOrissa compared to 9 percent in India as a whole. Not only miningbut manufacturing has grown faster than the rest o f the country, and so have trade and transport services. Agriculture recovered from a drought year in 2002103 and has grown at around 2 percent on average, similar to the rest o f 2 India. Private investments under implementation in Orissa are massive, at about US$125 billion, almost three times the annual gross state domestic prices. Double-digit growth of the Orissa economy over the next decade or two i s clearly within the realm o f possibility, with annual growth during2008-1 3 projectedto be faster than 20 percent. FigureA: Industry has led the accelerated growth in Orissa since 2003 RealAnnual Growth Rates (%) 25% Industry 20% -5% 1998- 1999- - 2003- 2004- 2005- 2006- -lo% 99 00 01 02 03 04 05 06(P) 07(Q) Sources:Government of India, Central Statistical Organization; Government of Onssa, Department of Planning and Coordination. 10. Income from agriculture, fisheries, and forestry, on which most poor depend, remains volatile and excessively dependent on rainfall. Sustaining a double-digt growth rate o f the state economy depends critically on the performance o f industry and services, while the inclusiveness or "pro-poor'' quality o f economic growth depends a lot on the performance of agnculture and other primary sectors. Reforms in land tenure and land administration are critical for raising agncultural productivity, while joint forest management i s a promising route to improve incomes from nontimber forest products. Effective investment and management practices in irrigation are also a high priority. Success o f participatory irrigation management, through the formation of paani panchayats (PPs) (water user groups), backed by a state-level legal framework, holds significant promise for improving agricultural performance and diversification to higher-value added crops. Amendment o f the Agricultural Products Marketing Act has paved the way for expanding market access and economic returns to farmers from more competitive trading arrangements. 11. Poverty reduction has accelerated in Orissa since 2000 and has perhaps been more rapid during 2000-05 than in India as a whole. The data available from the National Sample Survey for 1993/94, 1999/2000, and 2004/05 suffer from lack of comparability because of the mixed reference periods (MRPs) used in 1999/2000. Estimates based on the "uniform reference period" (URP) indicate that declines inpoverty over the past 10-12 years have been much less in Onssa than in India as a whole-with the rural poverty rate declining by less than three percentage points during 1993-2005 in Onssa, compared with nine percentage points overall in India. However, estimatesbased on the "mixed reference period" (MRP) suggest that the poverty headcount ratio declined by more than 8 percentage points inrural and 2.5 percentage points in urban Onssa during2000-05, compared with 5 and 2 percentage points respectively in India as a whole. The two comparisons, put together (Figure B), suggest that Ori`ssa's performance has turnedaround from beingmuch worse during 1993-99 to better than national average since 2000. Subject to caveats about comparability o f the MRP between 1999/00 and 2004/05, the best available estimate is that the number o f poor declined by about 1.5 million between these two years. 3 FigureB: Ruralpovertyhasdeclined faster inOrissathan in all ofIndiasince 2000 RuralPoverty Rates in Orissa(%) RuralPoverty Rates in India(%) 60 - 80 1 50 . 50 i 40 - 30 - 20 - :: J - = = : : : : 20 10 . points I I - . 10 MRP dropof B%points 1993194 I999100 2004105 0 1993194 1999100 2004105 Note: URP stands for uniform reference period which is comparable for the years 1993194 and 2004/05; MRP stands for mixed reference periodwhich is comparableover the period 1999/00and 2004/05. Source: GoI, h e s s Information Bureau, New Delhi, March 21,2007 for 2004/2005 data and various National PlanningCommission publicationsfor the earlier data. 12. Regional income disparities within Orissa have narrowed during 2000-05. Comparison o f household expenditure levels in 1999/2000 and in 2004/05 shows that per-capita expenditure increased faster inrural areas (by 12 percent over five years or 2.3 percent annually), as compared with urban areas (by 4 percent over the period or 0.8 annually). Inrural areas, the most rapid growth was recorded in the poorest Southern region where per-capita expenditure increasedby 25 percent (4.6 percent annually), followed by the Coastal region (12 percent, or 2.3 percent annually), and then the Northern region (6 percent, or 1.2 percent annually). In urban areas, per-capita expenditure grew overall by only 4 percent over the five-year period. Regonal distribution o f urban expenditure moved in favor o f the Northern region, where per-capita expenditure grew by 14 percent (2.7 percent annually), spurred by mineral-based industrial growth and its multiplier effects. 13. While various disparities have narrowed, the scheduled tribes continue to lag behind. Those belonging to scheduled castes (SCs) experienced growth in real per-capita spending o f 7 percent during2000-05, similar to the general population. However, growth inper- capita spending by the scheduled tribes (STs) lagged at only 2 percent over five years. The relatively impressive performance o f scheduled castes i s due to their gaining significantly from nonagncultural self-employment opportunities and experiencing risingagricultural wages as well. Lagging o f scheduled tribes reflects the fact that geographical seclusion has limited their access to new self-employment opportunities, and as labor supply has remained abundant in the remote villages with negligible out-migration, agricultural wages for this group did not grow to the same extent that they did for the scheduled castes. 14. The lagging behind of scheduled tribes, who constitute 40 percent of the poor in Orissa, has led to some widening income disparities. Figure C presents the growthincidence curve for rural Orissa. It shows that all income categories o f the rural population gained in real terms from the accelerated economic growth, but those in the middle- and higher-income groups prospered more than those in the lowest-income group. Still, growth in this period was more inclusive than before, while it is not as inclusive as i s desirable and necessary for rapid poverty reduction. In other words, even though the nonpoor have gained more than the poor, economic performance since 2000 has been far better than before 2000 in enabling people to emerge from poverty. 4 Figure C: Among Orissa's ruralpopulation,middle- andhigher-income groupsprospered morethan the lowest-incomegroup fromthe acceleratedeconomicgrowthin2000-05 0 C V - r In- h z- . A . -cv A . wA u \"/ In- 0 - I I I I I I ource: National Sample Surveydata. 15. Achieving rapid and inclusive growth requires focusing on intrastate connectivity and on productivity and terms of trade gains in agriculture and forestry. Over 40 percent of all villages in the state are small and isolated, with less than 500 residents and no all-weather connectivity with the rest o f the world. Around 85 percent o f the population o f Onssa lives in rural areas and hilly regions, dependent on agnculture, fisheries and forestry. Productivity and terms o f trade are constrained by outdated land tenure legslation and land administration. A ban on land leasing has gven rise to widespread use o f illegal sharecropping arrangements, wherein farmers have no recorded rights and hence no access to institutional credit. Unsettled land ownership i s a problem in some areas. Another major challenge that the state government i s grappling with i s to reform forest management to enhance the role o f the forest dwellers. The overriding challenge that Onssa faces i s to ensure that rapid industrialization i s accompanied by improved intrastate transport and electric connectivity, alongside productivity and terms o f trade gains in agnculture and forestry through appropriate policy and institutional reforms. These are among the most essential conditions to ensure that economic growth i s not only rapid but also inclusive. 16. Ease of entry for small and medium enterprises, with strengthened environmental due diligence, is another important condition for broad-based, inclusive economic growth. The current private investment boom is dominatedby large mega investments in steel and power. Such mega investments will have a multiplier effect on demand for a wide range o f goods and services, which small- and medium-scale enterprises (SMEs) can provide. For this multiplier effect to play out, the regulatory climate for SMEs must be improved. The easier it i s for a small investor to enter the scene, the more such investments will take place in the state, and the larger will be the overall impact on employment andpoverty reduction. Hence the ongoingefforts o fthe government to operationalize the "single window" clearance system at the district level, which i s 5 where SME investment proposals are screened, assume special importance. Given the significant environmental externalities associated with mineral-based industries, there is need to strengthen environmental institutions. Ongoing plans and current efforts o f the government toward strengthening the public consultation mechanisms as part o f environmentalassessment will play a crucial role indeterminingthe sustainability o f mineral sector investments inOrissa. B. The FiscalTurnaround 17. Orissa stands out among Indian states as a very poor state that achieved a very strongfiscal correctionduring2000-06. Onssa's fiscal stress was among the highest inIndia at the turn o f the century, as a result o f over-expansion o f government and public enterprise, with low returns financed in part by high-cost debt from the Government o f India. Salaries, pensions, and interest payments exhausted the state's own revenues, as well as central transfers. The fiscal crisis acted to galvanize reform momentum in Onssa, with policy-based external assistance playing a catalytic role, and political commitment ensuring continuity and persistence. Today, Orissa enjoys a primary fiscal surplus o f over 2 percent o f GSDP, and its interest-to-revenue ratio is declining steadily toward 20 percent by 2010 from 40 percent some years ago. The ambitious targets o f the Orissa Fiscal Responsibility and Budget Management Act have been met ahead of time. Figure D:Orissa achieved the strongestfiscal correction amongIndia'sstatesin 2000-06 Fig D: Orissa achieved strongest fiscal correction (200046) %GSDP per year 2.00 1.50 1.oo I I 0.00 AP RJ GJ HY TN W W B K N OR -0.50 -1.oo- -1.50 -2.00 1 I CentralResources oStates' effort Rimry Correction 1 18. Orissa is the only Indian statewhere all sourcesof fiscal correction havecontributed significantly. The state's own effort accounts for approximately 55 percent o f the fiscal correction between 1998-2000 and 2006/07, while increasing progressiveness of central resource sharing accounts for 45 percent. If the period until 2005/06 i s considered, for which compiled data are available for all states, Onssa's own effort accounts for 70 percent, much higher than other low-income states, where central transfers have contributed most to the fiscal correction 6 (Figure D). While the majority o f states have achieved an increase in their own revenues since 2000, hardly any state other than Orissa has gained significantly both from revenue enhancement and expenditure containment. 19. At least three importantlessonsemerge from Orissa's fiscal success story. These are lessons not only for other states to gain from, but also for Orissa's own foray into other areas o f politically difficult policy reforms. 20. First,the consultativeapproach adopted by the Government of Orissa helpedbuild public support for change. The government publicized the assessment o f a 1999 World Bank Report that the state's finances were on an unsustainable path, and a major course correction was needed. The state leadershp built public opinion slowly but surely in favor of shedding excess staff positions in the government establishment, and in favor o f separating employees o f loss- making state-owned enterprises through a voluntary retirement scheme (VRS). Extensive consultations were held on the public enterprise reform program, with support from the UK Department for International Development (DfID). 21. Second, politicalstability and the medium- to longer-term outlook of the political leadership made it possible to sequence the reforms sensibly. In the first period, 2000-03, fiscal correction in Onssa was mainly based on enhancing the state's own revenues, which was politically less difficult than tackling the expenditure side. The correction grew stronger after the 2004 re-election, with significant expenditure containment and restructuring measures accompanying tax reforms. Acceleration o f economic growth and expansion o f employment opportunities in the private sector made it politically feasible for the Government o f Onssa to implement significant downsizing o fthe public sector during2004-06. 22. Third, Orissa's experience shows how a crisis can be used to strengthen outcome orientationin government departments.The government used the tight resource position and constrained aggregate capital budget to emphasize the need for accelerating the rate o f project completion, so as to deliver more with the same amount o f rupees. Within the given constrained resource envelope, the government launched an exercise called the Zero-Based Investment Review to maximize the number o f projects completed each year, through reallocation within the departmental budget. This was a highly successful effort to turn the focus o f departmental attention from outlays to outcomes. Completion o f long-pending roads and bridges became a visible quick win that strengthenedpublic support for the reforms. C.Addressingthe InfrastructureGap 23. Orissa must improve and expand infrastructure services to achieve rapid and inclusive economic growth. Ollssa has significant natural resource endowments and a strategic location with a coastline facing South East Asia. Without adequate road, rail, and port infrastructure, the economy cannot exploit its potential and sustain the rapid economic growth o f recent years. The strain on transport infrastructure is already evident. Capacity constraints inrail have diverted goods traffic to roads, which is highly inefficient. Constraints inport capacity have diverted cargo to ports in other states. Continuation o f rapid industrial growth could further accentuate transport constraints inthe coming years. Massive upgrading o f urbaninfrastructure is needed to be able to attract and retain the slulled labor force demanded by modem industry and services. 24. The boom in industrial growth, while providingits own challenges, also provides opportunitiesfor new partnershipswith the privatesector to provide infrastructure.Given the scarcity o f resources, public-private partnerships (PPP) could be developed as part o f a comprehensive master plan for upgrading infrastructure. The Government o f Orissa has prepared a public-private partnership policy and established a public-private partnership cell reporting to the Planning and Coordination Department. There is a shelf o f 36 public-private partnership 7 projects at various stages o f preparation, including 9 road projects, 3 rail projects, 4 ports projects, 9 industrial projects , 6 urban projects and a few each in tourism, information technology, industry, and fisheries. 25. The Government of Orissa needs to emphasize that public-private partnerships mustbepursued onlywhere they represent value-for-money for the government. Translating this principle into practice would require strengthening the capacity of the Finance Department to measure and report the state government's financial support, including tax breaks, land grants, and contingent liabilities. Such costs needto be factored into decision-maktng by line agencies. 26. Orissa faces some particular challenges of exclusion linked to its geography and social structure. Tiny villages and remote habitations in the hills pose a very big challenge for achieving full transport connectivity. Electric connectivity i s also a major challenge, as rural electrification in Orissa i s among the lowest in the country. Electric connectivity can open up possibilities for e-services, including medical consultations for patients in remote areas. Rural transport connectivity and rural electrification need to be identified as high-priority claims on the additional fiscal space being created inthe state. Given that (a) about 52 percent of villages inthe state are too small to qualify for the central grant-financed rural roads program, and (b) Onssa i s yet to receive the promised grant funds from the center for rural electrification, the state may consider allocating a rising share o f its own capitalbudget resources to address these critical gaps. 27. Access to electricity in Orissa is well below national levels. While the richest quintile has nearly universal access, access falls o f f rapidly, with only 18 percent o f the poorest two deciles having electricity, compared with 38 percent in all o f India. The Government of Orissa could look at the potential for innovative approaches for rural electrification, including franchises and cooperatives for service delivery. Some countries have also established umbrella organizations-such as the Rural Electrification Board in Bangladesh and the National Rural Electric Cooperative Association in the United States-to effectively dispense subsidies as well as quality advice on technical, human resources, and financial management matters to numerous small, scattered entities engaged inservice delivery 28. Lessons from the lackluster experience with privatization of power distribution. Onssa led the way in power sector reforms in India, but these reforms have not delivered the desired results. Power distribution continues to be plagued by high aggregate technical and commercial losses. Why has the actual outcome been much poorer than what was targeted through the reform program? The main reason lies in the lack o f competitive pressure and adequate incentives to aggressively go after efficiency improvements and reduction o f losses due to power theft. The Onssa Electricity Regulatory Commission (OERC) attempted to create a multiyear tariff framework in 2005, which was aimed at creating incentives for the distribution companies to reduce losses and keep some o f the gains. While conceptually a sound approach, this attempt was undermined in practice by what the companies perceived as an ungenerous starting revenue allowance and the appointment by the commission o f administrators for day-to- day management o f the distributioncompanies. 29. The Orissa Electricity Regulatory Commission could consider developing new multiyear tariffs on the basis of realistic business plans. There appears to be merit in re- launching this strategy by approving fresh long-term, say, five-year business plans, at least for the three distribution companies where the private ownership (and management) is back in control. This re-launching has to include a starting point and targets that are realistic and incentives large enough to induce the distribution companies to improve their performance in the most pressing areas o f concern, namely overall technical and commercial losses, distribution losses, and arrears o f receivables. To make such an incentive system robust and credible, Onssa Electricity Regulatory Commission would need to simultaneously enhance its own capabilities to 8 independently monitor and verify progress, as well as the claims of the distribution companies in each o f the critical areas targeted for improvement. 30. Urbanareas are also criticalto Orissa's future development.AlthoughOrissahas one o f India's lowest levels o f urbanization (15 percent of the state population o f 37 million), urban centers are growing at a rapid rate from this low base. The urban populationinOnssa is currently growing at about twice the rate o f overall population in the state. The demand for urban water supply and sewerage services is likely to increase manyfold as a result o f recent increase in private sector investment in steel and other metals, as well as tourism and information technology services. Sound state and local finances, land use planning, housing, service delivery models, and regulatory frameworks are needed to meet the needs of the growing manufacturing and service industries and the urbanpopulation. 31. Filling the infrastructuregaps requires a combination of additional state funding, partnering with private investors, and lobbying effectively with the center. Some components o f the infrastructure investment agenda require significant additional state resources, such as transport connectivity. Some others require Onssa to play an enabling role for private providers to operate, with little or no commitment from the state budget. Yet others, like rail connectivity, require only effective lobbying by the state government with the central authorities. While there i s likely to be a fair amount o fprivate interest indeveloping port facilities, the Onssa government will need to address the overall strategic direction and a conducive regulatory framework for the port sector. 32. Not funds but implementation capacity could become a binding constraint for infrastructure investment. Expanding fiscal space and potential private participation could together meet the rising infrastructure financing needs, but construction capacity is currently laclung to be able to spend efficiently on infrastructure investment. Out o f Rs.31.6 billion o f central grant funds allocated during 2000-07 for rural roads inOnssa, the state was able to utilize roughly Rs.14 billion, or less than half. Rejection rates o f the executed works by the national quality-monitoring cell have been as highas 25 percent, indicating that rural engineering capacity has been overstretched. Onssa could consider relying more on national and international players in the state highways and major roads segments, thereby freeing up more of the state's own capacity to address the lower-level connecting roads and ruralroads. D.AddressingHumanDevelopmentNeeds 33. Sustainingrapid and inclusivegrowth in Orissa dependson the quality of the labor force it can produce. Raising the quality o f Orissa's labor force requires imparting strong educational fundamentals inthe schooling system from the earliest years, supplemented by some public and mostly private efforts in training and slull development. The health system is also crucial, both to provide a healthy foundation for productivity and to avoid health shocks that leave households in poverty. While social protection and antipoverty schemes may seem peripheral to the growth process (and have been treated that way at times), they can play an important complementary role in fostering a vibrant rural economy. And given the nature o f exclusion in Onssa, an inclusive strategy will require much greater attention to geographical targeting o f social programs. 34. The demand for skilled labor in industry and modern services will rise rapidly in Orissa over the next decade or two. If the Government o f Orissa does not invest now to generate a supply of skilled workers from within the state, the best paying jobs are likely to benefit persons migrating from outside the state, which could be perceived negatively and potentially lead to political resistance to modernization itself. To increase the productivity of human capital acquired in school and to make it more valuable inthe labor market, the state also has to find efficient ways o f providingtraining to the labor force. At the least, the state will have 9 to ensure: (a) universal participation in and completion o f primary education; (b) attainment o f learning goals in primary education; and (c) development o f marketable slulls in its youth by creating an enabling environment for private providers. 35. A simple "business as usual" expansion of the system will not tackle the labor force skills problem. Based on the evidence from Orissa, from India, and from around the world, it i s clear that simply spending more in the same old ways is not a feasible option for achieving the learning progress needed to make Onssa a slull-based economy. At existing learning levels, even ifOrissa achieves universal elementary school completion, a large section ofitsyouthwill grow upwithout the slulls necessary for employment or the ability to seek higher education. The poor quality o fprimary education casts its shadow on learning outcomes at higher levels o f schooling. 36. Reducing the gaps in performance across schools, by strengthening teacher accountability, is potentially the most important reform. Some government schools are 30-40 percentage points above the achievement levels of other schools, even after controlling for the impact o f student background and school inputs. Reducing the gaps between the poorly performing and better performing government schools could increase slulls enormously. The key to reducingperformance gaps is to address the issue o fteacher accountability. 37. A bold approach to strengthen teacher accountability has been initiated. Orissa has taken innovative steps in the direction of improving accountability, especially in relation to its large contingent o f contract teachers, who form nearly a third o f the teaching force in elementary education in the state. The state has established a credible career path for contract teachers, whereby they become regularized after nine years o f satisfactory performance as monitored by the village education committees. The village education committees are required to certify satisfactory attendance before releasing the teacher's salary 38. Government-sponsored occupational training is largely ineffective. It suffers from outdated equipment, training that i s disconnected from industry needs, and instructors who are not conversant with changing industrial methods. With such limitations, it is not surprising that students who undergo training inpublic sector institutions are poorly prepared to enter the labor force; often they cannot findjobs at all or they findjobs unrelated to their training. A recent study shows that only 17 percent o f industrial training institute graduates in Onssa had found any employment within 12 months o f completing training, compared with 30 percent for India as a whole. 39. Private enterprise i s growing in the field of training, which is a welcome development. InOrissa, as in other Indian states, the formal training sector has been growing at a fast rate since 1980-90. Much o f the growth has been inthe private sector, which far outstrips the public sector in training capacity. When the benefits from training are almost fully captured by the individual, economic efficiency does not require any government financing. The role o f the government should be to facilitate the entry o f the private sector inthis market, with some role in providing information about quality, but with the firmand/or the trainees bearing the costs. 40. In the health sector, Orissa has decisively moved away from an input-based approach to a more sophisticated focus on outcomes. Inthe past, ministries and departments of health have been tempted to view the problems o f health too narrowly. By focusing on what they felt they could control, public agencies often adopted a facility-based approach. Orissa's Health Sector Plan (OHSP) as approved in2005 envisions a muchbroader approach to improving health status. 41. Seclusion of tribal villages calls for innovative and flexible approaches to reach critical health services to them. Tribal villages and hamlets are often hilly and forested, makmg it difficult to reach them. Standard population norms for the construction o f health centers, schools, or roads are too high to meet the needs o f these isolated village residents. Service 10 providers, such as doctors, do not reside in these areas and very often do not even visit them, because o f the problems o f connectivity. Despite dramatic improvements in overall infant mortality in the state in the past 5-10 years, districts with a highproportion of scheduled tribes lag behind the rest. The predominantly tribal districts are also the poorest performers in immunization and access to antenatal care. 42. More than the level of government spending on antipoverty programs, the main problem lies in delivery gaps and leakages to the nonpoor. Approximately 80 percent o f all households in Orissa receive some benefit from at least one government-sponsored antipoverty program. This i s slightly higher than the all-India average o f 78 percent of households receiving some benefit from at least one government scheme. Around half o f all households in Orissa benefit from the public distribution system, where analysis using national survey data has indicated large leakages in Orissa as well as in other states. Orissa is the first and so far only Indian state to have requested the World Bank to carry out a professional assessment o f delivery gaps in two antipoverty programs, through a public expenditure trachng survey. This i s a sign that the state government recognizes the problem, which i s the first step toward a solution. E.IncreasingAccountability for Service Delivery 43. Instilling fiscal discipline i s only a first step in the program to modernize government and make it accountable for delivering quality services that the public needs. Improvement inthe state's financial position is only the means to an end, not an end in itself. The end goal i s to provide a transparent and efficient government that takes seriously its mandate to ensure that quality services are delivered to the people it represents. That the Government of Orissa has begun to recognize this larger goal is evident from the thrust o f its finance minister's annual budget speeches in recent years, wherein the need to translate outlays into outcomes has become the overarching theme. Fiscal correction has created space in the state budget for new investments and development initiatives. Thus the reform program now has to move into a new phase that emphasizes the output and outcomes achieved through public spending programs. 44. Accountability means that policy makers must hold service providers and line departments responsible for results, not merely for spending on a set of inputs. Recognizing the need for an appropriate institutional mechanism to plan, manage, and monitor administrative reform initiatives, the government has launched a program entitled the Orissa Modernizing Government Initiative (OMGI), housed under the General Administration Department headed by the chief secretary. The objective of OMGI is to encourage and support cross-cutting and department-specific reforms and initiatives to improve service delivery. Tackling institutional barriers to efficiency would be critical to the success o f this program. This would include dealing with fundamental issues o f human resource management including performance management issues and slull shortages, modernizing government monitoring and evaluation systems and supporting better financial management within departments. Inaddition, improvements in service delivery require fundamental reforms in the way schemes and programs are implemented, including at the level o f the district administration. Structural reforms need to take place at the district and sub-district levels that allows for better planning, coordination and convergence o f inputsbydepartments; andbetter enforcement o fthe compact between government and citizens. 45. The government's focus on anticorruption and transparency has had a significant impact on people's expectations of government services. Political analysts in India have suggested that the alliance that i s inpower in Orissa today originally won in 2000 on account o f its promise to provide good governance and reduce corruption. Its re-election in 2004 was also largely seen as a vote for increased transparency and accountability. Focus on enforcement and wide reportage o f corruption cases filed against prominent civil servants and officers responsible for service delivery has created an environment that supports deterrence. It has created a greater consciousness around the issue of corruption. Onssa is one o fthe few states inIndia to have taken up cases and jailed even senior officers for corruption. An independent survey o f citizens' perception o f government departments rated the Vigilance Department (which leads the anticorruptiondrive) as one o fthe best performers. 46. While Orissa has done very well on enforcement, tackling the roots of corruption will require also reforms in business processes to minimize opportunities for rent seeking. Corruption proofing the administration is in many ways more important than punitive action to tackle corruption when it occurs. Onssa's Anti-Corruption Action Plan recognizes this but strong commitment will be required to take forward reforms that allow for more transparent procurement processes, that strengthen internal and performance audit both at the level o f departments and at the district level, and support stronger internal vigilance systems within government agencies. 47. The Government of Orissa has launched innovative moves toward decentralization, which needs to be complemented with strengthening capacity of elected local bodies. Decentralization could leadto community empowerment, ifpublic awareness among both elected representatives and citizens i s increased, along with the capacity o f elected representatives to fulfilltheir role. Inelementary education, a new career path for teachers has been launched that gives the local bodies much greater input into teacher assessment. Inconnection with the National Rural Health Mission (NHRM), there is a move away from state government personnel based at distant facilities to workers from the local community. Women's self-help groups (SHGs) can complement the elected bodies as another arm o f civil society holding local bodies accountable for fulfilling governmental functions. F.Conclusions 48. Orissa can and must learn from its successes so far to meet the challenge ahead. As Orissa races to become a dynamic state capable o f crossing the Indian standard o f living by 2020, it must be mindful o f the most important lesson o f its fiscal success: the need to take thepublic into confidence. Today, such an open and consultative approach i s needed on the question o f industrialization and modernization o f Onssa. The government needs to win over public opinion to the cause o f encouraging and steering the current economic boom toward inclusive development. It i s far better to encourage development and try to shape it to benefit as many as possible, than to block development prospects on the plea that it may leave some worse off. The results so far from the industry-ledgrowth inOnssa indicate that some inequalities have begun to narrow. With timely reforms in land tenure, land administration, and joint forest management, alongside a more geographically focused and outcome-oriented public expenditure program, Orissa could narrow the gaps between rural and urban living standards, between the interior and the coast, between the scheduled tribes and castes and others, and betweenwomen and men. 49. A particularly challenging task of high priority is to make sure that adequate resources and attention are allocated for strengthening transport and electric connectivity within the state. Even at a gradual pace, greater connectivity will integrate the remote tribal villages, slowly but surely over the next 15 years, with the rest o f Orissa, India, and the world. This is o f strategic importance, gwen that geographical seclusion i s a major factor underlying social exclusion in Orissa, and that the remote tribal villages have been most vulnerable to insurgent movements. 50. Several critical gaps need to be addressed, but not all require funding from the state budget. Some o fthe infrastructure needs-such as ports and urban housing-can be addressed by creating an enabling environment for private sector participation. Other needs, such as rail connectivity, require effective lobbying with the center. A few will require state budget support, such as intrastate road connectivity and rural electrification. With respect to education, health 12 services, and antipoverty programs, accountability needs to be strengthened before budget allocations are increased, so as to avoid pouring more resources into leaky systems. 51. Orissa has entered a second phase of fiscal reform. The emphasis now has to be on: (a) prioritizing the use o f the additional fiscal space that i s being created by earlier reforms; (b) raising the efficiency o f spending; and (c) linlangadditional allocations to outputs and outcomes. Devolution to local bodies is one o f the ways that can potentially contribute to strengthening accountability for service delivery. Given that the government has already achieved significant fiscal correction, going forward there i s considerable room to step up capital investment. The fiscal situation i s no longer the binding constraint to scaling up public investment; capacity to execute good quality construction works i s becoming the bindingconstraint. Improvingfinancial management therefore requires strengthening technical capacity within government, as well as administrative capacity to manage private consultants hired to execute publicly funded projects. 52. It is time for the Government of Orissa to scale up public investment in infrastructure during 2007-12 and in human development subsequently. Addressing infrastructure gaps i s the most urgent priority for sustaining rapid growth. Addressing human development needs requires institutional change as a prior condition for allocating additional public resources. Hence, in terms o f the claims on the state's resources, infrastructure needs top priority during 2007-12. An Eleventh Five-Year Plan focused on infrastructure, followed by one devoted to human development, could take Onssa to its ambitious vision o f becoming a better- than-average Indian state by 2020. 53. Realimprovements inservice delivery will requirea fundamental transformation to make the government more performance-oriented. The scaling up o f public investment and improvements in service delivery, in order to be sustainable, needs to be accompanied by institutional reforms that focus on creating better systems for policy formulation, planning, and results-based monitoring and evaluation Staff with new s h l l s and systems with new capabilities will have to be put inplace. As far as human resource management is concerned, although the principle o f "doing more with less" remains valid, this logic i s not sustainable or efficient over the medium to long term, unless accompanied by second-generation reforms that refigure changes in the structure and shlls of staff who can take this agenda forward. The key problem is to develop well-defined and suitable criteria for identifying essential staff needed to support better planning, implementation, and monitoring of government programs. There i s need to link additional budget allocations with commitment to deliver additional and better outcomes. It is a problem whose solution i s a public expenditure management system that i s genuinely oriented toward results and outcomes. 13 CHAPTER 1: FROMAN ANEMIC PASTTOA DYNAMICFUTUm 1.1 Orissa, traditionally one of the lagging states, inclusive of the poorest regions of India, has been growing at an extraordinary rate in recent years. A booming economy has suddenly catapulted Onssa into the league o f fastest-growing Indian states. Growth o f the gross state domestic product (GSDP) has averaged 8.5 percent a year during the period o f the Tenth Five-Year Plan (2002-07), compared with 7.8 percent for all India (Figure 1.1:Economic growth is broad based and faster than the national average for 2002- 07). The opening up o f the Indian economy and the repeal o f the freight equalization policy have made Onssa a more attractive destination for investment inmetal industries, which along with power generation and some other industrial investments are stimulating economic activities in a wide range of sectors including trade and transport services. Improved transport connectivity, resulting from improvement in the state's financial management, has helped expand market access for many rural small entrepreneurs, reflected in significant growth o f nonfarm self-employment. While growth o f agricultural output in the aggregate has not been too dynamic, there is evidence o f very high growth in some specific cash crops, such as maize and cotton. - Figure 1.1: Economic growth is broad based and faster than the national average for 2002-07 4 0 % Aggregate and Sectoral Real GDP growth: Olissa vs. India (Tenth Plan Period) ElOrissa 3 0 % 26% n0India 20% 19% 0% % 10% 8% 0X Source: World Bank Live Database, Author's calculation. 1.2 Given its poor record inthe past, can Orissa sustain its currentgrowth momentum? Skeptics and critics point to Onssa's abysmal past record on growth and development. It has been the second poorest state, with per-capita income o f US$350; one o f the slowest-growing states, with an average rate o f 4 percent during the 1990s. It i s also the state with the highest poverty 14 headcount ratio in the country (46 percent) and with deep-rooted social exclusion and geographical isolation o f scheduled tribes in the society. They argue that the current growth acceleration i s merely a recovery from the low base and is unlikely to be sustained. Some others view the industry-led growth as a zero-sum outcome-benefiting the investors, while destroying the livelihood o f local people. Neither o f these points o f view tallies fully with the facts. 1.3 There are many reasons to be optimistic about Orissa's long-term prospects.First, the revival of the Orissa economy has coincided with the Indian economy moving to a higher growth trajectory, and it i s likely that several common factors underpin both of these growth successes. Second, the rate of poverty reduction in recent years has been faster than in earlier periods, more rapid in rural than in urban areas, with towns in the mining districts having seen greatest reduction inurbanpoverty. Finally, along with higher growth, Orissa has also emerged as a leading reforming state with a stable and committed political leadership. The state appears to have made a decisive break from its past. 1.4 The recent growth spurt in Orissa is indeed part of a larger story of an impressive turnaroundin macroeconomic policy stance. Orissa has emerged from an extremely stressful fiscal situation to become a fiscally responsible state. During200146, the fiscal deficit has fallen from around 10 percent o f GSDP to less than 1percent, with the current account deficit turned into a surplus-three years ahead o f target. By strengthening managerial oversight and cracking down on corrupt practices among government officials, the government has managed to improve the rate o f completion o f public investment projects. By simplifyingregulation to improve the climate for private investors, and taking advantage o f national policy change, it has also emerged as an important destination o fprivate investment. 1.5 Orissa ranks first among Indian states in private investment projects under implementation, according to data compiled by the Center for Monitoring the Indian Economy (CMIE) The largest projects are concentrated in steel, power, aluminium, petrochemicals, tourism, information technology and IT-enabled services. With some o f the foreign direct investment (FDI) exceeding the total annual output o f the state-the South Korean company, Posco, i s setting up a steel factory for approximately $12 billion and Mittals' Steel i s undertahng a greenfield project for $10 billion-there i s a feeling that k s s a could finally close the gap between its potential and actual performance. 1.6 This chapter examines Orissa's long-term growth prospects and their implications for development, and it suggests ways to sustain the momentum and make its beneficial impact more inclusive. Sudden growth acceleration has raised many issues. Can h s s a sustain the momentum? Is the growth broad-based? I s it geographically and socially inclusive? I s this growth coming at the expense o f the natural environment? If it can be sustained, by when will k s s a ' s per-capita income equal the all-India level, and to what level will poverty decline by 2020? What could the government do in the coming years to make growth more sustainable and inclusive? These questions are uppermost in the mind o f the concerned citizens o f Orissa, as the state's political leadership prepares an ambitious long-termvision for the state. A. Orissa's Long-term Growth Prospects 1.7 There are many misconceptions about the nature and foundation of Orissa's growth. It is commonly believed that Orissa benefited significantly from the protectionist and licensing policies adopted by the central government in the post-independence era, as evidenced by the location of the Rourkela steel plant and other large public sector industries in the state. According to this view, Orissa's economy did well under protectionism, but began to slow down after the liberalization o f the early 199Os, as it failed to compete with the more developed and reforming Indian states. An examination of national income data shows that this view has no foundation. Orissa's growth performance, compared with the rest of India, was weakest during 15 the 1980s. As shown in Figure 1.2, Onssa's share in national output fell in the 1980s and stagnated inthe 1990s, but has moved to a higher growth trajectory since then. Figure 1.2: Orissa's share in nationaI output has moved to a higher growth trajectory since 2000 ~~ ~ 3.5% 7, Share of Orissa's GSDP in India's GDP, FY81-FYO7 During880s Onssa's economy grew j considerablyslower thanthe nationaleconomy I Orissa`s growth rate=3 3% I I i I During890s,Orrssa's economy grewa I India'sgrowth rate=5 6% j tad belowthe nationalaverage hthe lastfiveyears,Orissa's economy I Onssa's growth rate=5 7 , I has grownfaster than national average 10% - I 1 I India'sgrowth rate=5 8% I Orissa's growth rated5% t 9 I I India'sgrowth rate=7 8% I I 0.5% - I I I I I I I I I I 0.0% FY81 FY83 FY85 FY87 FY89 FY91 FY93 FY95 FY97 FY99 FYOI FY03 FY05 FY07 Source: World Bank Live Database. Author's calculation 1.8 Orissa's poor growth performanceinthe past can be traced to its inability to exploit the upside of being a Coastal state while succumbing to all the downsides of being resource abundant. It is often said that "Orissa is rich, but the people of Orissa are poor." The two most important sources o f Onssa's wealth come from its geography and geology: the coast and mineral /forest assets in Its interior. Being a state with a long coastline, with easy access to the fastest- growing region in the world, namely, East Asia including China, Onssa has the potential to emerge as a maritime hub o f the country. Combine this with the fact that Orissa also contains nearly a quarter o f India's mineral wealth-the recipe for industrialization and growth i s quite straightforward.' But Onssa's growth record post-independence has belied all these expectations. The state has been an exception to the otherwise robust finding in the growth literature that Coastal countries (states) tend to grow faster than the land-locked ones. As the left panel o f Figure 1.3 (Onssa had poorly exploited its geographical advantages in the past) shows, barring Onssa, all the seven major Coastal states in India have grown faster than the six major land- locked states. Orissa's growth experience has been consistent with the burgeoning literature on the "resource curse" hypothesis, according to which countries (states) with abundant natural resources tend to perform poorer than those that are resource scarce (right panel, Figure 1.3). 1.9 Some ill-conceived policiesof the past played a role in Orissa's inabilityto exploit its natural advantages. In a closed economy, there is little advantage of being a Coastal state, and Orissa, like the other Coastal states in India, hardly benefited from its close proximity to the ocean during the first three decades after independence. This, along with the freight equalization policy, which ensured that freight rates for minerals are equal across the country, annulled Orissa's geographical advantage o f being closer to the mineral base. Consequently, it became 'Orissa's growth acceleration has often come from these two advantages. Itshistory IS replete wth stones about people from Onssa traveling to Ball, Sumatra, and S n Lanka to trade metals, spices, and other commodities. And the growth acceleration o f the past three years can be traced to large exports to China and East Asian countnes, much o f it going through tts port inParadip. 16 largely a raw material supplier to the rest o f India-its share in India's mining and quarrying output doubled between 1982183 and 1996197, while its share in manufacturing shrunk Figure 1.4, (Past policies led to expansion of the miningsector but little industrialization). In 1991, when India begun to gradually dismantle its industrial licensing system and investment decisions were made by market forces, Orissa, with its poor infrastructure network and low human capital base, initially lost out to the relatively better-off states. It is only in recent years that Orissa's share in both mining and manufacturing sectors have begun to rise. New investments are massive in size and for value addition within h s s a , unlike in the past, and appear to be having a wider impact throughforward andbackwardlinkages. Figure 1.3: Orissahadpoorlyexploiteditsgeographical advantages in the past Coastal states have grown faster than land-locked states. Resource-based states have poorgrowthrecords. Average RealGSDP GrovAh rate 89Z93-2OOZO3 a iI La$d-lockedStates aL nr 1u 2[ 3 3 4c 50 6 U 76 3: -.-- 5 Share cf ResourceinSDP I_ I ---___ Source: World Bank Live Database, Author's calculation, and Damania and Gupta 2004. Figurel. 4: Past policies led to expansion of the mining sector but little industrialization Orissa's Share in India's GDP in Mining and Manufacturing (in 46) 7.3% Share inmining and quar$ng Sharein manufacturing % I 0% I , , , , s , I , , , I , , : , , , , I , \ , , , 7 N F OF bF D F~ FC F ~ ~~ O ~- - b ~ F~ F C ~F r ~n FO F - NP ~ ~ C~ ~ ~ FN F~ F ~ ~b~ ~~ ~ Source: World Bank Live Database, Author's calculation. 17 1.10 With an appropriate set of policies and institutionsinplace, Orissa could potentially sustain a growth rate that is higher than the national average. Along with geography, Onssa has many other growth-enabling attributes. Its abundant water resources and fertile land can be an important source for accelerating growth in rural areas and making the distribution o f benefits more inclusive. Orissa also offers plenty o f relatively slulled labor at low wages, which has attracted big IT firms, such as Infosys and Satyam to the state. The state has been politically stable and relatively free o f political and ethnic violence. Orissa's society is also undergoing considerable change, with the younger generation willing to take more entrepreneurial risk and less interested in jobs offered in the public sector-a healthy sign for an economy that is receiving enormous private investment. (see Box 1.1: The Changing Oriya Society: Views o f Two Generations). Box 1.1: The Changing Oriya Society: Views of Two Generations As part o fthis study, a survey was conducted on 100secondary school students inOrissa (ingrades 10 and 1l), asked themthe following question: "What kindo fprofessional organization would you like to which be part o f when you grow up?" It was followed by the question: "What kindo f professional organization didyour parents want to be part o fwhen they were your age?" Although students reported that one out of every two parents wanted to join the public sector when they were growing up, only one out o f every seven students now wants to opt for a career inthe public sector. Instead, a quarter o f the current generation wants to be an entrepreneur and/or venture into modem sectors like fashion and entertainment. Views of the younger generation Views of their parents F A-Public Sectcr F G la% 10% 0% "27% 13% Note: The survey is based on only one school inBhubaneswar and is unlikely to be representative o f the entire state. 1.11 Current investments under implementation indicate the possibility of Orissa growing faster than all other Indian states over the next 5-6 years. The fact that Onssa is starting fiom a low base-with considerable lag behind other states in agricultural yields, and its growth acceleration is led by manufacturing industry-implies that the state can sustain faster than national growth in the medium term. Based on the size o f current investment projects under implementation, Orissa has the possibility to become the fastest-growing state o f India inthe next half-decade. According to projections carried out by CMIE for this Report, using their unique micro database on investment projects at various stages o f implementation, the additional value added consequent to completion o f 413 ongoing investment projects would be Rs. 5.4 trillion by 2012/13, under conservative assumptions about gestation periods. T h s translates into a real growth rate o f 20 percent annually during2008-13. 18 1.12 Sustaining the current growth momentum is a necessity for Orissa, given the rapid growth of the Indian economy. Since 2003/04, the Indian economy appears to have moved to a new growth plane, with growth averaging nearly 9 percent for the past four years. There is widespread consensus that India can sustain a long-term growth rate o f around 8 percent a year for the next decade or more. Under such a growth scenario, ifOnssa grows at the same rate as the rest o f the country, that is, 8 percent a year, per-capita income in 2020 will rise to Rs. 24,000, which is similar to the current level in Gujarat and Maharashtra. If we assume that Onssa will grow at the rate projected by CMIE, that is, annual average o f 20 percent in real terms during 2008-13; and subsequently at 15 percent annually, then Orissa's per-capita income by 2020 could rise to as lxgh as Rs. 62,000--completely eliminating the per-capita income gap between Onssa and India inslightlymore than a decade. B. The Implicationsfor PovertyandHumanDevelopment 1.13 Regional and some social inequalities within Orissa have begun to narrow, while some others remain major outstanding challenges. Regional inequalities within Onssa narrowed between 1999/2000 and 2004/05, according to latest available National Sample Survey data on household consumption expenditure. Real per-capita expenditure increased faster inrural than in urban Orissa, and faster in interior districts than in Coastal ones. Rural per-capita expenditure increased by 12 percent over the period, compared with 4 percent in the urban areas. Within rural areas, the highest expenditure growth was recorded inthe poorest Southern region, where the increase was 25 percent, followed by the Coastal region (12 percent) and then the Northern region (6 percent). In urban areas, while real per-capita expenditure remained flat in Coastal and Southern regions, it grew by 14 percent in the Northern region where most o f the mining and industrial activities are talung place. This growth was dnven by the very large increases inper-capita expenditure inthe households engaged in mining and in financial services, followed by the increase in the households engaged in social and personal services. Although Orissa's Coastal region remained the wealthiest and the Southern region the poorest, the gaps did begin to narrow during 2000-05. A wide cross-section o f the population, including scheduled castes, has gained from the expansion in income-earning opportunities since 2000. However, the poorest 40 percent of the population has gained much less than the better-off 60 percent, and most o f the scheduled tribes remain among the poorest and continue to lag behind. 1.14 Poverty reduction has accelerated in Orissa since 2000 and has perhaps been more rapid during 2000-05 than in India as a whole. The data available from the National Sample Survey for 1993/94, 1999/2000, and 2004/05 are not strictly comparable because of the mixed -reference periods used in 1999/2000. Estimates based on the "uniform reference period" indicate that poverty has declined much less in Orissa over the past 10-12 years than in India as a whole, with the rural poverty rate declining by less than three percentage points during 1993- 2005 in Orissa, compared with nine percentage points in all o f India. However, estimates based on the "mixed reference period" suggest that during 2000-05, the poverty headcount ratio declined by more than eight percentage points in rural and 2.5 percentage points in urban Onssa, compared with five and two percentage points, respectively, in India as a whole. The two comparisons, put together, suggest that Orissa's performance has turned around from being much worse during 1993-99 to probably better than the national average since 2000. Although exact magnitudes are subject to comparability errors, that economic performance changed in favor o f the poor inOrissa since 2000 emerges as an indisputable conclusion. 19 1.15 The composition of the labor force has changed considerably, and real wages have risen significantly?While in 1999/2000 almost 45 percent o f all household heads indicated that their primary occupation was agncultural labor, in2004/05 this proportion declined to 30 percent. The proportion o f self-employed in nonagncultural activities, which represent the second wealthiest group (after the group termed "other"), increased from 12 percent to 19 percent. The share o f nonagncultural labor doubled from 5 percent to 10 percent. The real agricultural wages o f men in their worlung prime ages increased by 45 percent, on average, while women's agncultural wages increasedby over 25 percent. Inthe Southern region, men's agncultural wages almost doubled. Table 1.1: Selected Human Development Outcomes in Orissa, 1992/93-2005/06 Indicator I 1992/93 I I998/99 I 2005/06 I Trend Percentage of children 12-23 months old who received all recommended vaccines: Urban I 44 I 53 I T 1 Note: t implies improvement and 3 implies deterioration. Source; Government o f India, Ministry o f Health and Family Welfare, Provisional results from 2005-06 National FamilyHealth Survey (NFHS). - - P 1.16 Orissa has registered reasonable improvements in several human development outcomes between 1992193 and 2005/06. The proportion o f children who received recommended vaccines increased from 44 percent to 52 percent, reaching parity between rural and urban areas. Currently, the proportion o f vaccinated children in Onssa i s higher than the all- India average. Trends in child malnutrition indicate that Onssa has caught up with the rest o f India from being much worse in the past. The number o f infant deaths per 1,000 live births fell in rural Orissa from 81 to 69, remaining higher than the all-India average o f 62; in urban areas it declined from 81 to 40 falling below the 42 deaths per 1,000 live births recorded for all-India. Progress has been made, albeit at a slower pace, in improving the use o f contraceptives and in attracting women to institutional deliveries Table 1.1, (Selected Human Development Outcomes inOIlssa). 1.17 Of particular concern is the social and environmental impact on livelihoodof those affected by mineral-intensive industrialgrowth. Given the substantial growth potential o f the 'The highest growth ofper-capita expenditure inrural areas has been recorded among the households self-employed in nonagricultural sectors. 20 e c ~ n ~ m y .natural c s ~ there 1s little doubt ~ ~ that natural~rcso~rcc5in general, ~ ~ and ~ ~ minerals ITZ pa3~~cular~ coiitinue to play a p r ~ } m ~ nrolelin .;haping Orissa's develop will e ~ ~ The ~ ~ o v ~ ~onf Orissa has recognved the ~ ~ i i ~ ? o rofademonstrating an ~ r i ~ ~ ~ r o ~ ~ c ~ ~ a i e n ~ ~ ~ ~ c e and socially responsible approach to promoting ~ n v e ~ t ~ ~in i e~n~~is~ n e r ~ l ~ industries. It has b a s e d put inplace a progressive ~e~ettlenientanti rehabilitationpolicy, uhichwas adopted inMay ~0~~~ A recent World Bank Report, To~vur-cls~ ~ ~ ~ til?`iner?ri-inrrriJi-t,r~ Gmt%dtin Orwsu, u ~ ~ i u l ~ underscores the ~ m p o i ~ a ~ofc etlie goi~ernment'sel%rts to develop systematic m e c h ~ n i s ~that i i s extend the benefits of ~ i n ~ r a l - b a s eeconomic growth to the local commLinitics living in and d around areas affected by the mining through: (a) job creation; fb) flow o f funds to local governments and/or tribal communities; (c> improvements in public service delivery; and (d) strengthening social protection. As the Report points out, "to succeed, this process needs to be supported by strengthening institutions and i ~ p l c ~ ~ e nrecord ~atoboth the state and toes1 ~ a ~ ~ i levels of government, in close cooperation and consuttation the c o r n ~ u n i ~ ~ e ~ . " ~ 1.18 These social i ~ ~ p r o ~ents, however, have r e i ~ f ~impacts~across ~astesan r ~ t regions because of the s t r ~ n gsocial and spatial e ~ c l u ~ i o Iin riya society. `The scheduled i s castes and scheduled tribes together constitute nearly 40 percent of the state's population. Although the scheduled castes suffer ftom socially exclusive practices, as in other parts of India, the scheduled tribes suffer also from geographical ~~olation,being concentrated in the hilly interior regions and residmg largely in small, remote villages and hamlets. In fact- r e ~ o ~ e n eISs s perceived as the most i m ~ o ~barrier tto the ~ ~ n ' de~elopme~About 52 percent of all i ~ . ~ and hamlets tn Orissa are too small to for the central grant-financed rural roads e ~ ~ ~ iGram~Sada r ~ a~ ~ s e ~ ~ ~the p~~ p L~l l ~ t ofosuch ~ n ~ ~ ~ a 3 small remote settlements constitutes about 15 percei-tt af the Orissa population anti o percent of the hbal ~ a ~ ~ l aThe~intersection of social and spatial inequatrty plays ~ o ~ i . m a r ~poorer outco~iie~ ~ ~ l ~ in area5 where the scheduled tnbes are concentrated. %%en asked about the impact of their r ~ ~ ~ i o ~ erespcmdents in a recent study in four `~illagcsin ~ i e s ~ , i n d i c a t ~that~ the greatest nipa act was on access to public scriices. rather than e ~ ~ ~ ~ ~ o orm e n t ~ y business oppoi-hinities. Figure 1,s: Orissa's regioIisvary I~iarkedlyin their per-ea ita ~ n ~and human~develo o i ~ i ~ ~ i e ~ ~ ~ r s Sutrrce Orissa tfumstn DeteloprnentReport,2001, and Author's calculatron 1.19 Different types of exclusion require different approaches. As shown in Figure 1.5, (Onssa's regons vary markedly in their per-capita income and human development indicators) six o f the eight districts located inthe South and Southwest regions o f the state-which are the poorest regions-fall in the quadrant with low income and low human development indicators (HDI).Some o fthese districts haveper-capita incomeashighas the Coastal districts andyet have extremely l o w human development indicators, a symptom o f the highincome inequality and high degree o f exclusion inthese districts, where remoteness is a problem but not mining.The districts inthe North andNortheast, which are richinmineral resources, also tend to have relatively high per-capita income, but perform a little below the Coastal districts in human development indicators. Clearly, raising per-capita income through higher growth will have greater impact on human development indicators and poverty reduction in Coastal districts than in the other two regions. The other two regons need growth plus appropriate direct interventions, at least in the short to medium term, to reduce poverty inthose areas. 1.20 Given the widespread regional and social disparities in the state, the impact of growth on poverty will depend on the extent of resolution of social exclusion and geographical seclusion. As shown in Figure 1.6, (Onssa's poverty headcount ratio, compared with other Indian states, will vary dramatically under different growth and social exclusion scenarios) assuming that historical levels o f inequality will continue, the poverty headcount ratio inOnssa is likely to range between 39 percent and 29 percent in2020, depending on the growth outcome. IfOrissa overcomes its disadvantage and achieves the pattern seen inother Indian states in the relation between per-capita income and poverty headcount ratio, then poverty will be reduced to around 22 percent under the low-growth scenario (5% average annual growth rate), to 10percent inthe base-case scenario (8% average annual growthrate), andto zero inthe high-case scenario (10% average annual growth rate).5 The reality lies somewhere inbetween the two paths shown in Figure 1.6. Exactly where it lies will depend on both the level o f aggregate growth and the distribution o f its benefits. That critical issue o f distribution will be determined by the extent to which the Government o f Orissa can address structural issues, like the lack o f connectivity, the persistence o f social exclusion, and the impact o f mineral-intensive industrialization. More recent studies (e.g., see CMIE, 2008) indicate that Orissa's potential growth rate could even exceed 10percent average annual rate assumed here under the high-case scenario. 22 Figure 1.6: Orissa's poverty headcount ratio, compared with other Indian states, will vary dramatically under different growth and social exclusion scenarios Onssa in FY20 5%growth (Lowcase Scenano) 40 I OnssainFY20 8%growth D MP (BasecaseScenano) 35 OrissainFYM: D%growth + ! 30 - cenario) , 25 20 i ~ajastnan kinaOrissa'sexistino " I \ \growthpovertyelasticity "i Kerala Usinga highlyfavorable growth-povertyelasticity 1Y axis:Povertyheadcount rationin2004/05 (UniformRecallPeriod) 5,000 x),ooo 25,000 20,000 25,000 30.000 35,000 Source: NSS. 61 Round. Orissa PD and author's calculation C. Sustainingthe Growth Momentum 1.21 The recent growth acceleration was preceded by significant reforms by the state government. &ssa has made important progress in improving its regulatory framework for private enterprises including: (a) establishment of a single-window system to speed the processing o f applications; (b) introduction o f a combined application form to reduce the number of clearances required to establish a business from 18 to 1; (c) introduction o f a time-bound clearance system; and (d) self-certificationfor compliance with provisions of applicable industry- and labor-related acts and rules. A new state-level resettlement and rehabilitation policy, adopted after broad stakeholder consultations, has been notified. The Orissa Rural Infrastructure and Socio-Economic Development Act, 2004, levies a tax varying from 5 percent to 20 percent o f the value o f land allocated for mineral extraction, with the revenue earmarked for developing rural and mine-affected areas. The government has also issued an ordinance that requires the mining companies in tnbal areas to: (a) allot 2 percent o f equity to displaced people; and (b) allocate 5 percent o f net post-tax profits on peripheral development (ina radius o f 15 kmaround the mining area). 1.22 The government has also taken a number of measures to increase the competitiveness of its agriculture sector. The Agricultural Produce Markets Act has been amended to permit private investment in marketing yards and storage facilities for agricultural products and to facilitate contract farming, so that farmers can diversify out o f low-value paddy to higher-value horticulture and other crops. The government has also rolled out Agncultural Technology Management Agencies in all districts to better facilitate the transfer o f knowledge and technology in agriculture. To facilitate empowerment o f farmers in water resources management, irrigation schemes have been put under the control o f puani panchuyats, so far covering 0.98 million hectares. To improve access to land for the poor, the Government of Orissa i s establishing a modernized land administration system with updated records of rights and 23 digitized cadastral maps. The government has also formulated a comprehensive forest sector vision and strategy, including the revision o f guidelines for joint forest management, new approaches for nontimber forest produce, bamboo, medicinal plants, and timber production aimed at raising the income o f forest-dependent people. Figure1.7: The cost of doingbusinessinOrissa hasdeclinedover time and is now comparableto the rest ofIndia -_ x x -_---_..--*L-- ~ ~ ~~~~~~~~~ ___I ~ 1 1 Doing Business in Orissavs. hdia 900 Doing Businessin Orissa: 2006YS. 2007 7 I Startinga 800 i Business Closinga Dealingwith Business Licenses Enforcing Registering Contracts Property I Startinga Dealingwith Trading Enforcing TradingAcross Business Licenses Across Contracts Borders - Bhubaneshwar India ~" - -- ~- _ _ Borders I Source DoingBusiness ReDorts. 2006 and 2007 1.23 Regulatory reforms have reduced the cost of doing business in Orissa. Between 2004/05 and 2005/06, the number o f days elapsed to start a business declined from 79 days to 52 days, the days to deal with licenses fell from 209 days to 159 days, and the days to enforce a contract reduced from 765 days to 610 days (left panel, Figure I.7: The cost o f doing business in OIlssa has declined over time and is now comparable to the rest o f India). With these improvements, the cost o f doing business in Onssa i s now comparable with the rest o f India. However, relative to states such as Gujarat and Maharashtra, which historically have had the best investment climate in the country, OIlssa still has a lot o f catching up to do, especially in provision o f infrastructure services like power, water supply, and telecommunication. It not only takes longer to get connection to these services in Onssa than in Gujarat (left panel, Figure 1.8) but the quality o f services is also considerably inferior inOrissa than inMaharashtra (right panel, Figure 1.8). 24 Figure 1.8: Orissa continues to lag behind states with better investment climates, especially in infrastructure services Time to get connection to various services, 2006107 Quality of servicesprovided, 2006/07 - 45 ', Ail 41 5 Orissa 0 Gujarat 116 61 Orissa Maharashtra 6 Source: InvestmentClimate Assessment, 2007. 1.24 Diversification o f crops, measures to increase yields, and creation of a competitive and integrated supply chain are critical to sustain the improved growth performance in the agriculture sector. Orissa's agnculture remains single-mindedly based on rice (85 percent o f cropped area grows rice, as shown in Figure 1.9), even though experts have argued that diversification into higher-value agriculture i s important to restore soil nutrients, to raise farm income, and to create more farm and nonfarm jobs. Some signs of diversification are evident: maize i s emerging fast as an important cash crop in Orissa, and cotton has increased from 5 million bales in 2002/03 to 14.5 million bales in 2005/06, a growth o f 191 percent. Along with diversification, Onssa's agnculture can get a big stimulus by closing the "yield gap," the difference in productivity per hectare with the all-India average, with the largest gains likely to come from paddy and from the fruits sector. By shifting 1 million hectares o f land from cultivation o f rice to fruits and vegetables and by closing the yield gap in both by half, Orissa could treble its apcultural output. But for the diversification strategy to succeed, Orissa needs better connectivity, improved storage, and an efficient distribution system. 1.25 Reforms in land tenure and land administration systems are of high priority to close the yield gap in Orissa's agriculture. Although no official data exist, several researchers have documented the widespread prevalence o f informal land leasing or sharecropping arrangements in Orissa. Such arrangements are informal because the Land Reform Acts o f the early post- independence penod made land leasing illegal inOrissa. The legalban does not benefit the small- scale tiller o f the land, who it was intended to protect in the first place. The owners of land today are typically smallholders resident in towns, who enter into informal arrangements with sharecroppers to send them a fixed share o f the output each year. The tenant farmer, who has no security o f tenure or any form o f recognized rights, is deprived o f access to bank credit. A s a result, little to no investment is made in the land to raise its productivity. The first step that the Government o f Orissa has taken to address this constraint is the initiation o f measures toward a transparent and user-friendly land registration and land administration system. The next crucial step i s to initiate an informed public debate about the need to reform land legislation, balancing the interests o f the farmers with that o f the landowners. 25 Figure1.9: A typical agricultural supply chainin Orissa is highly fragmented and is markedby the excessive presence of intermediaries R etalle r C 25% Wholesaler c 10% M a r k e t level c o m m i s s i o n a g e n t c 5 % C o n s ollda torlvilla ge level trader 10% 250 Out-of-state retailer,50 200 Uut-or-statedistrbutor, 20 50 Unexplainedmargin,40 I Corruptiop, i lTaxes,9 1 Localmanufacturer, P x)O cost of transporatation.2% Cost of production,37 50 Ldcalintermediary,3 Primaryproducer,50 0 Source: Background study for World Bank,A Brief Review of Anti-Poverty Programs and their Egectiveness in Orissa, Washington, D.C., 2006, and interviewwith traders. 1.26 Like most other Indian states, Orissa's agricultural supply chain is fragmented, small-scale, and inefficient. According to a World Bank study, the agricultural marketing channel works as follows. The village-level consolidator collects the produce from small farmers and brings it to the wholesale market. The commission agent in the wholesale markets sells it to the wholesaler and charges 6 percent commission on the transaction. The wholesaler sells the produce either to a subwholesaler or directly to retailers, who in turn sell it to consumers. The mark-up across the chain is shown inFigure 1.9 (top panel). Along with excessive intermediaries, the absence o f connectivity, the lack o f proper logistics, and the perishable nature o f products further tend to increase wastage and mark-ups at each stage. The farmer actually receives an unremunerative return. The marketing of certain forest produce, such as the plates made from siali leaf, also suffers from similar problems (bottom panel, Figure 1.9). 26 D. Conclusions 1.27 Economic growth faster than the national average is both possible and necessary in Orissa. Our analysis indicates that Orissa, historically part o f the lagging regions o f India, has been experiencing a broad-based economic expansion since 2000, with the pace o f expansion quickening significantly since 2003. The acceleration i s a result o f a more open policy and regulatory climate for private investment, both nationally and in the state. It is a result o f the turnaround in the state's fiscal health, accompanied by an improved governance environment. Sources o f dynamism in the Onssa economy include: (a) the surge in private industrial investments in steel, aluminium, and other metals, resulting from national and state-level policy changes as well as global factors like the rising demand for metals; (b) the increase in self- employment and small business enterprise, following improved road connectivity achieved through fiscal reforms and results-based management o f the capital budget; and (c) the diversification o f agnculture into cash crops in some parts o f the state, leading to higher economic returns per hectare. Increased and more effective public investment, which was made possible by fiscal and governance reforms, along with improvement in the investment climate, have succeeded in "crowding in" private investment. Large-scale investments in some sectors have begunto have a multiplier effect on other sectors o f the economy. 1.28 Despite Orissa's poor past record on growth and development, the current expansion, which is grounded on real reforms, is likely to be more durable. With appropriate policies and institutions, Orissa can sustain a growth rate that is higher than the national average, thanks to its locational advantage as a Coastal state and its preferred location for metals production. The sustainability of its growth rate is likely to depend critically on its ability to bridge the gaps that persist in infrastructure, human development, and public service delivery, which challenges are discussed inthe next three chapters. 1.29 The most serious risk i s political opposition to industrialization. Ongoing investments may get blocked and industrymay slow down in Onssa ifpolitical opposition grows due to real and/or perceived exclusion of the scheduled tribes from the benefits o f industrialization. Inclusion o f the hitherto excluded sections is therefore the most critical challenge ahead for Onssa. Inclusive growth i s not only desirable for its own sake, but also a condition for sustainingrapid growth inthis state. 1.30 Different kinds of exclusion need different interventions. Those suffering from remoteness need one set o f interventions, while those suffering from the negative effects o f mining need another set o f interventions. Those suffering from social discriminatory practices need interventions aimed at uplifting their social status through collective action, such as the successful Orissa program for women's empowerment, called Mission Shakti. 27 CHAPTER 2: THEFISCALTURNAROUND 2.1 This chapter presentsthe story of the fiscal turnaroundachieved in Orissa, clearly the strongest among poor Indian states. How was this extraordinary degree o f correction achieved? What were the contributing factors and sources o f correction? What lessons can be drawn from this experience? These questions are addressed inthis chapter, as well as measures to strengthen public expenditure and financial management practices, given their close connection withthe successful fiscal turnaround inOrissa. 2.2 Orissa faced a fiscal crisis in 1999/2000 as a result of overexpansion of government and public enterprise, with low returns financed in part by high-cost debt from Government of India. The crisis was aggravated by the unaffordable pay hike awarded to government employees in line with the central FifthPay Commission award o f 1997 and by the super-cyclone o f 1999. The fiscal deficit peaked at 10 percent o f gross state domestic product (GSDP) in 1999/2000, when interest, pensions, and staff salaries consumed all o f the state's revenue and central grants. The state also faced serious liquidity constraints. The treasury was closed every month after salaries and interest were paid, and overdrafts were resorted to on more than 250 out o f 365 days inthe year. 2.3 The fiscal crisis galvanized the reform momentum in Orissa. That Orissa was headed for a fiscal crisis was h o w n inthe late 1990s. Two analytical World Bank reports, in 1996 and in 1999, had highlighted fiscal imbalances as the binding constraint to addressing Orissa's development challenges. In 2001 the government issued a white paper on the pathetic condition o f the state's finances and signed a memorandumo f understanding with the central government to undertake fiscal reform measures, thereby publicly aclmowledging the fiscal crisis and openly committing to address the problem. 2.4 The firm negotiating position of external financial institutions and the central government helped to instilland consolidatefiscal discipline in Orissa.Both the World Bank and the Government o f India were willing to help, but only on the condition that the Government o f Onssa took corrective steps to enhance its own revenues and reign in unproductive expenditures. This firm negotiating position helped tip the scale in favor o f a strong fiscal correction. The correction was almost all on the revenue side inthe initial phase, which faced less political resistance than expenditure-saving measures. Onssa effectively used professional consultants for reforming the tax administration, with grant support from the UK Department for International Development (DflD). Unlike the results in many other Indian states, elections held in spring2004 returned the incumbent Chief Minister and coalition in Onssa for a second term that extends until 200849. The renewed mandate strengthened the commitment o f the Chief Minister and his team to press ahead in implementing the reform program, both revenue and expenditure measures, as well as to widen its scope to address a broad agenda o f issues affecting economic growth and human development. From relying on the public sector for job creation and direct government interventions for poverty reduction, the Orissa leadership seriously began to regard the private sector and community groups as the major engines for expanding employment and reducingpoverty, with the government playing a facilitating and complementary role. And to play its role effectively, the Government of Onssa embraced fiscal discipline as a necessary first step. 28 A. Fiscal Consolidation 2.5 Roots of fiscal imbalance were identified.The historical and structural roots o f the fiscal crisis in Onssa included a poorly functioning state tax system, an excessively large and unaffordable civil service, an excessive number o f loss-making public enterprises, and a large debt overhang. All these factors combined to create an unsustainable deficit path and a skewed composition o f public expenditure, with interest, salaries, and pensions absorbing 100 percent of the state's total revenues at the end o f the 1990s (see also Annex B). 2.6 The pace of fiscal - correction had to be strong enough to PUN Orissa out of the Figure 2.1: Fiscal correctionswere higher inOrissathan in deep hole it had sunk into. Given any other Indian statein 1999-2006 the high inherited debt and debt- servicing burden, Onssa had to achieve a significant primary fiscal surplus so that debt and debt- servicing indicators would decline, e 1.03 process o f dialogue with civil 3 o.4) not merely stabilize. Through a i3 society, as well as with the central government and the World Bank, 0.00 Orissa arrived at its own medium- term fiscal plan and further APK-IGIHYKNKRM'M-ICRPJ R I T N W W institutionalized it by adopting the %f5 Fiscal Responsibility and Budget Management Act, 2005 (FRBMA), which went into effect in June 2005. The Act stipulates that the P P government shall eliminate its deficit on current account and turn it into a surplus by 2008/09 and that the overall fiscal deficit will be brought down and maintainedbelow 3 percent o f GSDP. Onssa has achievedthese targets way ahead of time. The reduction in the primary (noninterest) deficit and the revenue (current account) deficit has been higher in Orissa than that in any other Indian state during 1999-2006 (Figure 2.1). The Fiscal Responsibility and Budget Management Act also mandates several measures for fiscal transparency, including annual reporting of unpaid bills along with the cash- based financial accounts. Orissa now produces an annual medium-term fiscal plan, which shows how its Fiscal Responsibility and Budget Management Act targets will be achieved. 29 Figu 2.2: Orissa has made large and consistentfiscal corrections Figure - ions f 6D'h - Deficit (% of GSDP) 4 0 % . 20%- -8wo * \ 2.8 Orissa is the only Table 2.1: Contributions to Fiscal Correction in Orissa, 1999/2000- Indian state where all 2007l08 Indicator any state other than Orissa Interest papents 0.2 Overall Fiscal Balance 10.2 II 30 Figure 2.3: :Orissa is the only state with significant contribution from all three sources of fiscal correction (Annual average, 1999-2006) 2.00 1.50 1.oo n 0.50 n - -1.oo -1-50 _ _ I CentralResources States Own Resources --k --Contractionof Non-Interestexpenditure Rimary Correction B. ReformsinTax PolicyandAdministration 2.9 Orissa's experience shows that poor states can significantly enhance their own revenues through tax policy and administrative reforms. Orissa's own taxes provide 70 percent of its own revenues. Increasing the own revenue-to-GSDP ratio through tax reform has been an important part of Onssa's fiscal reform program, supported by technical assistance from the U.K Department for International Development. Orissa has been successful in this regard, with an increase inthe rate from 5.2 percent in 1999/2000 to 9.2 percent in2007/08, on the back o f a series o f tax policy and administrationreforms. Whereas in 1999/2000, Orissa was ranked at 13 among the major states on tax collections as a share o f GSDP, it has now climbed to rank 10. Moreover, estimates o f the buoyancy o f own tax revenue with respect to GSDP in current prices between 1993/94 and 2006107 show that the buoyancy has increased since 2001, and inparticular since 2004. This suggests that tax revenues have become more responsive to GSDP growth, indicating that the reform o f tax policy and administration, not simply growth alone, has helped increase tax revenues in 2.10 The improved revenue performance of Orissa is largely attributable to recent increases in collections of sales taxes and value-added taxes? The Commercial Tax Department o f Onssa i s primarily responsible for the collection o f taxes in the state, including value-added tax (VAT), central sales tax, entry tax, entertainment tax, and the professions tax. As in other states, the mainstay o f the tax structure in Orissa is the sales tax and the VAT, which The buoyancy of own tax revenues with respect to GSDP in current prices, as estimated through a double log regression, works out to 1.30 for the years between 1993/94 and 2006/07. Limiting the observations to the 1993/94 2003/04 period, the estimated buoyancy drops to 1.17; it drops further to 0.97 for the period 1993/94-2000/01. Estimatedyear-on-yearbuoyancy in2004105 was 2.12; and in2005/06 it was 2.12. 'The Value-Added Tax Law o f Orissa was adopted as a model by the Empowered Committee of State Finance Ministersfor implementationof value-addedtaxes inother Indianstates. 31 account for about 60 percent o f own tax revenues. The rise in sales tax revenues actually precededthe formal introduction o f the VAT, which took place on April 1,2005, and appears to be related inpart to an increase inthe number o f registered dealers, whichjumped from 68,186 in 2004/05 to 90,873 in 2005/06.' Sectors contributing most to the increased revenues were automobiles, petroleum products, mining, and industry, linked to the start o f production o f a number o fmineral-based industries inOnssa. 2.11 The introduction of A Figure 2.4: Orissa's own tax revenueshave risen from a wide variety VAT has been the most of sources imDortant revenue reform in 1 Orissa in recent years. With the Other T m s introduction o f VAT, the 0Profession Tax cascading effects o f single-point LandRevenue 0 Stanp Duty &RegnFees taxation have been eliminated, Electricity Duty opportunities for evasion by 0 Statek i s e underreporting o f value have 0MotorVehicle Tax been pruned, and there has been Entry Tax an overall transformation o f the 0 Sales Tax VAT administration through organizational restructuring and computerization. As a result o f the reforms, electronic :: information regarding the P P compliance o f dealers, for instance, is more easily available, facilitating timely enforcement activities by the Commercial Tax Department (Box 2.1). 2.12 Tax incidence has become more progressive.The value-added tax is a market-friendly and growth-inducing tax, whose incidence falls on final consumption. Because the VAT taxes all consumers in proportion to their consumption and the poor generally have a higher marginal propensity to consume than the rich, the VAT could be considered a mildly regressive tax. Therefore, to make overall tax incidence more progressive, a state would be well advised to strengthen its other major taxes, especially the excise on liquor and stamp duties on real estate transactions, both o f which tax mainly the better-off in society. Onssa seems to have enhanced the overall progressivity o f state taxes during 1999-2006, as it has considerably enhanced revenues from liquor excise and from stamp duties (Figure 2.4). State excise on liquor has doubled as a share o f GSDP since 1999/2000, inresponse to the implementation o f a wholesale state monopoly for the trade designated as Indian-made foreign liquor, which appears to have been quite effective. 2.13 Nontax revenues are more significant in Orissa than in many other Indian states Mining royalties from nonferrous mining and metallurgical industries account for the bulk o f nontax revenues and have consistently been the second-highest own revenue source in Orissa, after the sales tax and VAT. Nontax revenues as a share o f GSDP have stayed roughly constant since 1999/2000. User charges for publicly provided services, such as education, health, irrigation, and drinhng water supply, have remained modest in Onssa, although in some areas they could rise in the context o f private sector participation-for specialized uses such as technical education, professional education and training, specialty health services, and urban water supply. * Theincrease in the number of dealers might be connected to the expected introduction o f the VAT, since a registered dealer has an incentive to purchase only from another registered dealer to get the advantage of offset. 32 Box 2.1:Administrative Reforms in Orissa's Commercial Tax Department Administrative reforms, training o f officers, a wide publicity campaign, and computerization o f the Commercial Tax Department have allowed for better monitoring and compliance and played a major role in expanding the efficiency o f tax collection. The introduction o f the VAT, leading to an increase in the number o f dealers to be administered, mandated the need for change inthe functioning and structure o f the department. An organizational review o f the department conducted in2000 recommended functionalization o f the department, and this has been partially implemented at the level o f the enforcement range. All processing activities are carried out at that level and specialized audit, debt management, assessment, and return units have been established. Leakages have been reduced through on-line monitoring and computerization o f 41 o f the total o f 54 circle offices and o f four major check gates. Opportunities for evasion o f tax by underreporting of value, which existed inthe earlier regime, have been pruned. About 3.6 million trucks carrying goods enter and leave Orissa every year-and all goods entering and leaving the state can now be monitored. According to the department, it was virtually impossible to monitor the earlier paper-based and widely dispersed tax collection system encompassing 110field offices, 5 enforcement ranges, and 44 circle offices. Circle offices are now on-line, and information o n dealers, transactions, and turnover can be captured on the computer. All registered dealers are provided government weigh bills at circle offices, which are recorded inthe electronic system. Copies o f the weigh bills can be accessed at the check gates, allowing for better scrutiny and a system o f checks and balances. Inaddition, about 600 dealers who contribute over 60 percent o f the total tax collection are monitored on a continuous basis. The Commercial Tax Department also works closely with the state's Vigilance Department, which is responsible for the anticorruption and investigation functions. A special cell has been establishedwithin the Vigilance Directorate comprising tax specialists. These specialists along with enforcement officials have the authority to do spot checks o n goods at check gates and directly collect fines and taxes. The Commercial Tax Department therefore has developed a practically independent tax enforcement function, which has beenresponsible for collecting over Rs.10 crore o f fines every year. Moreover, this cell acts as a strong deterrent to tax evaders The computerization initiative has been backed by an effective capacity-building strategy that has included training in rules, audit, revenue planning, and performance improvement, as well as the management and control o f tax evasion and fraud. A wide multimedia publicity campaign was also mounted by the department to spread public awareness among dealers about the benefits o f the VAT regime. Evidence suggests that the campaign, which used television advertisements, as well as serialized capsules on VAT, radio "jingles," street plays, and hoardings was successful inachieving implementation o f VAT with lower resistance than inother states. 33 C. Expenditure Restructuring 2.14 Expenditure composition, although still burdened by the state's high debt service, has improved significantly. The ratio o f the salary bill to the state's own revenues-selected by the Government of Onssa as a key indicator o f its fiscal reform efforts-has fallen dramatically from over 161percent in 1999/2000 to 62 percent in 2006/07. Capital outlays have reboundedto an estimated 2 percent o f GSDP in 2006/07 (roughly equivalent to the 1.9 percent in 1999/2000), after being at about 1.5 percent o f GSDP in recent years. Nonwage operation and maintenance spending has also rebounded from 0.45 percent in 2003/04 to just over 1 percent in 2006/07, driven by increased spending on road maintenance. The sectoral composition o f government spending (net o f interest and pensions) shifted slightly in favor o f human development, including education, health, dnnking water supply, social protection, and antipoverty programs: the combined share o f these sectors increased from 45.3 percent in 1999/2000 to 52.5 percent in 2005/06. 2.15 Resource constraint has put more emphasis on outcomesfrom capital spending. The degree o f fiscal stress and the massive correction that was required convinced the government by 2002/03 that it was not possible to finance any increase in capital spending for the next couple of years; the capital budget could at best be maintained constant innominal rupee terms. Within the given constrained resources, the government launched an exercise called Zero-Based Investment Review to maximize outcomes through reallocation within the departmental budget. This effort turned departmental attention from outlays to outcomes. A high-powered committee headed by the chief secretary asked every infrastructure-related department this key question: "How many investment projects can your department complete this fiscal year, assuming you get the funds needed?" Projects close to completion were accorded higher priority, and resources were reallocated from lower-priority projects to bring them to conclusion. The budget documents began to carry data on the number o f investment projects identified and numbers completed by each of the investing departments. The number o f bridges completed rose from 19 in 2004 to 85 in2005 and over 100in2006. Thus, bytacklingtheproblemo f spreading limitedresourcesthinly across too many projects, the state government achieved an increase in outcomes on the ground, even when budget allocation remained constant. Faster completion o f long-pending bridges and connector roads, with high benefits to the local population, became a visible quick win that the political leadership beganto publicize to gain political support. 2.16 Right-sizing the civil service has been the major contributor to the expenditure side of fiscal stabilization. The public sector in Onssa had acted for years as the employer o f first resort, leadingto a government workforce proportionately much larger than inmost Indian states. A white paper on public expenditure management and administrative reforms laid out a reform path for Onssa and noted that the state's proportion o f public sector employees to the population was twice the average for all India (1.6 percent compared with 0.8 percent nationally). Development expenditure had been squeezed to a minimumby the large and growing salary bill and interest burden. The ratio o f the salary bill to the state's own revenues was 150 percent in 1999/2000. 2.17 The salary bill has fallen significantly by 3.5 percent of GSDP over the past six years. A memorandum o f understanding signed with the Government o f India committed Orissa to reduce government employment by 20 percent (about 1, 00,000) people in the medium term. Between 1998/99 and 2005/06 Orissa has brought down the total number o f employees in the public sector from 4,75,791 to 3,92,805, a reduction o fmore than 80,000 people. The reduction in civil service numbers has been achieved without actually retrenching anyone in service. It has 34 been achieved through the elimination o f vacant posts and a ban on new recruitments across government, with negligible exceptions. The reforms began in 2001 and were reinforced by government orders in 2004 that required all departments to abolish 75 percent o f base-level regular posts that became vacant every year. The salary bill for temporary workers has also been halved from Rs.0.32 billion in2003/04 to an estimatedRs.0.15 billion in2005/06. 2.18 The containment of the salary bill has yielded substantial savings. Although it is difficult to estimate what the salary bill o f the state government would have been if there had been no reform, projections done by the Finance Department suggest that the state government would have spent an additional Rs.36 billion on salary expenditures in the absence of the right- sizing measures. Figure 2.5 shows the projections o f what the salary costs may have been in a "business as usual" counterfactual scenario compared with the actual salary bill. 2.19 Containing the cost - - of administration hasbeen a Figure 2.5: Significant fiscal savings have come from containing the public sector salary bill core element of fiscal discipline championed by the Finance Department. Much o f the credit for the fiscal turnaround needs to be laid at the doors of the Finance Department, which has consistently identified areas for savings and for delivering more with less burden on the budget. Establishing better budgetary controls and monitoring o f 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 staffing policies o f +Actual +Non-reformscenario departments have contributed to the overall fiscal Note: The projections are made using the following assumptions: (a) in a "no strengthening. Starting in reform" or "business as usual" scenario, the net attrition would be zero; Le., every post that falls vacant would be filled up; (b) annual incremental hikes 2002, the Finance Department would be 2.5 percent of basic pay, and (c) a "dearness allowance"-an has periodically issued orders inflation-based allowance on basic pay-would have been same as actualrates to the line departments to paid out by the GovernmentofOrissa. tighten administrative Source: Government of Orissa, Finance Department. spending. While there is a continuing policy o f abolishing 75 percent o f base-level posts falling vacant every year, the Finance Department has also established clear guidelines for filling the remaining 25 percent o f the vacancies. Departments have been urged to fill these posts with contractual-level staff on a consolidated salary, and decisions on staffing have been required to be made on the basis o f proven administrative necessity. Furthermore, departments are required to abolish the corresponding sanctioned post before creation o f a contractual post to avoid litigation around tenure. Uniform formats have been issued to all departments to use for such contracts. The Finance Department has shown extraordinary attention to detail in dealing with the crisis and instilling fiscal discipline. Austerity measures that have been introduced and strictly monitored include: 0 A complete ban on the creation o f any new post under any scheme. Abolition o f any equivalent posts would be required incase there i s an absolute necessity for a new post to achieve modernization or effective implementation. 0 Redeploymentas the first recourse for filling posts. 35 A ban on the purchase o f new vehicles and equipment, a ceiling on the monthly consumption o f fuel allowed for every officer, and a stipulation that no additional budgetary provisions would be allowed for transport costs for any department. Ceilings on reimbursable expenditure on telephone bills for both ministers and civil servants. Restrictions on travel and official visits, including a ban on air travel to attend workshops and seminars. Restrictions on entertainment and hospitality. Restrictions on transfers. Orders have been issued restricting mass transfers of officers except on completion o f a minimum tenure of three years in a post and six years in a district. Ban on withdrawals from civil deposits. Strict economies on the sale o f futtures, furniture, and stationery, including instructions on the best way o f managingpaper consumption and on note writing. Instructionson better monitoring o freceipts andrecoveries. Bimonthly reports to the Finance Department from administrative heads on scheme reviews, and orders that utilization certificates on expenditures incurred need to be provided withintwo months. Containment and reduction of explicit and implicit subsides and grants have been a noteworthy accomplishment, an important political victory over vested interests. The Government o f Onssa has managed to reduce different forms o f drain on the budget, including: (a) subsidizing the runningo f loss-making state-owned enterprises; and (b) government grants to cover teachers' salaries, claimed by nongovernmental educational institutions without any reference to the output or outcomes they deliver. 2.21 Orissa is a leader among Indian states in public enterprise reform. Onssa has made considerable headway in closing down loss-making enterprises and privatizing viable units. The 2002 public enterprise r e f o m and privatization policy recommends divesting government from commercial activities, reducing the fiscal losses, and facilitating private investment through a program o f privatization, closure or liquidation, and restructuring o f state-owned enterprises. Since the onset o f the power sector reform program, no explicit subsidies have been granted to the power sector. As discussed in greater detail in Chapter 3, the financial performance o f the power sector has improved considerably, with all distribution companies now paying 100 percent of their bulk supply tariff bills and paying parts o f their pre-privatization debts. Technical and commercial losses, although they are still high, are consistently on the decline. Enterprise restructuringhas also helpedto cut the cost o f the previously significant subsidy to the Onssa Lift h g a t i o n Corporation. About 6,450 employees have been separated, and a program for formation o f puuni panchuyuts (water user bodies) i s well under way. Phase Io f the public enterprise reform program, supported by U K ' s Department for International Development, has led to the separation o f 14,700 employees under the VRS with an estimated fiscal savings of Rs. 7.5 billion. Intotal, as ofJanuary 2006,3 1,248 employees havebeenseparated. 2.22 Education grants are also beingreformedto emphasize the performance of students and teachers. Grants-in-aid to colleges and high schools to cover teachers' salaries was politically the most difficult problem to tackle. Starting in 2002/03, the Government of Orissa began to publish, as part o f its annual budget documents, data on the number o f students on the rolls and the percentage who pass the final examinations. Bypublicizing the fact that a number of educational institutions drawing government grants were showing zero as their pass percentage, the Finance Department enhanced public awareness and public sympathy for reforming the grant system. Reforms are moving the grants toward linking budget support to performance and 36 outcomes. The first step has been taken in this direction by delinkmg grants from teachers' salaries and converting theminto block grants per student enrolled. 2.23 Progresshasbeenmadeto bringdownthe stock of outstandingguarantees. Over and above the immediate fiscal gains that the public enterprise program has provided, it has also helped to control the future build-up o f liabilities and unproductive investments. During2002/03 the government fixed the guarantee ceiling. The power sector accounts for over two-thirds o f the outstanding guarantees; outside the power sector, the Onssa State Financial Corporation and the Orissa Industrial Development Corporation are the largest recipients o f guarantees. A guarantee redemption fund was established in 2002/03, to be utilized for meeting payment obligations fiom guarantees. Total outstanding guarantees were reduced from 11.2 percent o f GSDP in March 2002 to 4.6 percent inMarch2006. D. DebtRestructuring 2.24 Debt restructuring has been an important part of Table 2.2: Debt Swapped bythe Governmentof Orissa, Orissa's strategy to bring the 2002103-2006107 I wrd I interest burden under reasonable limits. Orissa had Year Amount Interest been classified by the Twelfth savings Finance Commission as a highly debt-stressed state, principally on billions) billions) the basis o f two indicators: (a) 2002/03 4.75 NSSF 0.33 the debt-revenue ratio was higher 2003/04 8.64 NSSF 0.62 than the stipulated maximum of 2004/05 12.05a NSSFIloans from 0.49 300 percent, at about 338 percent 2005/06 4.00 I OpenMarketI 0.17 in 2003/04; and (b) the interest- and2006/07 NSSF I1 revenue ratio stood at 35 percent Total 29.44 1 1.61 in2003/04, muchhigher than the maximum o f 20 percent. The Note: NSSF indicates] Government o f Onssa has made a. IncludesRs.325 crore of WE3 use o f available debt restructuring and swapping possibilities with the support o f the Government o f India, usedpart o f the proceeds of the budget support from the World Bank to prepay expensive debt to domestic financial institutions, and qualified for debt relief under the Debt Consolidation and Relief Facility by passing the Fiscal Responsibility and Budget Management Act and bringingthe fiscal deficit to below 3 percent o f GSDP. In addition, Orissa rescheduled high-cost loans from the Government o f India at lower interest rates. As a consequence, Onssa has saved almost Rs.1.6 billion in interest alone since 2002/03, when the state first started swapping high-cost debt. The government has swapped almost Rs.30 billion since then (Table 2.2). All these steps have helped Onssa bring down the interest-to-revenue ratio from 35 percent in 2002/03 to 26 percent in 2005/06, and the ratio o f outstanding debtgto revenue fell below 300 percent in2004/05. Outstandingdebt includesyear enddebt stock plusoff-budgetborrowing. 37 Figure2.6: Orissa's debt is becomingsustainableas it declines in relationto revenueand GSDP Debmevenue Debt/GSDP 25% - mJ 899100 2000101 200V02 2002103 2003104 2004105 200Y06 2006107 200710I BE E. PublicExpenditureandFinancialManagement 2.25 Orissa has made important improvements to the budget process. Starting with new investment procedures in 2003/04 (tightening the fimding of schemes by setting in advance binding sectoral budgets, giving priority to continuing projects and to projects nearing completion, requiring viability analysis for proposed schemes, and several other measures), medium-term expenditure programming has been gradually introduced. The state has adopted a medium-term approach, whereby an expenditure projection i s formulated for the next five years, updated annually, and presented to the Assembly at the same time as the annual budget. In the past three years, clear guidance has been issued in formulating the annual budgets, aligned to the medium-term fiscal plan and focusing on curtailment o f unproductive expenditures, enhancing revenues, and speedy completion o fpriority investment schemes. 2.26 Orissa has also madeprogressinenhancingfinancial accountability for management of public funds. The government has complied strictly with the financial disclosure norms prescribed under the Onssa Fiscal Responsibility and Budget Management Act. The "budget at a glance" has been enriched to meet the requirements o f the Fiscal Responsibility and Budget Management Act and provides more comprehensive financial information on topics like employee position, sources o f revenues and allocations, reform initiatives, contingent liabilities, state enterprises, debt, and liabilities. This information, along with the revisedmedium-term fiscal plan and updated summarized accounting information, i s accessible on Government o f Onssa's website. The government did not resort to overdraft or short-term advances from Reserve Bank o f India (RBI) even for a single day during2004/05, for the first time in 22 years. Actual spending was more than 95 percent of the targeted outlay under the annual plan in 2004/05 and in2005/06, compared with only 82 percent during 1997-2002, indicating more realistic planning consistent with available resources and the approved annual borrowing ceiling. Utilization o f central assistance has risen significantly, as a result o f regular monitoring of the timeliness o f submission o f utilization certificates. Monthly financial reports o f actual expenditures against allocations, 38 forwarded to the individual departments by the Orissa auditor general, also increase the accountability o f departmental secretaries. Box 2.2: Treasury Computerization When reforms were launched in2000/01, the Finance Department did not have the knowledge and capacity to identify, let alone monitor, its 6,000 officers working across the state. In the past five years the department has established a computerized treasury management system that allows every transaction to be reported on a daily basis and has become a key instrument to both manage financial and human resource information and maintain financial accountability. The system will also be linked with the Office o f the Accountant General, so that there are no delays inreporting and accounting of expenditures. All budget lines will be centrally managed and will be entered into the system, so that no officer can bypass the budget allocations, as bills will pass through the system only ifthere i s a valid budget head. The computerized treasury system will allow for the reconciliation of accounts on a daily basis. Furthermore, it can verify salary bills electronically in association with the computerized human resource management information system. The previous manual system was both time consuming and open to fraud and graft. Over 3, 00, 000 humanresource records have already beenplaced inthe database, and about 20 percent o f all government employees' payroll is already being verified electronically. A pensioners' database i s also being developed, and linkages are being made with banks to enable salaries and pensions to be paid directly through banks. 2.27 Attention is being focused on financial management systems and the capacities of public enterprises and local governments. With the increasing responsibilities and roles o f urban local bodies (ULBs), attention i s being focused on their financial management systems and capacities that would enable them to enhance their own revenues and leverage funds from the market to meet the infrastructure financing gaps. The Government o f Onssa has agreed to pilot improved financial management systems in two urban local bodies as demonstration models o f excellence. As part o f the wider reforms in public enterprises, the government has focused on ensuring that accounts and audits o f all operating enterprises are brought up-to-date. Reduction in the backlog o f audits will be a key indicator of progress and will be monitored closely. Orissa i s probably the first Indian state to publish on its website the month-end summarized financial statements o f selected local rural governments orpunchuyuti ruj Institutions. 2.28 Timely compliance with audit objections is being monitored to establish greater accountability in administrativedepartments. An apex committee under the chairmanship o f the chief secretary, a review committee under the chairmanship o f the additional chief secretary (finance), and departmental committees have been formed to monitor progress. A handbook on compliancehas been publishedby the Finance Department. F. Conclusions 2.29 Orissa's consultativeapproach helped buildpublic support for fiscal reform. One o f the key factors for success in Onssa was the consultative approach adopted by the government to address the structural imbalance in its finances. During 2001-03, the state conducted a series o f regional workshops, inviting academics, nongovernmental organizations, and prominent personalities to sensitize them about the fiscal crisis. The main message conveyed at these events was that "business as usual" cannot continue, and a major paradigm shift was required. The Government o f Orissa publicized the assessment o f a 1999 World Bank Report that the state finances were in a very bad shape. Similar consultations were also held on the need to privatize, close down, or restructure state-owned enterprises. 2.30 Sequencing was determined, sensibly, by political economy considerations. The remarkable fiscal improvement i s underpinned by improved revenue performance and 39 expenditure restructuring, in that order. In2000-03, fiscal correction in Orissa was mainly based on enhancing the state's own revenues, which was politically less difficult than tackling the expenditure side. The correction grew stronger after the 2004 re-election, with significant expenditure containment and restructuringmeasures. 2.31 Orissa's experience shows that Indian states can achieve significant savings in their salary bills, even without throwing anybody out of work. Staffing was cut through the ban on recruitment, the abolition o f many base-level vacant positions, and the use o f redeployment and contractual employment wherever possible, rather than layoffs or dismissals. As a result, the government managed to effect fiscal savings as large as 3.5 percentage points of GSDP during 1999-2007. 2.32 Orissa's experience also shows how fiscal stress can be used to strengthen outcome orientation in government departments. The government used its tight resource position and constrained aggregate capital budget to lay emphasis on accelerating the rate o f project completion, so as to deliver more with the same amount of rupees. Going forward, the challenge facing the government i s to continue with and further strengthen outcome orientation in a period when the resource constraint i s easing and fiscal space is expanding for additional development expenditure. 40 CHAPTER3: ADDRESSINGTHEINFRASTRUCTUREGAP 3.1 Orissa must improve and expand its infrastructure services to sustain rapid economic growth. The development o f a mineral-rich, strategically located economy such as Onssa's depends on logistical efficiency. Already, critical constraints on rail transport and ports have diverted cargo to more expensive roads and to ports in other states. The poor state o f the transport network has eroded the state's competitiveness. Investment climate surveys reveal that access to power i s also a major concern, even though the state has been a pioneer inpower sector reforms. Massive upgrading o f urban infrastructure is needed to attract and retain the skilled labor force demanded by modern industryand services. Inexpanding infrastructure stock, the state has not yet benefited from the growth in public-private partnerships, particularly in the transport sector, that have flourished inother parts o f India. 3.2 Rural and tribal areas in I Table 3.1: Key Infrastructure Indicatorsfor Orissa andAll I the state need better India infrastructure to share in the Indicator I Orissa I AllIndia benefits of economic growth. Roads Onssa's many tiny villages and Overall density (km/lOOO sq. km) 1635 755 remote habitations pose a big Trunk roads 48 62 538 432 for achieving Surfaced roads transport connectivity. Almost 52 T e ofroads as a % oftotal network Typrunk roads percent o f the villages have a population o f less than 500, which Unsurfacedroads 66 43 makes them ineligible for the main Railwa 14.6 19.3 government program funding rural Railwa;density (km/looo sq, km) Electricity road Wgrades (the PGMSY). Even Per-capita consumption in2004-05 203 354 some larger villages outside tribal suppliedthroughutilities areas fall outside the scope o f the (KWyear) 3.3 The state has yet to take full advantage of its strengths, including major water and energy resources and a long coastline that can be exploited to provide ports access. The boom in industrial growth, while providing its own challenges, also provides the opportunity for new partnerships with the private sector to strengthen connectivity and improve service provision to townships and areas locatednear the new industrial centers. 3.4 Increasing access is not just a question of building more assets but also of reforming policies and institutions. Of course, greater connectivity requires expansion o f facilities, but greater accountability and efficiency in service provision are needed as well. The poor financial position o fmany infrastructureservice providers, which stems from under pricing and operational weaknesses, means that too little i s spent on maintenance and too many demands for service go unmet. This chapter examines prospects for improving transport, power, irrigation, and urban land and water infrastructure in Orissa. It concludes with an assessment o f the scope and prospects for public-private partnerships. 41 A. Transport 3.5 The state's road network, though improving, is inferior to that of many other states. About 80 percent o f the principal state roadnetwork carrying the bulk o f the traffic (consisting o f national and state highways and major and other district roads) is single lane or less, compared with 60 percent nationally. Most roads do not have adequate crust, proper drainage, or lane width to cater to the increasing volume o f traffic. Over 66 percent o f the entire network i s still unsurfaced, compared with the national average o f43 percent. . 3.6 Planningand prioritization of expenditures must improve to better match the needs with the available resources. Much greater expenditures are being allocated to national highways in the state, although spending on maintenance will have to be greatly increased and then protected. In the case o f state highways and district roads where resources are scarcer, classifications are fi-equently changed to access specific forms o f funding. The state should develop a comprehensive master plan o f the upgrades needed for highways and district roads, based on long-term traffic projections, and then develop a time-bound implementation plan with a funding strategy. Maintenance planning and funding, which tend to be largely dictated by the budgetary allocations, need to be systematized through the adoption o f sophisticated technologies, such as road management systems. Given the scarcity o f resources, public-private partnerships should be developed on stretches where tolling can provide a large proportion of project costs. 3.7 Orissa faces unusual challenges in ensuring rural connectivity. Onssa is unique in that it has a widely dispersed population consisting largely o f scheduled tribes living in small, isolated villages. Connecting these communities with the rest o f the economy is critical for the balanced development o f the state. Yet, the state also has a very extensive rural roads network, which presents its own maintenance challenges (Table 3.2). 3.8 Implementation capacity must be greatly improved to deliver this connectivity. Of the Rs.3,160 crore o f works sanctioned during 2000-07 the state has implemented roughly Rs.1,400 crore worth o f works under the Prime Minister's Gram Sadak Yojana. Another Rs.6,370 crore o f works are proposed for sanction for 2007-09. The rejection rates o f the national quality monitoring cell for the works implemented have been as high as 25 percent (43 percent in the case o f works inprogress), indicating that resources are stretched and some mitigation i s needed. Table 3.2: Rural Road Connectivitv in Orissa. bv Village Pondation Source:NRRDA, Departmentof RuralDevelopment. 42 3.9 The poor state of the Indian railway network has forced cargoes onto the road network, exacerbating congestion and other problems. Railways are the most efficient and cost-effective form o f land transport for bulk commodities such as coal and iron ore, worldwide and in India. The existing lines pass through the fringes o f the state, leaving vast areas untouched. Several critical railway projects, connecting the iron ore and coal mining belts to production centers and ports, have been much delayed. The long-awaitedDaitari-Banspanirail link,expected to connect the iron ore belt with the manufacturing centers and ports, reduce the overall travel distance by more than half, and significantly improve the economics o f iron ore trade, was sanctioned as far back as 1992/93. This line is now expected to be commissioned soon. 3.10 The state government has in recent years become proactive in proposing critical developmental projects to Indian Railways. A more structured approach to identifying projects based on a statewide master plan would be far more useful for timely identification and follow-up of projects critical to Orissa's economy, compared with the present informal approach. The Indian Railways' initiative for public-private partnerships inrailprojects has opened a window o f opportunity. Already, the Paradip-Haridaspur project i s being developed through such a partnership. 3.11 The state enjoys a vast coastline, which it has been slow to exploit. &ssa accounts for about 6 percent o f India's sea trade (30 million tons per year). Its only operational port, Paradip, has severe capacity constraints for cargoes such as iron ore, which has led to the diversion o f coal and iron ore traffic to the neighboring ports o f Haldia and Vizag. Paradip i s a major port, so the state-center coordination problemsnoted inrail have also played a factor here. 3.12 State-level ports offer great potential, though progress has been slower than in many other Coastal states. The ports of Dhamra and Gopalpur and more recently Subarnrekha have been awarded to private developers. Dhamra, awarded in the late 1990s, has been significantly delayed on account o f environmental and land acquisition problems and has only recently achieved financial closure. The 2004 port policy identifies 13 other potential port locations. With growing investor interest in mineral-based industries, port infrastructure also becomes extremely critical. While there is likely to be a fair amount o f private interest in both captive and common user facilities, strategic direction and a conducive regulatory framework for the development o f the port sector will be critical. B. Power 3.13 As with roads, access to electricity lagsinrural areas. Electricity i s yet to reachnearly 18,000 villages (about 40 percent o f the total) and about 50 lakh rural households (about 80 percent o f the total, well above the national average o f 56 percent, based on the 2001 census). The state is mobilizing funds for rural electrification through schemes such as Members of Parliament Local Area Development Scheme (MPLAD), the MinimumNeeds Programme (MNP),and the Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY). According to the Department o f Energy, during the past four years, Rs.72 crore were spent (mainly using funds from MPLAD and MNP) to cover about 3,600 villages. Under RGGVY, six projects sanctioned at a total cost o f Rs.609 crore are expected to cover 2,734 unelectrified villages, 6,083 electrified villages, and 7.8 lakh rural households. However, even after successful completion o f the ongoing projects, there will still be about 11,650 villages and 42 lakhrural households without electricity. 43 3.14 Access to power in Orissa i s well below nationallevels. While the richest quintile have nearly universal access, this share falls o f frapidly, with less than a fifth of the poor households in the state having access to electricity (Table 3.3). Table 3.3: Percentage of Households with Access to Electricity in Selected Indian States, average 64 I 38 I 50 I Source: World Bank staffestimatesfrom National Sample Survey, Round60. 3.15 The Government of Orissa should look at the potential for innovative approaches to rural electrification, such as franchisees and cooperatives for service delivery. Some countries have established umbrella organizations, such as the Rural Electrification Board in Bangladesh and the National Rural Electric Cooperative Association in the United States, to dispense subsidies and advice on technical, human resources, and financial management matters to numerous small, scattered entities engaged in service delivery. 3.16 Orissa led the way in power reforms in India. But these have not delivered results in the state, whereas other states have seen greater success. In particular, power distribution continues to be plagued by highlevels of aggregate technical and commercial losses (Table 3.4). The sector's performance-with 43 percent o f such losses in 2006-07+0mpares rather poorly with West Bengal, Andhra Pradesh, Gujarat, and Kamataka, which have reportedly managed to bringdown their aggregate technical and commercial losses in2004-05 to 24 percent, 27 percent, 30 percent, and 35 percent, respectively. Delhi, unlike k s s a , has improved its losses by privatizing its distributionsector. 3.17 Orissa has had lackluster experience with the privatization of electricity distribution. Private companies were invited to run the power distribution business with the expectation that their drive for private profits would improve commercial discipline and reduce system losses. Why has the actual outcome been much poorer than what was targeted through the power sector reform program? The main reason lies in the lack of competitive pressure and adequate incentives to aggressively go after efficiency improvements and reduce power thefts. Distribution Aggregate technical and commercial losses (%) Growth of energy company 2002103 I 2003104 I2004105 I2005106 I2006107 sales, 2005/06(%) WESCO 48.1 46.2 41.4 41.5 39.7 8 NESCO 51.4 49.2 44.9 44.0 38.8 15 SOUTHCO I 50.3 50.5 I 46.3 47.7 2 CESCO/CESU 155.0 11 51.1 II 45.8 51.0 I 49.4 II47.1 1 44 3.18 Improvingthe performance of the distribution companies is the critical concern in Orissa. The Onssa Electricity Regulatory Commission (OERC) attempted to boost performance with its multiyear tariff order o f 2005, which was intended to give the distribution companies incentives to reduce losses and keep some o f the gains. Conceptually this is a sound approach. In practice the attempt was undermined by what the distribution companies perceived as an ungenerous starting revenue allowance and by the appointment by the Onssa Electricity Regulatory Commission o f administrators and officers for day-to-day management o f the distribution companies. The companies in fact successfully challenged the tariff order before the Administrative Tribunal." 3.19 The Orissa Electricity Regulatory Commission could consider developing new multiyear tariffs on the basis of realistic business plans. There is merit in relaunching this strategy, by approving fresh long-term, say, five-year business plans, at least for the three distribution companies where the private ownership (and management) has been restored. The relaunch has to include a starting point and targets that are realistic, and it must provide sufficient incentives to induce the companies to improve their performance in the most pressing areas of concern, namely, overall aggregate technical and commercial losses, distribution losses, and arrears o f receivables. Furthermore, to make such an incentive system robust and credible, the Orissa Electricity Regulatory Commission may have to simultaneously enhance its own capabilities to independently monitor and verify the progress, as well as the claims o f distribution companies ineach o f the critical areas targeted for improvement. 3.20 The Orissa ElectricityRegulatory Commission and the government may also want to expedite steps to instillcommercialorientationor privateparticipationinthe distribution company, CESU. An earlier attempt to sell CESU failed, reportedly, because of deficiencies in structuring and marketing o f the sale offer. The large unfunded liabilities accumulated through inefficient performance in the past were said to have been the main deterrent. Hence, the Ollssa Electricity Regulatory Commission and the government may consider engaging a competent adviser to structure the transaction ina manner that would be attractive for private participation. 3.2 1 Improvingdistribution efficiencywill be critical, because generationcosts are likely to rise, with the share of cheaper hydropower projectedto fall. The state has so far been able to keep its overall power procurement costs low thanks mainly to its own low-cost hydropower, which currently meets nearly 35 percent o f its internal requirements. Orissa's significant coal resources provide it with great potential to expand its generating base for export to the rest o f the country. However, this will need the allocation o f coal blocks, a decision that falls under the purview o f the central government. An agreement between the center and the state governments would be required on Orissa's demand to levy duty on power generation, avail concessional power, and receive compensation for mitigating environmentalhazards. 3.22 Captive power generationis an area that offers significant scope for rampingup the total supply of power. Already, captive generation is playing a substantial role in meeting the state's demand for electricity; capacity under this category i s 2030 MW, whereas the total installedcapacity serving the utilities i s around 3530 MW. With the advent o f the Electricity Act lo The specific issues regarding which the distribution companies obtained relief included: (a) allowing full pass through of complete interest costs payable on National Thermal Power Corporation (NTPC) bonds; (b) bridging the gaps between income and expenditure of North Eastern Electricity Supply Company of Orissa Ltd. (NESCO) and Southern Electricity Company of Orissa Ltd. (SESCO), left uncovered in the approved annual revenue requirement over severalyears; (c) rectifying errors inthe computationof miscellaneousincome inthe order; (d) providing benefits for the increase in simultaneousmaximumdemand; and (e) requiring the commission to undertakea truing-up exercise on aregularbasis. 45 2003, there has been renewed interest in establishing captive capacity, with the explicit aim o f selling surplus power. According to the Confederation of Captive Power Plants, Onssa, captive generation capacity inthis segment is likely to increase by 3470 MW by 2012. The enthusiasm o f the potential investors, however, seems to be dampened by a variety o f factors such as, for example, a hike inthe electricity duty (to 20 paise per unit) and a lack o f certainty regarding the availability of open access. The state government and the Orissa Electricity Regulatory Commission may want to address these concerns expeditiously as part of the new captive power policy, which i s reportedly under preparation. C. Irrigation 3.23 The inadequacy of irrigation inhibits agricultural productivity and growth. Nearly 60 percent o f cultivated area in the state is rainfed and exposed to weather fluctuations. Total irrigation potential created so far is 2.75 million hectares, about 40 percent o f cultivable land, or 55 percent o f what i s assessedas the ultimate potential (about 5 million hectares, or 75 percent of the 6.6 million hectares of cultivable land are assessed to be the "irrigable area"). Given the importance o f irrigated agnculture for increasing farm incomes and providing rural employment round the year, the Government o f Orissa attaches high priority to expanding irrigation and optimizing the use o f water resources. 3.24 The area actually irrigated is considerably below the potential created. In 2005/06, for instance, the area actually irrigated was only about 60 percent o fthe state's full potential. Poor operations and maintenance are primary factors behind the weak performance. Variability in rainfall and changes in cropping patterns from what was envisaged at the design stage are also important contributory factors. 3.25 The state policy on water resources has changed to embrace participatory irrigation management. From being a mere provider o f water, the Government of Onssa has moved to a paradigm of sustainable water resource management based on user participation. Starting with a few pilot projects, participatory irrigation management has been extended as a general policy for the sector as a whole. The Paani Panchayat (water users' associations) Act 2002 and the Paani Panchayat Rules 2003 provide legal status to 13,284 water users' associations that were registered as o f the end o f March 2006. Elections have been conducted in 6,400 o f them, and the process i s ongoing in the rest. Paani Panchayats cover 1.05 million hectares o f irrigated land, o f which 0.8 million have been handed over to them for operation and maintenance. The government reports a 40 percent increase in cropping intensity on such lands, resulting from diversification infavor o f more remunerative crops and the use o f improved seeds and fertilizers. Orissa i s planning to hand over all irrigated land to Paani Panchayats duringthe Eleventh Five- Year Plan period (2007-12). 3.26 To strengthen the Paani Panchayats, attention is needed to build their capacity, improve their financial sustainability, and increasetheir inclusiveness. Training and capacity building. This type o f support is needed to ensure that they are able to carry out their responsibilities for operations and maintenance. These tasks remain to be satisfactorily addressed in a large number ofPaani Panchayats. Financial sustainability.This type o f support can be achieved by improving their access to adequate financial resources to carry out operations and maintenance. Currently the amount o f resources being transferred to Paani Panchayats are not enough to satisfactorily operate and maintain the system. 46 Inclusiveness. Membership o f the Paani Panchayats is presently limited under the act only to water users who are landholders in the area. To resolve conflicts that have emerged, consideration needs to be given to also covering tenants, and in the case o f minor irrigation tanks in particular, to including other traditional tank users, such as fishermen, who are presently excluded. 3.27 Ifthe Government of Orissa continuesto rely largely on major and medium surface irrigation projects, it would take over two and a half decades for Orissa to reach the ultimate potential of irrigating 75 percent of cultivable land. Of the total irrigated potential created, about 45 percent is through major and medium irrigation schemes (i.e., individual schemes irrigating more than 2,000 hectares), about 19 percent i s through minor flow schemes (mostly tanks), and about 15 percent i s through minor lift irrigation schemes. This suggests that other possibilities need to be explored as well. The rate o f exploitation o f groundwater, for instance, is lower in Onssa than in all other major states. While groundwater exploitation i s not possible or not cost effective in parts of the state where the soil i s rocky, it could be a viable alternative in selected areas. It may be the best alternative in nonrocky areas that are outside existing and potential surface irrigation systems. D. UrbanInfrastructure 3.28 Urban areas are critical to Orissa's future development. Although Onssa has one o f India's lowest levels o f urbanization (15 percent o f the state population of 37 million), the urban population i s currently growing twice as fast as the general population. The state has seven Class Icities(greaterthan1,00,000inhabitants).Bhubaneswar,thecapital, iscurrentlyestimatedto have approximately 8, 00,000 inhabitants. The state i s receiving large Foreign Direct Investments to support the development o f information technology services, natural resource extraction and processing, steel manufacturing, and ports. %le the capital city will continue to play a prominent role in Orissa's development, much o f the foreign investment will flow to several secondary cities. Demand for urban water supply and sewerage services i s likely to increase many fold. Sound state and local finances, land use planning, housing, service delivery, and regulatory frameworks are needed to meet the needs o f the growing manufacturing and service industries and the urbanpopulation. 3.29 Orissa has embarked on an ambitious urban reform program. The state's efforts are in the context of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and the UrbanInfrastructure Development Scheme for Small and Medium Towns (UIDSSMT). The state issued a government order on 6 November 2006 detailing a range o f actions to support urban development, including the transfer o f planning and land use functions, building regulations, service provision, and revenue generation and management (including property tax). These actions are consistent with the implementation o f the 74th Constitutional Amendment Act and the Jawaharlal Nehru National Urban Renewal Mission. Together, they frame the urban development strategy for the medium term. 3.30 Water supply and sanitation services in Orissa typify the problems of poor quality and access, overlapping responsibilities, and ad hoc planning that plague all urban services in the state. These issues are compounded by the absence o f "ring-fencing" o f finances and accounts, as well as the lack o f data collection and monitoring. At present about 60 percent o f the population in 103 urban local bodies of Orissa have access to intermittent "piped" water through house service connections and street standposts for four to eight hours daily. The National Sample Survey 2002 indicates that 55 percent o f urban households in Orissa have a tap in their premises (Figure 3.1). Orissa compares poorly with the all-India average o f approximately 74 47 percent of urban households having access to a tap and i s sixth from the bottom in a comparison across all states. The Public Health Engineering Organization estimates that only 17 percent o f Onssa's urban households have domestic water connections, which implies that most of the tap connections are privately owned, developed by citizen societies, or unauthorized or illegal. Figure 3.1: Urban householdsin Orissa have poorer access to tap water than those in most other Indian states Lakshadweep Bihar Assam Kerala Uttar Pradesh Orissa D & N Haveli Jharkhand Nagaland Mizoram Tripura Manipur Madhya Pradesh Chhattisgarh Haryana Andhra Praderh Puniab Rajasthan Tamil Nadu Goa Delhi Karnataka Meghalaya Arunachal Pradesh Maharashtra Cujarat A & N Islands Jammu & Kashmir Himachal Pradesh Daman & Diu Chandigarh 0 10 20 30 40 50 60 70 80 90 100 3.3 1 Sanitation access also lags seriously behind. Approximately 49 percent of urban households have a toilet within the house, relying mainly on water closet, pit, and other types o f latrines, while 40 percent have no latrines and 42 percent have no drains. Provision of sewerage services i s poor in the state, with only partial coverage in Bhubaneswar and Cuttack. The sewerage system in Bhubaneswar collects sewage from 40 percent of the population; Cuttack covers only 7 percent of the population. There i s no sewerage system in the other urban local bodies. 3.32 For drinking water services, the problem is distribution management not production capacity. Given the reasonably good water resources and electricity in the state, the low level of drinlung water service clearly points to the need for sectoral reforms to improve efficiency and accountability. Estimated demand i s about 300 million liters daily, against the production capacity of about 666 million liters daily, indicating a huge surplus. Physical distribution losses (over 40 percent) are responsible for the inadequate delivery of water service 48 for only four to eight hours daily. Thus, the need i s for improving distribution, rather than production. 3.33 Average cost recovery is only about 30 percent of direct operating costs. Even that low return does not take account of depreciation and debt service charges. Historically, tariffs have not been revisedregularly, and decisions have been made ad hoc. There is no proper system of cost accounting maintained by the department and hardly any assessment o f the unit cost o f supply. 3.34 Improving accountability is the key to improving water and sanitation services. There is a huge potential for better management o f Onssa's urban water and sanitation systems, which could raise the efficiency o f services and accommodate future increases indemand. One o f the mandatory reforms that will improve accountability i s the decentralization of water operations and maintenance to the urban local bodies by 2009-10. A s a result, local service users will have more input into the quality and cost o f services provided. To make the transfer fiscally sustainable, the urban local bodies will also receive the right to collect water tariffs directly and the deputation o fpersonnel who now perform these finctions at a more centralized level. 3.35 The government needs to improve the overall framework for urban services. To create an environment conducive to attracting investment and slulled workers to Orissa's growing urban areas, reforms must go beyond the water and sanitation sector, as critical as these services are. The government's development strategy raises a host o f policy, financial, and institutional issues: What i s the appropriate policy mix for urban planning? For example, how will land use decisions be made, and what can be done to ensure an adequate supply o f housing? What financing strateges will provide the best incentives to upgrade urban services? For example, should the urban local bodies have their own sources revenue and access to financial markets? What can be done to increase institutional capacity o f the government and the service providers? H o w can the urban local bodies and private partners be prepared to undertake planning, budgeting, and implementation of projects, and how should the government regulate urban services? These questions are especially vexing in those secondary cities where large investments-critical to the success o f the state's development plan-are likely to occur. 3.36 Urban planning and management must be reformed. As inmost cities across India, in Onssa urban planners rely on rigidmaster plans that are inappropriate for rapidly changing urban spaces. Though conventional restrictions, such as the Urban Land Ceiling and Rent Control Acts, are not present in Orissa, the master planning process still tends to constrict uneconomic land use and shape the spatial development o f urban areas. By limiting the supply o f buildable land (and space) the master plans also distort the development o f housing markets and even encourage the proliferation o f slums. Development regulations also impede the provision o f affordable housing. Reservation requirements for public facilities create perverse incentives for property owners (their land i s "frozen" untilthe government steps in and acquires the land). The planning process needs to: (a) integrate land use planning with investment planning for service delivery; and (b) allow land markets to develop at an even pace with investments ineconomic infrastructure. 3.37 Reforms must also address the ability of urban local bodies to improve their financial soundness and begin to access finance from the capital markets. Urban local bodies suffer from interconnected problems that constrain their competitiveness, diminish their bankability, and impede their capacity to deliver services. Though Bhubaneswar has achieved some success, property taxes are an underutilized source o f revenue in most cities and towns. Development charges and other land use fees are also underutilized, thus depriving urban local bodies of their own revenue sources. This lack o f own-revenue and weak management also 49 undermine the urban local bodies' creditworthiness and limit their access to financial markets. Again, Bhubaneswar i s malung progress in this area, but other urban local bodies lag behind. For the most part, these urban local bodies lack adequate financial management systems and practices, with the result that they cannot make sound plans, manage assets or liabilities, or account for the way funds are spent. E. Public-PrivatePartnerships 3.38 The Government of Orissa is keen to use public-privatepartnerships to address its infrastructure deficits. Such partnerships could potentially be formed in a wide variety o f sectors, ranging from power, transport, and urban amenities to education, health, and tourism. The government has already prepared a policy on public-private partnerships and established a public-private partnership cell as part of the State Planning and Coordination Department. This, incoordinationwiththe line departments, has createda portfolio of 36 public-private partnership projects (Table 3.5). 3.39 It will be importantfor Orissa to emphasize that public-private partnerships must be pursued where they represent value-for-money for the government, given the often extensive amounts of government support involved for individual projects. This principle would then needto be put into practiceby strengthening the capacities of the Finance Department to measure and report the financial support provided by the government, including tax breaks, land grants, and contingent liabilities. The cost o f all these types o f support needs to be factored into decision-making by line agencies. The state can also benefit from existing models at the national level for risk allocation under public-private partnership contracts. Putting in place such safeguards assumes even more importance in light o f government's reported initiatives to enter into negotiated arrangements with selected organizations, such as IL&FS and IDFC, to develop public-private partnership projects on a success fee basis. Table3.5: Public-PrivatePartnershipProjectsinOrissa, by Stage of Development ector Projects at each stage I Total Note: In addition, the portfolio also contains five projects for which cost estimates are not available. These comprise one project in the aviation sector (ISIURFP stage) and four projects in housing and urban development (three in constructiodimplementation stage and one in ISIURFP stage). The category "others" comprises projects in tourism, information technology, industry, and fisheries sectors. 3.40 The institutionalframework needs to ensure that line departments have sufficient ownership of the public-privatepartnershipprogram.The current approach of the state-level public-private partnership cell rightly envisages that the line departments (and their respective public-private partnership units) will "own" the public-private partnership projects and, at the same time, work in tandem with the state-level public-private partnership cell, so as to mobilize an array o f resources, skdls, and capabilities to expedite public-private partnership transactions. 50 However, at present, the focus seems to be predominantly on the public-private partnership cell's developing isolated public-private partnership transactions, which are not obviously integrated into the sector investment program or the line department activities. It would be useful to recognize that, in certain sectors (for example, roads), the full potential o f public-private partnerships could be better harnessed through a programmatic approach, because o f the scope for replication, the network economies, and the need for relatively intensive monitoring over long periods. Accordingly, the state will need to build capacities for undertalung public-private partnerships not only inthe state cell but also ina few selectedline departments. 3.41 Experienceelsewhere suggests that the ability of the public-private partnership cells to be proactive depends on the quality of their staff and the financial resources at their disposal. Considering that the state government may not be able to find experts with requisite skill sets for undertahng public-private partnership transactions within itself, it may want to consider making up this critical deficiency through lateral recruitment or outsourcing. At the same time, it may be useful to consider deputing a few staff from the government to the public- private partnership cells, to develop a core group o f "in-house" professionals with capacities to effectively internalize and manage the public-private partnership approach inthe long run. F. CONCLUSIONS 3.42 Without adequate road, rail, and port infrastructure, Orissa cannot exploit its natural resource endowments and sustain the rapid economic growth of recent years. The strain on transport infrastructure is already evident. Capacity constraints in rail have diverted goods traffic to roads, which i s highly inefficient. Constraints in port capacity have shifted cargo to ports in other states. Continuation o f rapid industrial growth could further accentuate transport constraints inthe coming years. Massive upgrading o f urban infrastructure i s needed to be able to attract and retain the shlled labor force demanded by modem industryand services. 3.43 Orissa faces challenges of exclusion linked to its geography and social structure. Tiny villages and remote habitations in the hills pose a very big challenge for achieving full connectivity in transport and power. Rural electrification in Orissa i s among the lowest in the country. Although Orissa led the way in power sector reforms in India, these reforms have not delivered the desired results because o f a lack o f competitive pressure and adequate incentives to aggressively go after efficiency improvements and reduction o f losses due to power theft. The Onssa Electricity Regulatory Commission could consider developingnew multiyear tariffs on the basis o f realistic business plans. To make such an incentive system robust and credible, the Orissa Electricity Regulatory Commission would need to simultaneously enhance its own capabilities to independently monitor and verify progress, as well as the claims o f the distribution companies in each o f the critical areas targeted for improvement. 3.44 Urban areas are critical to Orissa's future development. Although Onssa has one o f India's lowest levels o f urbanization, the urban population is currently growing twice as fast as the total population. The demand for urban water supply and sewerage services i s likely to increase manyfold as a result o f recent increases in private sector investment in steel and other metals, as well as tourism and information technology services. Sound state and local finances, land use planning, housing, service delivery models, and regulatory frameworks are needed to meet the needs o fthe growing manufacturing and service industries and the urbanpopulation. 3.45 Filling the infrastructure gaps requires a combination of additional state funding, partnering with private investors, and lobbying effectively with the center. Some components of the infrastructure investment agenda require significant additional state resources, 51 such as transport connectivity. Some others require Orissa to play an enabling role for private providers to operate, with little or no commitment from the state budget. Yet others, like rail connectivity, require only effective lobbyingby the state government with the central authorities. While there i s likely to be a fair amount of private interest indevelopingport facilities, the Onssa government will need to address the overall strategic direction and a conducive regulatory framework for the port sector. 3.46 Not funds but implementation capacity could become a binding constraint for infrastructure investment. Expanding fiscal space and potential private participation could together meet the rising infrastructure financing needs, but construction capacity i s currently lacking to be able to spend efficiently on infrastructure investment. During2000-07 the state was able to use less than half o f its allocation for rural roads, and almost a quarter o f executed works failed to meet the standards o f the national quality-monitoring cell, indicating that rural engineering capacity has been overstretched. Onssa could consider relying more on national and international players inthe state highways and major roads segments, thereby freeing up more o f the state's own capacity to address the lower-level connecting roads andruralroads. 52 CHAPTER4: ADDRESSINGHUMANDEVELOPMENTNEEDS 4.1 A critical constrainton economic growth inOrissa inthe past, despite its abundance of naturalresourcesand Coastalgeography, has been its low quantity and quality of human capital. A healthy, better educated, and skilled labor force is necessary for Onssa to move from a reliance on primary commodities (agnculture and mining) to growth led by industries and services. Only with a more diversified economic base can Orissa sustain its double-digit growth for a decade or longer and catch up with the all-India average per-capita income. 4.2 Human development has to be an essential component of any strategy for inclusive development. In the absence o f human development, rapid economic growth, even if it can be achieved, will likely result in widening inequalities. For economic growth to be inclusive, its benefits will have to be tangble to more and more people. That can happen through better participation o f the currently poor and excluded sections of society in the expanding market economy and by reducing vulnerability through more effective social protection programs. It can also happen through raising the quality o f social services that benefit households today and their children inthe future. 4.3 This chapter examines four dimensions of Orissa's human development gap. The chapter considers: (a) how to strengthen basic education; (b) how to instill the skdls needed to modernize the labor force; (c) how to improve public health, especially in remote villages; and (d) how to create greater social protection and increase the effectiveness of antipoverty programs. A. BASIC EDUCATION 4.4 H o w much o f Onssa's growth potential will be realized will depend on the amount and effectiveness o f investments made inthe human capital o f its young. There i s n o questioning that demand for slulled labor inindustryand modem services will rise rapidly inOrissa over the next decade or two. If the government does not invest now to generate such a supply fi-om within the state, the best-payingjobs would benefit persons from outside the state, which could be perceived negatively and potentially lead to political resistance to modernization itself. At the least, the state will have to ensure: (a) universal participation and completion in primary education; (b) attainment o f learning goals inprimary education; and (c) development o f marketable slulls inthe youth. 4.5 On education there is good news in Onssa, but also bad news, and some hopeful news. The good news is that there has been a significant increase inenrollment and retention o f children in elementary schools. The bad news is that on learning achievement Onssa lags very badly behind other countries and other states in India. Ina recent comparison o f students in grade 9 in Onssa with students in grade 8 (one year behind) in other countries, Onssa lagged all but three countries-by a substantial margin. It appears that less than one in five children in Onssa are mastering even basic mathematics by grade 9. This poor performance i s somewhat offset by the fact that the very top of the achievement in Onssa is high by international standards. A tiny minority i s risingto top global standards, while the vast majority are not learning even very basic concepts. The hopeful news i s that the state government has launched bold initiatives to improve teacher management and accountability. 53 4.6 There has been a substantial expansion of schooling in Orissa, especially in the last 10-15 years. According to the Census o f India 2001, the literacy rate in the state was 63.61 percent, just below the Indian average o f 64.84 percent. Over time, literacy inthe state has caught up with the national average. Current enrollment rates, which will determine the amount of schooling in the labor force in the future, are also at the national average, high in elementary education. The Gross Enrolment Ratio (GER) in upper primary level i s rapidly increasing and GER during2006-07 inthe state is 89.73 percent. 4.7 Even as more children are enrolling in formal schooling, school participation i s far from universalin the state. Four out o f every ten children who enroll in school drop out before completing the primary cycle. A further two drop out before completing the secondary cycle. Nearly 8 percent o f children 5-14 years old are not in school." Not only are the drop-out rates high,they have declined slowly inthe lasthalf-decade for which we havedata. 4.8 On learning achievement, Orissa's students fall way behind most other countries. Recently 6,000 students in grade 9 inOrissa were tested on their mathematics competencies using questions from an international examination that were administered in other countries Figure4.1: Students inOrissatest far behindthoseinother to students in grade 8. This is the countries on mathematicalachievement first time that a random sample o f Indian students has been compared with international students and the results have been made comparable (Das and Zajonc 20071). While the international average was around 500, the students in Orissa scored only 341, which was worse than all but three countries o f the 51 that have taken the examination. On the same test, the United States, which is constantly worried about Source: Das andZajonc, 2007 maintaining its competitiveness inrelationto places like Japan, lags Japanby 70 points, whereas Orissa lags Japan by230 points. Onssa lags Indonesia by as much as the United States lags Japan (Figure 4.1). Moreover, it i s likely that ifcomparable grades were compared, Onssa would lag behind even Ghana. 4.9 Onssa's poor showing on mathematical achievement strongly suggests its children are not being adequately prepared to enter a modem labor force. If one i s concerned about the education o f the labor force, then the slulls on completion o f education are o f concern, and in most OECD countries students in grade 9 are far from completing their education. Thus, even though Norway, at 461, scores the lowest o f the prosperous OECD countries, most o f these students will remain in school through high school and get some post-secondary schooling. In Onssa, most students in grade 9 are at the end o f their schooling, and in fact the majority o f children inthat age group have already dropped out. Testing enrolled students, as this test does, i s a way o f assessing the quality o f schooling, but the implications for economic growth depend on the skills o f the entire age group (cohort) entering the labor force. " Insomedistricts,nearly afifthofall 5-14 year oldsarenot inschool: Bolangir (15.34percent), Malkangiri(16.42 percent), Nawrangpur (1 8.18 percent), and Koraput (20.69 percent). 54 4.10 The majority of Orissa's teenagers lack basic mathematical knowledge. In the international examination, while the average was 500 there were also benchmark scores, and a score o f over 400 implied the student had "some basic mathematicalknowledge" and was the low international benchmark. If we assume that students who dropped out before grade 9 did not reach the low benchmark o f 400, then we can calculate what fraction o f a cohort o f grade 9 age did not reach even that level o f proficiency by adding those enrolled in grade 9 who did not reach the basic proficiency level plus the fraction o f the 61.95 total cohort not reaching grade 9. In 50.39 61.92 Onssa if we take the d r o p ~ rate from Table 4.1 o f 62 percent and take the estimate from Das o ~ and Zajonc (2007) that o f those enrolled only 38 percent'* score above 400, then we can estimate that 85 percent of the current age group entering the labor force do not reach even a standard o f "some basic mathematical" knowledge (Figure 4.2). Figure4.2: The vast majority of youthinOrissado not reachthe standardof"some basic mathematicalknowledge" 100.0% %.6% 9o.ooh 8O.Vh 7O.Wh Ec 60.oDh 500% e` 4os% 30.G% 20.Vh Japn USA Norway Indonesia ckissa Ghana Source: Das andZajonc, 2007. 4.11 A small proportion, but large in absolute number, achieve international standards of learning. Although the vast majority o f children leave school completely unequipped for a modem economy, the better performing students in Onssa perform very well, and, given the very large absolute numbers o f students, the absolute magnitude o f high-quality labor force entrants i s quite high. The "advanced" international benchmark was set at a mathematics score o f 625 or above. Because the Indian (and Orissa's) educational system has maintained a very rigorous and demandingelite tier, with fiercely competitive examinations, the best students inOnssa are very good. Approximately 2.5 percent o f grade 9 students achieve above this threshold, compared with only 1percent inIndonesia, almost no one inNorway (where the distribution is muchmore equal, implyingfewer poor performing but also fewer super-high performing students), and 7 percent in the United States. The fact that the best are very good, combined with the size o f the cohorts in a '*For ease of exposition, we are glossingover the difficult technicaldetails of how these distributionso f scores were estimated. Das and Zajonc (2007) use two different methods of estimating the distribution and find a range of 36 percent to 40 percent of enrollednot reaching400 with the two methods and wejust take the mid-point ofthat range of 38 percent. 55 large state like Orissa, implies a large absolute number o f grade 9 Figure4.3: Thousandsof students in Orissa are ableto meet the students above the international high internationalbenchmarkin mathematics threshold (Figure 4.3). 4.12 I f the state succeeds in attracting modern industries, then initially there will be E available skills, but the supply 15 i s thin and will soon be 0 exhausted. As demand grows, slulled labor will be drawn in from other places, and the 1 i I I I I shortage o f sktlls could inhibit the development o f new industries. W e discuss two ways o f improving the slulls of the labor force: (a) higher achievement o f those coming out o f school; and Note: Figure excludes the "big five" Japan, USA, Korea, China and (b) more training in skills when Russia. Source: DasandZajonc, 2007. out o f school. government,aided, and Figure 4. 4: Students from many kinds of schools in Orissa unaidedschoo~s to both show only modest gains in learning achievement with increase learning outcomes and the inr years of schooling I household and school correlates 100.0 of achievement. The "learning 90.0 profile"- that is, the increase in y 80.0 learning achievement with u E 70.0 increase in years of schooling, ' 60.0 appears to be very flat. Only in 50.0 c) E grade 9 have the grade 4 40.0 competencies been mastered by 30.0 most students (Figure 4.4). At 20.0 existing learning levels, even if 10.0 Onssa achieves universal 0.0 I elementary school completion, a Class Class v Class Class Class Class large section of its youth will IV VI VI1 VI11 IX grow up without slulls and Gov't (actual) opportunities, because poor Gov't (ifPTR=20) learning will mean they are Govt (ifall teachers graduates) Private unaided neither employable nor able to 4.14 A simple "business as usual" expansion of the system will not tackle the labor force skills problem. Averaging the estimates o f the pupil-teacher ratio across grades 4 and 5, and across reading and mathematics, suggests that reductions in class size from the existing average 56 o f 43 pupils per teacher to 20 would only lead to one percentage point increase in scores (illustrated in Figure 4.). Similarly, students with teachers who were graduates do better than other students, but even if one were to somehow move from the existing 33 percent o f teachers who are graduates to 100percent (which would take decades and be very costly) the scores would increase by only five percentage points a year. It would still take until grade 7 to reach mastery o f the grade 4 curriculum. Based on the evidence from Orissa, from India, and from around the world, "input-based" strategies for increasing learning outcomes-simply spending more in the same ways-are not feasible options for the progress in learning achievement needed to make Onssa a skdl-based ec~nomy.'~ 4.15 These findings do not mean that nothing can be done, as there do appear to be large school-specific effects. The average difference between the private unaided and the government schools was between 20 and 30 percentage points, depending on the s~bject.'~These differences are enormous compared with the scope for "input-based" approaches. 4.16 Reducing the gaps in pi ,formance across schools, by strengthening teacher accountability is potentially the Figure4.5: Reducingthe gaps betweenthe poorly performing and most important reform. Even better performing governmentschoolscould increaseskills after empirically controlling for enormously student background and observable I characteristics o f teachers and schools, there i s a large variance in learning achievements across schools. Some schools are 30-40 percentage points above other schools, even talung out the impacts o f student background and school inputs. The simulated distribution in Figure 4.5 shows how much better performance would be if, say, over a five-year period every school could close even half the gap between their -20 NormalizedPercentae Score 0 20 40 performance and that o f the 75th percentile school. -Simulated - current1 4.17 A bold approach to strengthen teacher accountability has been initiated. The Government o f Onssa has already taken several bold steps to address the issue o f teacher accountability. Studies indicate weak incentives for accountability on the part o f teachers and principals within government-run education systems in India. According to a national survey of l3 This is consistent with the state report for Orissa from the NCERT study based on achievement surveys in 2002. This study examined the correlates o f achievement and found that across the three tested subjects-EVS math, and language-there were very few factors statistically associated with observed learning achievement (e.g., "pupil - teacher ratio" was not correlated with learning outcomes in the expected way) and that even in those cases where a statistically significant association could be found the magnitude o f the coefficient suggested very small magnitudes o f impact. For instance, an index o f "teacher-learner practices" was associated with better scores in all three subjects, but the magnitude was that a substantial improvement (one standard deviation) would lead to only around a 1.5 percentage point higher average achievement. l4 This is consistent with the evidence from the ASER report in 2005, which reported that only 30.4 percent o f children ingrade 5 ingovernment schools inOrissa could do both subtraction anddivision, compared with 53 percent inprivate schools, 23 percentage points higher. This raw comparison does not adjust for the different socio-economic composition o f private versus public schools, which may account for some o fthe difference. 57 teacher absence (World Bank, 2004), the absenteeism rate in Onssa was close to the Indian average o f 25 percent. Even when they are not absent, teachers spend 45 percent of their time in nonteaching activities. Onssa has taken innovative steps in the direction o f improving accountability, especially in relation to its large contingent o f contract teachers, who form nearly a third o f the teaching force in elementary education in the state. The state has established a credible career path for contract teachers, whereby they become regularized after nine years of satisfactory performance as monitored by the village education committees. Even during their time o f service, the village education committees are required to certify satisfactory attendance before releasing the teacher's salary. B. SkillDevelopment 4.18 Skill development differs from school education. The route to skill development i s through training, whether on-the-job training or pre-employment training provided in vocational and trade institutions. Some vocational education i s provided in the higher secondary grades in schools. Pre-employment training i s provided both by public institutions, usually under subsidized terms, and private institutions, generally financed by student fees. Despite regular government claims to increase the share of students who enter the vocational stream inschools to 25 percent, currently less than 4 percent o f students opt for it (World Bank, 2006). 4.19 Orissa, like many states in India, is facing the paradox of both large numbers of educated unemployed and skill shortages.This is especially the case in sectors attracting large investments from domestic and foreign sources, such as steel, other metals, and construction. The state government i s concerned that the lack o f readily available shlled labor would lead to the out-sourcing o fjob opportunities, at the very least to people from other Indian states. 4.20 Government-sponsored occupational training is largely ineffective. It suffers from a number o f weaknesses, including outdated equipment, training that i s disconnected from industry needs, and instructors who are not conversant with the changing industrial methods. Students who receive training in public sector institutions often have difficulty findingjobs afterwards, and the jobs they do manage to find are often unrelated to their area o f training. According to a nationally representative tracer study, only 17percent o f IT1pass-outs (technical school graduates) inOrissa had found any employment within 12 months o f completing training (World Bank, forthcoming). The average for India as a whole was also low at 29.9 percent, butnearly double that for Onssa. 4.21 Private enterprise is growing for training in marketable skills. In Orissa, as in other Indian states, the formal training sector has grown rapidly since 1980. Much o f the growth has been in the private sector. The private sector far outstrips the public sector in training capacity (Figure 4.6). On-the-job training is considered more effective than pre-employment training, which i s a high-cost activity that often yields low returns. There i s little on the extent o f on-the- job training inthe state. 58 4.22 The role of the government should be to facilitate the entry of the private sector in I this market,with some role in providing informationabout quality.When the benefits from training are almost fully captured by the individual, economic efficiency does not require any government financing. In competitive markets where workers are paid their marginal productivity, firms should be willing to bear the costs o f firm-specific Figure4.6: Privatetraining institutionsinOrissa have training (Becker, 1962). If markets muchgreater capacity thanpublicinstitutions are noncompetitive, firms should also be willing to pay for even general Number of seats invarious training institutions, 2006-07 training (Acemoglu and Pischke, 3 1 7 4 3 7 1998). InIndia, in general, only large 21 o8 o0 o0 o0 firms share in training costs, even as 1 6 0 0 0 firms in general complain o f slull 1 4 0 0 0 1 3 0 8 7 shortages. 1 2 0 0 0 1 8 0 0 0 0 4.23 In the face of chronic 6 5 6 5 shortages of trained labor, especially professional skills, 6 0 0 0 development of such skills may 4 0 0 0 lead to large social returns. To 2 0 0 0 capture those social returns, 0 T- government intervention and public C o l l e g e D i p l o m a I T I spending may be justified, either on G o v e r n m e n t its own or in partnership with the private sector. Public-private P r i v a t e partnerships for training are a Source: Presentation made by the director of technical education, relatively new phenomenon, and April 2007. most have been specific to particular industries or locations. Public-private partnerships for training are often governed by memoranda o f understanding between the state and the industry guaranteeing the placement o f graduates, which has the advantage o f reducing search costs and uncertainty for both the students and the industry.InOnssa, a number o f large industrial establishments, especially inthe steel, mining, and power sectors, have tied up with the government to provide training in skills needed for these sectors. C. Health 4.24 Health status is an essential part of people's well being, and health shocks are a major cause for sinking into poverty. One key way o f making growth inclusive is by ensuring that the benefits o f economic growth translate into concrete gains in the survival and nutritional status o f children and their mothers; and reductions in the vulnerability o f households to health shocks. 4.25 Orissa has made substantial progress in reducing infant and child mortality, but much remains to be done. Between 1992/93 and 2005/06, the proportion o f children who receivedrecommended vaccines increased fiom 44 percent to 52 percent, reachingparity between rural and urban areas. Currently, the proportion of vaccinated children in Onssa i s higher than the all-India average. Trends in child malnutrition indicate that Orissa has caught up with the rest o f IsOne possibility is for small firms to act as a consortium to provide training that is specific to the industry and therefore, generalacross firms inthat industry. 59 India from being much worse inthe past. The number o f infant deaths per 1,000 live births fell in rural Onssa from 81 to 69, remaining higher than the all-India average o f 62; in urban areas it declined from 81 to 40, falling below the all-India average o f 42. Progress has been made, albeit at a slower pace, in improving the use of contraceptives and in attracting women to institutional deliveries. 4.26 The majority of both rural and urban population depends on public facilities for health care in Orissa, and public provision varies widely between districts. The National Sample Survey (60* Round, 2004) shows that out o f households who reported episodes of ill health, 62 percent in rural and 58 percent in urban Onssa used public facilities, while the remaining used private facilities or did not seek care at all. Lack o f access was cited as a major reason for not seelung care or preferring nongovernment providers. Onssa displays wide inter- district disparity in public health provision (Table 4.2). The best served district has 11times the number o f doctors as the least served district; for nurses this ratio is 26 and for beds it is 28. Table 4.2: Inputsand OutputsinPublicHealthSystem, 2005-06 No. of Districts Lowest Highest Standard District District Mean Deviation Bed 30 70 1,942 467.4 423.2 I Doctor I 30 I 17 1 197 1 87.6I 47.2 Nurses 30 16 412 74.8 82.5 Sterilization 30 40 10,524 2,768.3 2,146.6 1.U.D 30 665 9,837 5,320.8 2,598.1 B.C.G 30 6,670 84,832 30,827.2 16,081.3 Measles 30 6,200 71,222 27,329.2 13,767.1 Outpatients 30 1,14,405 I 19,02,364 8,70,373.4 4,76,791.1 Inpatients 30 II 6.286 1 2.67.068 II 88.843.0II 61.371.7 Source: IIT, Chennai (2008). 4.27 Recent analysis indicates significant room to raise efficiency of public spending through reallocating resources from surplus to deficit districts. An innovative diagnosis of output efficiency, usingData Envelopment Analysis (DEA) methodology, has been carried out by the Indian Institute o f Technology, Chennai, across the 30 districts o f Onssa. This study has generated districtwise efficiency estimates, usingnumber of doctors, nurses, and beds as inputs; and number o f inpatients, outpatients, sterilizations, BCG, TT, and measles vaccinations as the outputs. The study covers all health facilities from medical college hospitals down to health sub- centers. It finds that 13 o f the districts were technically "efficient" while the other 17 were technically "inefficient". Seven out o f the 13 technically efficient districts are found to be also scale efficient (experiencing constant returns to scale, or CRS) - meaning that they have the most productive size, given the input-output mix. The inefficient districts together had 574 beds in excess, 23 surplus doctors, and 129 underutilized nurses. Only two districts (Rayagada and Baragarh) were found to have surplus doctors; otherwise, doctor as an input was scarce in all the remaining districts. Given that the Data Envelopment Analysis is a nonparametric approach, it has no way o f accounting for random noise, which is one limitation o f this methodology. The results are also highly sensitive to the quality o f data; they are therefore to be treated with caution. They are illustrative and not conclusive. 60 4.28 Institutional constraints to health service delivery. In Orissa, as in the rest o f India, health service delivery i s hostage to a number o f institutional constraints. A recently completed Detailed Implementation Review o f the Orissa Health Systems Development Project financed by the World Bank identified a range of administrative weaknesses that provide opportunities for fraud and corruption, and pose risks to effective health outcomes. These include: (a) weaknesses inhumanresource staffingand management; (b) limitedplanning and coordinationcapacity; and (c) weak systems for concurrent and performance monitoring o f process, outputs, and outlays. Poor financial management systems, particularly at the district level, and inefficiencies in coordinationand convergence across sectors affect health sector investments and service delivery. Weaknesses inprocurement and contracting systems and weak contract management often result inpoor infrastructure. These findings are not unique to kssa; such institutional weaknesses are common across most Indian states 4.29 Commitment to institutional reforms. The Government o f Onssa has realized that institutional and governance reform within the health sector i s a key determinant for improving outcomes. Following the Detailed Implementation Review, the government has developed an action plan to specifically deal with the major weaknesses highlighted in that report. Reform measures envisaged include strengthening the procurement and contracting systems o f Department o f Health and Family Welfare (DoHFW) through the development of a procurement reform plan, including the establishment o f a specialized organizatiods to manage procurement of drugs, equipments and services, establishment o f independent systems to undertake concurrent quality control and checks o f the procurement activities, as well as a third party verification system for health investments. Financial systems o f the Department o f Health and Family Welfare are to be strengthened by expanding specialist expertise in financial management, internal audit and a performance management plan to strengthen the existing human resource and health management information systems. These institutional reforms will require sustained leadership and commitment; they have the potential to strengthen the impact o f public health investments 4.30 Discussingthe way forward in improving health i s complex, as health outcomes are not driven simply by the availability and quality of services, but rather by an entire nexus o f environmental factors that determine exposure to health risks. Outcomes are affected both by household and community conditions, behavioral choices o f families and individuals (often based on limited information), resource constraints o f households, and the availability o f services (in either the public sector or from private practitioners) A conceptual framework o f factors that affect child mortality in shown inBox 4.1, as an illustration. 61 Box 4.1: The Framework for UnderstandingChild Mortality: Actors and Actions Actor: Individual woman/mother Actor: Thefamily Education(especially post-primary) Income and wealth Nutrition (duringpregnancy and breastfeeding) Educationof other adults inthe family Age at first birthand spacing between births Water (piped into house) Birthattendedbytrainedperson Hygiene practices (especially hand washing) Lengtho f exclusive breastfeeding Cooking fuels (clean) Hygienepractices (especially hand washing) Use o f insecticide nets (to combat malaria) Actor: The community Actor: Serviceproviders Environmentalhealthpractices (water, sanitation) Basic health and nutrition services inthe village and Road access inall-weather conditions outreach to households for antenatal care, birth, and postnatal preventative care Access to health facilities for emergency obstetric and sick child care Other services, such as schools, transport, and electricity Source:Achieving the MDGs inIndia's Poor States. 4.31 Orissa hasdecided to move away from an input-basedapproach to public health to a more sophisticated approach focusing on health outcomes. In the past, ministries and departments o f health have tended to view the problems o f health too whichled to a facility-based approach. Orissa's health sector plan Strategy 2: Strengthenthe health delivery system to be effective and (OHSP), as approved in responsive. 2005, envisions a much broader approach to Strategy 3: Strengthenthe health sector management systems. improving health status, Strategy 4: Enhance the demand for and use o f services, particularly to with seven strategic thrusts further equity and gender goals. (Box 4.2). The Onssa health sector plan, Strategy 5: Promote decentralized, participative planning and developed with assistance implementation involving the Panchayati Raj Institutions. from the UK Department for International Strategy 6: Address health determinantsthrough effective cooperation Development reflects a among departments. fundamentally approach to improving health outcomes in Orissa. Implementation o f this ambitious plan poses a major challenge, as it involves a radical change in mindset, from being input oriented to being output and outcome oriented. 4.32 The seclusion of tribal villages calls for innovativeand flexible approachesto reach the underserved.The isolationofmost ofthe scheduled tribes calls for special attention from the 62 Orissa government to improve geographical targeting. Tribal villages and hamlets are often hilly and forested, malung it difficult to reach them even in normal circumstances, but more so during natural disasters and monsoons. Services have not reached into these areas, which are more sparsely settled than the standard population norms for health centers, schools, or roads. Service providers, such as doctors, do not reside in these areas and very often do not even visit them because o f the difficulty of access. Despite dramatic improvements in overall infant mortality in the state inthe past 5-10 years, districts with a highproportion o f scheduled tribes lag behind the rest. The predominantly tribal districts are also the poorest performers in immunization and access to antenatal care. When asked about the impact o f their remoteness, respondents in a recent study in four villages in Koraput indicated the greatest impact on access to public services rather than employment or business opportunities.'6 4.33 Freedom to innovate requires flexibility to allocate resources within each district and down to each village. The Orissa health sector plan consistent with the National Rural Health Mission, stresses the importance o f engagmg the rural local bodies or panchayati raj institutions (PRIs) at all levels-district, block and village, or gram panchayat (GP>-in planning and implementation (Strategy 5). Inmoving to greater engagement o fpanchayati raj institutions inhealthcare, there are three keyissues: 0 First, ifpanchayati raj institutions are treated as nothing more than implementing agents o f schemes designed elsewhere, and not given true flexibility in allocation o f real resources, it will be difficult to sustain engagement o f panchayati raj institutions or to nurture innovative approaches. Freedomto innovate inmodalities o f delivery (including choosing the contract with nongovernmental organizations or other providers for services) will be key to success. Second, information on inputs, outputs, and outcomes at the relevant level for decision- malung bypanchayati raj institutions i s crucial. To make the switch from an input focus and facility-based approach to an outcome-oriented service, information i s needed about outputs and outcomes at the district, block, and gram panchayat level. The state has to take the lead in creating and maintaining the information base without seelung to reassert top-down control. 0 Third, capacity building is essential. As new institutions are being built, it cannot be assumed that that they can take on new responsibilities without focused assistance to buildthe appropriate capabilities (training ina general sense isnot a substitute). D. Social Protection 4.34 A majority of antipoverty programs in Orissa are designed and supported by the central government, which implies that the state has limited room for maneuver. Government social welfare or antipoverty programs implemented in Orissa cover the traditional mix o f social protection interventions that promote and protect livelihoods or provide safety nets. The programs either focus on the chronically poor or those who fall temporarily into poverty as a result of income or expenditure shocks. The programs are financed by the center and the states in the ratio 80:20, on average. Broadly, these programs can be grouped as follows: Programs that are meant to help households mitigate risks by facilitating income smoothing (Jawahar Gram Samridhi Yojana, Sampoorna Grameen Rozgar Yojana). l6See Shah et al, 2005. 63 Programs that promote children's movement out of poverty in the long run (school scholarship, mid-day meal program, school textbook and uniform distribution, and the Integrated ChildDevelopment Services Program). 0 Programs that provide direct support to the chronically poor, without an objective of lifting households out of poverty (the Targeted Public Distribution System (TPDS), National Old Age Pension Program, disability pensions, widow pensions, and maternal benefits). 4.35 Poverty is high throughout Orissa, and even higher in the interior. Orissa has the highest proportion o fpoor people inits population o f all states inIndia. However, there have been positive developments inrecent years, and poverty rates in Orissa have declined from 47 percent to 39.9 percent between 1999-00 and 200445." Despite this improvement, poverty rates in Onssa remain almost twice as highas rates inthe rest o f India. Poverty rates vary from 87 percent inthe Southern interior regon to 50 percent inthe Northern interior regon to 32 percent in the Coastal region (Table 4.3). Although scheduled tribes represent about 22 percent o f the population o f Onssa, they constitute more than 40 percent o f the poor. Largely driven by central government spending increases, spending on antipoverty programs in Orissa have increased annually by 12 percent inreal terms between 2002 and 2005. Government expenditures on public works increased dramatically, fuelled by the launch o fthe National Rural Employment Guarantee Program. Source: National Sample Survey Data, as calculated by A. Dubey and referenced in De Haan (2005) (Quoted in World Bank, 2006) 4.36 Many households that are not chronically poor are vulnerable to poverty as a result of shocks. Onya households are vulnerable to "idiosyncratic" shocks, some o f which are predictable (like old age) and some unpredictable (such as illhealth, an injury, death o f a work animal). They are also vulnerable to "covariate" shocks, which in &ssa include cyclones, floods, and droughts, as well as those arising from environmental degradation. Health shocks, which affect households directly through out-of-pocket expenses and indirectly through loss o f earnings, are among the most frequent shocks affecting household welfare (Figure 4.7). Dev et al. (2007) argue that shocks such as droughts are generally more visible to policy makers and hence receive more attention, while health shocks are "invisible" and tend to be neglected. " See Government o f India Press Information Bureau (http:iiplannin~commission.nic.ininewslprmar07.~~ the for latest poverty estimates and details o f its estimation. 64 Figure 4.7: Orissa's householdsare vulnerable to a wide variety of risks 30, 25 - 20 - 15- 10- 5 - 0 - Source:Dev et al(2007). 4.37 Poverty programs are more hampered by delivery gaps and leakagesthan by the overall level of government spending for social protection. Orissa is the first and so far only Indian state to have requested the World Bank to carry out a professional assessment o f delivery gaps in two programs, through a Public Expenditure Traclung Survey. This study estimated delivery gaps as large 50 percent in a centrally sponsored rural employment program and about 40 percent in the case o f a nutrition program. Approximately 80 percent o f all households in Onssa receive Some benefit . at least Source: Umali-DeiningerandDeininger(2006), estimatedfromNSS I I government-sponsored antipoverty I One program.'* This i s slightly higher ihan the all-India average of 78 percent o f households receiving some benefit from at least one government scheme. Around half o f all households in Orissa benefit from the public distribution system, where recent analysis usingNational Sample Survey data suggests that only 17 percent o f This section draws primarily from Ajwad (2007). The HumanDevelopmentProfile of India(2004-05) survey is used in the analysis. The sample size for Orissa is 10,600 individuals in 2,066 households(representative at the state and rural-urbanlevel). The large sample size allows for a descriptive analysis of most major social protection programs, with the exceptionofthe Sampooma Grameen Rozgar Yojana. 65 the foodgrain allotments meant for the poor actually reachthem, as comparedwith 35 percent for India as a whole (Table 4.4)." program expenditure, Table 4.5 Table 4.5: Average Spendingon Poor Householdsby presents the spending per Antipoverty ProgramsinVarious Regionsof Orissa, 2002-05 households classified as being below the poverty line or poor in three major programs aimed at Region Poverty Annual Annual rural wage employment, self- rate (%) spending spendingper employment, and housing." Per Per poor poor household, spending is household household lowest in the poorest Southern below the (National interior region and highest in the poverty line Sample xichest Coastal region. Without (program Survey) more information on the data) absorptive capacity of spending, Coastal 32 Rs.965 Rs. 1,867 further inferences cannot be drawn, but the current pattern o f Northern 50 I Rs. 1,453 I Rs. 1,300 spending is clearly in need of close scrutiny. Southern I 871 Rs.961 I Rs. 966 4'39 A concerted effort is required to ensure that Source: National Sample Survey, 55th Round, Bank staff estimates, Government of India data on poverty and spending. E. Conclusions 4.40 Sustainingrapidand inclusivegrowth in Orissa dependson the quality of the labor force it can produce. That requires strong educational fundamentals imparted in the school system from the earliest years, supplemented by public and mostly private efforts in training and skill development. The health system is crucial, both to providing a healthy childhood foundation for future productivity and for avoiding health shocks that leave households in poverty. While social protection and antipoverty schemes may seem, and have been treated at times, as peripheral to the growth process, they can play an important complementary role in fostering a vibrant rural economy. And finally, given the nature o f exclusion inthe state, an inclusive strategy will require much greater attention to geographical targeting insocial programs. l 9Here "leakage" is defined in a conservative sense, i.e., the difference between officially reported release o f public distribution system grains relative to the quantities o f such grains reported as received by households in the National Sample Survey. This does not include leakage o f TPDS grains at BPL or AAY prices to nonpoor households. 2o Poor households are classified according to a consumption aggregate calculated using a detailed household expenditure module. It i s generally thought to be a more accurate descriptor of poverty than the designator "below the poverty line." 66 CHAPTER 5: ACCOUNTABILITY FOR SERVICE DELIVERY 5.1 Instilling fiscal discipline is only the first step in the program to modernize government and make it accountable for delivering quality services that the public needs. Fiscal correction has created space in the state budget for new investments and development initiatives. The reform program has reached a new phase, when the focus has to be on translating outlays to outcomes. Improvement in the state's financial position i s only the means to an end, not an end in itself. The goal is to provide a transparent and efficient government that takes seriously its responsibility and mandate to deliver quality services to the people it represents. The Government o f Orissa has begunto recognize this goal, as i s evident from the thrust of its finance minister's annual budget speeches, which take as their theme the need to translate outlays to outcomes. 5.2 The relationship between the people and their elected representatives-one of the key components of accountability- i s relatively sound in Orissa. Recent literature on the determinants o f public service delivery uses the framework o f a triangle o f relationships, namely: (a) between the people and policy makers or elected representatives; (b) between the policy makers and the service providers; and (c) between the service providers and the people. The first, explicitly political dimension is sound in the sense that elections at state and local levels have been held regularly. There i s an active media in English and Onya languages, with government performance and nonperformance being a topic o f regular debate. The elected government does appear to feel the pressure from below to perform or be voted out. After being reelected in 2004, Shri Naveen Patnaik i s reported to have conveyed to his Cabinet colleagues that two successive electoral wins were the maximum returns possible from his "clean" image, so now the emphasis has to be on performance and results. A. Policy Makers and Service Providers 5.3 Accountability of service providers to the policy makers means holding line departments responsible for results, not merely for spending on a set of inputs. Recognizing the need for an appropriate institutional mechanism to plan, manage, and monitor administrative reform initiatives, the government has launched a program entitled the Onssa Modernizing Government Initiative (OMGI), housed under the General Administration Department headed by the chief secretary. The objective o f Onssa Modernizing Government Initiative i s to encourage and support cross-cutting and department-specific reforms and initiatives to improve service delivery. With grant support from the U.K.Department for International Development, technical assistance is being offered for line departments to draw on to take forward reform initiatives. 5.4 There is need to strengthen planning and budget formulation. Multiyear medium- term expenditure plans incorporating performance targets are being developed in key social sectors, such as health. Going forward, these must form the basis for budget formulation, providing closer linkages between the annual budget and the desired development outcomes. 5.5 Developing better systems for policy formulation, planning, and results-based monitoring and evaluation is critical for improving service delivery. Policy formulation is weak across government departments, and districts have little capacity in place for planning. There is a clear need to strengthen planning as an independent function, particularly when policy requirements demand that financing be linked with district plans. Staff with new skills and systems with new capabilities will have to be put in place. Planning reforms need to be linked with improved monitoring and evaluation systems. Existing monitoring and evaluation o f 67 government programs are largely rooted in finance and compliance audit. Real improvements in service delivery will require a fundamental transformation to make the government more performance-oriented. 5.6 There is need to "rebuild the muscles." Onssa recognized, in 2001, the need for a major surgery to cut excess fat inthe government establishment, and it has succeeded incarrying out this surgery over the past five years. A s with most major surgeries, some muscle has also been cut in the process. Now, inthe upcoming phase, the Finance Department needs to refine its stance with respect to recruitment o f skilled personnel. Human resource management needs to go beyond cutting employee positions and freezing recruitment. The policy o f a blanket ban on hiring in most categories has probably served its purpose and may be counterproductive to continue. Although the principle of "doing more with less" remains valid, this logic is not sustainable or efficient over the medium to long term, unless accompanied by second-generation reforms that refigure changes inthe structure and skills o f permanent staff. The key problem i s to develop well-defined and suitable criteria for identifying essential staff needed to support better planning, implementation, and monitoring of government programs, particularly inthe context o f increasing levels o f investment inpublic services. This requires the linkmg o f additional budget allocations with commitment to deliver additional and better outcomes. It i s a problem whose solution i s public expenditure management system that is genuinely oriented toward results and outcomes. 5.7 It is not only the quantity of staff, but also the quality that matters. If Onssa is to meet its human development goals, it will need to radically restructure the long-term s h l l profile o f its employees. One stark example emerges from the Health Department. Onssa has only three anesthetists in government service to serve a public health system that covers 38 million people. To develop a robust basis for decisions on right sizing, several new capacities are required: (a) a qualitative analysis to determine staffing patterns and norms across categories and departments; and (b) a database on surplus employees, which can form the basis o f an equitable staffing policy that will support better staffing o f underserved departments and districts and allow for better cadre and human resource management. These actions will require considerable administrative and political commitment. The human resource management agenda needs to go beyond the Finance Department and become an integral part o f all line department functioning. 5.8 The launch of Orissa Modernizing Government Initiative holds promise for the development of better systems of human resource management and reengineering of government processes and systems An excellent beginning has been made in developing a Human Resource Management Information System (HFWIS). This will have a major impact on accountability, as the problem o f ghost workers will be completely eliminated once the system i s linked with a computerized payroll being driven by the Finance Department. The program has also supported the development o f a policy on staff redeployment and the establishment o f a mechanism to deploy surplus manpower through the establishment o f a central database on surplus employees. This process will need to go hand-in-hand with a process for identifying staffing needs o f departments and districts. Together these policies will substantially meet the criticisms faced by the Government of Orissa that its focus on rightsizing has caused distortions inhumanresource availability at the implementationlevel. 5.9 There has also been some progress in taking forward the reengineering of government procedures and processes to improve productivity. Some o f the reforms being taken forward through Onssa Modernizing Government Initiative include: (a) reviewing the rules o f business; (b) restructuring state government training institutions; and (c) improving the format o f performance appraisal systems to simplify processes and reduce transaction costs. A caseload management system i s being introduced to improve litigation management, and it will be piloted 68 in departments with the largest caseload problem in 2007-08. Sectoral and department-specific reforms are also being undertaken to increase efficiency and accountability. Good progress has been made by the Food and Civil Supplies Department, which i s piloting a food trachng and management system. All o f these measures are improving citizens' perceptions o f government operations (Box 5.1). Box 5.1: Transforming the Way inwhich Citizens Perceive the State Moving from a situation where citizens perceive the state to be inefficient and its services to be poor in quality, to a situation where they feel that the state is actively intervening to guard them against poor quality services requires a generational shift. There are some indications that the shift is beginning to take place, and reforms in accountability and transparency over the past five years have supported this progression. Particularly noteworthy is the Government o f Orissa's focus o n anticorruption and transparency. Political analysts in India have suggested that the alliance that i s in power today had originally won in2000 o n account o f its promise o fproviding good governance and reducing corruption. Its reelection in2004 was also largely attributed as a vote for increased transparency and accountability. It is widely accepted that a focus on enforcement and wide reportage o f corruption cases filed against prominent civil servants and officers responsible for service delivery has created an environment that supports deterrence and has created a greater consciousness around the issue of corruption. Orissa is one o f the few states inIndia to have taken up cases andjailed even senior officers. A recent newspaper survey o n citizen's perception o f government departments rated the Vigilance Department (which leads the anticorruption drive) as one of the best performers. Political support for the anticorruption agenda has played an important role indefining the way inwhich people view the nature of govemment. Computerization o f land records and the commercial tax records are attempts to effect reforms in government functions that deal directly with citizens and that may be open to the misuse o f discretionary authority. The implementation of the Right to Information Act has directly affected transparency, and an effective State Information Commission has introduced innovative mechanisms to prioritize cases that have a direct bearing onpublic issues through establishing a system o f "public interest cases." 5.10 Orissa shows a rare political commitment to supporting anticorruption initiatives.It i s one o f two states in India to develop a comprehensive anticorruption action plan. Actions include expanding investments in enforcement, prevention, and public awareness. The Vigdance Department in Orissa has a well-established reputation for competence and effectiveness. Orissa has one o f the highest levels of registered cases on corruption in India, with 1,659 cases being registered between 1997 and 2002, compared with 2,722 cases in Maharashtra, 1,238 in Karnataka, and 167 inBihar.A further indicator of anticorruptionenforcement i s the highnumber o f anticomption cases (39) filed against high-ranking officers. The anticorruption action plan recognizes the centrality o f procurement reform as an important area, and e-procurement is being piloted inthe Works Department. The government has also passed the OIlssa Special Courts Act, which allows for the setting up o f special courts to try high-level corruption cases within one year. The Act also allows for the confiscation o fproperty o f corrupt officials. 5.11 Better accountability and transparency in service delivery is also being driven through a focus on e-governance. Administrative reforms, such as business process reengmeering, that will have an impact on both efficiency and accountability, are also being reinforced by a specific thrust on e-governance solutions for better monitoring and evaluation. Significant gains have been made in the area o f computerization of land records and motor vehicle accounts and automation of processes in registration, commercial taxes, and panchuyuti ruj departments (Box 5.2). 69 Box 5.2: Information Technology Solutions for Better Accountability An information and communications technology policy o f 2004 and an e-governance vision released in 2006 aims at "establishing a networked government for greater transparency and accountability." In 1999/2000 Orissa had little web-based connectivity. Today, every district and block i s linked through a VSAT-based network, which facilitates the monitoring o f schemes and fund utilization. A local area network for the secretariat connects various departments, and computers have been provided to every department. A secretariat training facility has been created for providing basic as well as specialized training to officers. A state portal has been established to provide information and interactive services for customers. Progresshas beenrapid, and initiatives include: Computerizationo f landrecords Computerizedregistration o f deeds, endorsements, and issue o f certificates A foodgrain monitoring system Treasury automation Automation o f commercial tax processes, including applications for registration, identification o f defaulters, and issue o f forms Establishment o f a unique child-tracking and intervention-monitoring system across the state. A comprehensive database o f every child below age 14 in the state has been created, and all 14 interventions under the Sarva Shiksha Abhiyan are monitored online. Web-based applications for monitoring accounts and fimd flows inthe Panchayati Raj department and across blocks and Gram Panchayats and for monitoring work flows under the National Rural Employment Guarantee Scheme. Currently 19 o f DRDA's 205 blocks and 3,672 Gram Panchayats use this package for registration o fjob seekers, issue o fjob cards, and muster rolls. E-procurement is being implemented in four departments, including Information Technology, rural development, works, and water resources. 5.12 Strengthening the district units will enable better district planning and coordination. While decentralization should be the main driver for improving service delivery, successful decentralization requires reforming and repositioning the existing civil administration at the district level. Frameworks need to be established within which the district administration can take on new roles o f planning, regulation, and oversight. There i s a need to move to a system o f district plans, which are not merely aggregations of the plans o f central and line departments, but are based on specific district needs and priorities. Districts at present lack the ability to plan and manage resources effectively. At the same time, capacity needs to be built within local government, which would inevitably be time consuming. B. Service Providersand the Public 5.13 Important lessons have been learned about the role of decentralizationin bringing service providers closer to the people they serve. An extremely important initiative to strengthen service delivery through the devolution o f responsibilities to the local community i s the recent decision o f the government o f Orissa to empower village education committees to certify teacher attendance in elementary schools. The government is also piloting the devolution o f runningthe mid-day meal scheme in schools to women's self-help groups. While progress i s being made in strengthening the elected rural local bodies or panchayati raj institutions, there remains a needto have a comprehensive capacity-building strategy for rural local body officials. 70 5.14 Decentralization could lead to community empowerment, if public awareness amongst both elected representatives and citizens is increased. A recent survey2' conducted in some o f the poorest districts o f the state before thepunchuyut elections of 2007 revealed that only 6 percent o f the Gram Panchuyut representatives were aware o f the 73rd and 74th Amendments to the Constitution, which empowers panchuyati ruj institutions. Less than 1 percent o f the representatives were aware o f the provisions included in the extension o f the Punchuyut Act to Scheduled Areas (PESA). Interms o f attendance, 71percent o f the village population was shown to attend meetings o f the Puli Subhu, while only 39 percent actively attended. The majority o f respondents felt that, although they had adequate voice in the deliberations, their decisions were often overruled at the higher block level. A large number o f respondents felt that officials did not disseminate information about development schemes, and nearly 40 percent had no idea about budgetary provisions to their area. 5.15 Self-help groups can complement, but cannot be a substitute for panchayati raj institutions. Most o f the new centrally sponsored schemes are puttingmore and more power and implementationresponsibility inthe hands o f the rural local bodies or punchuyuti raj institutions. However, there i s still quite low capacity in the punchuyuti ruj institutions in Orissa, as systemic efforts to strengthenpunchuyutiruj institutions havejust begun. The need to implement programs at the local level, combined with the weakness o f punchuyuti ruj institutions, often leads to a reliance on other "community" groups, either special purpose groups created by the scheme itself or other functional groups at the local level. Indeed, in the current situation in OIlssa, both the state government and external donors are attracted by the option o f delegating women's self-help groups (SHGs) for delivering services, such as for kerosene distribution. This approach has several risks. Self-help groups are membership-based organizations that have neither the constitutional mandate nor electoral accountability to act as tiers o f government. Self-help groups can play a role as a complement to punchuyuti ruj institutions-as another arm of civil society holdingpunchuyuti ru. institutions accountable for fulfilling governmental functions-but cannot be the substitute inthe longrunfor effective local governments. 5.16 Orissa is moving rapidly ahead to empower panchayati raj institutions. The government has now devolved 21 o f 29 subjects in 11 departments to the three tiers o f the panchuyuti ruj institutions. In September 2006, the entirety o f rural drinkmg water was devolved to thepanchuyuti ruj institutions ,issuingdetailed instructions for the allocation o f assets, as well as responsibilities for an array o f activities (from planning to maintenance) and funds (allocating the existing sources o f funds). This detailed attention i s required in every sector, as studies in other states have found that devolution i s often thwarted by unclear and concurrent allocations o f responsibilities that then tend to revert to centralized control. 5.17 Orissa has launched innovative moves toward decentralization in a number of sectors. Inelementary education, a new career path for teachers has been launched that gives the local bodies, which are in a position to observe aspects o f teacher performance, much greater input into teacher assessment. Inconnection with the National Rural Health Mission, there is a move away from facility-based personnel to workers who come from the local community and are responsible to the local community. Inthe devolution o f the rural drinkingwater schemes, the employees were transferred to the respective tiers o f the punchuyuti ruj institutions, while remaining affiliated to their parent department at the state level. Orissa i s pushing to take the motto o f Simple, Moral, Accountable, Responsible, and Transparent (SMART) governance to the local level. This requires the difficult task o f strengthening overlapping tiers o f accountability, so that they can work together. ''The survey conducted by the Center for Youth and Social Development inMarch 2007 in the districts of Koraput, Keonjhar, Kalahandi, Sundargarh, Rayagada, and Cuttack in 34 Gram Panchayats. 71 C. Conclusions 5.18 Accountability means that policy makers must hold service providers and line departmentsresponsiblefor results, not merely for spendingon a set of inputs. Recognizing the need for an appropriate institutional mechanism to plan, manage, and monitor administrative reform initiatives, the government has launched a program entitled the Orissa Modernizing Government Initiative, housed under the General Administration Department headed by the chief secretary. The objective o f the Onssa Modernizing Government Initiative is to encourage and support cross-cutting and department-specific reforms and initiatives to improve service delivery. 5.19 The government's focus on anticorruptionand transparency has had an impacton people's expectations of government services. Focus on enforcement and wide reportage o f conuption cases filed against prominent civil servants and officers responsible for service delivery has created an environment that supports deterrence. It has created a greater consciousness around the issue o f corruption. Better accountability and transparency in service delivery i s also being dnven through a focus on e-governance, whereby government records and application forms are readily accessible on-line. 5.20 Although Orissa has made innovative moves toward decentralization, building the capacity of district units and elected local representatives remains a largely unmet need. Decentralizationcould lead to community empowerment, ifpublic awareness among both elected representatives and citizens i s increased, along with the capacity o f elected representatives to fblfill their role. Self-help groups can play a role as a complement to the local governments-as another arm o f civil society holding local officials accountable for fulfilling governmental functions-but cannot be the substitute inthe long runfor effective local governments. 72 CHAPTER6: CONCLUSIONSFOR PRIORITY SETTINGAND a SEQUENCING P _______p__ __= P 6.1. Orissa has entered a second phase of fiscal reform The emphasis now has to be on: (a) prioritizing the use o f the additional fiscal space being created, along with measures to raise the efficiency o f spending; and (b) linlung additional allocations to outputs and outcomes. Devolution to local bodies i s one o f the ways that can potentially strengthen accountability for service delivery. 6.2 Given that Orissa has already achieved significant fiscal correction, going forward there is considerable room to step up capital investment. The fiscal situation i s no longer the binding constraint to scaling up public investment. The fiscal deficit is well below the ceiling prescribed by the Fiscal Responsibility and Budget Management Act. The capacity o f the construction industry needs to be scaled up by attracting contractors from outside the state and concomitantly upgradingthe capacity within the state. 6.3 There are severalpriority gaps to be addressed,butnot all require funding from the state budget. Some o f the infrastructure needs- such as ports, urban housing, and vocational training institutions-can be addressed by creating an enabling environment for private sector participation. Other needs, such as rail connectivity, require effective lobbying with the center. A few will require state budget support, such as intrastate road connectivity, rural electrification, and surface irrigation. With respect to education, health services, and antipoverty programs, strengthened accountability needs to precede increased budget allocations to avoid pouring more resources into leaky systems. 6.4. Intrastate transport connectivity is of highest priority. Sustaining high rates o f economic growth needs immediate as well as long-term investment to strengthen transport connectivity. Improved road connectivity within the state has been one o f the factors underlying the improved economic performance o f Onssa inrecent years. There is an urgent need to address the gaps inroad infrastructure that serves the main industrial hubs and tourist centers. There i s a long-term need to provide all-weather connectivity to hitherto secluded areas. These two considerations together imply that investments in transport connectivity will have to absorb the largest share o f additional allocations inthe capital budget over the next 5-10 years. 6.5 Investing in irrigation is also a high priority for the state, but the quality of investment matters. In-depth analysis carried out as part o f the completion report o f the World Bank-assisted Onssa Water Resources Consolidation Project indicates that the returns to farmers from public irrigation investment are potentially high, provided the quality of investment i s assured through sound technical design, competitive procurement, and close monitoring o f implementation. Past public investment in irrigation in Orissa has not been cost effective; most such projects have been plagued with time overruns and consequent cost overruns. They also generally involve large-scale displacement o f people. Moreover, relying mainly on such investments would imply that h s s a cannot reach its ultimate irrigation potential even in two decades from now. Going forward, Orissa could explore more intensive use o f other methods o f irrigation to complement the surface systems, including tanks and groundwater in selected areas where the possibility exists for cost-effective investment with user participation to ensure effective maintenance. 6.6 Sequencing of reforms and investments must take account of economic and political considerations. Reforms in land tenure are important for pro-poor agricultural growth, but they 73 are politically difficult and likely to require a consultative process, hence they will be time consuming. That i s a good reason to initiate the process immediately. Successful implementation o f the state's resettlement and rehabilitation policy and significant sharing o f benefits between private investors and affected residents in the case of mineral-based investments are high priorities inthe short to mediumterm to secure the sustainability of rapid economic growth inthe state. The key reform challenges and hgh-priority claims on the state budget duringthe next two five-year periods, is summarized inTable 6.1. Ta le 6.1: PossibleSequencin ofReformsandInvestments,2007-17 Areas Actions during2007-12 Claim on state budget state budget Structural 1. Joint forest 1. Low reforms for management accelerating 2. Landadministration 2. L o w growth 3. Landtenure 3. Nil 4. Single window 4. Nil Infrastructure 1. Rail 1.Nilor low 1. Rail 1.Nil reform, 2. Roads 2. Very high 2. Roads 2. High initiatives, and 3. Irrigation 3. High 3. Irrigation 3. Moderate investments 4. Rural electrification 4. Moderate 4. Rural electrification 4. L o w 5. Urbaninfrastructure 5. L o w 5. Urbaninfrastructure 5. Nil Human 1.Teacher accountability 1. Low 1.Upgrade schools 1.High development 2. Health delivery reform 2. Low 2. Health facilities 2. High reform, 3. Reduce delivery gaps 3. Nil 3. Scale-up program 3. Moderate initiatives, and 4. Decentralize to PRIs 4. L o w investments 6.7 It is time for Orissa to scale up public investmentin infrastructureduring2007-12 and in human development subsequently. Addressing infrastructure gaps is the most urgent priority for sustaining rapid growth. Addressing human development needs requires institutional change as a prior condition for allocating additional public resources. Hence, in terms of the claims on the state's resources, infrastructure needs to be accorded the highest priority during 2007-12. An infrastructure focused Eleventh Five-Year Plan, followed by a human development focused plan, could take Onssa to its ambitious vision o f exceeding the national average or even becoming a leading state over the next two or three decades. 74 ANNEX A: ECONOMICGROWTHAND POVERTY Table A. 1: Gross State Domestic Product of Orissa at Current Prices, by Sector, 200047 Note: Data are inRs.billion at current prices. Source: CSO and Government o f Orissa. i Table A. 2: Gross State Domestic Product of Orissa at Constant Prices, by Sector, 1999-2007 Construction 25.31 30.66 28.01 24.98 23.81 27.57 28.35 27.79 Services 190.45 200.15 210.48 226.28 244.29 266.27 289.62 306.08 Trade, Hotel & Restaurant 37.85 42.34 44.63 49.05 53.89 63.72 69.00 71.36 Transport, Storage & Communication 28.97 31.57 33.94 37.63 44.26 50.50 57.63 63.35 Finance, Insurance,Real Estate, Ownershipof Dwelling, Business Services & LegalServices 40.96 43.57 46.73 50.54 52.07 54.93 58.75 63.31 Banking Insurance 13.64 14.89 16.81 19.36 19.32 20.98 22.74 24.77 Real Estate, Ownership of Dwelling, Business Services & Legal Services 27.32 28.67 29.92 31.18 32.75 33.95 36.00 38.54 CommunitySocial & Personal Services 82.68 82.68 85.17 89.07 94.08 97.13 104.24 108.07 Total GSDP 425.27 428.79 453.54 449.76 514.08 567.98 601.51 637.75 Table A. 3: Incidence of Poverty in Orissa and All-India, 1993/94-2004/05 Note; "URP" stands for uniform reference period; "MRP" stands for mixed reference period. Source: GoI, PressInformationBureau, New Delhi, 2lMarch2007 for 2004/2005 dataand variousNationalPlanningCommissionpublicationsfor the earlier data. 11 ANNEX B: FISCALPOSITION Table B. 1: Fiscal Summary for Orissa, 1999/0&2007/08 Primary balance -25.98 -10.40 -11.29 -6.55 3.90 15.49 34.2 23.51 30.24 Interest payments 12.38 22.87 28.35 28.85 28.60 33.32 36.97 32.72 40.49 Overall balance -38.36 -33.27 -39.64 -35.39 -24.70 -17.83 -2.76 -9.21 -10.25 Memo: ... Ill Table B. 2: Fiscal Summary for Orissa, 1999/00-2007/08(as % of GSDP) Source: Governmentof Onssa budgetdocuments Nore: RE= RevisedEstimate; BE=Budget Estimate. iv Table B. 3: Debt and Guarantees as a Share of Revenuein Indian States, 1998101-2004lO5 Source: Ravishankar, Zahir, andKaul, `Indian States' FiscalCorrection-- An UnfinishedAgenda,' Economic & Political Weekly. Table B. 4: Own Tax Revenuesin Orissa, by Source, 2000101-2005/06 Source: Sen Tapas 2007. V ANNEX C: INFRASTRUCTURE, Table C. 1:Village Electrificationin India, by State, as of March 2006 16 All India 593732 I 474162 I 119570* I Note ;Asterisks indicatedatacompiledunderthe new definition ofvillage electrification(effective in 2004-05). Total number ofunelectrifiedvillages is estimatedto be around 1,25,000. Source: 1ndiastat.com vi Table C. 2: Index of Social and Economic Infrastructure in India, by State Source: Reportof the EleventhFinanceCommission(for 200(M5), June 2000, Governmentof Indiaand1ndiastat.com. vii Table C. 3: Road Density in India, by State, 1971-72 to 1996-97 ANNEX D:HumanDevelopment Table D. 1: Key Indicatorsof HumanDevelopmentinOrissa, 2005-06 Marriage and Fertility Total fertility rate (childrenperwoman) 2.4 1.9 2.5 2.5 2.9 Medianage at first birthfor women age 25-49 20.0 21.0 19.8 19.6 19.1 ChildImmunizationand Vitamin A Supplementation' Children 12-23 months fully immunized (BCG, measles, and3 doses eachofpolio/DPT) (%) 51.8 52.7 51.6 43.7 36.1 Treatment of ChildhoodDiseases (childrenunder 3 years)' Children with diarrhea in the last 2 weeks who receivedORS /o/ \ 41.3 58.8 38.8 35.1 16.8 I Childrenunder 3 vears who are undenveieht(%) I 44.01 33.31 45.71 54.41 52.41 Women's Empowerment I H I I I Currentlymarriedwomen who usuallyparticipate in household decisions(%) 55.3 60.0 54.3 -_- --- Ever-married women who have ever experienced spousal violence (%) 38.5 31.0 39.9 -_- --- Note: Figures are provisional.Asterisk indicatesdata are not shown; basedon fewer than 25 unweightedcases. I Basedonthe last2 births inthe 3 years beforethe survey. For children,the educationrefers to the mother'seducation. Childrenwith missinginformation onthemother's educationare not includedinthe education columns. Source: NationalFamily HealthSurvey (NFHS) for variousyears. ix TableD.2: HumanDevelopmentIndexfor India, by State Source: Human Development Report 2001 and Indiastat.com. All risks Idiosyncratic Covariate Poorest 4 2 43 Richest Coping Strategy quartile , quartile Asset dedetion 10.4 8.8 11.6 4.23 11.29 13.18 9.77 Labor market exDosureI 7.0 I 4.8 I 8.8I 14.08 I 11.29I 5.43I 5.26 I Borrow 24.7 26.2 23.5 26.76 27.42 18.60 26.32 Intra HHadjustments 7.0 6.5 7.5 1.41 2.42 8.53 9.02 DeDend on aid 9.0 7.5 10.2 11.27 9.68 9.30 7.52 Others 6.3 5.4 6.9 4.23 3.23 9.30 6.02 None 35.7 40.8 31.5 38.03 34.68 35.66 36.09 X TableD.4: Awareness of AntipovertyPrograms,by SelectedGroupsand States Source: Dev et al. 2007. Table D. 5: Proportionof HouseholdsBenefitingfromAntipovertyProgramsin OrissaandAll-India (inpercent) Benefit I Orissa All-India Boughtgrainfrom FairPrice Shop (amongall households) 25.6 I1 26.3 Source: Ajwad 2007. xi References Ajwad, M.I. (2007), `Coverage, Incidence and Adequacy o f Safety Net Programs in India,' World Bank, Mimeo. Onssa State Pollution Control Board (2003,2004 and 2005), Annual Report. Comptroller and Auditor-General of India (2003), `Performance Audit: Ministry o f Rural Development: Rural Housing,' Ch 3. Nabakrushna Choudhury Centre for Development Studies, Bhubaneswar (2002c), Orissa Development Report, Planning Commission, New Delhi. Department of Health and Family Welfare, Bhubaneswar (20020, `Onssa Vision 2010 - A Health Strategy: Orissa State IntegratedHealth Policy, Strategies and Action Points.' Dev, M.K.Subbaroa, S. Galab, C. 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