India Poverty, Employment and Social Services - World Bank ...

Report No. 7fil7-1N

IndiaPoverty, Employmentand Social Services(In Two Volumes) Volume 1: Executive Summary and Main ReportMay 10, 1989

Resident Mission in IndiaAsia Region

FOR OFFICIAL USE ONLY

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QURRENCY AND OTHER EOUIVALENTf

Currenc

Prior to June 6, 1966: US$1.00 u Ra. 4.7619Re. 1.00 = US$021

From June 6, 1966 to mid-December 1971: US$1.00 = Re. 7.50Rs. 1.00 = US$0.13333

Mkl-Deember 1971 to end-June 1972: US$1.00 = Re. 7,27927Ra. 1.00 = US$0.1 34

Attrr end-June 1971: FRoating rate

Rate end-March 1989: US$1.00 = Re. 15.6415Ru. 1.00 US$0.0639

Rupees values have been converted Inte dollars by using the prevailing exchang!a rates Indicatedabove up to 1970/71. For subsequent years the fodiowing average rates in rupees per US dollarhave oeen used:

1971/72 : 7.4441972/73 : 7.7061973/74 : 7.7911974/7S : v.9761975/76 : 8.6531976fl : 8.9391977/78 : 8.5631978/79 : 8.2061979/80 : 8.0761980/81 : 7.8931981/82 : 8.9291982/83 : 9.6281983/84 10.3121984/85 : 11.8871985/86 : 12.2371986/87 : 12.787

17/88 : 12.968

Source: IM _ .mational Flnanclal Statistics (lFS), line '.'

In this report an eslmate of 14.50 Rupees per US Dollar was used for 1988/89.

The Indian fisc year runs from April 1 through March 31.

Weseights

Unless othlervAse specified all weigghts measures are metric.

FOR OMCIAL USE ONLY

TITLE INDIA: POVERTY, EMPLOYMENT AND SOCIAL SERVICES

VOLUKE I: EXEr'TIVE SUMMARY AND MAIN REPORT

COUNtRY INDIA

REGION : ASIA

SECTOR COUNTRY ECONOMIC

REEO-RT 3y=E -IASSIFIMAON Mm LANGUAGE7617-IN CEM Restricted 05/89 English

ABSTRACT: This report consists of two parts: Chapter 1, which analyzesrecent economic developments and growth prospects; and Chapters2-6, which discuss the problem of poverty in India and theGovernment's poverty alleviation efforts. The review of recentdevelopments emphasizes the vigorous recovery the Indianeconomy has made from the drought of 1987. The economy islikely to grow by 9% in 1988/89, making it likely that theSeventh Five Year Plan's target rate of growth of 5% will bereached, and rendering the 6% target of the forthcoming EighthPlan attainable. The report emphasizes, however, that thefiscal and balance of payments deficits will have to be reducedin order to establish a sound base for sustained higher growth.It suggests that real export growth of at least 10% per annumwill be required to pay for the increased imports required forhigher growth and to avoid an unsusteinable build-up ofexternal debt. Reducing the fiscal deficit is required toreduce the pressure on the balance of payments and permitefficiency-enhancing liberalization of the trade regime. Thesecond part of the report finds that the more rapid growth ofthe Indian economy during much of the 1970s and 80s, coupledwith an expansion of programs aimed at poverty alleviation hasled to a decline in the incidence of poverty. At the sametime, poverty has become more strongly concentrated in EasternIndia and more closely associated with landlessness and wagedependency, especially in unirrigated rural areas. It suggeststhat, while more rapid growth can lead to greater progress onthe poverty front, policies which have inhibited the growth ofemployment both in agricultural and non-agricultural pursuitswill have to be changed. At the same time, partly because offiscal pressures, but also to increase their effectiveness,programs designed to increase the ability of the poor toparticipate in the growth process by improving their health andeducational status will have to be more sharply targeted,simplified in their administrative structures and more closelyattuned to the needs of the communities they serve. Finally,the report urges that some sort of safety net, in the form ofguaranteed employment will be required to protect those who,because they lack the human or physical capital, or live inchronically depressed regions, cannot benefit directly orimmediately from the growth process.

This document has a rfstricted distribution ad may be used by recipients only in the performanceof their official duties. Its, corents maY not otherwise be disclosed without World Dank authorization.

Acknowledgements

This report consists of two parts. Chapter 1 was written by JamesA. Hanson. Chapters 2-6 were written by Samuel S. Lieberman based on backgroundstudies by Sarthi Acharya (Consultant), Lynn Bennett (Consultant), William Byrd,Rajesh Chodha (Consultan-), Heera Chatterjee (Consultant), Suma Chitnis(Consultant), Nat Colletta, L.K. Deshpande (Consultant), James A. Hanson, SithaHariharan (Consultant), Richard Heaver, S.C. Jain (Consultant), S.J. Krister(Consultant), John Kurrien (Consultant), Dennis J. Mahar, Robert V. Pulley, R.Radhakrishna (Consultant), V.J. Ravishankar, Farhat Saiyed (Consultant), SunandaSengupta, Gurbaehan Singh (Consultant), Susan Stout, K. Subbarao, Margaret Sutton(Consultant), and Nargret Thalwitz. The report benefited from numeroussubstantive and editorial comments by David Greene.

Statistical and computing assistance was provided by Saj itha Bashir,Manisha Gupta, Nukesh Magoon, and Sunita Verma.

INDIA:

COUNTRY ECONOMIC MEMORANDUM 1989

Table of Contents

Volume I

EXECUTIVE SUMMARY & MAIN REPORT

Abbreviations

EXECUTIVE SUMMARY ............................................ I

A. Recent Developments and Macroeconomic Prospects .............. IS. Poverty in India: lncldence and Underpinnings .................... xC. Labor Force Growth and Agricultural Employment Prospects ....... . xliD. indusrial Policyand Employment ...... ....................... xvE. The Safety Not ...............Nt.. ......................... xviF. Socal Service Programs and Thelr Funding ... .............. ... xvillG. lmproving Management and Dlivery of Soclal Services ............. xx

Chapter 1. RECENT DEVELOPMENTS AND RACROECONOMIC PROSPECTS. 1

Introduction . ....................................... 1..... A. Recent Trends In GDP and Sectora Growth ..................... 2B. Elghth Plan Framework ..................................... 9C. Saving and Investment . ..................................... 10D. Public Finances .. ........................................ 14EL Pice, Monety, and Financlal Sector Developments .......... ..... 22F. Balance of Payments Developments ... . ... 240. Macroeconomnic Prospects .................................. 34

Chapter 2. POVERTY IN INDiALINCIDENCE AND UNDERPINNINGS ........... .. 41

A. Introduction . . .................. . 41B. Dimensions of Poverty .................... 44C. Some Underpinningsof Poverty ................... ............ 60D. Urban Poverty: Rising Numbers but Declining Prevalence .... ....... 72

Chapter 3. LABOR FORCE GROWTH AND AGRICULTURALEMPLOYMENT PROSPECTS .... . . . ... . ....... 79

A. Background ........... 79B. ProJectd Increa In Working Age Cohorts . . 79C. Agricult-iral Employment Prospects ..... .81D. Land, Water, Research and Extenslon Pole .. .87E. Rethinking IRDP . .91F. EsabiIshing aSaety-Nt Some Options . .99

Chapter 4. INDUSTAIAL POUCY AND EMPLOYMENT .104

A. Background ............................. 104B. Recent Manufacturlng Employment Trends .105C. Disincentives to lndustria Employment Growth .109D. Options for Accelerating Employment Growth

In Indian Manufacturlng .114

Chapter 5. SOCIAL SERVICE PROGRAMS AND THEIR FUNDING. 118

A. Introduction .... 118B. Socai SerAtce Spending Pattems ... 123C. Educaion Outays .. ...... .. 124D. Health Expenditures . . . .128

E. Overvlew and Options . .. .. 132

Chapter 6. IMPROVING MANAGEMENT AND DEUVERY OF SOCIAL SERVICES ... 135

A. Structure of Delivey Systems .. 135B. Health .. 138C. Fanily Planning ................. 145D. ICDS ...... 150E. Basi Educatlon ............................ 154F. Common Features and Challenges ............................ 161

ANNEX

A Study of the Bomnbay Labor Market ........................... 164

Annex Tables wo Volume I

BIBUOGRAPHY

Volume II

STATISTICAL APPENDIX

Ust of Text Tables and Figures

TlAWn

CHAPTER 1 Pa6 e No.

1.1 Real GDP Growth Rates and Value AddedIn Major Sectos ......................................... . 2

1.2 SavingandInvestment ...................................... 121.3 Accountlngforthe CentralGovemment'sDeficlt .................. 171.4 lnfbaton mnd the Growth of Financial Assets ............ .......... 231.5 Balance of Payments, 1980/81-1988/89 ...... ................... 251.6 Key Economic Varlables ................. .................... 271.7 Import Composlon ......................................... 301.8 Financing the Current Account Deficit, 1985/6 to 1987/8 ..... ....... 331.9 Balance of Payments, 1986/87-194/95 .... ................. 37

CHAPTER 2

2.1 Monthly Per Capita Expenditures In Rs. Current andConstant (1970)Prlces,Indla1970/71-1983 ....... ............... 45

2.2 Average Per Capita Expenditure In the Lowest TwoDoelles for Dffeuent Rural Occupatlonal Groups ............... ... 47

2.3 Nutritional Status of Children (1-5 Years) In theSelected States by Weight-For-Age ...................... 51

2.4 Percentage of Malnourished (Grades III + IV) ChildrenIn ICDS Projects by Caste Status, 1981 ........ .................. 52

2.5 ProportIon of Aduiht (Age 15+) Literate by IncomeQulntile for 8 Major States In Indla, 1983 ....... ................. 55

2.6 ProportIon of Children Ages 5-14. Currently AttendingSchool by Income Qulntle for 8 Major Stwes In India 1983 .... ...... 55

2.7 ProportIons Attending School In the 5-14 Age Group byHousehold Income Level Six Andhra Pradesh Districts, Rural, 1986 .... 56

2.8 Proportions Below Poverty Une In Different RuralOccupational Groups ........ .. ............. .. .. . 60

2.9 Average Monthly Per Capita Expenditure for WifferentLand Holding Groups, 1983, In Six Rural Andhra Pradesh DIstricts ..... 67

2.10 Growth In Metropolitan Ctes ....... ......................... 73

CHAPTER 3

3.1 Estimated and Projectd Young Adult Population(Ages 15-29) In Dffdrent Years ................ .. ............. 82

3.2 Sectoral Labor Force Shares ................................. 853.3 Measures of Success for IRDP . ................................ 933.4 IROP Retention In Uttar Pradesh ...... ......................... 94

CHAPTER 4

4.1 Decomostiton of Employment Growth In Manufacturlng ............ 1064.2 Elmated Labor Demand Funptons 1974/75-1984/85 ............... 1084.3 Effectlve Protoctlon of Manufacturing Industries .................. 111

CHAPTER 5

5.1 Child Moraity by Educational Level of Mother, 1981 ............. 1215.2 Expendfture and Real Growth of Schools ..... ................... 1265.3 Compostion of Educatlon Expenltures ....... ....... 1275.4 Inter-State Comparlson of Lseath Expenditure .................... 1295.5 Central Grants to States (Health Sector) ......................... 1295.6 Changing Composlton of Health Expenditures .............. 1305.7 West Bengal: Rural Component of Health Sector

Expenditure ................. ............................. 1315.8 Composftion of Expenditure on Water Supply and

Santaton .............................................. 132

CHAPTER 6

6.1 Seventh Plan: Primary Heath Care lnfastructure ..... ............. 1396.2 Health Officer Vacancies .................................... 139

ANNEX

IA Monthly Per Capita Expenditure by Ste and RegionIn the Lower Four Dectles, Rural, Current Prices, 1983.

15 Monthly Per Capita Expenditure by State and Regionin the Lower Four Deciles, Urban, Current Pri¢es, 1983.

2 Average Monthly Expenditure In the Lower Four Deciles,by State, Rural and Urban, 1970/71, 1977/78, and 1983.

3 Distribution of Rural Regions by Ra1 Wage Brackets(1970/71 Prices) for Mdes.

4 Distribution of Rural Regions by Real Wage Brackets(1970/71 Prices) for Females.

5 Distribution of Regions by Trend Growth Rates InReal Wages, 1970/73 - 1982/85.

GA Proportions and Numbers Below Poverty Une by Stateand Region, Rural, 1970, 1983, 1988.

68 Proportions and Numbers Below Poverty Une by Stateand Region, Urban, 1970, 1983, 1988.

7 Selected Charmcteristics by State.

8A Wage ana Sdaay Eamings, By Industry, Rural and UrbanAMutt (Ages 15-59) MAdes, 1983, Ra. per Day.

8B Wage and Salary Eamings, By Industry, Rwal and UrbanAdult (15-59) Males, (15-59) Females 1983 Rs. per Day.

3-1 Statewise Comparison of IRDP OLordues.

5-1 Per Capita Revenue Expenditure on Social Services, bystate 1980181 Prices, 1976/77 - 1986/87.

5-2 Per Capita Revenue Expenditure on Education, by State 1980/81Prices, 1976/77 - 1986/87.

EXECUTIVE SUMMARY

1.1 Foodgrain Production and Rainfall ............................. III12 Central Govemment and Public Sector Savings ................. IV1.3 Central Government Receipts and Expenditure.. v

CHAPTER 1

1.1 Foodgratn Production and Rainfall . . . 412 Growth Rate of Manufacturing GDP ... ......................... 61.3 Central Govemment and Pubiic Sector Savings ................... 131.4 Central Government Deficits .......... ... .................... 15

CHAPTER 2

2.1 Average Rurnd Monthly Per Capita Expenditure In theLowest Two Deciles by Region ................. ............... 46

2.2 Real Wages: Male Labor ..................................... 482.3 Real Wages: Femati Labor ................................... 492.4 Monthly Per Capita Food Expenditure In the Lowest

Two De¢le by Reglon, Rural and Urban, 1983 ................... 512.5 Estimated Infant Mortality Rates by Region, Rural

1976 and 1985, and Urban, 1985 .............. * ......... . 532.6 Proportlon of Rural Population Below Poverty Une ............. .... 592.7 Numbers of Rural Population Below Poverty and Ura-

Poverty Unes ....................................... 592.8 Agricultural Wages and Productivly-1984185 .... ................. 822.9 Total Fertilii Rates by Region In 1971 and 1981 .............. .... 72

CHAPTER 5

5.1 Per Capita Revenue Expenditure on Social Services ............... 12352 Per Capita Revenue Expenditure on Education ... ................ 125

CHAPTER 6

6.1 Social Service Delivery Arrangements In Rural Areas . . .... 136

ABBREVIATIONS

ASCI Adminlstrative Staff College of IndiaASI Annual Survey of IndustryAWW Anganwadi WorkerBIMARU Bihar, Madhya Pradesh, Rajasthan and Uttar PradeshCB Commercial BankCDPO Child Development Project OfficerCES Concurrent Evaluation SurveyCESS Center for Economic and Social StudiesCHC Community Health CenterCIL Coal India UmitedCMDA Calcutta Metropolitan Development AuthorityCOWDEP Comprehensive Watershed ). evelopment ProgramCPI Consumer Price IndexCPR Common Property ResourceCSO Central Statistical OrganizationCVD Countervailing DutyDA Dearness AllowanceDIET District Institutes of Education and TrainingDRDA District Rural Development AgencyDRS Debt Report System (of the World Bank)EGS Employment Guarantee SchemeFERA Foreign Exchange Restriction ActGDP Gross Domestic ProductGOI Govemment of IndiaHAF Female Health AssistantICDS Integrated Child Development ServicesICRIEAT International Crops Research Institute for the Semi-Arld TropicsICOR Incremental Capital to Output RatioIEC Informatlon, Education and CommunicationsIPRS International Price Disbursement SchemeIRDP Integrated Rural Development ProgramIUD Intra Uterine DeviceJWN Jana Shikshan NllayamKAP Knowledge, Attitudes and PracticesLR Land ReadjustmentMCH Mother and Child HealthMIS Management Information SystemMNP Mlnimum Needs ProgramMO Medical OfficerMODVAT Modified Value Added TaxMLT Medium & Long TermMPCE Monthly Per Capita ExpenditureMPW Multipurpose WorkerMPWF Multlpurpose Worker FemaleMPWM Multipurpose Worker MaleMRTP Monopoly and Restrictive Trade Practices Act

()

MS Mukhya SevikaNABARD National Bank for Agriculture and Rural DevelopmentNAEP National Adult Education ProgramNCAER Natonal Council of Applied Economic Researc.NCERT National Council of Educational Research and TrainingNFE Non-formal EducationNGO Non Government OrganizationNIPCCD National Institute of Public Cooperation and Child DevelopmentNRI Non-Resident IndlanNTPC National Thermal Power CorporationNLM Natlonal Literacy MissionNNMB National Nutritional Monitoring BureauNPE National Policy on EducationNREP National Rural Employment ProgramNRR Net Reproduction RateNSS National Sample SurveyNUC National Urbanization CommissionNV Navodaya VidyalayaOB Operation BlackboardOGL Open General UcencePDS Public Distribution SystemPHC Primary Health CenterPL Poverty-linePOL Petroleum Oil & LubricantsPPS Pre-primary SchoolRBI Reserve Bank of IndlaREP ReplenishmentRLEGP Rural Landless Employment Guarantee ProgramRRB Regional Rural BanksSAS Service Area SchemeSC Sub-CenterSCERT State Councils for Educational Research and TrainingSEB State Electricity BoardSSEP Small-Scale Enterprise ProgramSSi Small-scale IndustryT and V Training and VisitTFR Total Fertility RateTISCO Tata Iron & Steel Company Ltd.TRYSEM Training for Rural Youth for Self EmploymentUEE Universal Elementary EducationUIP Univeroal Immunizatilon ProgramUPE Universal Primary EducationVHG Village Health Gu4e

s-&=zas I*&--N X17- 3m-

L u g mu Ha- aS

aI t tKst Irie a. 100.6 3.2 3.9 2.9 4.0 5.4 5.2Cross stic 1wrotina 51.35 22.5 6.2 2.6 5.2 3.5 4.5 5.1

Cgss 3inl gayia 52.62 20.7 6.0 4.6 5.3 5.1 4.0 5.00.mant Act B.1lm 4.55 1.6 - - - - - -

1- 1 b 1 D *"1~~~~~~~~~-

Arlt 5. .0 12. 70.* 341 55.9Ioduy 40.1 25.9 1.6 12.9 12i6 200.3Sewi l 55.9 36.1 40.5 16.5 1367 219.1totalAwaxaga 154.9 100.0 24.6 100.0 653 100.0

.~~ o&, f 068 h. IJia. 2 dofN39W7WlF 19m714 19f34 t1$l 17l9sl

91711

Darrant _ cipts 615.49 20.4 19.5 353.06 11.6 10.6Darreat p enditnr 114.14 23.4 21.6 466.04 14.1 12.9carrnt l0nj8DafIAit -1w-.25 -5.1 -2.2 -64.96 -2.6 -2.0Capital itre M 6.0.21 1.3 1.6 195.67 5.9 6.2

tetozol Aistsia (nat)fl 26.19 0.6 0.7

W. MnM A PRIn 2 fZI MLML hs A 85M M6M MM6 I NW(as. Sullcm ent a-sdin *t eod of pawl")

3gm.7 d qasi 1ini at 109.6 224.0 351.7 726.1 860.9 1023.6 1166.8 1407.1 l15.4 1918.1Dan Crdt to _ovst (Cat) *1 54.6 106.5 251.2 552.6 406.4 502.S .2 720.2 843.7 973.5

Cret to Cinrlal Sctoer St 64.6 156.2 566.4 511.6 e00.3 109.5 82m.0 947.4 1074.9 1294.0

(Fe"Mnag Of _Ama eA)

_AMY an 1 Q en a of 6 D 21.5 50.3 4. 41.0 41.6 44.4 45.2 48.0 49.4 49.911Lesle Prie Index (1970J711100) 100.0 115.0 251.5 286.1 316.0 336.4 551.8 11.1 4*05.2 433.4

Annual Percentage ehmasa Inssllbole PrIcs Data 7. -1.1 1i.2 2.6 9.5 1.1 5.1 5.4 1.4 1.0

-ak Celdt to _ t (t) of 15.0 22.7 28.5 15.1 15.3 25.6 16.1 2S.5 17.1 15.4ank Crdit to GOiarl S-etor go 19.4 22.7 16.2 17.7 1.? 16.6 16.7 14.4 13.4 20.4

The per capita - estimata is at mzkat primc. asiag bu1g awk Atla aatbod@lcy. Other c.awrsLuaw to dollarsin this tabe ae at the prewailn svirgs mhmg rate fr tha priod .

bi Quick tl_te. Cental Statistial OrgasatiLc.cJ Total Laber era e t Wen bdoma fn_ 1961 Censu. 1lidas data for Asam.di Tansf t n tr S bae bean antted out.

A*1l1 lorTIand _ ed ema tO tIL-CO partls h1o be_ aittd t.fJ world seek esticos of not dt bursemnt of offiia lowns.

4 lars for 88169 ar pralmimrl estintes baed an provisiol data fr last Fridas of 6116 6ad U 169.

ElMIC DEIELOPNEUT DATA

661. Or PAYIWIT 19/ S6 9/7 19M7/S 106/869 *RCIUIU ErTS (AVERAGE 1964/83-87/8B) h/

(CJS NUlh) S/ (CUSS mll t.) (X)

ExlporV of Good h/ 946 10460 tOU 14824 Tn 516 4.8lworts of cood h/ 17M 177 19772 22760 Irn Ore 427 4.0Trad Barnt -78314 -7268 -614 96 Chemicals 476 4.5UPS (not) 1111 9g2 1100 1056 Lather ad Lesther Products 701 6.6

Tetiles 11C9 11.2

Resource stance -673 -6276 -5764 -6MG0 Gants 1030 9.7.....-.----..- G_N 14?7 13.9

EnWineering Goads 694 6.4Others 3935 37.0

Interest In_me (ewt) bl -3368 -2976 -1877 -2162Net Tramfrs e/ 2198 2261 2674 3223 Total 1064S 100.0

Balance on Current Acouont -SS66 -s237 -4SS1 -5385, ........................

EXTERHUL DEBT, MARCN 31.1986

Direct Investment 160 208 2S1 299 CUSS billion)Officiat Lean & Srsnt (nat) 1770 1680 2471 3047 Outstanding nd Disbursed 40.77Gross Disbursements 246S 280m 3820 4388 Undisbursed 21.59Amortization 693 970 1349 1341 Outstwnding Inct. Utdisbursad 1/ 62.36

Private borrowings (net) 1427 57 144S S10Von-Resident DeosIts 1176 1308 1274 1520Transaction uIth 1KV (not) -209 -520 -931 -1071 OET SERVICE RATIO FOR 1987/88 e/ e 27.7 XAll other Iteme f/ 1315 2164 -296 -326 ------------------------------------Errors awo C issias 474 -101 - -

Increase In Reserves -) -S47 -73 339 1406Gross Reserves (cod year ) g/ b6S7 6730 6391 4985 tBRD/IDA LENDING. MARCH 31, 1988Net eserves (ad year) dV 2367 2436 2739 2S68 ----------------------------------

IBRD IDA

Fuel ad Related haterials CUS million)................... .............. _ Outstanding and Disbursed 4661 1161S

lports (Petrolae) hi 4054 2187 3148 278 Undisbursed 7052 4518of which: Crude 3013 1672 395 169M outstanding inct. Undisburesed 11713 16133Products 1041 515 7S3 860

RATE OF EXCNAGE_

Jw's 1966 titl U#1.00 a RS..7.5O After end-Jure 1972 Floating Ratedid-Decber 1971 Re,1.00 a US$0.13333

Spot Rate end-Narch 1989 U#31.00 * Rs. 15.641Smid-Oeca_fr v 1 till U#91.00 * Rs.7.279' Re.1.00 a USt 0.0639end-Juns 1972 Re.1.00 1 US0.137376

….......................................................................................................................

a/ Estfmtedbi Figures given cover all invtment mncm (net) . Major paymnts are interest on foreign loans and

ad chargs to IMF; nd mjor receipts are interest earned on foreign assets.,c/ Fires given inciude workers remttan but exclude offIcial grant assistance which is included within

official loas nd grants. nd non-resident depositr ihich are shwAn separately.d/ Exclude not us of INF credit.*/ Mrtization ad interet psyments on foreign lons os a percentage of total current receipts.f/ Inctude resve valuation changes, short-tar. capital and finanming of ictalances in rupee trade.g/ Excluding gold.h/ Not of crude petrols. oil exportsi/ Includes RUF

1988 SOCIAL INDICATOR DATA SHEET

INDIAReference Groups (NRE)

MostRecent Lower mid

196S 1975 Estimate Low-Income income

AREATotal land area (thou sq km) 3,287.6 3,287.6 3,287.6Agricultural (% of total) 53.9 55.0 55.0

OWP PER CAPITA (current USS) 100 160 300 280 730

POPULATION AND VITAL STATISTICSTotal population (mill) 487 613 797Urban pop. (% of total) 19 22 26 28 38Population growth rate(%):Total 2.3 2.2 1.9 2.5Urban 3.7 4.0 S.7 4.2

Life expect, at birth (yro) 45 50 87 S1 59Population projections:

Pop. in 2000 (mill) 1,002Stationary pop. (mill) 1,700

Population density per sq kmof agricultural land 275 339 415 349 404Pop. age structure (%):0-14 yro 42 42 40 37 4218-64 yrs 54 F5 56 59 556S and above 4 3 4 4 3

Crude birth rate (per thou) 46 37 32 30 35Crude death rate (per thou) 20 15 12 10 10Total fertility rate 6.2 5.3 4.4 3.9 4.7Infant iort. rate (per thou) 1S0 130 86 72 76Child death rate (per thou) 23 19 ii 9 IIFamily planning:Acceptors, annual (thou) 2.985 7.009 6.826Users (% of married women) 19 35

FOOD. HEALTH AND NUTRI fIONIndex of food production percapita (1979-81 a 100) 90 101 111 tS Jo0Per capita supply of:Calories (per day) 2.100 1.925 2.116 2.327 2,507Proteins (grams per day) 53 47 51 55 a6

Pop. per physician (thou) 4.9 4.9 :.7 5.0 7.5Pop. per nurse (thou) 6.8 3.7 4.7 4.0Pop. per hospital bed (thou) 1.7 1.3 1.1 1.1Access to safe water

(% of population): Total 31 84Urban o80 8Rural 18 47

Population Growth Infant Mortality Primary School EnrollmentU3..

3- ~ ~ ~ ~ ~ ~ .

0 0

*§U-t 1t7|-lt 160 170 15O i.sO 1iP0 1§|0m INDIA INDIAco nIrS 3r OROUP * cw .JtQ?

1988 SOCIAL INDICATOR DATA SHEET

INDIAReference Groups (MRE)

MostRecent Lower mid

1965 1975 Estimate Low-income income

L1ASR FORCETotal Labor Force (thou) 206.872 243,481 299.144

Female (%) 31 28 26 34 29Agriculture (%) 73 71 70 66 55Industry (%) 12 13 13 14 16

Participation rate (%)Total 42 39 39 47 37Male 56 54 55 58 51Female 27 23 21 35 23

Age dependency (%) 85.6 82.8 77.6 71.6 82.7

HOUSINGAverage size of household:

Total SUrban gRural 5

Percentage of dwellings withelectricity:

TotalUrbanRural

EDUCATIONEnrollment eates:Primary: Total 74 79 92 99 104

Male 89 94 107 110 109Female 57 62 76 87 99

Secondary: Total 27 26 35 34 42Male 41 36 45 41 47Female s 16 2a. 25 36

Pupil-Teacher ratio:Primary 42 42 58 39 31Secondary 21 21 23

Pupils reaching grade 6 (X) 40 72

INCOM,E CONSUDTION, AND POVERTYEnergy consumption per cap.(kg of oil equivalent) 128 201 327 351Percentage of private incomereneived by:

Highest 10% of households 33 34Highest 20% 49 49Lowest 20% 7 6Lowest 40% 17 16

Est. absolute poverty incomelevel (USS per capita):

UrbanRural

Est. pop. below absolutepoverty Income level (X)

UrbanRural

Passengeer cars/thou pop. 0.9 1.2Newspaper circulation(per thousand population) 13.0 15.3 19.8 32.0 43.5

IECSE August 1988FMt awallobj5 . 1: g5W mg ot popubl dio and GtIP per calta stet 15? unls otewiss notd.

oup aveee so populetion td. Country caeyg depends co date vavl-bilty and is not unifom. Unless otbewtss note&IM ago to any Vesr betwen IM and 1St IM6 belween 1972 and ISM and most entmate betwemn 10 and 196M.

Definitions of Social Indicators

Despite recent iprovements in international ifsheweretobearcidrenateachageIaccordancecompabity, definitions of soial indicators may with pxevailln agepedfic fertility rates.still vy from coty to country or frowm period to I1fn mortality rate-Number of Infats perperiod. These data should be used with caution. thousand live birtbs, in a glven year, who die beforeArna reaching one year of age.

Child death rate-Number of deaths of children, ageToalI-Total urface area in thousands of square 1-4,per thousandWildreninthesaneagegroup,inkilonters,ompsing 1and area and inland wates a given year.Agdcutua-Bsimate of arculra area used for Famiy pl:nning accetors-Annual number ofcrops, pastu, market and kitchen gadens or aceptrs of bih ctrol measures receved underlying falow, as a perntae of total area. theauspiesof anationalfamlyplannl.g program.Gnpper Capita Faiy plamdng uan-Percntag of maried

Gup ~U ClitP P women of childbearing age who are practicng, orGNPpercapitaestmatesforl987atcwTentmarket whose husbands are practicing, any form ofprires in US dollars, calculated by the conversion contracepion. Childbearing age is genealy 15 tonmehod used for the World Bank Atla. Because they 49, although for some countries contraceptiveusageare not ,Punded, these figures differ marfially is measured for other age groups.from tose in other Bank publicoations. Food, Health and Nutrition

Popuwnum and Vital St4tIStlca Index of food producion per cat a-Index of perTotalopop tion-World Bank estimtes for 1987. capita annual production of al food commoditieUrban popubao-COUntis use different Production excludes animal feed and seed fordefitions of urban popuration, which may affect agriculture. Food commodities include primarycomparablity. commodites that are edible and contain nutrientsPopulaton growth rate-Annual leastsquares (for example, tea and coffee are exduded). Theygrowthratesesdmated md-yearfortotalandurban indude nuts, fruits, pulses, ceals, vegetables, oilpopulaions, 1965-75, and 1975-87. seeds, sugrane and sugar beets, livestock, and

eepectanyatbirth-Numberofyearsanewborn livestock products Aggregate production of eachIant would live if prevailn pattems of mortality country isbasedonnational average producer priceat the time of Its birth were to stay the sam weightstroughout its life. Peracqpt suly ofcalo -Computed frm nergPopulapin in 2000-PMjected on the basis of total equivalent of net food supplies available in apopulation, age and sex disubution, fertlity, country, per capita, per day. Available suppliesmlration,andmortalty tesinthebaseyearl980 comprise domestic production, imports lessStatonay popukla-Projected population leve exports, and changesinstockL Net suppliesexcludewhen zero population growth is achieved. ie., the animal feed, seeds for use in aicture, and foodbirth rate Is constant and is equal to the death rate, lost In processing and distribution.the age structure is stable, and the growth rate is Per apita spl of protein-Protein content of perzero. capita net supply of food per day. Net supply ofPopulton density, qrcultund land-Popultion per food is defined as above. Requhim ts for allsquare kllometer (100 hecaes) of agricultural area. countries, estbised by United States DepartmentPopulation age structure -Children 0-14 years, of Agricuture, provide for minimum allowances ofworking-age group 15-64 years, and people of 65 60 grams of total protein per day and 20 grams of-ears and over as percentages of popuatlon. aninal or pulse protein.Crude birth rale-Annual Ihve births per thousand Popultinperphyskica-Populatioondivdedbythepopulation. number of prctng physicians qualified fomaCrude deah rate-Annual deaths per thousand university level at nmdical schooL Note that thepopulation. definition of recogniaed medical practtonersTotlfriy rate-Average number of Children that differs n counthies.wouldbebornlivetoawomndulngherHfetme, Poulaton per nuing pwon-Population divided

by the mber of practidng graduate nurees,

asistant nura, pctical nurses, and nurdng groups. For some countries with universalau,d1laries. education, gross enrollment wll exceed 100 percentPopulaion per hotl bed-Population divided by if some pupils are younger or older than thethe number of hospital beds available in publc and countrys own standard primary school age.povate, gene and spealized hospitals, and Seodary sdooenrollmr ent-Computed in the sam

habiltation center Hospitals are establismnts manner as primary enrollment ratio; the age grouppermnently staffed by at least one physiian, again varies but is usualy 12-17. The ratio is forAccs to sot water-Percentage of people with ger secndary school enrollment and excludesreasonable access to safe water supply (includes pupils in vocational or teacher training secondarytreated sufce waters or untreated but schools..Theflguresshownaredifferentfromthoseunontauinated water such as that from springs, published in earlier reports, which included pupilssanitary wels, and protected boreholes). In an enrolled in more spealized secondary education.urban area this may be a publc fountain or Pupil-teacher rto-Total nrmer of studentsstandpost ad not rmore than 200 meters away. enroled in school divided by the total number ofIn rural areas it Imnples that mebers of the teachers.household do not have to spend a diprop tonate Percetage of pupi reching grade six-Thepart of the day fetchng water. The defindtion of percentge of children startng primary school and"safe has chauged over tmconnuing until grade six; based on enrollmentLaborForce records. The end-of-year data are affected by

repeaters and re-entrans trying to obtain schoolTotal labor Pre-o1he -ewnomicaly active," leaving and quallfcatior. certificates.population including armed forces and Jixie, Consumption, and Povertyunemployed but excldng homemakers,cregivers, and students. EneW conuption-Annual consumption ofFmarle-Female labor frce as a perentage of total commercial primary energy (coal, lignite,labor force. petroleun, natural gas, anri hydro, nudear, andAgrulture-Labor force in fann foresty, geothemal electricity) in kilograms of oilhunting, and fishing as a percnbtge of total labor equivalent per capita.fore Incomedislribution-ncome (both in cash and kind)Particption mre-Perentage of population of all accrungtopercenilegroupsofhouseholdsrankedages in the labor frce, based on RD data on the by total household income. In some cases statisticsasex stucue of the population. obtained from other agencies are revised by BankAge dpwdency rutiotatio of population under 15 staff.and65andover,totheworkdnageapopulation(age Passenger ca-Private motor cars seating seven15-64). people or less, per thousand population.Housing Newspaper circubtion-Average circulation of a

"daily, general iterest newspaper," defined as aAveragize of household-A household consists of a news periodical publshed at least four tfmes agrup of individuals who share ving quarters and weekmain eals. Estimaed absolute poVty inme el -The levelPewentageofd dwingswOtdatric47th onventional below which a minimal nutritionally adequate dietdweings with electricity in Hlivii quarters, as a plus essential nonfood requirements are notpeoreta of all dwellins affordable. These estimates are based on specialEducation surveys that, in rnost cases, are now almost 10 years

Prmay sool nrolment-Grms enrollment of aU Estmated population below absolute poe Icomags at primary level as a pemrnage of sdhool-ae levk-Pcta of utban and rra popuations whodhldrenasdefinedby eachcuntry and repored to live in "absolut0 poverty," mosly based on the surveysUnesco.Althughmanycounlsin derprlmary mentionedaboe.scool age to be 611 years, otners use different age

EXECUTIVE SUMMARY

A. Recent Developments and Macroeconomic Prospects

India's economy has performed well In recent years. The economyresisted 1987's drought well and Is likely to grow about 91 during the goodmonsoon year of 1988/89, putting the Seventh Plan's 51 p.a. growth target wlthlnreach. The steady lmprovement In Indla's performance Indicates the potenmialfor stlll higher growth. Thls would be hlghly desirable from the standpolnt ofpoverty reductlon, as dlscussed In the second part of this report. However,.-eallzing Indla's potentlal wlll entall pollcy action almed at underlyingstructural Issues, namely:

0 Reversing agriculture's recent slow growth (aside from 1988/89);O Increaslng competltlon and responslveness to incentives and upgrading

technology In the Industrlal sector, whlch In turn will entallcontinued domestic deregulatlon and ratlonallzatlon of tradepolicles, wLth emphasls on reduction of protectLon, exportprofltablllty and slmpllflcatlon of procedures; and

0 Reformlng the structure of public sector finances, by reducing thedependence on Lmport tarlff revenues, ellmLnatlng low priorityexpendltures, and improving effllency in the soclal sectors.

To provlde a sound base for sustained higher growth, actlon Is needed to reducethe twin deflcits In the balance of payments and the government budget,speclfically:

o e Stimulating hlgh real export growth - at least 101 p.a. - throughenhancement of export profltablilty and reductlon ln the high levelsof protectlon that currently hinder export growth. Tlght controlof domestlc demand also will be necessary to prevent dlverslon ofexports to the domestlc market. Faster export growth wlll be neededto pay for the Increased Imports necessary for rapid Industrialgrowth and to avold an unsustalnable build-up of external debt.

O Reducing domestlc flscal Imbalances further through strict 1lmltson the growth of current expendltures and measures to broaden thetax base and Lmprove the buoyancy of revenues. Improving fiscalbalances also wlll entall greater effllency and some streamliningIn the public enterprlses, so as to reduce the drag of the publicsector on the economy and realize an adequate return on the massireinvestments that have been made. These Improvements In publlcfinances wlll relleve pressure on Imports and exports and ensurereasonable price stability, while provlding a sound base forsustained hlgh growth.

Higher export growth and sm1ller flscal deficits, along with Increasedconcesslonal disbursements, will limit the growth In India's commercialborrowings to manageable levels; prudence recommends against using externalborrowings to offset any export shortfall or to stlmulate growth, In order toensure that debt service remains within sustainable limits.

1. In 1987/88, India weathered a severe drought with about 3.6% GDPgrowth. Agricultural output declined surprisingly little and growth in industry

ii

and services remained fairly high. This suggests that the economy has becomemore drought-resistant since 1979/80, reflecting the spread of irrigation andthe increased resilience of the non-agricultural economy to internal shocks.Using the widespread anti-poverty network, the public food distribution system,and its large grain stocks the Government, supported by the Consortium, ensuredthe availability of food throughout the country in 1987/88.

2. In 1988/89, buoyed by an excellent monsoon, GDP growth is estimatedat about 9%. Agricultural GDP is expected to grow by at least 12.5%. TheGovernment estimates foodgrain production will reach 170 mnt, a 23% increaseover 1987/88's 138 mmt. Industry sustained its recent strong performance, withan estimated 9% overall growth and 10% in manufacturing. Domestic deregulationcontinued in 1988/9 and imports of industrial inputs and capital goods reboundedfrom 1987/88's depressed levels. Indications are that private investment isincreasing rapidly. Power output rose about 9% with good rainfall fillingreservoirs and allowing a large increase in hydroelectric generation. Crude oiland coal output both rose by about 7%.

3. Viewed from a longer run perspective, the economy seems to haveshifted to a higher growth path. Trend growth for 1976/77-1986/87 was 4.4% p.a.,versus 3.4% p.a. for 1962/63-1975/76. The 7th Plan (1985/86-1989/90) growthtarget of 5% p.a. now appears well within reach. In manufacturing, the growthrate since 1982/83 has averaged over 8% p.a., nearly double the average of theprior twenty years. The increased growth in manufacturing was achieved withlittle or no rise in either the rate of investment or employment growth. Thisimplies a substantial improvement in the productivity of capital and labor andrepresents a sharp change from the 1960s and 1970s, when factor productivitygrowth was negligible.

4. The economy's recent strong performance indicates the potential forhigher growth and has encouraged the Planning Commission to opt for a 6% p.a.growth target for the 8th Plan. This higher growth would be very desirable fromthe standpoint of poverty reduction. However, increasing sectoral growth rateswill require policy action aimed at structural issues. More importantly, changesin structural policies must be coordinated with improvements in the Government'sfinances and in export performance, in order to provide a sound foundation forsustained high growth and to ensure reasonable price stability and a viablebalance of payments. The minimum fiscal policy target should be elimination ofthe Central Government's dissaving (2.9% of GDP in 1988/89), as recommended bytl'e 9th Finance Commission, the Planning Commission and the Finance Minister,along with a corresponding reduction in the deficit. Real export growth at least10% p.a. would be necessary, in addition to faster growth of concessionaldisbursements.

5. Despite the economy's recent good performance, growth in key sectorscannot be taken for granted. Growth in agricultural GDP in the period 1984/85-1987/88 was much below the long run average. Although foodgrain output roseabove the trend line in 1988/89, it was only slightly higher than would have beenpredicted from past responses to good monsoons. The true test of whetheragriculture has stepped up its recent sluggish pace will come only when rainfallreturns to more normal levels. Measures are needed to improve efficiency in

iii

Figure 1.1

268 FM rainindic FOODGRAIN PRODUCTION Pro geAND RAINFALL RIrma

198 - grainprod )4 w f _

148 -- eaurain _140

1408- graintrnd 7 .*Z

indeax Trend ji Foodgra in(Sept. ls. ,n(2.5:8 p.a.) Production

686970717273 4M67898188888888Indian Fisal Years

constructing new irrigation systems and in managing the old ones, includingbetter collection of water charges. Rainfed irrigation can benefit from betterdissemination of existing techniques for moisture conservation and soilpreparation, and from a redirection of the research and extension system to itsneeds. Attention is also needed to wasteland development and resourceconservation. Agricultural price and subsidy policies need a thorough-goingreview, not only from the standpoint of their impact on individual crops andincome distribution, but also from the standpoint of overall efficiency andfiscal burdens. For example, what will be the impact of the support prices inthe new edible oil buffer stock program, which are several times aboveinternational levels? It seems likely that they will raise the already highdomestic prices of oilseeds substantially. This in turn could divert cultivationfrom cotton and wheat, generating a potential net loss of foreign exchange inaddition to the fiscal burden of tne buffer stock.

6. Maintenance of rapid industrial growth will depend on continuationof the domestic deregulation process and on incentives to encourage rapid growthof manufactured exports. Moreover, lower protection would be desirable, not onlyto improve access to the imported capital goods and inputs needed forproductivity growth, but to increase competition in sheltered domestic marketsand to provide a better environment for exporters. This reduction in protectionwill need to be coordinated with tight control of the public finances, and activeexchange rate management, to avoid an unwarranted import boom.

7. Labor market and industrial exit policies also need attention. Therise in industrial growth in the 1980s appears to have had limited employmenteffects. The current defensive strategy of preserving and providing benefitsto existing job holders and firms seems to have raised explicit and implicitlabor costs and thereby worsened the overall environment for employment growth.

iv

This policy framework also has discouraged entry into new domestic product linesand into exports, where markets are uncertain. By making exit difficult andproviding benefits to 'sick' firms, industrial policy has unintentionallycontributed to "sickness'. Subsidization of sick firms also harms healthy firms,by preempting part of their potential market (See paras 45-50).

8. The energy sector also presents some challenges. Preliminaryprojections suggest some 38,000 MW of new power generating capacity will beneeded in the 8th Plan, costing about US$50 billion when ancillary investmentsare included. Investments of this magnitude will stretch financing and projectexecution capacity to the limit. Hence, attention is being directed towardimproving efficiency in investment and generation and conserving energy. Thiswill involve relying more on efficient entities like the National Thermal PowerCorporation (NTPC), upgrading State Electricity Boards, and making investmentsto cut distribution and transmission losses. In addition, the Government isconsidering options for private sector power generation. In coal mining, actionis needed to improve productivity. In oil, the prospect is for demand toincrease faster than domestic supply, since production in the main producingfield (Bombay High) is peaking and there have been no major finds in recentyears. Thus, imports are likely to increase. Natural gas, whose reserve andproduction potential have been growing rapidly, will be used increasingly forpower generation as well as for feedstocks and fertilizer production.

9. Turning to monetary and fiscal policy, macroeconomic imbalances needfurther correction in order to reduce the pressures on imports and exports,ensure reasonable price stability and provide a sound base for economic growth.According to the 9th Finance Commission, "The fiscal scenario in the country hasgradually deteriorated to an alarming extent and corrective steps are required

Figure 1.2

CENTRAL GOVERNMENTAND PUBLIC SECTOR SAVINGS

I, GDPmp(rev)

4.8 4o.5 42 340 ||1-__-.------ 4 ............- -.................... .................. 2- ~ ..... .

-0.6 -0.- -0.7

4-77 78 79 80 81 82 83 84 85 86 87 88 89 90

Indian Fiscal Years

Public Sector =Central Govt.

v

now to reverse the deteriorating trend and create conditions for the restorationof health to the financial system.' The deterioration began in the early 1980s.Central government expendit a, particularly current expenditures excludinginterest, persistently gre'-6 ter than relatively buoyant taxes. Defense,subsidies, administrative as, and grants to the States all grew fasterthan GDP, as did loans -.i States and Public Enterprises. Capital anddevelopmental spending and Central Government support for the Plan have all grownslowly in recent years.

Figure 1.3

x of CENT GOVEIITGDPp RECEIPTS AND rEDInnR

25.0e.

28,8 ~~~~~bexndituz'e

s.e~~~~~~~~~~~~.

58.0

INDIAN FISCAL YR Proj.

10. In the last two years some progress was made in controlling thedeficit and the 1989/90 Budget promises further improvement. In 1987/88 theCentre held its deficit roughly constant in nominal terms, which meant areduction in the deficit: GDP ratio, from 9.4% to 8.4%, because of nominal GDPgrowth. However, this reversal of the previous trend reflected mainly areduction in developmental and capital expenditures. In 1988/89 the deficitremained roughly constant as a percentage of GDP, with revenues, current spendingand capital spending all rising at about the same rate as nominal GDP. In both1987/88 and 1988/89, budget support for the Plan, in particular the Central Plan,grew slowly; Central Plan expenditure targets were met by greater reliance onthe public enterprises, including much larger than planned borrowings.

11. The 1989/90 Budget envisages a large improvement in the Centre'smacroeconomic balances, with the deficit programmed to fall to 7% of GDP anddissaving reduced to 1.7% of GDP. This improvement would be derived from heavier

vi

taxation of the modern sector and restraint on spending, particularly capitalspending. Excise taxes on iron and steel and consumer durables were raisedsubstantially, and excises on other non-essential commodities were also increased5%. Tax rates on profits and higher income individuals were raised slightly.Duties on capital goods were rationalized and some relief was given to thecapital goods industry and small scale firms. Overall, however, the p-ojectionsof increased revenues from the tax changes may prove optimistic. On theexpenditure side, current spending is budgeted to rise 10%, with defense spendingto decline and subsidies to rise only 8.5%. These proposals are desirable butmay prove difficult to sustain. Capital spending is budgeted to rise only 4%.The limitation on capital spending repeats the approach taken in 1987/88, which,if continued, could eventually have an adverse effect or growth. Central Planexpenditures are programmed to rise by 14% but almost the whole increase is tobe financed by the public enterprises. If the past is a guide, the publicenterprises are likely to fall short of the target for growth in internalresource generation (57%) and be forced to borrow substantially more than plannedin order to fulfill the investment target. In sum, the programmed reduction infiscal imbalance is welcome from the macroecan.mic standpoint but may provedifficult to realize, and the continued restriction on capital spending .nayhinder future growth. There also remains substantial zoom for fundamentalimprovement in the incentive aspects of tax policy. This would involvebroadening the base of direct and indirect taxes and reducing marginal rates,reducing the current heavy reliance on customs and excise taxation of a fewindustrial inputs and capital goods, and further moving away from the numerousspecific excise taxes toward a standard valu6 added tax at all levels. Thereis also substantial room for efficiency improvements and streamlining in thepublic enterprises, which would reduce their drag on the economy and generatean adequate return from the massive investments that have been made.

12. Inflation in 1988/89 was 6.3% in wholesale prices and about 8% inconsumer prices, somewhat less than 1987/88. The normal seasonal downturn inprices occurred later and was less than might have been expected given the goodharvest. These deviations from the usual patterns reflect some microeconomicfactors, such as rebuilding of stocks and rising administered prices, as wellas the rapid growth of aggregate demand last year.

13. Last year's performance continues India's record of less-than-doubledigit inflation. Although the large and growing Central Government deficits anddeclining public sector saving of the 1980s were potentially inflationary, thispotential was largely offset by the simultaneous growth of private financialsaving. The public sector tapped the private financial sector saving directly,through sales of instruments bearing attractive interest rates and tax benefits,and indirectly, through financial intermediaries that acquired government debtvoluntarily or involuntarily, to meet reserve and liquidity requirements thatnow amount to 49% of bank deposits. The process through which the public sectorabsorbed private saving also has created some strains in the financial system,in terms of limiting its ability to provide credit to the private sector andraising the cost of such credit. In addition, the financial system suffers froma problem of growing arrears, which now represent over 10% of bank credit toindustry and 46% of agricultural credit. Continued growth of arrears couldeventually force the government to provide budgetary support to the commercialbanks.

vii

14. On the balance of payments front, the trade and current accountdeficits worsened in 1988/89. This reflected growth in aggregate demand thatoutstripped even the near-record increase in supply. The balance of trade isestimated to have worsened by about US$ 1 billion and the current account deficitby US$ 800 million. The current account deficit is estimated at 2% of GDP, upfrom 1.8% in 1987/88. Foreign exchange reserves declined about US$ 1.4 billion.

15. India's imports exceed exports by about 50%; hence export growth muscbe 50% higher than import growth to keep the trade deficit constant. This wasachieved in 1987/88. It also was achieved in 1986/87 but that was due to lowerpetroleum prices, which kept the import bill roughly constant despite largeincreases in capital goods and non-oil imports. For 1988/89, export growth isestimated at about 15% (in dollar terms and on the RBI, payments basis).Manufactured exports grew about 20%; primary exports continue to stagnate.Overall export growth was much better than in the aarly 1980s, but slackenedcompared to 1987/88's 23.2%. Import growth in 1988/89 was about 15%, reflectingboth higher bulk imports (including grains and gems for processing) and increasesin imports of capital goods and inputs to satisfy the high level of demand andinvestment. Hence the trade deficit widened. This rise was partially offset inthe current account by increased Invisibles receipts, which reflected the one-time inflow related to the Bhopal settlement. Invisibles also grew rapidly in1987/88 because of increased private remittances but their general trend in the1980s has been downward. For the future, high export growt2h will be needed toensure that the balance of payments does not become a constraint to highergrowth.

16. The real exchange rate improved an estimated 11% in 1988/89. Anumber of specific export incentive programs also were enhanced. However, therapid growth of domestic demand diverted some potential exports to the domesticmarket. A number of micro-problems -- quotas, slow growth in the Middle Eastand Africa, and reduced exportable surplus in the oil refineries -- alsoaffected specific export products. The real exchange rate also lagged up to theend of 1987, which may have slowed export growth early in 1988/89; export growthaccelerated later in the year. Finally, the slow growth of exports also mayreflect the fact that specific incentives can only simulate a free tradeenvironment for exporters to a limited degree within the context of India's stillhighly protected economy. The problem is that incentives to misuse the programsare great if protection is high. Complicated bureaucratic controls are thenneeded to reduce the diversion of the programs' benefits, but such controls alsoreduce the attractiveness of the incentives. All this suggests that the requiredimprovement in export growth will depend on a combination of maintenance ofexport profitability through active exchange rate policy and incentive programs,tighter control of aggregate demand, and reduction of protection and taxes,particularly on key imports.

17. India's import policy can be characterized as gradual liberalizationof a complicated licensing, high-tariff regime. Recent policy has improvedaccess to imported capital goods and intermediates, especially for exporters.These imrrts have grown rapidly, which contributed to the improved growth inmanufacturing. Recent import policy changes also have increased reliance on theexchange rate and tariffs, and reduced the role of quantitative restrictions,as limits to imports. This policy shift has had the desirable effect of

viii

transferring the scarcity premium on imports from recipients of import licensesto the government and exporters. However, tariffs are high (118% average tariffand collections equal to about 60% of imports), imports of competitive productsand consumer goods are very liv4 ted, and key industrial inputs and final productsremain highly protected. A program of gradual, targeted reductions inprotection, beginning with universal inputs and capital goods that often areproduced in inefficient, capital-intensive industries, will be vital todeveloping a rapidly growing iiversified export sector. It also would yieldbenefits to consumers and input users, while direct loss of employment would besmall and probably be more than offset by higher employment in user industries.Any revenue loss could be made up by allowing some imports of consumer goods athigh tariffs as well as changes in the tax structure mentioned above (para 11).Given the tight foreign exchange situation, such a program will need to beclosely coordinated with export growth and rising capital inflows, and requiretight demand management.In rationalizing imports, some attention probably needsto be paid to controlling the large excess of RBI payments for imports comparedto imports passing through the Customs, a gap that now represents about 13% ofimports and the growth of which accounts for much of the recent rise in imports.

18. India's gross international reserves in forel.gn exchange remainadequate, equivalent to about 2.6 months of imports, despite the decline in lasttwo years. In addition, India's gold reserves, valued at market prices, areequivalent to over 2 months of imports. The debt service ratio declined slightlyin 1988/89, to an estimated 27% of current account receipts (based on the WorldBank's Debt Reporting System, which differs from the Government of India'sfigures due to differences in coverage, timing, and exchange rates), reflectingthe increased growth of current receipts. However the still low ratio of exportsto imports (0.65) and GDP (5.3%) mean that India remains vulnerable to rapidincreases in import prices or tightening of international capital markets.

19. Prospects for 1989/90 are for agricultural output to decline slightlyfrom the levels achieved in 1988's excellent monsoon. This in turn will leadto a GDP growth rate of about 4% in 1989/90. Nonetheless, the average growthrate for the 7th Plan period (1985/86-1989/90) should still exceed the 5% p.a.target.

20. The balance of payments is likely to remain under pressure in1989/90. With tight control of domestic demand, continued active exchange ratemanagement and simplification of export incentive programs, and some looseningof import rostrictions, exports should rise about US$ 2.6 billion (over 17%).Import growth should slow to about 13%, reflecting tight demand management andcompletion of restoring. However, transfers are likely to decline. The currentaccount deficit is projected to worsen about US$ 800 million, reaching US$ 6.2billion. This would mean that a rise in international borrowing will benecessary in order to avoid a repetition of the reserve loss of 1988/89. To theextent that concessional disbursements can be speeded up, the impact of thisborrowing on future debt service will be lessened. In 1989/90 itself, the debtservice ratio should decline, to about 24%, because of rising current accountreceipts and roughly constant principal repayments.

21. Looking beyond 1989/90 to the 8th Plan Period (1990/91-1994/95), thePlanning Commission has chosen a 6% p.a. growth target. Achieving this target

ix

will involve improvements in both productivity (i.e. a fall in the ratio ofincremental capital to output) and the investment ratio. Improving productivitywill, in turn, entail a continuation of the deregulation process. On theinvestment side, any increase in the real investment ratio that is necessary forhigher growth should come from higher national saving, as the Governmentrecognizes. Given the already high rate of private saving, almost all of anyincrease in saving should come from the public sector. In addition, thegovernment deficit needs to be further reduced, in order to reduce its alreadylarge preemption of credit resources, to ensure that inflation remains in singledigits, and to reduce dcmand pressures on the balance of payments.

22. The balance of payments poses a potentially serious obstacle tohigher growth. The import bill is likely to rise because of the growing gapbetween domestic production of petroleum and demand. In addition, higher growthwill depend on higher growth of imports of capital goods and inputs. Finally,remittances and deposits of Non-resident Indians, which were rapidly growingsources of foreign exchange in the past, are likely to grow more slowly in thefuture. Hence, high export growth will be necessary to achieve high growth.Projections suggest that real export growth would have to reach at least 10% p.a.in order to finance the projected import bill under a 6% p.a. growth scenario.The nominal increase in exports would be about US$ 2.5 - US$ 3.5 billion p.a.,a fairly small increment in terms of either world markets or the performance ofEast Asian exporters, and real export growth in the last three years has averagedabout 10% p.a. Thus the target is feasible, but achieving it will depend onmaintenance and enhancement of export profitability, tight control of domesticdemand, and reduction in protection on key imports and capital goods. Inaddition to rapid export growth, Consortium disbursements would have to grow byabout 8.5% p.a. over the Eighth Plan period. Commercial inflows (gross) areprojected to grow by about 10.5% p.a.

23. In view of the large balance of payments deficits in 1988/89 aprudent policy will involve continued restraint on the growth of aggregate demandin the early 1990s, combined with maintenance of export profitability and somereduction in protection. A more expansionary stance could then be taken, oncehigh export growth is assured. Above all, prudence recommends against usingexternal borrowings to offset export shortfalls or to stimulate growth in orderto avoid an unsustainable growth of debt service in the mid 1990s.

24. Increases in concessional inflows will be an important factor inIndia's balance of payments stability. The growth of Consortium inflows alsodemonstrates the donor community' s support for the continuation of India' s recentperformance and reforms. Finally, larger Consortium funding, particularlyconcessional funding, is needed to support the Government's anti-poverty efforts.

25. Gross Consortium disbursements are projected to rise from about USS3.7 billion in 1987/88 and US$ 4.2 billion in 1988/89 to about US$ 5.1 billionin 1989/90. Achieving this growth in disbursements will require continued actionon the part of the Government and the Donor community to achieve highdisbursement ratios. Untying aid flows would help in raising disbursement ratiosas well as permitting India to purchase inputs from the lowest cost source.The growth in disbursements also will entail growth in pledges from theConsortium. Specifically, to ensure this growth in Consortium disbursements,

x

pledges by the Consortium members of concessional aid will need to increase atleast 10%, from last year's US$ 3.9 billion to at least US$ 4.3 billion, andtotal commitments from US$ 6.3 billion to US$ 6.7 billion.

B. Poverty In India: Incidence and Underpinnings

26. Elimination of poverty has been and remains the primary objectiveof India's development efforts. The goal of reducing poverty has loomed largein India's development plans and strategies. It is in fact one of the reasonsfor the determined drive toward greater efficiency and more rapid growth thathas marked Indian policy over the last decade or so, and the expansion ofprograms designed to lift people out of poverty. The success of these effortshas been seen in a rise in real agricultural wages and in consumption levels ofpeople at the lower end of the income distribution in the 1970s and the firsthalf of the 1980s. As a result of this, the prevalence rate of poverty and thenumber of people in absolute poverty in India have been diminishing.

27. How rapidly poverty is being alleviated and how many people remainbelow the poverty line are less clear. Different methods for estimating realincome and establishing "poverty lines" yield different results. Estimates usedin this report indicate that as many as 40% of the population may have incomesbelow the poverty line. Estimates prepared by the Planning Commission suggestthat the figure may be substantially lower. Nevertheless, it is indisputablethat despite recent progress, poverty remains a massive problem and that verylarge proportions of India's popstlation continue to be subject to malnutrition,ill-health, and short life expectancy and that they do not have the educationalskills and access to means of production that will enable them to participatefully and benefit from the growth process.

28. The critical question is how to speed up the gradual decline in povertythat has been taking place. A key finding of the report is that the complex'-onand context of Indian poverty have changed with a result that many of thefactors, including governwent programs, that contributed to poverty reductionin the last fifteen years are unlikely to yield a similar reduction in thefuture. Hence, alternative options and instruments will be needed to deal witha changing poverty scene.

29. A positive new feature of the poverty picture is the likelihood thathigher economic growth, of 5% p.a. or more, can be sustained. The prevalenceof poverty fell during the 1970s and early to mid 1980s despite only moderateoverall rates of growth and continuing high population and labor force growth.If the economy's potential for higher growth can be realized, and if inflationis kept down, then a more rapid reduction in poverty may be possible in thefuture.

30. The positive effect of higher growth depends on the extent to whicnit is translated into employment and real wage increases. In agriculture, thereare technological, product market and other factors which may slow productivelabor absorption. This makes it all the more important that productiveemployment generation proceed rapidly in industry and services. Unfortunately,recent high rates of industrial value-added growth have not been reflected inmore rapid employment creation, especially in the organized sector. Ensuring

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more buoyant job creation will require changes in industrial policy, includingsimplification of labor codes and elimination of small scale industryreservations and other measures which interfere with the efficient working oflabor markets.

31. A second important but worrisome change in the poverty picture isthe increasing concentration of the poor in specific regions and occupationalgroups. A sharp fall in poverty incidence in the South has left over threefifths of the poor in the East and Central states. The low consumption and wagesin this vast region (412 million people) are accompanied by adverse health,nutritional and educattional indicators. The states in Eastern and Central Indiahave lagged far behind the rest of the countLy in social service (includinghealth and educational) spending per capita, and have lacked the resources toexperiment with and implement indigenous responses to poverty. Birth rates wellin excess of those in other regions and high current and projected labor forcegrowth rates suggest that the share of this region in Indian poverty will risefurther. Looking ahead, production and employment gains and essentialinprovements in the health and education status of the population will requireexpenditure increases which go well beyond the financial resources of the statesin the region. Therefore, changes in revenue sharing arrangements to target thepoorer states, the allocation of larger Plan resources or establishment of aspecial regional fund to underwrite the large investments needed should beconsidered.

32. A third important change in the poverty landscape is the growingshare of landless, wage dependent households in the poor as a whole. Thesehouseholds account for 37% of the rural population, but 46% of the rural poorand well over half in some states. The casual labor market is the main arbiterof the fortunes of this chronically and often desperately poor rural group aswell as many of the urban poor. While rural labor markets work far fromperfectly, earnings do seem broadly to reflect demand and supply-side forces inthe medium to long run and also across regions at a given point in time. Demandand supply factors, operating through labor markets, help account for differencesin regional wage and expenditure increases and poverty reduction, and explaincontinuing poverty in many wage-earning households. Casual labor householdswill need special policy attention in view of their often desperately lowconsumption levels, their vulnerability to sickness and shortfalls in labordemand, their limited risk bearing ability and bargaining power and theirinability to derive major benefits from existing anti-poverty and social serviceinitiatives. Such families need dependable access to a basic package of socialservices of uniform quality. In addition, their high degree of exposure tomultiple threats and risks points to the need for programs which have insurancefeatures and offer a reliable income or employment safety net.

33. The likelihood of much slower growth in public spending representsthe final new element in the poverty scene. Halting the deterioration in India'spublic finances could have adverse implications for poverty alleviation, sinceslower overall expenditure growth (even with higher economic growth rates) willmake it harder to fund major new anti-poverty and social service initiatives.Targeting of anti-poverty policies will therefore be very important to etsurethat benefits go the worst-affected, highest risk areas and groups. Moredetermined cost recovery efforts, for example by reducing higher education

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subsidies, would improve the social service resource picture. Meanwhile,reducing the range of services and the complexity of delivery arrangements wouldenable social sector programs to be strengthened without substantial increasesin spending.

C. Labor Force Grovth and Agricufunr Employment Prospects

34. The fundamental supply-side factor in the labor market is theincreasing number of individuals of labor force age. Estimates indicate thata rise of roughly 110 million will occur in the young adult cohort, ages 15-29,between 1980 and 2000, compared to 69 million between 1960 and 1980. During1980-2000 growth of the young adult population will diverge significantly acrossregions, with the most rapid growth occurring in the Eastern and Central states.Looking beyond 2000, the regions in which fertility is already falling willexperience only modest increases in the young adult population, while this cohortwill continue to grow rapidly in other areas unless a rapid fertility declineoccurs. These findings point to a demographically-driven build-up of laborsupply pressures, particularly in the Eastern and Central regions. This couldlead to a leveling off or even reversal of recent favorable wage and povertytrends unless labor demand also increases.

35. The growth of agriculture's demand for labor will be critical sincethis sector -ow accounts for four-fifths of rural and 15-20% of urban employmentamong low income households. Between 1977/78 and 1983, agriculture's share oftotal employment fell from 68% to 64%. This suggests that India may have enteredthe phase of declining relative, and eventually absolutv, numbers in theagricultural work force that is a universal development pattern. It alsosuggests that it will become more difficult for the poor to find employment andincome support in this sector. But, in assessing the potential for productiveemployment growth in India's agriculture, it is important to note that there isno standard scenario for the structural transformation. Various technological,labor and product market, and policy-linked factors will determine how quicklyagriculture's share of the labor force falls in India.

36. Some scope remains for additional employment growth in agriculturethrough further development of the country's water resources. It is thought thatabout 40% of irrigation potential, defined according to technical criteria, isstill to be 'developed'. There is room as well for increasing cropping intensityand yields in existing irrigated areas, and there are possibilities for increasedgrowth in rainfed areas. But these technological opportunities for employmentgrowth are not inexhaustible. There is concern, for instance, that the ultimateirrigation potential has been overestimated; gains in rainfed areas have beenvery slow in coming. All in all, it appears that the technological options foremployment growth in agriculture are more restricted than the possibilities thatexisted fifteen years ago.

37. There are other reasons why the employment content of agriculturalproductios increases may fall below recent levels. Difficulties in managinglaborers, resistance to wage cuts when earnings fall below an accepted floorlevel and other "transaction" costs have encouraged use of labor savingtechniques, which impinge adversely on employment elasticities. Cost ofcultivation data indicate that labor-saving technologies and crops are being

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employed increasingly in many settings. These results suggest an actualreduction in the demand for agricultural labor in the next decade in some states.This decline may be even faster if the pace of irrigation expansion slackens.Landless, wage-dependent households are likely to bear the brunt of any decline.

38. Another key determinant of labor absorption lies in the demand foragricultural output. Predictions are that growth in cereals consumption (2.5%per annum) will only slightly exceed population growth and not rise much evenif overall income growth accelerates. In the 1970s and early 1980s, growth wasslightly faster as it was given a filip by import-substitution in cereals andthe building up of foodgrain stocks for release through the Public DistributionSystem (PDS) network and related channels. A major problem with this approachwas that the procurement, storage and transport of food to PDS outlets provedvery costly and resulted in a PDS 'release' price that was beyond the reach ofthe poorest consumers, thus defeating the aim of bolstering demand. All thissuggests that it will be essential to develop new sources of demand foragricultural products. To some extent, faster GDP growth will result inincreased labor demand in activities such as animal husbandry, dairy farming,horticulture, and food processing. Additional employment benefits could comefrom a reduction in trade restrictions, particularly controls on rice and cottonexports. In contrast, the proposed cropping shifts to various oilseed or otherimport-substitutes may be labor saving on balance relative to cereals, accordingto some studies.

39. In addition to finding new sources of demand for agriculturalproducts, there will be a continuing need for measures and programs thatcontribute to productive labor absorption. Reform of water policies is likelyto have large anti-poverty effects. Various design, construction, andorganizational problems have limited the availability of irrigation services,particularly for marginal cultivators who, because of the lack of water, areforced to rely increasingly on casual wage labor. In surface irrigation L. stems,water usually reaches only a part of the targeted area, in part becauseprescribed cropping patterns are often violated since more water intensive cropssuch as sugarcane yield higher private (although not social) returns. An optionwith great potential impact on the poor would be to widen the spread of scarcewater resources. For example, calculations show that irrigation coverage inHaharashtra could be tripled if only lightly irrigated crops received water.In groundwater development, equity concerns focus on the inability of smallfarmers to afford wells and pumpsets. Publicly-run tubewells and cooperativeschemes have not overcome problems of poor maintenance, high running costs, andlack of cost recovery, have thus not solved the problem of "scale', which is mostacute in Eastern India. An alternative mechanism is for small farmers to becomebuyers (or sellers) in the private water market. This can be encouraged bypursuing a "saturation" approach in areas of ample groundwater, e.g. by drillingholes for tubewells at public expense, improving access to credit, augmentingpower supplies, and improving the energy efficiency of pumpsets.

40. Small and marginal cultivators also need to be supported by effectiveresearch and extension services. From the poverty vantage point, the widelyestablished Training and Visit (T and V) system of agricultural extension ispromising. However, studies suggest that extension services often operatemechanically and have not yet evolved into a flexible and decentralized tool for

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problem solving (and poverty eradication). The quality of availableresearch recommendations has an obvious bearing on the effectiveness ofextension, especially in rainfed farming. Despite some promising advances, itwould be imprudent to rely on developments in rainfed farming to contributesignificantly to poverty alleviation. The emerging moisture conservation-basedapproach works best in medium rainfall zones comprising only a third of the areaunder rainfed agriculture. Elsewhere the picture is less hopeful, withuncertainty about the timing and volume of rainfall and problems of managingexcess moisture (in some localities) constituting difficult problems.

41. Improvements in the institutional credit system will also yield anti-poverty benefits. As with past agricultural credit initiatives, the IntegratedRural Development Program (IRDP) offers loans for poor farmers at subsidizedinterest rates. A novel element, though, has been the capital subsidy of up tohalf the loan principal: IRDP is not only a subsidized credit scheme but avehicle for endowing the poor with assets. However, this dual role--as acomponent of the institutional credit system and an asset-transfer scheme whichlooms large in the Government's anti-poverty strategy--has led to implementationdifficulties. A recent study shows that while 60% of the beneficiaries in asample in Uttar Pradesh retained their assets after five years, only 30% hadachieved real income gains greater than 15% during this period, only 16% hadincreased their incomes and also repaid their loans, while only 7% hadsuccessfully closed their IRDP account and received unsubsidized loans outsideof IRDP.

42. The Government has responded to implementation problems with remedialmeasures that typically accentuate the supply-driven features of IRDP. CurrentlyIRDP uses subsidy payments/lending targets to ensure that the program meets itsobjectives as a transfer scheme. Target-driven imperatives are inconsistentthough with key features of the rural credit scene such as the intrinsicdifferences among poor households in theiL need for and ability to use credit.Overlooking differences in the ability to use credit has produced high arrearsalong with an oversupply of funds and a continuing search for new "deployment"methods. A second problem is that IRDP is financially unattractive to banks,which incur a sizable net loss on each account even if beneficiaries repay theirloans. This, plus high overdues, helps to explain why banks do not see formerIRDP borrowers as part of an expanding client base.

43. All this suggests that a major rethinking is needed if IRDP is tohave a significant, positive impact on low income borrowers. Evidence suggeststhat IRDP has not succeeded in providing viable income earning opportunities fora large segment of the poor, especially those lacking the skills, experience andmotivation to be self-employed. Other schemes (see paras 51-55) may be moreeffective in assisting the very poorest households. Still, many poor familiescan derive sustained benefits from this program. To better serve thesehouseholds banks need to focus on whether projects are viable and how loans areused (rather than how many people have access to funds). In other words, banksshould be freed of social development and welfare dispensing tasks and allowedto return to the more conventional role of appraising investments, disbursingfunds, and monitoring results. Banks will need to be able to charge higherinterest rates to cover the substantial costs of lending to numerous poorclients. There are ways, moreover, of easing the problems banks face in

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identifying creditworthy borrowers and assuring repayment. An option worthexploring is to replace the current capital subsidy, which is paid when the loanis provided, with an interest rebate to eligible borrowers who maintain a perfectrepayment record. Those who regularly repay loans should be eligible foradditional credit, with the portion of the credit that is offset with an interestrebate falling in successive loans.

44. Meanwhile, officials need to concentrate on certifying eligibility,controling against administrative abuse and political interference, and takingstrict action against defaulters. The key functions of identifying investmentopportunities, formulating project proposals and assisting in projectimplementation, are currently handled rather ineffectively by banks andofficials. These tasks could instead be made the responsibility of promotionalentities such as informal groups of potential borrowers, voluntary agencies, andgovernment Line departments.

D. Industrial Policy and Employment

45. India's industry and services sectors have the potential to generatelarge increases in employment, provided recent high output growth can besustained. Improvements in human capital and in the functioning of the labormarket could intensify these gains. In the 1970s, manufacturing employment grewsurprisingly fast, despite the slow growth in value added. For example, theAnnual Survey of Industry shows a 4.3% annual growth rate for 1973/74-1980/81in the organized sector. Evidence points to a similarly rapid rise in theunorganized sector and in services. In the 1980s, value-added in organizedmanufacturing has grown much faster, over 8% p.a. as compared to less than 5%p.a. in the 1970s. However, various data sources suggest that industrialemployment has increased at a much slower pace in the 1980s than in the 1970s,despite the sharp rise in industrial growth.

46. Given the need for rapid employment growth, it is important to.inderstand why, despite higher output growth, employment creation in the factorysector has been so limited in recent years. An analysis of past employmentchange shows that in the 1970s and early 1980s there has been a substantialdecrease in the amount of labor used per unit of value added, which offset allof the positive effect of faster output growth on labor demand.

47. This decline in the labor intensity of output is a reflection of apolicy environment that on the whole, has discouraged job creation in the factorysector. Despite a longstanding national commitment to employment generation,growth in industrial employment has been held back by an emphasis on preservationand upgrading (i.e. raising wages and benefits) of existing jobs, as opposed tothe generation of new employment in commercially viable activities. In largerfirms, jobs are protected by the regulatory and legal eyrtax -firms above acertain size cannot reduce employment without government approval. The small-scale sector as a whole is protected against competition from large firms innumerous "reserved" product lines. In the entire manufacturing sector, jobsare protected from foreign competition through a complex structure of tariffsand quantitative restrictions. Another element in this broad approach is thelegal framework and government apparatus regulating industrial labor and labor-

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management relations, which generate strong disincentives to employment growthin organized manufacturing.

48. Given India's need for generation of productive employment over thenext several decades, new industrial labor strategies and policies seemdesirable. The bias against labor-intensive industries inherent in the currentstructure of protection in the Indian economy should be reduced. Effective ratesof protection should be broadly similar for different industries, so that labor-intensive exports as well as domestic industries will be induced to expand outputand employment, while highly capital-intensive investments would be lessattractive than in the past. Moreover, to the extent that excessively high wagesin more capital-intensive industries have been permitted by the protective traderegime, upward pressures on wages in these industries and in organized-sectormanufacturing as a whole would be eased. The change in trade regime would alsoreduce the need for administrative "protection" of many labor-intensiveactivities undertaken by small-scale firms, and for the complex and costly exportincentives that are in force at present.

49. Large and small scale industry should be seen as complementary ratherthan competitive. Healthy growth in the organized sector and broad-based incomegrowth are likely to result in higher demand for the products and services ofsmall-scale firms. A change in the overall mix of policies is also likely tostimulate employment growth in the urban as well as the rural informal sector,and in the organized sector. Regarding policies specifically directed towardsmall scale industry, the reservation of products should be eased. Thesereforms, combined with foreign trade reforms, will give a boost to labor-intensive export-oriented activities, many of which would be undertaken by small-scale firms. Calcutta's successful Small-Scale Enterprise Program suggests thatgrowth and employment expansion in the urban informal manufacturing and servicessectors can be stimulated by providing better access to credit, unencumbered withhard-to-implement extension, technical assistance, and training components.

50. In the area of labor legislation, the general approach should be oneof simplifying regulations and speeding up reviews of disputes. Codes andprocedures need to be evolved that provide a few key safeguards (e.g. safety inthe workplace, etc.) for workers, which can be enforced even in small-scalefirms. in addition, changes are needed in the way that unions are establishedand the conditions under which they represent workers. The current system ofnumerous, highly competitive small unions, often in a single plant, is divisiveand has not served the interests of workers or owners. Apart from a fewstrategic activities, restrictions against retrenchment should be eased, whileworkers who are displaced should be provided with retraining/placement servicesand some form of income maintenance during the transition phrases. Employersshould share in the costs of these progress.

E. The Safety Net

51. Even with more rapid growth, there will be a large number of peoplewho because they lack human or physical capital or are in depressed regions,cannot benefit directly or immediately. Thus, India will continue to needprograms that transfer income or employment benefits to the very indigent. Anumber of existing schemes have such "safety net" features. For example, IRDP

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aims at endowing the poor with physical assets which can generate self-employmentand sustained income gains. However, the income transfer/anti-poverty andefficiency objectives of this scheme have operated at cross-purposes, and itseems prudent to reduce the transfer element in the scheme and to introducereforms which enhance repayment, access to credit and lending quality. Otherinitiatives should be used to provide the safety net needed by the very poor.

52. The poverty impact of the Public Distribution System (PDS), anotherimportant transfer scheme, has been limited by lack of access to distributionpoints and resupply problems. Except for the Southern states and Gujarat, PDScoverage of rural areas is weak. States like Bihar, Madhya Pradesh and UttarPradesh with large concentrations of poverty get a disproportionately smallallocation of PDS supplies, while big cities receive a relatively large share.The Union Territories, particularly Delhi and Chandigarh, got nearly a quarterof PDS supplies in 1983/84, the last year for which data are available.Fortunately, some positive lessons on how to use PDS to benefit the poor areavailable. Kerala, for example, has succeeded in making PDS commoditiesavailable throughout the state, and in using passbooks and other instruments aswell as eligibility criteria to restrict leakages of PDS goods to the non-poor.

53. Income transfer has been among the key objectives of the NationalRural Employment Program (NREP) and the Rural Landless Employment GuaranteeProgram (RLEGP), the two rural job creation schemes currently in operationthroughout the country. These programs have pursued other goals, includingconstruction of durable and productive rural works and providing financial andorganizational support to Panchayati Raj (local government) institutions. Butas with IRDP, the multiple roles allotted to NREP and RLEGP have led toimplementation problems. Recent evaluations provide a generally discouragingpicture of the impact of these programs in terms of regular, intensive coverageof target groups and the quality of assets constructed. By contrast, theEmployment Guarantee Scheme (EGS), which is operated and largely funded by thestate of Maharashtra, has delivered a package of employment and de facto incomeinsurance benefits to landless and marginal cultivation households in a reliablefashion for 15 years in several thousand remote and dispersed work sites.Although it operates primarily as an employment security program for the verypoor, EGS has also been relatively successful in controlling the type of workstaken up and the quality of implementation.

54. This suggests that EGS has features which ought to be reflected inthe arrangements which are emerging for the new rural jobs scheme (Jawahar RozgarYojana) which incorporates NREP and RLEGP and is to begin operating in 1989/90.One of the strengths of the EGS model is its matrix-organization procedures inwhich line departments come under the authority of revenue officials for thepurpose of executing EGS works; payment of below market wages is anotherimportant ingredient. What is crucial though is the guarantee which, backed byreliable program execution, has made EGS a social fact, a perceived right andentitlement and a form of insurance which the poor can bank upon. The guaranteeis crucial not only in shaping public expectations and directly addressing thepervasive vulnerability to income loss which the very poor are subject to, butas a measure that keeps government personnel on course in operating a complexprogram.

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55. The replication of EGS would represent a difficult decision for theGovernment. As an experience-tested, self-targeting commitment with legal force,EGS represents the sort of safety net which is needed by the most indigent. Noneof the alternative routes that have been used (e.g. Gujarat and several otherstates have experimented with widow's pensions, old age and life insurance andcash grant entitlements) to deliver a safety net has sustained large scaleoperations for a ler.gthy period or dealt with leakages and other administrativeproblems as effectively as EGS. Nevertheless, the statutory basis of EGS alsoentails significant financial risks. In particular, the costs of deliveringguaranteed employment can increase sharply if market or above market (includingstatutory minimum) wages are paid and workers are attracted t_, the scheme fromother jobs. Costs could rise well above the 10% of the budget which Maharashtraallocates to its safety net. This suggests that all possible means should beused to restrict coverage to the very poor and contain costs -- in particular,wage payments must be kept well below market level to insure self-targeting; theguarantee should be offered only in the most impoverished areas; and iron-clad'exit" clauses should be included in the enabling legislation which allow electedofficials to periodically reexamine whether the scheme is needed.

F. Social Servce Programs and Their Funding

56. Good health, adequate nutrition and educational attainment are notmerely inputs that can raise wage earnings and enhance productivity in self-employmenc, but are themselves important facets of the standard of living ofthe poor. For both these reasons, the low health, nutritional and educationalstatus of India's poor is of great concern.

57. The highest mortality risks are in Bihar, Madhya Pradesh, Rajasthanand Uttar Pradesh, with the greatest threats to health occurring in infancy,especially for females, and during the reproductive phase for women, particularlyduring pregnancy and childbirth. Fertility remains high in low income areas andhouseholds, with women's first pregnancy at an early age and frequent pregnancieswithin the childbearing period constituting a common syndrome. The linkagesbetween education, fertility and mortality are indicative of the social costsof continuing low levels of female literacy and school attendance in rural areas.Among poor rural women, there is virtually uniform illiteracy in most of India.This will persist so long as educational institutions fail to attract or retainlarge proportions of the children of school-going age. In rural areas, less thana quarter of poor girls (43% for boys), age 5-14, went to school in 1983. Thisfigure was 12% or less in three of the states (Bihar, Madhya Pradesh, andRajasthan) for which data are available.

58. The Government is aware of the unsatisfactory health and educationalstatus of the poor, and has responded with major service delivery effortsdirected at disadvantaged households. The most recent initiative is the 1986National Policy on Education, which aims at achieving universal primary schoolenrollment and other goals. The 1982 National Health Policy redefined programpriorities (and the package of services offered) in line with the objective ofproviding "an integrated package of services to tackle the entire range of poorhealth conditions." The goal of the 1986 revised Family Welfare Strategy isto strengthen public provision of mother and child health and family planninginformation and services. Another important intervention is the Integrated Child

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Development Services (ICDS) scheme, begun in 1975, which delivers a package ofbasic health, nutrition and pre-school education services to children under sixand to pregnant and lactating women.

59. Despite admirable goals, these and related programs have notsucceeded in reaching the poor with reliable and high quality services. Forinstance, the newly released Fifth Educational Survey reveals that primary schooldropout rates remain high. Other evaluations have found the primary health andfamily welfare system to be operating at low efficiency levels. Studies havealso highlighted difficulties in the functioning of ICDS. This disappointingperformance appears to be the result of inadequate funding in coniunction withinappropriate program design. Data on the financing of social services remaininadequate--a good deal of additional work will be needed before a definitiveview of resource issues emerges. However, available figures suggest that fundsallocated to the social sectors have been far below what is required in view ofthe continuing low educational and health status of much of the population, andthe amounts invested in those developing countries that have reached much higherlife expectancy and literacy levels. For example, per capita public educationalspending in India is a third of that in Thailand and Egypt. Secondly, socialspending remains much below average in the states with the lowest educationaland health indicators. For instance, per capita health expenditures in Biharis one half of the average for India as a whole. At the same time, educationand health have lost ground in many states to various welfare schemes in theallocation of social sector resources. And within the health and especially theeducation budgets, there has been no significant shift in composition towardsservices (e.g. primary schooling and health) which benefit the poordisproportionately.

60. The funding picture is unlikely to improve dramatically in the nearto medium term. Health and education expenditure needs continue to rise byvirtue of population growth. Moreover, the goals of universal school attendance,increased literacy and reduced fertility and infant mortality translate intolarge remedial spending requirements. There are, however, several ways ofovercoming resource constraints, which need to be pursued simultaneously. First,incentives for cost-effective performance need to be enhanced throughout thesocial sectors. In addition, a more determined effort needs to be made to raiserevenues from beneficiaries who can afford to pay. The Government's Challengeof Education document took a clear position in this regard in its finding that"there is no justification for subsidizing higher education to the extent it isbeing done today". Similar considerations apply in the health sector where largeand uniform subsidies introduce numerous distortions. Extensive recourse toprivate medical practitioners points to a willingness and ability to pay acrossmuch of the income spectrum. NGOs have also demonstrated that clients will"accept" modest fees, especially if services are of high quality. Since socialspending will very likely continue to have to be rationed, a suggested courseof action is to concentrate public provision of services on those that have largeexternalities and that non-government sector either cannot or is not likely toprovide, and to encourage private and NGO-run health and educational institutionsto expand provision of others.

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G. Improving Management and Dellvey of Social Services

61. It is important to adjust the focus and design of social servicedelivery efforts to make better use of the resources allocated to primary he3lth,education and related initiatives. Government programs in these social servicesectors have much in common. Each of these initiatives provides diverse servicesto an impoverished, and often dispersed, uninformed and sometimes uninterestedaudience. The delivery strategy is similar- -government personnel establishdirect, regular contact with prospective clients, undertake educational 4admotivational (demand-creation) work and carry out various service delivery tasks(e.g. provide medical care, nutritional supplements, etc.). Field workers aresupported and supervised by specialized staff and institutions located at theblock and other levels.

62. These social service endeavors have many admirable conceptualfeatures. Yet the common approach which has been adopted brings in its wakecritical challenges and constraints. For one thing, program success dependsheavily on the quantity and quality (training, mot'vation, supervision etc.) ofthe staff who are deployed. Even without funding restrictions, these initiativeswould have to solve difficult management problems, many having to do with workingout, in a trial and error fashion, the tasks, reporting and peer relationshipsand other features of a host of new field positions. However, the multi-tieredadministrative and technical support systems, large infrastructure requirements,high staffing levels and the wide range of services typically offered make theseschemes costly. Resource shortfalls in such programs often result in more-than-proportionate reduction in the actual delivery of services. Such fundingshortfalls would be tolerable for a time in older, ongoing programs served byexperienced and motivated staff who face a well-defined demand curve and havestrong public support. In India's case though the service delivery programs arestill establishing themselves and thus are especially vulnerable to underfunding.

63. Since funding is likely to remain scarce, it is important to identifythe incidence of resource constraints, to define service delivery priorities moresharply to ensure that the most needy are targeted, and to resolve variousoperational issues. This will involve some difficult choices and trade-offs.In each case (primary health, family welfare, ICDS, and basic education), theservice delivery set-up appears to be over-ambitious in terms of the range andnumber of tasks to be performed and coverage across and within geographicalareas. A scaling back of the scope and complexity of tasks assigned to fieldworkers, leaving a more limited number of high priority activities, seems to berequired.

64. The primary health care system could focus on those most at risk,i.e. women and children. Women, especially those of reproductive age, are acrucial entry point because of their own vulnerability to health problems andbecause they are instrumental in the health care and practices of other familymembers. The key actor in a reoriented, outreach-based health program would bethe female multi-purpose worker (MPWF). Concentrating initially on pregnantwomen and those with infant children, this field worker should aim atestablishing a durable relationship with and augmenting the health capabilitiesof poor women. The exact services to be provided by the MPWF or the specialists

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in the primary health centers and sub-centers who support her should bedetermined in consultation with local communities. MPWFs need to be recruitedfrom local communities and given training which emphasizes technical and inter-personal skills and quality of care considerations. Priority in pursuing thisstrategy naeds to be given to the Eastern and Central states and other highmortality areas.

65. One expected outcome of this broad reorientation would be increasedadoption of temporary birth control methods through the family welfare program.This program currently relies heavily on sterilization which is usually adoptedby individuals over age 30 and who have three or more children. Because of thesetypical acceptor characteristics, the use of "spacing" methods will have toincrease significantly if contraceptive prevalence is to rise above and fertilityto fall below present levels. However, an outreach-based approach cannot workunless the current strong emphasis on sterilization is ended. Evidence suggeststhat reliance on sterilization targets has undermined the program's ability toreach priority groups and provide care of acceptable quality. Accordingly, nosingle measure can do more to foster contraceptive use in India than replacingsterilization targets with indicators of performance that are more closely linkedto desired demographic outcomes. It should be roted though that an outreach-based approach itself is unlikely to yield iumediate results, i.e. a sharpincrease in prevalence and reduced fertility rates. This is because variousfactors which underpin large family size targets and strong son preference arechanging only slowly, and will continue to be influential in the medium term.Consequently, the Ministry of Health and Family Welfare cannot be expected tobring about rapid changes in the family planning picture by itself. A broad viewof population policy needs to be adopted which recognizes the demographicbenefits from improvements in female literacy, better health services, and accessto employment, life and old age insurance.

66. Ar. outreach-based approach will also help in shoring up linkagesbetween the ICDS worker, the angaLndi worker (AWW), and health staff. Conceivedas an integrated package of basic health, nutrition and pre-school educationalservices, ICDS currently suffers from an identity crisis, with some states usingthis initiative as a child feeding program and others emphasizing child care.A strong field presence (including home visits) and a focus on women and childrenby MPWUs will free up some of the AWWs a time, allowing her to devote moreattention to regular weighing and charting of children (and pregnant women) atanganwadis, follow-up measures for those with nutritional problems, developingeffective early childhood education activities (in cooperation with the localprimary school teacher) and providing other support to the MPWF.

67. A focus on low performance groups and regions is also needed inrespect of the longstanding goals of universal literacy and elementary schoolattendance. The "high risk" groups are those who enroll or begin late and thoselikely to drop out. Improved facilities; rationalizing access to services;appointment of new, appropriately trained staff (recruited from key targetgroups) and inservice training for the existing corps of teachers; improvedmanagement and supervision of staff; and efforts to make curriculum interestingand to overcome direct and indirect costs of attending school are among the stepsneeded. As with health services, states and districts with low performancedeserve concentrated attention.

Chapter 1

RECENT DEVELOPMENTS AND MACROECONOMIC PROSPECTS

Introduction

Indla's economy has performed well In the recent years. In 1987/88,Indla weathered a major drought with a relatlvely small drop In agrlculturaloutput and continued hlgh growth In Industry L:d servlces. The Government'sprograms, supported by the Consortium, ensured food availability throughout thecountry. In 1988/89, buoyed by an excellent monsoon, GDP growth is estimatedat about 91 by the Government. Agricultural output grew sharply, and industrycontinued Its strong performance. From a longer run perspectlve, the economyseems to have shifted to a hlgher growth path and there Is potentlal for stillfaster growth. Nonetheless, there Is little room for complacency. The test ofagricultural policy ard performance will come when ralnfall returns to morenormal levels. Sustalning lndustrial growth will depend on continuing thederegulation process, ratlonallzation and reductlon of protectlon, and hlghergrowth of manufactured exports. In addition, more employment generation isneeded. More importantly, macroeconomic demand Imbalances need to be corrected.

In 1988/89 aggregate demand expanded faster than even the recordgrowth In supply, worsening the trade and current account deficlts and producinga loss of about US$ 1.4 bllion In International reserves. The CentralGovernment's deficit reached 8.51 of GDP and dissaving worsened to 2.91 of GDP.Fiscal performance began deteriorating In the early 1980s, a trend broken onlyin 1987/88, by a slow down In capltal spendlng that reduced the defllt.Government spendlng, particularly current spending, has generally grown fasterthan buoyant revenues. The dangers of continued high dissaving and deficits--interms of crowdlng out, inflatlon, and balance of payments deficIts--have beenwidely commented on by Government offlcials. The 1989/90 Budget prcgrams welcomereductions In dIssaving (to 1.71 of GDP) and the deflilt (to 71 of GDP) but mayprove optimistic. Further action will be needed to lmplement the FlnanceM.InIster's call for curbing the gvowth of expenditures, broadening the revenuebase, and Improving the performance of public enterprlses. Furth.hr action alsols needed to reduce the high taxatlon and protection on key inputs. To ensurethat expendlture cuts do not affect the poor adversely, the Government cat' takeadvantage of the ample scope for effllency Improvements, targeting, and costrecovery In the social sectors (See chapters 5-6).

The balance of payment. situation also could pose a serious obstacleto higher growth. To support hiF,her GDP growth, real export growth of 101 p.a.or more w'll be needed. Substantial Increases In concesslonal lnflows, andcommerclal borrowing also will be necessary. In view of the already largebalance of payments deflilt and the risks that a hlgh growth scenario wouldentall, a prudent policy will Involve restralning the growth cf aggregate demandIn the early 1990s, malntalnlng and Increasing export profitability, and reducingthe protection of universal Inputs and capital goods that currently hinaersexport -growth; a more expansionary stance can be taken once export growth Isassured and the current .account defilct reaches sustainable levels. Otherwisethe chances for sustained higher growth may be threatened by hlgher inflatlonand International payments Imbalances.

2

A. Recent Trends In GDP and Sectoral Growth

1.01 GDP growth in 1988/89 is estimated at about 9% or more. Thisrepresents a stronger recovery from drought than typically occurred in the past.The reco-:ery's strength reflects the excellent 1986 monsoon, but also theimproved resilience of industry and services to agrticltural shortfalls. For1987/88, GDP growth is now estimated at 3.6%, compared to earlier projectionsof 1 to 2%. This is also an indicator of the economy's resilience. The highgrowth of 1988/89, coupled with the new estimates for 1987/88, mean that theSeventh Plan's 5% p.a. growth target is within reach.

Table 1.1India: Real GDP Growth Rates and Value Added in Major Sectors

1962/3- 1976/7- 1985/6 1986/7 1987/8(0) 1988/9(P) 1962/3 1980/1 1985/61975/6i 1986/7 Sectorat Shares

(Constant Prices)

Growth Rates (Percent ger aowun) PercentAgriculture 2.5 2.5 0.3 -2.3 -1.0 12.5 5n.5 38.0 30.5Industry 3.8 5.5 8.2 8.4 6.5 9.0 20.2 25.8 30.6Mamnfacturing 3.6 6.0 9.2 9.2 7.4 n.a. 14.0 M?. 22.0

Services 4.4 5.9 7.3 6.2 5.1 6.5 29.3 36.2 38.9Pub.Add.& Def n.a. A 7 11.0 9,1 n.a. _ 4.7 5.7

GOP-factor cost 3.4 4.4 5.1 4.0 3.6 9.0 100.0 100.0 100.0. ._ ~..... ............ ... .. ..... ...... ... ... .__. ._____._. _..................................

Notes: Data from 19S0/1 onward are from the 1980/1 base GDP estimates (revised) and are not strictlycoq3arable with earlier estimates.

(0) Quick Estimiate. 1P) World Bank estimate. * Growth rates calculated fran logarithmic trendreressions. Point-to-point estimates yield similar results, except for agricutture where theoutput fluctuations make point-to-point estimates highly sensitive to the base year chosen.

1.02 From a longer-term perspective, the economy's growth path has shiftedupward. Regression analysis indicates that GDP growth has risen significantly,from 3.48 p.a. in the period 1962/63-1975/76 to 4.4% p.a. in the period 1976/77-1986/87. The achievement of the Seventh Plan's 5% p.a. growth target will meanthat the growth path has shifted upward again. The economy's recent goodperformance suggests the potential for higher growth and has encouraged thePlanning Commission to opt for a 6% p.a. growth target for the Eighth Plan.Higher growth would be very desirable from the standpoint of poverty reduction,as discussed in the second part of this report. However, increasing the growthrate will depend a sustained reversal of the slow growth that characterizedagriculture prior to 1988/89 (see Para 1.11). In the industrial sector it willdepend on continued deregulation, enhanced export profitability, andrationalization and reduction of protection (para 1.18). More importantly, toprovide a sound base for sustained growth and limit the growth of external debtto prudent levels, action is needed in the short run to remedy the twin deficitsin the government budget (Section D) and the balance of payments (Section E).

1.03 Agriculture and Food Supply. The high GDP growth in 1988/89 was led byrecord agricultural growth. This reflects a combination of: a) depressed outputin 1987/88, because of a poor monsoon, and b) record output in 1988/89, largely

3

because of the best monsoon in at least ten years. In 1987/88 foodgrain output,an important indicator of agricultural performance, was only 138 mmt. Thiscomparevs with a Government estimate of 170 mit in 1988/89, an increase of 23%.

1.04 Although 1987/88 foodgrain output was low, from the standpoint ofdrought resistance performance was very good. The summer khar;£ crop, with itshigh percentage or rice and coarse grains and its dependence on rainfall,declined only aSout 8% from the previous year and 18% compared to the peak kharifcrop (1983/84). The winter rabi crop, which accounts for most of India's wheatproduction and which is largely irrigation-based, actually increased (2.1%) andwas only slightly below the previous peak. By comparison, in the drought of1979/80, the kharif harvest declined by 19% and the rAbi by 14% from the prioryear (also the previous peak). The good rabi performance in 1987/88 reflectsthe Government's efforts to ensure the supply of inputs but, more fundamentally,the spread of irrigation that has enlarged the sector's drought-proof base.

1.05 Other crops suffered in the 1987/88 drought. Jute and mestaproduction fell by over 20%. Kbarif groundnut production fell nearly 10%, asa result of the drought's sev3rity in Gujarat. However, harvests of othercilseeds and rabi groundnut increased, so that total oilseed production actuallyrose. Sugarcane also rose (6%), but cotton production declined (7%).

1.06 To ensure food supplies in the face of the 1987 drought, theGovernment increased sales through the Public Distribution System (PDS) anddistributLon through the relief network. Almost 23 mit of wheat and rice wereprovided from the Central Pool, versus 20 mmt in 1986/87. Low procurement meantthat much of this came from the buffer stocks that had been built up in earlieryears; stocks fell from 19.5 mnt in March 1987 to 9.4 mmt in March 1988. Toincrease the availability of pulses, which are on the OGL import list, the dutywas cut to 15% and imports by State governments and agencies were encouraged.The Government also increased allocations of sugar and edible oils to the PDS,in order to limit the rise in their prices. To supplement the domesticavailability of edible oils, the Government raised its imports from 1.3 mmt in1986/87 to almost 2 mmt in 1987/88. All in all, the Government's efforts,supported by the Consortium members and channeled through the well-developedrelief system, played a major role in mitigating the drought's impact.

1.07 Last year's good monsoon and high agricultural output contrastssharply with 1987/8's drought and depressed production. The 1988 June rainfallwas the best in twenty-five years. By the end of September, only 3 of 35districts reported poor or scanty rain, compared to 21 last year. The Governmentestimates that kharif and rabi foodgrain harvests are both records, 95 and 75mmt respectively. This was achieved despite severe floods in Punjab at the endof the kharif. The I;rowth in production was widespread. Gujarat and Rajasthan,the areas hardest hir by 1987 drought, had their best kharif since 1983. Othercrops also did well in 1988/89. Oilseeds output rose an estimated 20%, cottonproduction an estimated 40%. Sugarcane production rose slightly.

1.08 Following the 1987 drought the Planning Commission set up a programto increase production in 169 selected districts, by ensuring availability ofinputs and credit. It has now gone a step further ard undertaken a district-level, physical planning exercise for agriculture. Thiis is to be complemented

4

by a new approach to agricultural credit, in which a single lead branch bank willtake responsibility for credit in a service area (5-10 villages). This approachto agricultural policy is the reverse of the current tack in industrial policy,in which policy planning and price incentives are replacing physical planningand which emphasizes competition in the financial sector. Another newagricultural policy initiative involves a buffer stock scheme for edible oils.Seed import policy was liberalized s'ibstantially, to speed up development of highyielding varieties of non-cereal crops.

1.09 Despite improved drought resistance and last year's record foodgrainsoutput, there is little room for complacency regarding agriculture. Althoughestimated harvests reached record levels in 1988/89, foodgrain procurementactually was down by 7% compared to 1987/88 (October to December). Governmentstocks at year end were below the target levels set in 1984. And, except foredible oils, agricultural prices did rot decline as early or as much as usual,despite the good harvests.

1.10 Prior to the drought, agricultural value added had grown only 1.7%p.a. in the 1980s. Foodgrain output had fallen below the long run trend, whichitself was only 2.5% p.a. (including 1987/8e and 1988/89). Although foodgrainoutput in 1988/89 was substantially above the trend, to a large extent thisreflected the good monsoon. The monsoon's importance can be judged by usingsimple regression of foodgrain output on rainfall and a time trend. Thisregression forecast a 137 mmt harvest for 1987/88; it also predicts that thisyear's favorable monsoon should yield a 166 mit harvest, compared to theestimated production of 170 mnt. Thus, the true test of agricultural policieswill come with the return of normal rainfall.

Figure 1.1

2_ * rainuidic FOODCMIN PRODUCTION P70i. 180 RegresAni PAIrAU. 178 Mntio

188 gr impord w jm Mt

168 - eanrain 140

14R- gralintrud 12-

Raindex 8-- Tronkd --lae Foodgraili(sept. 100 (2.5;w p.a.) Production

end) 6e - m la Be (R tOM)

68- 6

28 2

68 69 172 1 374 ' 5 7677779818283848586878889Inlian Fiscal Years

5

1.11 Agricultural GDP will have to grow by 2.7% p.a. or more in the l990s,in order to provide food for India's growing population and contribute toemployment growth and poverty reduction. Irrigatlon will necessarily remain amajor factor in growth ana in further "drought-proofing of the sector. However,costs of new public irrigation have risen sharply. Curtailing this upward spiraland securing good returns from irrigation expenditures will involve implementingthe recommendations of the 7th Plan and the 1987 National Water Policy: a)concentrating on completing existing works and key investments to improvedrainage and dam safety in the more developed areas; b) limiting new developmentsto under-irrigated parts of India; and c) improving operation and management ofexisting systems, of which one step is the just-begun National Water ManagementProject. Greater reliance on private irrigation also will be necessary.Reassessment is probably needed of the groundtvater strategy and of the costs andbenefits of implicit and explicit subsidies in irrigation charges, both toimprove efficiency and to reduce their fiscal drain through better cost recovery.Improvement of rainfed agriculture is a second vital element in the strategy,because of the limits to the expansion of irrigation. Agricultural research andextension will play a critical role in both rainfed and irrigation basedagriculture. In irrigated agriculture, extension can assist in the cropdiversification that better water management would entail. In rainfedagriculture, all facets of research on farming systems could be improved.Indeed, the whole research program could be slanted more heavily toward problemsof rainfed farming. Moreover, there are a number of existing techniques formoisture conservation and soil preparation that could be disseminated moreeffectively by the extension services. Wasteland development and resourceconservation also will be important. This will involve greater emphasis onwatersheds as a whole, attention to erosion control and to forests and publiclands, as well as improved management of common property resources (World Bank,1987a, 1988a and 1988c). Finally, agricultural price and subsidy Rolicy needsa thorough-going review from the standpoint of its impacts on production andincome distribution, highlighting opportunities for increasing efficiency, fortaking better advantage of international markets, and for controlling fiscalburdens. For example, the recently set price intervention zone for the edibleoil buffer stock is substantially above even the cyclically high level of worldprices (Gulati). This new price policy is likely to raise oilseed pricessubstantially, which could cause inefficient substitution of oilseeds for othercrops that are internationally competetive, such as cotton and wheat, and perhapsresult in a cctresponding net loss of foreign exchange. In addition, the schemeis likely to have a large fiscal cost. An evaluation of the subsidy element inagricultural credit also is critical. Approaches ara needed that willconsolidate the gains that have been made in rural banking and ensure itscontinued viability (See Cnapter 3).

1.12 Industry contributed substantially both to last year's rapid growthand to the economy's resistance to the 1987 drought. Industrial output forApril-January (as measured by the Index of Industrial Production (IIP) whichcovers mining, manufacturing, and power) rose 9.6%, compared with 9.5% in1987/88. Industrial GDP (including the same three sectors plus construction)i.acreased 6.5%, in 1987/88, the latest year for which GDP data are available.While the growth of industrial GDP did decline from the 8.3% p.a. average of theprior two years, the decline was much less than during previous droughts.

6

1.13 The rapid industrial growth of the last few years continues thehigher growth phase that began in the mid-1970s. The trend growth rate of valueadded in industry was 5.5% p.a. over the years 1976/77-1986/87, versus 3.8% p.a.in the period 1962/63-1975/76, a statistically significant increase.

1.14 Manufacturing output (April-January) rose an estimated 10.1% in1988/89 and 9.3% in 1987/88 according to the IIP. Value added in manufacturingrose 7.4% in 1987/88. Although the growth of value added did slow in 1987/88,the slow-down was less than in previous droughts. Growth in the last two yearshas been particularly high in subsectors that have benefitted most fromindustrial deregulation, such as electronics, two and three wheeled vehicles,and cement. Steel production rose about 10% in 1988/89, after increasing lessthan 5% in 1987/88. In contrast, the cotton textile industry continues to sufferproblems.

1.15 Manufacturing has led the upward shift in industry's underlyinggrowth rate. The trend growth rate of manufacturing value added was 6% p.a. inthe period 1976/77-1986/87, compared to 3.6% p.a. in the period 1962/63-1975/76a statistically significant increase(World Bank, 1988a). However, two years ofnegative growth at the turn of the 1980s obscured the underlying improvement,as well as bringing down the 1976/77-1986/87 average. In 1981/82, growth pickedup once again, and it has averaged about 8% p.a. in the neriod 1981/82-1987/88.Moreover, the strength of recent growth suggests that manufacturing has becomemore resistant to internal and external shocks since the beginning of the 1980s.

Figure 1.2

GROWTH RATE OF MANUFACTURING GDPPERCENT

12' 10

10 | -- ----- ....... ............... .. .----92.n3.9.,~~~~~.

.o -. .. .................

.... ........... ..... 56.g 5 6." 8. 6 .6

2. .. ......

I ,-0.3

-1.7

-4 , ,77 78 79 o0 61 62 63 64 65 66 67 66

FISCAL YEARS

7

1.16 The higher growth rate of manufacturing in the 1980s seems to mainlyreflect improvements in total factor productivity, rather than higher inputgrowth. Capital and labor inputs in manufacturing appear to have grown at thesame rate, or even slower, in the 1980s than in the 1970s (Hanson). Thisconclusion appears to be fairly robust in terms of possible variations inparameters and data problems. No doubt increased access to imported capitalgoods has upgraded technology, particularly in recent years. However, theimprovement in total factor productivity in manufacturing should not beinterpreted solely as faster technical progress. To some extent it representsthe fruition of earlier investments that knitted together regional markets andreduced supply bottlenecks. The higher growth in the mid 1970s reflected notonly heavy investments but the easing of restrictions on inventories and importsof spares, which permitted better utilization of existing equipment. The1979/80-1980/81 recession brought little slowdown in investment or employmentgrowth. This meant that measured total factor productivity fell in these years.It also meant that the 1980s began with some excess capacity, which permittedthe rising fiscal deficits and faster monetary expansion to be translatedinitially into higher growth without much increase in inflation. In recentyears, greater access to imported, better quality inputs has probably contributedto improved efficiency. Finally, the process of industrial deregulation andincreased export rivalry of recent years has encouraged a more efficienteallocation of resources between industries and a better capacity utilizationwithin industries. (World Bank 1987b).

1.17 The gradual process of industrial deregulation continued in 1987 and1988. Among the major measures adopted during this period were: a) auto-aticendorsement of licensed capacity at the maximum output reached in 1988, 1989 or1990; b) easing of licensing requirements, by raising the ceiling above whichlicenses are needed from 1981's Rs. 50 million figure to Rs.150 mil. (nearly 100%in real terms) for investments outside urban areas and to Rs. 500 mil. forinvestments In the most backward areas (provided such firms are not subject tothe Monopoly and Restrictive Trade Practices Act (MRTP)); c) easing of licensingand entry restrictions facing large firms (firms subject to the MRTP and theForeign Exchange Restriction Act (FERA)) and d) reduction in the number ofproducts legally reserved for small scale production. These policy changesshould increase domestic competition, at the same time making modernizationeasier. The Government also has strengthened its sick industry policy, resisting"bail-outs" of sick firms while using the recently-created Board for Industrialand Financial Reconstruction and the development banks to work out financialpackages for viable firms and for closing non-viable ones. Private and publicfirms are increasingly using termination benefits to rationalize their workforce.

1.18 The critical issue in industrial policy remains the speed and scopeof reforms, so as to maximize growth benefits and minimize transition costs.In the past, India's industrial policy often sought to minimize the costs oftransition through a defensive, micro-oriented preservation of employment inexisting firms and product lines. This, of course, has delayed adjustment. Froma longer term standpoint it also has raised costs of employing labor, which hasbeen detrimental to employment growth from an economy-wide perspective (SeeChapter 4). An alternative approach, that would be more favorable to employmentin the aggregate, would involve greater reliance on active policies to assistlabor adjustment in declining industries, such as retraining, and less reliance

8

on protecting and improving specific existing jobs. Of course such activepolicies, to be effective, will require continued rapid growth. Maintaining andincreasing industrial growth will entail a) encouraging domestic competition byfurther reducing barriers to entering new lines, shifting product mix andchanging location; b) increasing international competition by reducingquantitative restrictions, rationalizing and lowering tariffs, and pursuing anexchange rate policy that maintains the profitability of exports and efficientimport competing industries; and c) moving toward a broader based tax system,that reduces the current concentration of the tax burden on a few universalindustrial inputs. (World Bank, 1987b).

1.19 Electric P-wer output was up about 9% in 1988/89, similar to theaverage growth rate in recent years. Hydroelectric generation shot up about 20%in 1988/89, as the bountiful rains filled reservoirs. Thermal generation roseby only about 5% in 1988/89. Plant load factors (PLFs) did decline slightly asa consequence, but this permitted some much-needed maintenance and red-ced thedemand for coal and petroleum.

1.20 Preliminary projections suggest that 38,000 KW of new generatingcapacity will be needed in the Eighth Plan. This, together with relatedinvestments in generation and transmission, is expected to cost in excess of US$50 billion. Development on this scale will stretch the ,ower agencies' financingability and project-executing capacity to the limit. Thus, emphasis has beenplaced on improved efficiency and energy conservation, and consideration is beinggiver, to private sector participation in power generation. Higher efficiencywould implj a larger role for utilities, such as NTPC, that construct and runplants efficiently. It also would involve upgrading the technical andoperational efficiency of the State Electricity Boards (SEBs), many of which havemuch lower PLFs than NTPC. There also is substantial scope for reducingdistribution and transmission losses, which now absorb almost a quarter of grossgeneration. Numerous Government committees .ave recommended a reallocation ofinvestments to reduce such losses, but implementation has been slow.

1.21 Coal production rose about 7% in 1988/89. Coal India Limited (CIL)which accounts for over 87% of production increased its output by 7.8%. Outputper manshift in CIL remains low, but did improve in 1988/89 by 6.5%, continuingthe upward trend of the previous two years. Much of the improvement inproductivity has come in open cast mines; despite some recent improvement theproductivity in underground mines remains very low. Coal output is of lowquality, reflecting the poor quality of reserves. A recent analysis indicatesthat only about 3% of reserves are of prime coking quality and only about 12%of superior, non-coking varieties. The low quality of Indian coal has negativelyaffected power generation and, to an even greater extent, steel production. Asa partial remedy for the steel industry, coking coal imports have been increased,from 0.7 mmt in 1984/85 to about 4.4 mmt last year. As of January 1, 1989 theGovernment raised the weighted average price of CIL coal from Rs. 219 per tonneto Rs. 249 per tonne, 13.7%. This should reduce CIL's large deficitsubstantially, but will raise costs in other sectors, notably steel, electricpower and cement.

1.22 Oil and Gas Crude oil production rose to about 32 mit in 1988/89,

9

after stagnating the previous three years at just over 30 mmt. This kept crudeoil import volume roughly conAtant. Domestic production of petroleum productsincreased somewhat but refineries are near capacity. With consumption increasingan estimated 7% p.a., imports of products increased nearly 2 mut and exports fellby about .5 mnt. During the next Plan two new refineries are scheduled to comeon stream and capacity of existing refineries will be raised about 6%.

1.23 Over the medium term, the prospect is for oil imports to increasesubstantially, which will have major implications for balance of paymentsprospects (See Section G). Production in Ind- .'s richest oil field, Bombay High,is peaking and there have been no new major discoveries, hence demand is likelyto grow faster than domestic supply. In the face of a prospective rise in oilimports, with substantial natural gas still being flared, and with reserves ofnatural gas being discovered in many parts of the country, the Government ofIndia is rethink'ng its natural gas policy. Until now gas had been reservedprimarily for the fertilizer and petrochemical industries. However, the powersector will now receive substantial amounts of gas. About 4000 KW of new gas-based plants are projected for the 8th Plan period, in addition to the fourapproved plants of 2470 MW capacity. These plants have high fuel efficiency andcan be constructed rapidly. In September 1988, the production and supply of gasfrom South Bassein field into the 1700 km HBJ pipeline commenced.

B. Eighth Plan Framework

1.24 Encouraged by the economy's recent performance and potential, thePlanning Commission has chosen a 6% p.a. target for the Eighth Plan. Reportson the Planning Commission's discussions indicate that the growth target is tobe achieved through.

a) a rise in the average gross national savAng rate to over 24%, from aprojected figure of 21.6% in 1989/90. This will imply a marginal savingrate of about 40% and growth in consumption of under 2.3% p.a.

b) a decrease in the incremental capital to output ratio (ICOR) from 4.6to about 4.35. This is to be achieved through concentrating investmentsin sectors with low ICORs, completing projects already undertaken, reducingenergy consumption so as to reduce the required investment in powergeneration, and removing biases in favor of capital intensive operations.

c) a real export growth of 10% p.a., along with strict management of theother components of the balance of payments.

1.25 The main factor in raising the saving rate would be elimination ofthe government sector's dissaving by the end of the Plan period, by raising theratio of tax revenues to GDP and by slowing the growth of current expenditure.This also has been recommended by the Ninth Finance Commission. As is widelyrecognized, the atagnation of India's saving rate reflects a falling publicsector saving rate, particularly in the Central Government (See Sections C andD). However, the target will not be easy to achieve; the Government's Long TermFiscal Policy Program of 1985 also proposed eliminating government dissaving,but by the end of the Seventh Plan. The private sector's saving rate would alsohave to rise somewhat in the Eighth Plan. By implication this would entail

10

policies to stimulate private savings, in particular keeping inflation low.

1.26 Regarding taxes, the aim would be to raise the tax: GDP ratio from17.4% projected for 1989/90 to 20% by 1994/95. The proposals for raising thetax ratio include broadening the tax base to include urban services and improvingcollection. However, the difficulty of raising the tax ratio should not beunderestimated. Over the past decade various tax rates, tax structures, and taxcollection methods have been tried. Nonetheless, the ratio of Central and Statetaxes to GDP has remained within a fairly narrow band (14.5% - 17.4% of GDP),and some of this variation is simply due to cyclical variations in GDP. Inaddition, higher tax rates could be counterproductive from a growth standpoint.For example, indirect taxes, which provide the majority of revenues, areconcentrated on petroleum products, a few domestic goods, and non-bulk imports.Raising indirect tax rates of these products could hurt competitiveness.

1.27 Proposals for slowing the growth of current expenditures includerestraining non-Plan expenditure; reducing the ratio of subsidies to GDP,combined with making production subsidies more effective; and targeting foodsubsidies toward the weaker sectors. Another possibility for higher publicsector saving involves improving public enterprise performance, but this hasproved difficult to achieve in the past.

1.28 The 1989/90 Budget moves in the direction set by the Plan framework(and the Ninth Finance Commission), projecting a reduction in Central Governmentdissaving to 1.7% of GDP, through an increase in the tax ratio and limited growthin current expenditures. However, realizing the Budget's tax and expendituretargets may prove difficult, especially since the Budget contains no major changein the structure of taxes, nor any major change in the approach to subsidies (seePara 1.59). Further action will thus be needed to ensure attaiment of the Plan(and Ninth Finance Commission's) target for eliminating Government dissaving.Achieving higher growth also will entail higher export growth in order to dealwith a current account deficit that rose to 2% of GDP in 1988/89. Real exportgrowth fell somewhat in 1988/89 and will need to reach at least 10% p.a. in orderto ensure the availability of imports needed for a higher growth rate, as wellas to maintain a prudent debt service ratio.

1.29 It could be argued that higher growth could be achieved withouthigher saving, through improved efficiency, i.e. lowering the ICOR by more thanplanned. This would, however, require faster deregulation, greater emphasis onagriculture and labor- intensive industries, and greater reliance on internationalspecialization than occurred in the Seventh Plan. All this would meansubstantial changes in the policy and incentive framework. And it would stillbe necessary to achieve at least a 10% p.a. real export growth rate. Finally,unless the large government deficits and low public sector saving are corrected,the potential gains from improvements in overall efficiency could easily beoffset by crowding-out, inflation and balance of payments pressures.

C. Saving and Investment

1.30 India has a high saving rate for a developing country. It has reliedon its own saving to finance the bulk of its investment. Rising foreign capitalinflows have complemented national saving in the 1980s, financing much of the

rise in India's investment ratio. Public sector saving has declined in the 1980swhile private saving has risen. In 1988/89 there are signs that privateinvestment picked up faster than saving; with government saving remaining low,the current account deficit worsened.

1.31 India's gross national saving rate' averaged 22.24 of GDP over theperiod 1980/81-1986/87, about the same as in the period 1975/76-1979/80.2India's saving rate puts it in the top quarter of all developing countries andthird among low income developing countries according to the World Bank's WrhlDevelopment Report 1988 (WDR88). India's saving rate is somewhat below the otherdeveloping countries classified as exporters of manufactures. However, exceptfor China, these countries have per capita incomes 6 to 20 times India's. Netforeign capital inflow -- foreign saving in the national accounts terminology,which by definition equals the current account deficit -- has averaged 1.9% ofGDP in the 1980s, reaching 2% of GDP or more since 1985/86 (except for 1987/88).

1.32 During the period 1975/76-1980/81 India avoided the excesses offoreign borrowing that led to debt crises in many African and Latin Americaneconomies. In 1975/76-1977/78 India actually accumulated foreign assets, a netcapital outflow which meant that resources were being transferred abroad. In1978/79 and 1979/80 net capital inflows became positive but still averaged only0.5% of GDP. While India's reliance on foreign borrowings increased in the19E s, capital inflow remains small by historic standards. For example, duringKorea's takeoff period, its net foreign capital inflows averaged nearly 6% ofGDP. However, international capital flows are much smaller today than in Korea'stakeoff period and average flows to India, as a percentage of GDP, have beensimilar to other developing countries in the latter half of the 1980s.

1.33 India's gross domestic investment has averaged 24.4% of GDP in theperiod 1980/81-1986/87. This represents a slight rise from the 22.6% averagein the second half of the 1970s.3 Again, India ranks among the top quarter ofdeveloping countries, although below the other "exporters of manufactures".

1.34 India's gross national saving has financed over 90% of its investmentin the 1980s; net foreign capital inflows financed less than 10% (except1985/86). However, the rise in net foreign capital inflows since the end ofthe 1970s has financed much of the rise in India's investment rstio.

1.35 The economy's gross investment ratio (in current prices) has risen,from 18.6% in the period 1962/63-1975/76 to 23.5% of GDP for the period 1976/77-1986/87, a 26% rise. However, real gross fixed investment is estimated to have

'India's gross domestic saving rate (GDS) ls sanevhat less than lts gross national saving rate (GNS). GDSequals GNS plus net international factor recelpts and current transfers from abroad. Unlike the highly indebtedcountrles, India's current transfers exceed net factor payments, so GDS is less than GNS.

2 Tbe fisures are not strictly comparable due to the revlsLon of the national accounts base in 1980/1.However, the 197011 base nationl accounts shov a similar saving rate (235) for the period 198011-198516.

3Agaln figures are not strictly comparable. The 1970/1 accounts show an irvestment ratio (24.81) fat 1980/1-198516.

12

Table 1.2India: Saving and Investment

(X of GDP at current market prices)

1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88

Foreign Savings 1.6 1.8 1.6 1.4 1.6 2.6 2.3 2.0(Current Account Deficit)

Pri1vate Sg rGross DomesticInvestment 13.9 15.0 12.0 12.8 12.2 14.4 12.3 11.7

Fixed Investment 10.7 10.6 9.7 9.4 9.4 10.4 10.4 10.9Change in Stocks 3.2 4.4 2.3 3.4 2.9 4.0 1.9 0.8

Savings 19.2 19.7 17.4 18.6 19.2 20.3 19.3 18.6Household 17.5 18.2 15.7 17.0 17.4 18.4 17.6 16.9Private corporate 1.7 1.6 1.6 1.5 1.7 1.9 1.7 1.7

Investment-Savings 6ap -5.2 -4.7 -5.4 -5.8 -6.9 -6.0 -7.0 -7.0

Pubitc SectorGross DOwestic Investment 10.3 11.1 11.4 10.5 11.4 11.7 12.0 10.8Fixed Investment 8.6 9.2 10.5 9.9 10.2 10.5 11.2 10.4Change in stocks 1.7 1.9 0.9 0.6 1.2 1.2 0.8 0.4

Savings Li 3.4 4.6 4.4 3.3 2.9 3.1 2.7 1.9Current Revenues 18.6 19.7 .1.0 20.3 21.6 22.8 23.8 24.2Current Expenditure 15.2 15.2 1.i 17.0 18.8 19.7 21.1 22.3

Investment-Savings Gap 6.9 6.5 7.0 7.2 8.6 8.6 9.3 9.0

Public and Private SectorTotal Savings 22.6 24.3 21.8 21.8 22.0 23.4 22.0 20.5Total Investment 24.2 26.1 23.4 23.2 23.6 26.0 24.3 22.5

Investment-Savings Gap 1.6 1.8 1.6 1.4 1.6 2.6 2.3 2.0Memo Item:Share of 601 financedby foreign savings (X) 6.8 6.9 6.9 6.0 6.9 10.0 9.4 8.9

6OPmp (Rs billion) 1358.12 1594.20 1775.88 2072.72 2295.42 2617.33 2934.08 3304.64

Notes: Foreign savings are World Bank Estimates. Investment data are from CSO National AccountsStatistics, on a commodity flow basis. Total national savings are derived residually. Publicsavings and current expenditure are from National Accounts Statistics, while private savings area residual.

/a Public sector saving refers to the combined saving of the Central 6overnment, the States and

risen no more than 11% and some of that rise is due to higher estimateddepreciation in the new National Accounts Data (World Bank 1988a, based on CSOdata). All this means that it is difficult to disentangle the relative rolesof investment, technical progress, efficiency improvements and higher capacityutilization in trying to account for India's higher growth.

1.36 The overall figures on saving and investment rates conceal a declinein public sector saving, which has fallen from 4.5-5% of GDP in the late 1970sand early 1980s to 2-3% of GDP recently. This fall is due principally toworsening dissaving by the Central government (See Figure 1.3 and Section D).

1.37 At the same time the private saving rate has risen, to just under20% of GDP. Much of the rise in private saving represents increased financialsaving. Saving in financial instruments--currency, deposits, shares anddebentures, government debt (particularly small saving instruments), pensionsand insurance -- amounts to about 55% of saving, compared to 45% in 1979/80.To a large extent the rise in private saving, particularly the financial portion,

1?

Figure 1.3

CENTRAL GOVERNMENTAND PUBLIC SECTOR SAVINGS

% GDPmp(reav

!4 .4.S 4-9 4.8 4.5 4.4

2 .. . . ......

-0.6 -0.6 -2 7-2- . ........................... .. -.. . . ... ... :l : i ...X. ~i--j! -2 , , , , , . , -. -12.9

77 78 79 80 81 82 83 84 86 88 87 88 89 90! I~~~~~~~~~~~~~~~ndisri Fiscal Years

_ Public Sector iN Cent( a] Govt.

represents a response to incentives: the maintenance of realistic interest rateson deposits and inflation in single digits which have contributed to depositorconfidence, the spread of branch banking and the postal saving system, thedevelopment of the capital market, and the favorable tax treatment for savers,especially for purchasers of public debt. The level and growth of India'sprivate saving is a significant ae'lWevement, particularly in light of thecountry's low per capita income.

1.38 Within investment the situation is the reverse of saving: publicinvestment generally has risen in the 1980s as a percentage of GDP (aside from1987/88), while private investment generally has stagnated or even fallen. Inboth bank lending and the capital market, the share of government has risen sincethe early 1980s, in the capital market substantially. Nedium and largeindustrial borrowers also complain of high real interest rates. Thus there isa suggestion that in relative terms, at least, public sector spending has"crowded out" private investment. Of course, any tendency toward ncrowding out"has been mitigated by the government's increased external borrowing.

1.39 In sum, a rising private sector surplus, plus larger fcreign capitalinflows (compared to the 1970s), have financed larger pu.blic sector borrowing.The larger public sector borrowing reflects both deteriorating public sectorsaving and higher public sector investment (compared to the 1970s). Theincreasing financialization of private saving has made it easier for the publicsector to tap the rise in private saving, both directly, by issuing claims tohouseholds (e.g. currency, National Savings Certificates, and small savinginstruments), and indirectly, through firancial intermediaries that acquiregovernment debt voluntarily, or involuntarily to meet portfolio requirements.At the same, the attractive rates and tax concessions on the public sector'smarket borrowings and the rising requirements for the financial intermediaries

14

to invest in public sector debt have raised the cost and reduced the availabilityof funds to private sector borrowers at the margin. This process can limit theprivate sector's ability to invest, to take advantage of deregulation and toadjust to increased competition and new relative prices, through the combinationof high real interest rates and limits on the availability of bank funds.

D. Public Finavices

1.40 According to the Ninth Finance Commission's Report for 1989/90 'Thefiscal scenario ir the country has gradually worsened to an alarming extent andcorrective steps are required now to reverse the deteriorating trend and createconditions for the restoration of health to the financial system". Thedeteriorating trend began in the early 1980s and Central Government finances werelargely responsible. Despite some improvement in 1987/88, in 1988/89 CentralGovernment dissaving was 2.9% of GDP and its deficit4 was 8.5% of GDP. Thetre.nds in dissaving and the deficit reflect a persistent tendency forexpenditure, particularly current expenditure, to grow faster than relativelybuo;-nt revenues. The 1987/88 and the 1988/89 Economic Survey, the PlanninyCommission, the 9th Finance Commission Chairman, the Govertnr of the RBI and theFinance Minister have all stressed the urgent need to eliminate Governmentdissaving and moderate public sector borrowing, especially from the RBI, echoingconcerns expressed in the 1985 Long Term Fiscal Policy Paper. Tighter budgetswould relieve demand pressures on the balance of payments and moderate the strongmonetary impulses emanating from the fiscal sector, thereby envuring sustainedgrowth and the price stability that has been the hallmark of Indian macroeconomicpolicy. As the Finance Minister has stated, solving the fiscal problem willinvolve action on three fronts: curbing the growth of expenditures, broadeningthe revenue base, and improving the performance of public enterprises. The1989/90 Budget has brought some relief along these lines, but its provisions mayprove optimistic (see para 1.59). Moreover, much of the improvement in 1987/88and in the 1989/90 Budget reflects limits on capital spending. There remainssubstantial room for improving the incentive aspects of the tax system and forimproved efficiency and streamlining in the public enterprises.

1.41 Centrsa Government dissaving -- borrowing to finance currentexpenditure -- began in 1979/80 and has worsened over time. The rate ofdeterioration was slowed after 1986/87 but dissaving reached 2.9% of GDP in1988/89. The 1989/90 Budget programs a reduction in dissaving, to 1.7% of GDP.

1.42 Central Government deficits also have worsened as a percentage ofGDP; going from an average of about 5% of GDP in the last half of the 1970s, toabout 6.5% of GDP in the 6th Plan, and to ahout 8.7% of GDP in the first twoyears of the 7th Plan. (See Appendix Table 5.3). In 1987/8 the deficit wasbrought down from a record 9.4% in 1986/87 to 8.4% of GDP, despite the droughtand with a minimum of complaint, but mainly by limiting the growth of capitalexpenditures. In 1988/9 the deficit remained roughly constant as a percentage

4A. used here, the term defielt refers to the difference between expenditure and current revenue, l.e..the total borrowing requiremet. This is the concept of deficit used lnternationally. The Govermn^t uses theterm deficit to refer only to Lts not borrowings fron the Reserve a-ik of Indis.

15

Figure 1.4

CENTRAL GOVERNMENT DEFICITS

I ... ::.:::::':::::::::::::::::-:::-::::-:::::::::................ -.:-.. ...... .:: ......... -- -:: - ---

............... .............. .............. .......... ........... _ __

. ------ . .. . ................. . ............ . .... .. .... . .. . ......

77 T8 79 80 8l 8 884 as 80FISCL YEARS proj.

of GDP, with revenues, and capital and current expenditures all rising at aboutthe same rate as GDP. The 1989/90 Budget projects a sharp decline in thedeficit, to ;4% of GDP, derived from a projected rise in the tax ratio andlimitations on capital spending and, to a lesser extent, current spending (seepara 1.59).

1.43 Both Central Government total borrowings and RBI borrowings haveaubstantially exceeded the Long Term Fiscal Policy projections for the SeventhPlan period. Domestic borrowing at the end of the Plan was to fall to 4.2% ofGDP, versus a 1988/89 figure of 5.2% of GDP. Borrowings from the Reserve Bankin the first four years of the 7th Plan averaged 2.2% of GDP, more than doublethe average envisaged for the Plan period. The rise in Central Governmentborrowing has preempted a growing share of bank credit, raising the cost anddecreasing the availability of bank finance for the private sector. CentralGovernment borrowings from the RBI were equivalent to almost 90% of base moneygrowth in the 1980s and represented an average increase of 16% p.a. in basemoney. This latent inflationary pressure was offset by raising reserve ratiosand, recently, by loss of international reserves.

1.44 Government interest payments, which are included in currentexpenditures, are among the most rapidly rising components of current spending.But, the growth of dissaving should not be viewed simply as a rise in borrowingto finance rising interest payments. There is a close link between the CentralGovernment's growing dissaving and the rising imbalance between its non-interestexpenditures and taxes. Government dissaving is not a problem that can be solvedsimply by lowering interest rates on government debt.

1.45 The importance of the growing expenditure-tax gap can be seen byconsidering changes in the deficit excluding interest payments (Table 1.3). This

16

measure India's "primary deficit" has risen from 3.6% of GDP in 1979/805, to anaverage of 5.6%e of GDP in the period 1986/87-1988/89, a 47% increase. This 47%increase in the Government's borrowing requirement would, by itself, imply thesame proportionate rise in the ratio of government debt to GDP and, as aconsequence, a 47% rise in Central government interest payments as a percentageof GDP, even with no rise in the interest rate on the debt. Hence, the rise inthe "primary deficit" has a multiplicative effect on the standard measure of thedeficit, and it increases the measured dissaving of the government substantially.Tne importauce of the rise in the primary deficit in the Indian context also canbe seen by noting that between 1980/81 and 1986/87, about 80% of the rise in theCentre's interest payments was due to its rising debt, and only about 20% torising average interest rates on the outstanding debt (Hanson and Gupta).Moreover, the portion due to rising interest rates can be further divided,analytically if not empirically, into the rises in government interest rates toimprove the efficiency of the financial system, as recommended by the ChakravartyCommission, and the rises necessary to generate enough financial saving to absorbthe larger public debt. Thus, some of the rise in the interest rate actuallyshould be attributed to the rise in the primary deficit.

1.46 Revenues What are the elements that have produced the rise itu theCentral Government's primary deficit and what can be done to reverse the trend?On the revenue side, the ratio of Central taxes to GDP rose to 11.3% of GDP in1988/89, from 10.0% of GDP in 1981/82. Of this total, taxes equivalent to 2.8%and 2.7% of GDP respectively were turned over to the states, laaving net Centraltax revenues of 8.5% and 7.3% of GDP respectively. Non-tax revenues have alsorisen in the 1980s, but much of this rise represents higher interest paymentsfrom the States, that would be reduced by adoption of the 9th FinanceCommission's suggestion for a moratorium on States' debt service to the Centreon recent loans. Non-tax revenues also reflect contributions from the )il Poolaccount from time-to-time (see Appendix Table 5.3).

1.47 The rise in taxes conceals a number of problems. Direct taxes haverisen slowly. A major tax reform in 1985/86 reduced rates and in the next threeyears the ratio of direct taxes to GDP rose by about 5%, as a result of bettercompliance and enforcement. However as a percentage of non-agricultural GDP (therelevant base since agricultural income is constitutionally exempt from Centraltaxes), personal and corporate taxes have declined from 3.2% in 1980/81 to about3% currently. One factor in the slow growth of direct taxes has been the growthof tax concessions such as the reduction of exporters" taxes and the increasedtax preferences on interest income. Another factor has been the high proportionof income exempted and/or outside the tax net. In addition to excludingagricultural income from Central taxes, India has one of the highest personalincome exemptions among developing countries relative to its per capita income(WDR88). Only about 7 million persons and corporations file returns and onlyabout 4 million number actually pay taxes. This compares with an estimated

GGDP figures for years prior to 198011 were adjusted upward by the ratio ODPrp in 198011 (New Series):GDPmp in 198011 (Old Series) to make the ratios used in this section comparable. The Centre's fntances weresLmilar in 1979180 and 198112s in 198011 there was a larger deficit, due to rising capital expenditures.

17

Tabte 1.3INDIA: Accowuting for the Central Gover-entIs Deficit

CX of CDP)

1979/2 15R1/82 1986187 198718B 1988/B9 !,8i91. TotIltRev 9.65 9.50 112 1. 12.47

Taxes 7.48 7.26 8.30 8.48 8.50 9.09Other 2.17 2.24 2.93 2.78 2.73 3.38

2. Totat ED.1 13.L 12.93 17.44 16.29 16,.05 II4Current 8.32 7.68 10.73 10.63 10.42 10.10Capital 4.97 5.25 6.71 5.66 5.63 5.34

3. PrEmrv Def.1 alu 34 La L2.

4. Interest 1.93 2.00 3.15 3.40 3.68 4.03

5. Deficit 58 5.4 IA 8.3 "S L7.0!0

agem Ite=s:

A. TgXat E .1 13.30 12.9 1L!§& 1L1 It&l IlaaDev. 3.86 4.25 5.37(Current) (1.98) (1.86) (2.70)(Capital) (1.88) (2.39) (2.67)

Non-Dev. 4.49 4.34 6.27(Current) (4.18) (4.03) (5.39)(Capital (0.31) (0.31) (0.88)

Loans (net) 2.84 2.56 3.17 2.74 2.49B n.s.Grants to Stetes 2.10 1.79 2.64 2.76 2.64B 2.39

B. Tot,at Exg. 13.30 12.93 17.44 162 165 1L54Plan 6.34 6.52 7.83 7.35 7.01 6.59Non-Plan2 6.96 6.41 9.61 8.94 9.05 8.85

Defence 2.93 2.88 3.48 3.62 3.44 3.08Subsidies (MaJor) 1.36 0.97 1.60 1.62 1.78 1.77

2 Exctudes Interest.2 Residual, exctudes interest; Plan Exp. from Budget in Brief.B Budg'rt.

Sources: Plan and Non-Plan, Defence and Subsidies: Budget Docunents and Jetta

middle class of 80-100 million and about 200,000 industrial firms in the factorysector alone. Indian marginal tax rates also rise more rapidly than in mostother developing nations (pDR88). This encourages evasion and makes lobbyingfor tax concessions more profitable. It should be possible to step up the yieldof direct taxes, at tne same time increasing the fairness of the system, bywidening the base, greater use of retention at source and better enforcement (forexample more widespread use of presumptive taxation, greater use of managementtools in the Income Tax Department, and cross checking of automobileregistrations and tax contributors, which is being considered), while at the sametime reducing the steepness at which rates rise. The exemption limit should bekept constant in nominal terms, which will erode it in real terms.

1.48 Under current arrangements, a major rise in direct tax revenues would

18

be necessary to reduce the Centre's deficit substantially. First, these taxesrepresent only a small fraction of GDP, 1.0% for income taxes and 1.1% forcorporate taxes in 1988/89. Second, the States are entitled to 85% of incometax revenue. However, the necessity for such a large transfcr would be reduced,and/or it could be better targeted toward the poorer states, if the Statesexerted a greater effort on the revenue side. As the RBI Governor has commented,"It is a matter of some concern that the States have not so far found it feasibleto bring large income earners in the agricultural sector within the directtaxation net" (Malhotra). Even if only 10% of the estimated 60 million non-poorfarm households could be taxed, this would nearly double the number of taxpayers.Similarly, better cost recovery, for example better collection of overdueelectricity bills would free up State funds that now support the SEBs.

1.49 Tne low volume and slow growth of direct tax receipts have forcedthe Government to rely heavily on indirect taxes -- the central excise tax andcustoms duties. Respectively, they now account for 33% and 48% of the Centre'snet tax revenues. Excise tax revenue has grown roughly proportionately to GDPsince 1980/81: the excise tax buoyancy is about 0.95 taking non-agricultural GDPas a base. Forty-five percent of excise revenues have been committed to theStates since the 7th Fin-ance Commission. Small scale firms receive a graduatedexemption from excise taxes. Until the Modified Value Added Tax (MO)VAT) wasintroduced in the 1985/86 tax reform, the excise tax cascaded through theproduction chain, distorting relative prices and eAport incentives andencouraging verL.-cal integration. With the 1987/88 extension of MODVAT to allcommodities except textiles, tobacco, and petroleum products, "cascading" hasbeen reduced substantially, the principal exception being capital goods.

1.50 Customs revenues have grown faster than GDP, reflecting both therapid growth of dutiable imports and the rising duty collection rate (See SectionF). In fact, the growth of customs revenues accounts for most of the increasein the Centre's tax ratio since 1980/81.

1.51 Indirect taxes, such as excise taxes on sugar, are generallyrecognized to be regressive. Moreover, both excise tax and customs revenues comemostly from high rates on a few basic inputs6. This leads to high relativeprices for final outputs using those inputs directly or indirectly (e.g. capitalgoods). It is also difficult administrltively to offset fully the impact ofthese taxes on potential exporters of sopliisticated products. For these reasons,it would be useful to shift to greater reliance on direct taxes. Some changescould also be made to improve the indirect tax system. For example, the baseof the indirect taxes could be widened, by taxing other products, allowing someconsumer goods imports that pay high duties, and reducing the exemption ̂n smallscale firms, which has some distorting effects. Also, the simplificationprocedure, begun by MODVAT could be continued. For example, the number of taxand tariff rates could be reduced and distinctions between rates for differentend users, which are difficult to enforce, could be eliminated. Some reduction

i cIee taxes on petroleum and petroleum products represent 21X of excise col.ections, on the syntheticfibres and plastics groups 8.7X and on iron and steel products (excluding the lPRS cens and the Steel Poolcontributions), 32 (Gupta 1988a) Duties on metals, plastics, waumade fibres and ctemicals (includingcountervailing duties equivalent to excise taxes) represent 27.5X of tarlff revenue, on capital goods, 272.

19

in exiscing rates could then be undertaken, which would reduce the high coststructure of the economy and, at the same time, permit some reduction in theoffsetting payments to exporters.

1.52 Expenditures As noted above, the Centre's deteriorating fiscalperformance reflects a persistent tendency for expenditures to grow faster thanbuoyant tax revenues. Rising current spending accounts for the bulk of the risein the Centre's expenditures. Capital spending has risen less uipidly andactually declined as a percentage of GDP in the ibst two years. The share ofDevelopmental spending also has declined (Ministry of Finance 1989b).

1.53 Between 1981/82 and 1986/87, when a major increase occurred in thedeficit, the ratio of Current Spending (excluding interest) to GDP rose by over3 percentage points. Capital Spending rose by only 1.5 percentage points. Thus,even though revenues rose from 9.5% to 11.2% of GDP, the primary. deficit:GDPratio rose about 2.2 percentage points.

1.54 An alternative breakdown of spending (See Table 1.3) shows thatNon-Developmental expenditures (current plus capital) rose from 4.3% to 6.3% ofGDP. Within this category, defense expenditures increased from 2.9% to 3.5% ofGDP. Developmental expenditures only rose from 4.25% of GDP to 5.37% of GDP.Within current expenditure, non-developmental spending represented over 45% ofthe increase. Developmental current expenditures also rose but less rapidly(by 0.84 percentage points). Also, the main factor here was the ubiquitous"other" category. This includes subsidies for fertilizer and exports (largelyan offset to domestic taxes) which together rose to nearly 1.0% of GDP. TheCentre's current developmental expenditures for education and for health,measured as percentages of GDP, rose by nearly 45%. Nonetheless, in 1986/7 theyeach represented only about 0.3% of GDP and thus were not a major factor in therising deficit. Within capital expenditures, non-developmental spending alsogrew much faster than developmental expenditure.

1.55 Another important factor in the rising primary deficit has beenincreased aid to the States. Grants to States (a Current Expenditure) and Loans(net) to States and Public Enterprises (a Capital Expenditure) rose much fasterthan GDP between 1981/82 and 1986/87. The total rose from 4.35% to 5.81% of GDP,with the increase about evenly divided between the two categories. This meansthat, after netting out interest payments, about 53% of the rise in the primarydeficit can be attributed to the Centre's increased borrowing to fund Grants tothe States and Loans to the States and Public Enterprises. In future years thisimplicit financial intermediation role of the Centre is likely to increase itsinterest burden, because the interest rates paid by the States to the Centreare substantially below the interest rate paid by the Centre at the margin(perhaps the Centre's accounting should be revised to highlight this subsidy)and because the Centre periodically reschedules and forgives State debts.

1.56 In 1987/88 the Government did reduce the primary deficit to 5.0% ofGDP (by 1.21 percentage points). However, tLis was done by cutting capitalspending relative to GDP; current spending in fact continued to increase fasterthan GDP. Moreover, capital spending for non-developmental purposes, mainlydefense equipment, rose while nominal developmental capital expenditures fell

20

(Ministry of Finance 1989b). Thus, the reduction in the government deficit wasachieved by reducing capital and developmental spending. This route cannot bepursued very long without impinging on the development effort. In 1988/89, thevarious types of expenditures all increased at about the same pace as nominalGDP, leaving the GDP: deficit ratio roughly constant.

1.57 Developmental and demand management considerations make it necessaryto reverse the recent trends in the Centre's expenditure patterns. Specificaction is needed to implement the high level recommendations. For example, afreeze on current spending (other than interest payments), would lower theprimary deficit and current spending by about 1.5 percentage points of GDP. Thiseventually would have an even larger effect on the usual measure of the deficit,through the feedback of lower future interest payments. Some of these savingscould be diverted to redress the balance with capital spending. Failure tocontrol expenditures would, on the other hand, increase the pressures on pricesand the balance of payments, threatening the Government's developmental effort.To ensure expenditure cuts do not affect the poor adversely, emphasis will haveto be given to the ample scope for improving efficiency in the delivery of publicservices, targeting, and cost recovery (See chapters 5-6).

1.58 The 1989/90 Budget envisages a large improvement in the Centre'smacroeconomic balances, with the deficit programmed to fall to 7% of GDP anddissaving reduced to 1.7% of GDP. This improvement will be derived from heaviertaxation of the modern sector and restraint on spending, particularly capitalspending. Excise taxes on iron and steel and consumer durables were raisedsubstantially, and excises on other non-essential commodities were also increased5%. Tax rates on profits and higher income individuals were raised slightly.Duties on capital goods were rationalized and some relief was given to thecapital goods industry and small scale firms. Overall the projections ofincreased revenues from the tax changes may prove optimistic. On the expenditureside, current spending is budgeted to rise 10%, with defense spending decliningand subsidies rising only 8.5%. These proposals are desirable but may provedifficult to sustain. Capital spending is budgeted to rise only 4%. Thelimitation on capital spending repeats the approach taken in 1987/88 which, ifcontinued, could eventually have an adverse effect on growth. Central Planexpenditures are programmed to rise by 14% but almost the whole increase is tobe financed by the public enterprises. In sum, the programmed reduction infiscal imbalance is welcome from the macroeconomic standpoint but may provedifficult to realize, and the continued restriction on capital spending mayhinder future growth. There also remains substantial room for fundamentalimprovement in the incentive aspects of tax policy. This would involvebroadening the base of direct and indirect taxes and reducing marginal rates,reducing the current heavy reliance on customs and excise taxation of a fewindustrial inputs and capital goods, and further moving away from the numerousspecific excise taxes toward a standard value added tax at all levels.

1.59 State Government revenues have grown about as rapidly as the Centre's.The States, like the Centre, have increased current spending rapidly (14% p.a.between 1980/81 and 1987/88). However, the States' ability to run increasingdeficits is much lesL than the Centre's -- their market borrowing is tightlycontrolled and their overdraft facility with the RBI is limited. Hence, the

21

States' combined deficits remain about the same as in the early 1980s, equivalentto about 3% of GDP. The rapid growth of current spending, along with limiteddeficit finance, has meant a slower growth of capital spending -- (11% p.a. inthe 1980s). Plan spending has also grown slowly. The slow growth of Statecapital spending has at times hindered disbursements of Consortium aid becauseof the lack of local funds. In 1985/86, the States' situation improvedtemporarily, because of increased transfers from the Centre. However, in thelast three years their current expenditures have grown an estimated 17% p.a.This rapid growth reflects higher salaries, to maintain comparability with theCentre, and rising subsidies and losses of State Enterprises, particularly theState Electricity Boards (SEBs) and transport companies. In 1987/88, the growthin current expenditures also reflected spending for drought relief, much of itfinanced by Central grants and loans.

1.60 The States account for about 75-80% of social sector spending, 9%to 10% of which is financed by tied grants from the Centre, mostly in the healthand welfa:e areas. States are also the channel for the rural employmentprograms: the Centre has provided 50% of the funds for National Rural EmploymentProgram (NREP) and 100% for Rural Landless Employment Guarantee Program (RLEGP)in tied grants; beginning in 1989/90 the Centre will provide 80% of the fundingfor the new, expanded rural employment scheme, Jawahar Rozgar Yojana, into whichNREP and RLEGP will be merged. The increases in State spending on social sectorand economic services account for most of the rise in current developmentalspending at the State level. In Andhra Pradesh and Tamil Nadu food distributionschemes (Rs. 2/kilo Rice and Mid-day Meals) have contributed to a rapid increasein current spending. In the future, State social sector spending and, to a largeextent, India's spending on the social sectors will depend on the growth ofStates' own revenues. Central grants will be limited by fiscal constraints, afact that is already being reflected in the recommendations of the 9th FinanceCommission regarding grants for 1988/89. As in the Centre, increasing State taxrevenues would probably involve broadening the tax base, in this case byincluding the small scale manufacturing sector and imposing taxes on wealthyfarmers. The potential for increasing State revenues through increased tax ratesis limited. Another option would be improved cost recovery. Better collectionof electricity and irrigation charges would provide a large source of revenuefor expanding soclal services. This could be supplemented by better cost recoveryin non-basic social services. A third option would be greater reliance on theprivate sector to provide education and health, combined with better targetingon the poor by the public sector providers of these services (See Chapter 5).There also are substantial opportunities to improve social service management(See Chapter 6).

1.61 Public enterprise performance has come in for growing criticism duringthe discussion of the Eigth Plan. While public enterprises as a whole dogenerate saving -- which accounts for the overall positive level of public saving-- this is almost wholly accounted for by depreciation allowances and profitsof the oil, power, transport, and telecom sectors. Profits of the oil sectorexceeded total profits of the public enterprises in 1987/88. A large number ofindustrial and mining enterprises continue to make losses, and total cash lossesare reported to exceed Rs. 8 billion. Moreover, the Auditor General hassuggested that in some cases public enterprise profits are overstated.

22

Preliminary results suggest some recent improvement in Central public enterpriseperformance, with profits of profit making institutions rising in 1987/88 andthen increasing sharply in 1988/89, while losses of loss making firms declining(Economic Survey, 1988/89). Nonetheless, profit rates remain low. Anotherproblem in the public enterprise sector has been the arrears of the SEBs withthe Central public enterprises producing power, oil and coal. These arrears havehad a large negative effect on cash flow of the Central public enterprises andincreased their borrowing requirements.

1.62 Major entities like the Railways, Coal India, and the NationalThermal Power Corporation have depended heavily on budgetary support for theirinvestment. Under the 7th Plan the Central Public enterprises were expected tohalve their dependence on budget support for investment. This was to be replacedby greater internal resource generation (depreciation allowances and profits).Results, however, have been different: internal resource generation has been muchlower than planned; budgetary support has declined in real terms but nowherenear as fast as planned, and borrowing, external and internal, has been muchgreater than planned (A. Gupta). This pattern is likely to continue in 1989/90.The public enterprises are programmed to finance almost the whole increase inCentral Plan spending. If the past is any guide, they are likely to fall shortof the target for growth in internal resource generation (57%) and be forced toborrow substantially more than planned in order to fulfill the investment target.

1.63 Improving public enterprise performance will be a crucial step towardincreasing saving in the economy. Recent increases in public enterprise priceswill raise their cash flow and saving. However, in the long run the use ofprice increases to offset inefficiencies is not a desirable solution to thepublic enterprise saving problem -- it simply generates higher costs for and actsas a drag on the rest of the economy. Substantial improvement in efficiencywill be needed to reduce the burden of the public sector. Some steps have beenalready taken in this direction. For example, the nationalization of sickindustries has been discontinued; memorandum of understanding, giving greaterautonomy to and increasing accountability of public enterprise managers, havebeen signed with key enterprises; and some sectoral holding companies have beenestablished. However, major changes in public enterprise policy will be neededto improve performance significantly and reduce the fiscal drain. This wouldinvolve: increasing competition for public enterprises; closing down unproductiveenterprises, discontinuing new public sector firms and limiting investment innon-competitive areas; restructuring of viable firms; and still greater autonomyand accountability for public sector managers (World Bank, 1988b).

E. Price, Monetary, and Financial Sector Developments

1.64 Wholesale prices rose 6.3% and consumer prices about 8% in 1988/89.This represents less inflation than last year. However, the seasonal downturnin prices occurred later and was smaller than usual. In fact, inflation fellsurprisingly little and food prices have grown surprisingly fast in 1988/89,given the estimated rise in agricultural output. This probably reflects a numberof micro-level factors: a) slower than usual release of foodgrains from depletedpublic stocks and rebuilding of private stocks; b) rising domestic prices ofimports, due to exchange rate depreciation and rising external prices; and c)rising public enterprise and administered prices (coal, steel, non-ferrous

23

metals, edible oils, milk and railway freight). It also reflects rapidlyincreasing aggregate demand, which has put pressure on pricea as well as thebalance of paymetits.

Table 1.4INDIA: Inflation and the Growth of Financial Assets

(percent p.s., point-to-point estimates).. ,__. . ... ... .... . . .. _ _ .. . . . .. . . .. . . .. . . . .. . . ._. . . . . _ . .. . . .

1962/3- 1975/6- 1980/1- 198516 1986/7 1987/8 1988/91975/6 1980/1 1984/5

. .... .... . . _*___... . . _. . . . .. . . . .. . _ . .. . . . . .. . _ .. . . . . _ . . .. . .

Inflation (WIPI)' 8.2 10.7 6.4 3.8 5.3 10.6 6.3Inftation (CPW)0 8.0 6.9 8.7 8.9 7.5 9.8 8.0"Narrow Money (MI)' 11.0 15 .3C 14.3 10.4 16.8 13.7 1S.4Broad Horny (M3) 12.7 19.9 16.4 15.9 18.6 15.9 17.6Pwemo: Growth of GDPfc 3.6 3.4 5.1 5.1 4.0 3.6 9.0P

a - - -Yea--end data the__ ..... __ ___Year-end date b Currency with the public plus demand deposits c Adjusted for break in series

in March 1978. d February to February. e Wortd Bank estimate based on prov. estimates frao weekof the tast March (R9I1 Weekly Bulletin - Statistical Supplement). World Bank Projections.

Money data refer to end March, after the closure of government accounts. See Appedix Table 6.1.

1.65 Narrow money grew an estimated 15.4% and broad money 17.6% in1988/89. This compares with increases of 13.7% and 15.9%, respectively in1987/88. New RBI credit to the Government amounted to Rs. 77.3 billion versusRs. 64 billion in 1987/88. Overall, base money increased by an estimated Rs.90 billion (17%), compared to Rs. 87 billion (19.4%) for 1987/88. The 1988/89growth in base money reflects the large increases in RBI credit to the Governmentand the banks, less the offsets of the international reserve losses and growingnon-monetary liabilities. Cash reserve ratios (15% effective July 1, 1989) andliquidity requirements (38P) have been rising steadily; they will now tie upabout 53% of the commercial banks' resources in Government (and other approved)securities and reserves with the RBI.

1.66 The RBI announced a number of financial sector measures in October1988. These included a) replacing the ceiling lending rate of 16.5% p.a. witha minimum rate 16%, thereby allowing banks to charge higher rates on lendingpreviously subject to the ceiling; b) replacing the Credit AuthorizaticI Scheme,which had subjected about 1000 large firms to a time-consuming RBI creditapproval process, with a post-loan scrutiny; c) allowing free transfer ofaccounts between banks, which previously required a "no objection letter"; d)reinstituting participation certificates in lending, to help banks even-out shortterm liquidity movements and increase flexibility; e) extending the amortizationp,riod for housing loans, from 10 to 15 years, decreasing the down payment, anddecreasing the interest rate by one percentage point ; and f) lowering themaximum rate to 16% for retail trade advances and commodity procurement bycentral and state governments. Measures (a)-(c) could increase competition andimprove the sector's performance. In March 1989, the RBI unified the cashreserve ratio at a slightly higher average level (15% effective July 1, 1989),abolished the ceilings on rates in the interbank money market, and announcedthe forthcoming introduction of two new instruments -- commercial paper andcertificates of deposit.

24

1.67 Despite these measures the banking sector continues to suffer fromsome problems. Deposit mobilization is not, however, one of them. Real interestrates on deposits have been maintained at reasonable levels. This, along withthe spread of bank offices, has contributed to a rapid growth of deposits. Theproblems are mostly on the lending side. Over and above the cash and liquidityrequirements, more than 40% of the banks' remaining portfolio is tied up inmandated, priority sector lending, up from 33% in 1979. This priority lendingalso includes some additional lending to the public sector; over 60% of thebanks' portfolio goes to the public sector in one way or another. The highpercentage of required public sector and priority lending leads to a number ofdifficulties. First, it limits the availability of funds for medium and largeindustrial firms, which can hinder their ability to adjust to changing industrialconditions. Second, since much of the government credit bears low rates, otherbank borrowers (including the priority sectors) must pay high real rates to coverthe deposit rates. However, this problem is being reduced as low interestgovernment debt is gradually retired, as recommended by the ChakravartyCommission's. Third, with so much public sector credit and with effectiveguarantees on some priority sector lending, banks have little incentive or needto develop a project evaluation capacity.

1.68 Loan arrears represent a growing problem. Over 10% of bank creditto industry is now in arrears. Agricultural credit is much worse; arrears tocommercial banks amount to 46% (Pulley) a figure that is likely to worsen.First, the new program of a single lead branch bank will reduce the incentiveto pay outstanding loans to other banks. Second, some politicions and officialshave promised write-offs or reschedulings of farmers' debts and the Farmers'Movement in Maharashtra has encouraged widespread declarations of bankruptcy.With the chance for debt relief high, borrowers naturally are delaying payments.The RBI Governor has pointed out that the high and growing arrears could threatenthe banking system's stability. Ultimately it could require Governmentintervention to cover banks' deposit liabilities.

F. Balance of Payments Developments

1.69 India's current account deficit rose an estimated US$ 800 millionin 1988/89, about 18%. This reflected growth in aggregate demand that out-stripped even the near record increase in supply. Export growth (in dollars)was about 15% (about 9% in real terms). While much better than the negligiblegrowth of the 1978/79-1984/85 period, this is less than 1987/88's 23.2% increase,or what is needed with imports also growing about 15% (as in 1988/89) and importsexceeding exports by some 50%. Reflecting the rising trade deficit, the currentaccount deficit rose to about 2% of GDP and gross international reserves(excluding gold) fell US$ 1.4 billion over the year, following a US$ 300 milliondecline in 1987/88. Despite these declines, gross reserves are still equivalentto over two and one-half months of imports. India's low ratios of exports toimports and to GDP (5.2%) represent a potential constraint on growth and leavethe country vulnerable to sharp rises in import prices or to any tightening ofconditions in international capital markets. Continued growth of concessionaldisbursements will be necessary from a balance of payments standpoint, as wellas to support the Government's poverty reduction efforts. However, the keyfactor in allowing room for further import growth and maintaining a viablebalance of payments will be sustaining real export growth of at least 10% p.a.

25

Table 1.5INDIA : Salnce of Pawmnts. 1980/81-1988/9

(USS Hiltion at current prices)..................................... _…_

1980/81 1981t82 1982/83 1983/84 1984/0 19M/86 19t6/87 1987/88 1988/89...... .......... e............................. ........................................................ ..............................

Exports I 11211 11394 11207 12291 13158 12696 13677 16488 18757Merchandise, f.o.b /a/ 2 8332 8697 a3m8 9089 9769 9461 10460 12888 14824Non-factor Services 3 2879 269? 2819 3202 3389 3235 3217 3600 3934

lIports 4 -17408 -17248 -16271 -16946 -17774 -19419 -I9954 -22Z72 -2563Merchandise c.i.f /a/ 5 *15892 -15552 -143? -14782 -15424 -172m -1772 -19m -22760mon-factor Services 6 -1516 -1696 -1884 -2164 -2350 -2124 -2225 -2500 -2878

RESOURCE BALAUCE 7 -6197 -5854 -5064 -4655 -4615 -6723 -6277 -5784 -6881

Met Factor Income 8 585 344 -429 -726 -1066 -1041 -1221 -1441 -1728Factor Receipts 9 1083 912 525 449 493 547 501 50S 479Factor Payments /b/ 10 -498 -568 -954 -1175 -1559 -1588 -1722 -1946 -2207

CN8LT Interest Paid) 11 -420 -443 -601 -780 -851 -1129 -1313 -1517 -1857

Net Current Transfers 12 27m 2318 2505 2570 2526 2198 2261 2674 3223Transfor receipts fcf 13 2786 2339 2526 258? 2542 2220 2287 2700 3250Transfer Payments 14 -15 -21 -21 -17 -16 -22 -26 26 .27

CURRENT SALANCE 15 -2841 -3192 -2988 -2812 -3155 -S566 -S23? -4551 -5385

Direct Investmznt 16 8 10 65 63 62 160 208 251 299official Grant Aid 17 643 497 399 367 453 359 403 405 448Met N&LT loans (ORS) 18 2117 1658 2194 2170 3355 2838 1848 3511 3109

Disbursements 19 2878 2402 3104 3204 4386 4421 4090 6191 5946Repayments 20 -J61 -744 -910 -1034 -1030 -1583 -2242 -2680 -2837

Other HILT (Net) 21 - - - - - - - - -

Net credit from IMF 22 312 689 1968 1306 67 -209 -520 -931 -1071Disbursements 23 312 689 1968 1376 201 - - - -Repayments 24 - - - -70 -134 -209 -520 -931 -1071

Capital flows NEI 26 -384 -1618 -1343 261 -791 2491 3472 977 1194Mon-Resident Deposits 31 195 233 414 712 549 1176 1308 1274 1520Net Short-TerM Capital 25 - - - - - - - - -

Others fd/ 53 -579 -1851 -1757 -452 -1340 1315 2164 -298 -326Errors & oissfns fef 27 -200 -441 210 -474 272 474 -101 - -

Change in Reserves Iff 28 345 2398 -505 -881 -263 -547 -73 339 1406(- * Increase)

End-Year Reserves (Gross) fef 2"' 6859 4461 4966 5847 6110 6657 6730 6391 498SC # Months of Imports ) 52 5.2 3.4 4.1 4.7 4.8 4.6 4.6 3.9 2.6

Nemo Items :Debt Service Ratio (X) 50 8.0 8.4 11.6 14.5 15.1 21.5 26.9 27.? 26.7Curr Acc Deficit/GUPmp (X) 51 1.7 1.8 1.6 1.4 1.6 2.6 2.3 1.8 2.0

.... ... ... ... ... ... ... ... ... ... ... ... ... ... .... ... ... ... ... ... .................. ... ...

/a/ Met of crude petrolet. exports.fbf Includes IMF interest; Excludes interest on Non-Res Deposits.fcr Includes the Bhopal gas settlement in 1988/89.fdf Including reserve valuation changes, rupee trade imbalQnce, etc.

1e/ As estimated by Government of India./f/ Excluding Gold.

26

This, in turn, will depend on maintenance of the export profitablity throuighexchange rate policy and incentive programs, tighter control of aggregate demand,and reduction of protection, particularly on universal inputs and capital goods.

1.70 Expots rose about 15% in 1988/89 (in dollar terms on the RBI basis).This is less than the 23% increase recorded in 1987/88. Estimated real growthalso was lower, declining from 12.6% in 1987/88 to about 9% in 1988/89. Despitethis decline, real export growth has averaged over 10% p.a. in the last threeyears. Exports of manufactures are estimated to have risen over 20% in dollarterms in 1988/89. Gems and Jewelry accounted for about 50% of the increase inmanufactured exports, with chemicals, engineering goods and, to a lesser extent,leather goods also growing rapidly. On the other hand, exports of textile andgarments stagnated in dollar terms and petroleum products declined. Exports ofprimary exports fell 12% irn real terms in 1987/88 and another 3% in 1988/89,reflecting the 1987 drought but also their long run stagnation.

1.71 Regarding export incentives, the real exchange rate improved anestimated 11% in 1988/89. This continues the trend of recent years and wassomewhat better than 1987/88 (See Table 1.6). Specific incentives formanufactured exports also were improved somewhat early in 1988. The 1988-91Import-Export Policy, announced in April 1988, further improved exporters' accessto imported inputs. The types of manufactured exports entitled to REP licenses(transferable licenses that can be used to import restricted or canalizedimports) were increased and rates of entitlement were raised for a number ofproducts. The number of products subject to export control was reduced, althoughthis was offset by the continued canalization of most primary exports throughgovernment agencies. The new Import-Export policy also contained provisions forextending export incentives to indirect exporters. It improved exporters' accessto imported capital goods, by increasing the number of capital goods used byexporters on Open General License (OGL) and by reducing tariffs on some of them.The policy also improved the rules and facilities for export and trading houses,bonded warehouses, and free trade zones. In addition, the Budget for 1988/89raised the export profit tax deduction to 100% of export profits, and the RBIincreased and liberalized its foreign exchange allowance for export marketing.The Cash Compensatory Scheme for reimbursement of local taxes on exportedproducts and the Duty Drawback Scheme were enhanced and broadened, and theirprocedures were streamlined. The Advance License scheme was decentralized and,in April 1988, the eligibility for the Import Passbook Scheme was extended toall firms with exports of over Rs 150 million. Finally, the International PriceReimbursement Scheme (IPRS), which is intended to reduce the costs of domesticinputs to exporters, was extended and, as part of the steel price rise, the taxon domestic steel supporting the IPRS fund was doubled.

1.72 Given the improved incentives in 1988/89, the question is why didreal export growth slacken. For exports of manufactures, the rapid growth of1987/88 and the slackening in 1988/89 probably reflect the shifting balancebetween the attractiveness of the internal and external market, coupled with thelagged effects of real exchange rate movements. In 1987/88, the combination ofa weak domestic market and the lagged effects of the rapid improvement in theexchange rate in 1986/87 stimulated a sharp rise in exports. In contrast,

27

1988/89 was characterized by a rise in domestic demand as a result of the goodagricultural harvest, tite large government deficit, and the rebound in industryand in private investment. This diverted potential exports to the domesticmarket. Also, the constancy of the exchange rate in terms of SDRs and dollarsuntil nearly the end of 1987 probably had some lagged effect on exports earlyin 1988/89. Export growth clearly picked up in the latter part of 1988/89,reflecting the improvement in incentives and the real exchange rate. Inaddition, there are some product-specific explanations for the decline in export

Table 1.6KEY ECONOMIC VARIABLES

1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88INCENTIVE INDICATORS

Real Effective Exchange RateIndex 1980"100 101.7 102.7 99.9 104.0 101.6 95.7 81.6" ?6.8 ",

Annual change 1.0 -2.7 4.1 -2.3 -5.8 -14.7 -7.1

Real Interest RatesShort term (Treasury Bills) -5.9 -5.0 -2.3 -2.4 -3.0 -2.1 -2.1 -3.0Long term (ID81) -0.2 3.5 6.5 6.3 5.7 6.7 6.7 5.7

Index of real wages [a] 100.0 100.9 104.5 110.9 117.7 117.6 120.4 123.4Prices of agr. commodities(domestic and int'l) US$/NTWheat US 168.3 154.6 132.6 137.3 140.2 128.7 118.7 113.8

India [b] 148.2 145.6 147.5 146.4 127.0 128.3 126.7 128.0Rice Thailand 433.9 482.8 292.9 276.9 252.1 215.9 210.5 254.2

India (b] 133.0 128.8 126.7 128.0 115.3 116.0 114.2 115.7Tea London 2230.0 2020.0 1930.0 2330.0 3460.0 1983.0 1928.0 1735.0

India 1902.0 1751.0 1779.0 2589.0 2819.0 2150.0 2136.0 n.a.

EXTERNAL TRADE INDICATORS

Volume Index of Major Exports1980/81-100

Tea 100.0 93.3 84.9 82.0 93.3 89.8 83.9 86.1Iron ore 100.0 105.8 96.9 98.7 113.8 134.4 118.3 126.3Textiles 100.0 90.1 77.1 72.6 89.0 77.2 78.2 93.3Readymade garments 100.0 91.5 79.9 91.5 114.5 115.5 141.7 174.3Leather & products 100.0 148.1 140.8 150.0 190.8 195.8 194.6 229.7Engineering goods 100.0 97.9 83.5 73.2 84.5 88.3 84.1 97.0

India's exports as % of:Exports non-oil dev. countries 2.7 2.6 3.0 2.8 2.7 2.3 n.a. n.a.Exports of dev. countries 1.4 1.4 1.7 1.8 1.8 1.6 n.a. n.a.World Exports 0.5 0.5 0.6 0.6 0.5 0.4 n.a. n.a.

Manufactured ExportsReal Growth rate 1.5 3.4 -3.6 2.2 8.8 6.2 11.2 26.5Value as X of Tot. Exp. 59.8 61.2 61.3 62.7 63.8 64.7 66.8 74.3

Conmodity Terms of TradeIndex 1980-100 100.0 105.3 107.9 120.3 111.2 110.8 114.1 113.7Annual change -27.5 5.3 2.5 11.5 -7.6 -0.4 3.0 -0.4

------------------------------------------------------- _------------__-------__---------------------------

[a] Per capita emoluments of public sector employees at 1960/61 prices (1980/81-100).(b] Procurement prices.

28

growth in 1988/89 -- textile and garment quotas have been reached in some cases,MidJle East and African markets continue weak for capital goods, and theexportable surplus of petroleum refineries fell, reflecting capacity constraints.For primary exports, growth was slow because of a) lagged effects of the poorharvest in 1987/88, b) concentration of agricultural growth in foodgrains, withtraditional export commodities rising less, c) higher consumption (e.g. tea,sugar) and d) continued policy restraints on some exports (e.g. cotton).

1.73 High domestic demand is likely to have a particularly negative effecton exports in the Indian context. First, although India has reduced its relianceon quantitative restrictions, canalized sales, and prohibitive tariffs to controlimports, these policies are still important in many areas where imports competedirectly with domestic production, such as tires and packaging materials, andconsumer goods. When domestic demand for such products expands, resources aredrawn away from potential exporters. Second, while some important exports aredelinked from the domestic market (e.g. Gems and Jewelry), in many cases exportsales are a ven_. for excess production. Producers are loathe to set up export-oriented units, for example in textiles, not only because of the normal risksof shifting world demand and domestic incentives, but also because of India'sstrict limitations on exit and layoffs (See Chapter 4). Hence, when the domesticmarket is poor, exports from such suppliers increase but, when the domesticmarket improves, exports decline just as rapidly.

1.74 In addition, the specific export incentive programs are inherentlylimited in their ability to simulate a free trade environment for exporters, inthe context of India's highly taxed and still higher protected environment.Broadly speaking, India's manufacturing sector continues to be characterized byhigh cost, low quality production. This reflects the heavy tax burden on andthe still limited competition in many lines, particularly "universalintermediates' such as metals, chemicals, petrochemicals and plastics, andpackaging materials. The more a potential exporter depends on the domesticeconomy for inputs, directly and indirectly, the more serious the disadvantage.The numerous incentive schemes mentioned above (and MODVAT) ara attempts tooffset these problems. However, the offsets are only approximate. Moreover,although these schemes offset taxes, they are treated as subsidies which, in anera of fiscal stringency, limits their size politically. Moreover, the schemesare complicated and to prevent diversion of benefits, which even the FinanceMinister has indicated may be a problem, involve substantial bureaucraticcontrols. This reduces the benefits of the schemes to exporters andcorrespondingly limits their incentive effect. An alternative would be simplyto allow duty-free imports for exporters, as some of the current schemes attemptto do. However, substantial controls still would be necessary, in order toprevent diversion of imports that are intended for exporters into what is stilla highly protected domestic market. All this suggests that the complicationsand the bureaucratic controls which reduce the attractiveness of export incentiveschemes, will only be reduced as the general level of protection declines.

1.75 Resumption of rapid export growth will be critical to maintaininga viable balance of payments. The need for rapid export growth has beenemphasized in the 8th Plan discussions and is shown in the projections of sectionG. The foregoing discussion suggests that one condition for rapid export growth

29

will be maintenance of export profitability, through active exchange ratemanagement and maintenance of specific incentives programs. The importance ofthis factor is apparent from the experience of 1986/87 atnd 1987/88 and shows upin the estimated responsiveness of real exports to the real exchange rate (WorldBank, 1987b). Second, tight contro. over growth of domestic demand also willbe important in providing a framework for rapid export growth, as suggested bythe experience of 1988/89. Third, reduced protection and taxes on universalintermediates and capital goods will be critical to developing a rapidly growing,diversified export sector with strong linkages to the domestic economy. Thispolicy change would lower the current high costs of such inputs to direct andindirect exporters. It also would reduce the costs of and the controlsassociated with the export incentive programs. However, since domestic excisesand customs duties on these products account for an important fraction of totaltaxes, alternative sources of government revenue will need to be developed.

1.76 Impors rose about 15% (in dollar terms and on the RBI basis) in1988/89, following an 11.5% increase in 1987/88 and a 2.5% rise in 1986/A7.Much of the variation in imports over the last few years is explained by changesin imports of petroleum and petroleum products (POL). The underlying trend inPOL import volume has been up. However, the value of POL imports has grown lessrapidly, because of the drop in world petroleum prices. The exception was in1987/88, when prices firmed. This price rise, plus a drought-induced rise indemand for thermal power that contributed to an 18% increase in POL importvolume, produced a US$ 1 billion increase in POL imports in 1987/88. Thisincrease represented nearly 50% of the rise in total imports in 1987/88. In1988/89 the volume of POL imports rose about 9%. However, the value of POLimports fell about US$ 400 million in 1988/89 because of the decline in prices.

1.77 Other bulk imports (including gems) rose sharply in 1988/89. About2 mmt of wheat and 850,000 tons of rice were imported in 1988/89, along withlarge amounts of edible oils. These imports represent a part of the drought'simport bill, but one that was paid in 1988/89 rather than in 1987/88. Anotherfactor in rising bulk imports was the increase in international metal prices.Finally, gem imports have continued to rise rapidly, accounting for much of theincrease in bulk imports in both 1987/88 and 1988/89. These imports are inputsfor Gems and Jewelry exports, representing about 75% of the export value.

1.78 Capital goods imports rebounded last year from the-ir depressed levelsof 1987/88. Imports of non-bulk intermediates also grew, reflecting higherindustrial growth and restocking. The increases since 1984/85 in capital goodsand non-bulk intermediates have been much faster than foreseen in the SeventhPlan, reflecting the rapid growth of manufacturing and the gradual liberalizationof these imports. The higher import bill in these two categories was largelyoffset by the aforementioned drop in the cost of oil imports. However, with oilprices likely to stabilize and perhaps even to rise, continued high growth inthese two categories of imports will put pressure on the balance of payments.Some respite from these pressures occurred in 1987/8Z. because of the industrialslowdown. However, the rebound in these imports in 1988/89 contributed to theworsening trade deficit.

1.79 The excess of RBI payments for imports over Customs import figures

30

Table 1.?7INDIA: Inport CoMOsLtiona (US$ blllil)

, _______________._____________________ _______________________________________

POLQ Other Cap. Other Stat. Totals"d Bulk Goods (Inter- Dtsa:.b bwortsFert. mediats)

1983,4 3.9 4.0 3.2 3.1 0.6 14.8198415 4.4 3.0 2.7 3.1 2.3 15.4198516 5.2 3.2 3.5 4.1 1.2 17.3198617 2.8 3.1 4.3 5.6 1.9 17.7198718 3.5 3.7 4.8 5.2 2.5 19.8e198819 3.4 5.2 5.9 6.0 2.2 22.86-..-- _------------------------______-_-----------------------------__--------

n lot of crud petrolem expotrt.b Dlffrmooe betven RBS ad Coerce estLmates.

is a factor that has contributed to rising import payments and which also makesit difficult to pinpoint the sources of import growth. This difference rosesharply in 1984/85 and has averaged over US$ 2 billion p.a. since 1986/87. Thediscrepancy reflects several factors. Some imports, such as offshore oil rigsand military equipment, do not pass through customs. Also, differences betweenRBT payments for imports and Customs declarations reflect differences invaluation and timing. (If payments are increasingly made closer to the time thatgoods pass through Customs or Customs values are less than RBI payments, thenRBI payments for imports will increasingly exceed Customs figures.) In 1986/87,the last year in which RBI payments for imports are available, the RBI-Customsdifference was US$ 1.9 billion, equivalent to over 12% of Customs imports. Thediscrepancy rose US$ 700 million in 1986/87, compared to a decline of US$ 250million in Customs imports. The large and growing size of the RBI-Customsdiscrepancy suggests that further scrutiny and rationalization is necessary.

1.80 Indian import policy can be characterized as gradual liberalizationof a complicated licensing, high-tariff import regime. All consumer goodsimports are basically prohibited. Most inputs and capital goods are classifiedunder one of four categories: a very small banned list, a small restricted list(about 375 items), a limited permissible list (about 1000 items), and an opengeneral license (OGL) list (about 3000 items). The remaining imports, some ofwhich are fairly important (e.g. petroleum, iron and steel, non-ferrous metals,agricultural products), can only be imported by "canalizing" public sectortrading agencies. Of course the numbers of items on each list are onlyillustrative of the importance of quantitative restrictions, since the potentialimpact of an "item' varies, depending on the narrowness of its definition. Inthe Indian context the scope of an "item" often varies substantially, in somecases different items refer to different uses of the same product or only smalldifferences in size or weight of an item. Import of goods on OGL is furtherrestricted to "actual users" except for a small list (74 items) of imports forstock and sale. Imports of inputs are also restrained by phased manufacturingprograms, which require manufacturers to attain increasing levels of domesticcontent over time. REP licenses (para 1.71), reduce the impact of the protectivesystem as they are transferable and can be used to import limited permissibleor canalized items. Since 1985 over 1000 items have been moved to OGL and anumber of items have been "decanalized".

1.81 Import duties are quite high and collection rates have been

31

increasing. The average duty (unweighted) under the new Import-Export Policy(April 1988) was 118% (World Bank estimate) with 2,404 products (of 5037) in the125-149% duty range, 1,126 products in the 100-124% lange, and 715 in the 75-99%range. An August 1987 drought surcharge added 5 percentage points to tariffsand this was continued in the 1988/89. In addition to the duties included inthe above figure, a "countervailing duty (CVD)" equal to the domestic excise taxis imposed on the cost of an import (c.i.f.including other duties). Includingthe countervailing duty, the average (unweighted) tax on imports is 143%.

1.82 Duty collections were equal to about 60% of customs imports (c.i.f.)in 1987/88. Excluding imports of gems, edible oils, fertilizers and POL, whichhave low tariffs, the duty collected would be in the 70% range. These figuresare much higher than other developing countries, where collections usually rangefrom 10% to 20% of imports (World Bank, 1987b). India's duty collections haverisen substantially in comparison to the roughly 30% ratio prevailing in theearly 1980s and 48% in 1985/86. This increase does not necessarily representhigher prote-tion however. In many cases it represents use of tariffs torestrain imports moved to OGL and higher collection rates on imr-rts that remainlicensed.

1.83 Imports under OGL seem to be increasing. Estimated OGL imports nowaccount for over 40% of non-POL imports, versus less than 20% in the early 1980s.However, imports of products competitive with local production and, thus the roleof imports as a force for efficiency, remain limited. For example, imports ofmanufactures were equivalent to only about 8.2% of domestic supply in 1986/87,a figure slightly lower than the 8.5% ratio of 1980/81. Moreover, in mostmanufacturing sectors where imports exceed 10% -- petroleum products,fertilizers, edible oils, paper and paper products, cement, iron and steel, andnon-ferrous metals - - imports are largely controlled by public sector canalizingagencies. The main exception is capital goods, but here the domestic licensingprocedure (the "indigenous angle clearance") can be used to control imports.

1.84 In sum, the main recent improvements in import policy have beeneasier access to imports by exporters, easier application of existingrestrictions and greater reliance on prices (the exchange rate and tariffs) tolimit imports. The substitution of price rationing for quantitative controlshas had the desirable effect of transferring to the government (and exportersin the case of the exchange rate and REP licenses) the scarcity premium onforeign exchange that otherwise would go to recipients of import licenses.Increased imports of capital goods and intermediates have been an importantfactor in the higher growth of total factor productivity in manufacturing.However, protection remains high on basic inputs and many final products.

1.85 A program of gradual, targeted reductions in protection, beginningwith universal inputs and capital goods that often are produced by inefficient,capital intensive industries, will be vital to developing a rapidly growing,diversified export sector. It also would yield benefits to consumers and inputusers and any direct loss of employment would probably be more than offset byhigher employment in exporting and user industries (World Bank 1987b). Ofcourse, such a program will require careful coordination with export growth,prudent demand manageaent, and rising capital inflows, in light of the tightforeign exchange situation. In the context of such a program, it is worth noting

32

two other points: First, tariffs will have to be adjusted on user induatriesas well as inputs, so as to avoid inadvertent increases in effective protectionon final products. In cases where protection of user industries prohibitsimports, greater competition must be encouraged in order to reap the benefitsof lower user prices. Second, avoiding excess demand pressure from monetary andfiscal policy will become even more critical as tariffs drop below prohibitivelevels and quantitative restrictions are further reduced, because of theincreased potential for leakage of excess demand into the balance of payments.

1.86 The Trade Defick increased by nearly US$ 1 million in 1988/89 (14%),even though exports and imports grew at roughly the same rate. Imports exceedexports by roughly 50%. Hence, as a rule of thumb, exports need to increaseroughly 50% faster than imRorts in order to keep the trade deficit constant.This ratio was exceeded in 1986/87, largely as a result of the fall ininternational oil prices, and in 1987/88, as a result of rapid export growth,but not in 1988/89. The increased trade deficit in 1988/89 by definition meansthat aggregate demand grew even faster than tie record growth in supply. Theexcess growth in demand in turn reflects a combination of the high Governmentdeficit-low public sector saving and the rebound in private investment.

1.87 Invluibles (tourism, shipping and insurance (net), factor payments(net), and remittances) have traditionally offset much of India's large tradedeficit. Howe.ver, this offset has trended downward in the 1980s, owing to thegrowth in interest payments and the stagnation of remittances. For 1988/89estimated net invisibles were about US$ 2.6 billion, compared with US$ 4.8billion in 1980/81. A spur. in tourism in 1986/87 slowed the decline. Since1986/87, however, the growth of tourism has slowed again, reflecting limitedhotel capacity and limitations on airline arrivals. Iu the last two years,transfers have risen rapidly, reversing the downward trend in invisibles; thisreflects a large rise in private remittances in 1987/88 and the payment relatedto the Bhopal settlement in 1988/89, respectively.

1.88 The CurrentAccount deficit rose about US$ 800 million in 1988/89,reaching US$ 5.4 billion and 2% of GDP. The rise reflected the rising tradedeficit, partially offset by the Bhopal-related increase in net transfers. Therise in India's current account deficit, in a year when supply increaseddramatically and a large, one-time transfer occurred, is cause for worry. Itis true that similar current account deficits have been recorded in a number ofmajor developing countries recently. In 1986, for example, the average currentaccount deficit of the other large low-income countries (Bangladesh, China, andPakistan) was 2.9% of GDP, and of the larger lower-middle-income countries(Indonesia, Thailand, Turkey, Colombia, and Philippines) 1.23%. However, manyof these countries are today suffering balance of payments difficulties, so theirexperience may not be a good guide. Also worrisome is the tightening ininternational capital markets and the slow growth of total capital inflows,including NRI flows, to India. This meant that India had to finance the risein the current account deficit through reserve losses.

1.89 Capia Inflows (net) have declined since their 1985/86 peak. MLTborrowir-5s (net) have been roughly constant since the sharp rise in commercialborrowing in 1984/85. Inflows of NRI deposits and equity have also stabilized

33

since they increased sharply in 1985/86. With these two major items roughlyconstant, the overall trend in the capital account has been dowmard because ofthe rising repayments to the IMF and the sharp decline in 'Otherw capital inflows(capital inflows outside the World Bank's DRS plus reserve valuation changes andchanges in rupee trade balances). As a result, reserve losses have beennecessary in order to finance the current account deficit.

TabLe 1.8India: Financing the Current Account Deficit, 1985/86 to 1987/88

(bilIeon US 6)

1986/85 lYBStB86 198M8 19B7188 1988jCurrent Account 3.2 5.6 5.2 4.6 5.4

deficitfinwnced byCaoitat Flows 3. 6.1 5.3 43. 4.0

NLT (net)a 3.3 2.8 1.8 3.5 3.1NRI 0.5 1.2 1.3 1.3 1.5Grant Aid 0.5 0.4 0.4 0.4 0.4Direct Imv. 0.1 0.1 0.2 0.3 0.3Other (Residual b) -0.1 1.8 2.1 -0.3 -0.3

less IMF repayment -0.1 0.2 0.5 0.9 1.1

iReserve Lss(- z gain) -0.3 -0.5 -0L1 f 1.4

(P) World Bank ProJection. a Includes NLT commercial and non guarenteed loans.Source: World Bank estimates (based an RBI, IMF and World Debt Tables and

I Projections). b Includes reserve valuation changes, rupee trade fabalances.

1.90 This process came into sharp focus in the last two years. In1987/88, net disbursements of MLT loans rose nearly US$ 1.7 billion, accordingto the World Debt tables. World Bank disbursements (gross) increased roughlyUS$ 900 million (IDA was up US$ 250 million). Bilateral loans and grants wereup nearly US$ 300 million. These large increases reflected the Consortium'squick response to support the Government's drought program, including commitmentsof US$ 200 million from Japan and US$ 350 from the World Bank especially fordrought aid. Estimated MLT disbursements from commercial sources also rose in1987/88. However, all this was more than offset by an estimated US$ 2.4 billiondrop in "Other' capital inflows and by increased IMF repayments. Hence, therewas a slight reserve loss in 1987/88, even though the current account deficitdeclined by US$ 600 million.

1.91 In 1988/89 estimated total capital inflow fell slightly. Consortiumdisbursements were roughly constant; the drop in quick disbursing drought loanswas roughly offset by increases in other disbursements. World Bank disbursements(including IDA) were up from about US$ 2.2 billion to US$ 2.5 billion. NRIdeposits rose slightly and Grants, Direct Investment and 'Other' capital inflowswere constant. However, MLT commercial borrowing (net) appears to have declinedsomewhat and IMF repayments increased slightly. Hence, the US$ 800 million risein the current account deficit, plus the slight fall in net capital inflows (US$300 million), had to be financed by an increase in the reserve loss, from US$300 million to US$ 1.4 billion.

34

1.92 Inflows from non-resident Indians (NRIs) have been a major sourceof capital inflows, averaging about US$ 1.4 billion in the last three years.Most of the recent inflow has gone into dollar denominated deposits, which nowaccount for almost 50% of the stock of deposits. In addition there are sterlingDM, yen and rupee deposits and programs for equity investment. NRI's have beenattracted by the economy's improved performance and the attractive interestrates. On NRI rupee deposits, the Government has maintained a two percentagepoint premium over comparable domestic deposit rates. On the dollar and sterlingdenominated deposits, rates are adjusted to maintain a premium over externalrates. As of March 1989 rates on new US$ deposits are 10.75% p.a. on 6 months -1 year deposits, 11% p.a. on 1 - 2 year deposits and 11.25% p.a. on depositsof 2 years or more maturity. However, inflows seem to have stagnated since1985/86, and much of the rise in deposits represents reinvestment of interest.A recent offering by the State Bank of India of non-repatriable, dollarequivalent bonds to NRIs was undersubscribed.

1.93 Debt Total medium and long-t"rm (MLT) debt (including privatenon-guaranteed debt) increased from US$ 25.6 billion in March 1985 to US$40.8billion in March 1988, according to the World Debt Tables. This is an increaseof nearly 60% in three years. MLT debt is estimated to have increased a further9.1% in the current year, to reach about US$ 44 billion in March 1989. Includingestimated short-term debt and obligations to the IMF, the total debt stockamounted to about US$ 49.5 billion (excluding non-resident deposits of aboutUS$ 8.9 billion). The non-concessional component of India's publicly guaranteedMLT debt (excluding IMF) increased from 21% in March 1985 to 30% in March 1988;this increase has hardened the average cost of external debt.

1.94 Internatonal Reserves remain over two and one-half months of importsdespite last year's decline (IMF International Financial Statistics, excludinggold). India also has gold reserves equivalent to over 2 months of imports(valuing gold at current market prices). Debt Service, including interestpayments, amortization, and IMF repayments and interest, but excluding intereston NRI accounts, now amounts to an estimated 27% of current foreign exchangereceipts (based on the World Debt Tables which differ from the Government ofIndia's figures due to differences in coverage, exchange rates and timing). Thisrepresents a slight reduction from 1987/88's 28% ratio, reflecting the increasedgrowth rate of current receipts. However, the still-low ratio of exports toimports (0.65) and to GDP (5.3%) mean that India remains vulnerable to rapidincreases in import prices or tightening of international capital markets.

G. Macroeconomic Prospects

1.95 Growth in GDi" should be about 4% 1989/90. Agricultural output islikely to decline somewhat from the high level attained in last year's excellentmonsoon, if the past is any guide. Growth of industry and services will,however, continue high. Despite the projected decline in GDP growth in 1989/90,average growth for 1985/86-1989/90 should exceed the 7ch Plan's target of 5% p.a.

1.96 Looking beyond 1989/90 to the 8th Plan period (1990/91-1994/95), thePlanning Commission has chosen a 6% p.a. growth target. This reflects bothoptimism arising from the recent improvement in performance and a desire to

35

reduce poverty more quickly. From the sect'tral standpoint, achieving the 6% p.a.figure will depend on improving agricultural growth, from the 1.3% p.a. averageof the 7th Plan period to about 2.7% p.a. With this more rapid agriculturalgrowth, industry would only need to reach a 7.7% p.a. growth and services only6.7% p.a., both about the same as in 7th Plan.

1.97 In more aggregate terms, achieving higher GDP growth will depend onhigher investment or faster growth in the productivity of capital and labor.The higher productivity growth, the less the necessity for higher investment.Until the early 1980s India relied heavily on raising investment rates toincrease growth. Productivity improvement, by definition, was slow. Since then,however, productivity growth has accounted for a larger proportion of growth,especially in manufacturing (para 1.16). Based on this recent experience, thePlanning Commission has called for modest increases in both the investment rateand productivity (a fall in the ratio of incremental capital per unit of(additional) output (ICOR)), in order to achieve higher growth. Of course,improving productivity in the aggregate will not mean solely modernizing thecapital stock: improving the allocation of capital and labor and raising capacityutilization, through better incentives, can also increase growth withoutrequiring much new investment.

1.98 Demand management also will be critical in realizing higher growth,as the Government recognizes. Foreign saving already represents about 2% of GDPand further increases will come largely on commercial terms. Hence, prudencesuggests that any increase in the (real) investment ratio that is necessary forhigher growth should come from higher national saving. Given the already highrate of private saving, almost all of any increase in national saving would haveto come from higher saving by the public sector. Of course, placing greaterreliance on productivity gains to achieve higher growth would reduce the needfor higher investment and saving. However, it would still be necessary to cutthe government's deficit, in order to reduce its already substantial preemptionof credit resources and to ensure that inflation remains below double digits.The Government correctly recognizes that any upsurge in inflation would beespecially harmful to the poor and would threaten India's high private savingrate. Finally, tighter control of demand also will be necessary to contain thetrade deficit at prudent levels.

1.99 Balance of Payments Prospects are conditioned by three underlying,unfavourable factors. First, the petroleum import bill is likely to increasesubstantially in the 1990s (para 1.23) and international oil prices are expectedto rise. Second, workers' remittances, which are now equivalent to over 10% ofthe import bill, are unlikely to increase as rapidly as in the past. Finally,capital inflows from Non-resident Indians (NRIs) also are unlikely to increaseas rapidly as in the past.

1.100 Given these factors, India will have to depend more on export growthto pay for its rising import bill than it has in the past. The PlanningCommission has estimated that real growth of exports of at least 10% p.a. willbe a critical factor in achieving higher growth. In absolute terms 10% p.a.real export growth implies annual increases of only US$ 2.5-3.5 billion - fairlysmall increments in terms of either world markets or the performance of East

36

Asian exporters. Moreover, India's real export growth has averaged over 10% p.a.in the last three years. Hence the target is feasible, the question is how tosustain and improve recent performance. India' s recent experience indicatesthat achieving the export target will require an incentive structure thatincreases export profitability, including active management of the exchange rate;tight control of aggregate demand, especially improved fiscal performance; andreductions in protection beginning with universal imports and capital goods,(para 1.73-1.75). With this higher export growth, and significant increases inconcessional aid disbursements, India's debt service obligations will remainmanageable in the l990s, despite some rise in the proportion of non-concessionaldebt.

1.101 In 1989/90, however, the balance of payments is likely to remainunder pressure. The current account deficit is likely to worsen, reaching aboutUS$ 6.2 billion (about 2.2% of GDP). The current account will deterioratefurther, even though export growth is expected to increase, because of theaforementioned imbalance between exports and imports and the fall in transfers.With tight control of domestic demand, continued active exchange rate managementand simplification of export incentive programs, and some loosening of importrestrictions, and with some increase in primary exports owing to 1988/89's goodharvests, exports are projected to rise about US$ 2.6 billion (over 17%). Importgrowth (13.2%) is likely to be somewhat slower than in 1988/89 for a number ofreasons: elimination of foodgrain imports (unless the 1989/90 harvest is poor),slower GDP growth, completion of restocking of imported inputs in 1988/89, andcontzol over the government deficit and the residual category of imports. Tothe extent imports are not restrained by macroeconomic measures, they willprobably be controlled by policy changes. Resorting to such measures would,however, increase inflation and reduce growth in the longer run. On the positiveside, factor payments will increase only about US$ 200 million, owing to thedeclining of interest on the IMF loan. However, transfers, which sharply in1988/89 because of the Bhopal settlement, will decline.

1.102 With a current account deficit of about US$ 6.2 billion and smallprojected increases in NRI deposits and direct foreign investment, India's totalborrowing (gross) will have to rise to about US$ 7.5 billion (a 25% increase),in order to avoid further reserve loss. Of that total, concessional flows shouldrepresent about US$ 2.6 billion (IDA US$ 1 billion, bilater-' (including USSR)US$ 1.6 billion), based on disbursement profiles. IBRD ane .ner multilaterallending should rise, to US$ 2 billion, again based on die.Lrsement profiles.Close attention to disbursements will be necessary in order to achieve thesedisbursement ratios; in addition disbursements could be increased by untyingexisting aid programs. Publicly guarantee' commercial borrowing will rise toabout US$ 1.8 billion, higher than last year, but less than in 1987/88. Ofcourse, any shortfall in exports or in bilateral or multilateral disbursementswill entail a corresponding increase in commercial borrowing (or a loss inreserves). Finally, non-guaranteed lending is projected to rise slightly, toabout US$ 900 million. Taking into account amortizations (US$ 2.9 billion),total MLT debt (excluding the decrease of US$ 900 million in INF debt) will riseto about US$ 49 billion, about 11%. Non-concessional debt will rise to about35% of publicly guaranteed MLT debt. The resulting hardening of terms willcontinue to higher debt service in the 1990s. However, in 1989/90, the debt

37

Table 1.9INDIA : Batance of Psymnts, 1986/87-1994/95

(USS Miltion at current prices).. .......................... ,........... ........ ................ ,__.... .. .. _,,,.............................................._. ......

1986/87 I"?/8 1989 1989/90 190/91 1991/92 1992/ 1993/94 1994/95

Exports 1 13677 1688 18757 21900 243ss 27224 34815 4022Nerchandise, f.o.b /e/ 2 10460 128M 14824 17413 19428 21793 2603 2 32484Non-factor Services 3 3217 3600 3934 4487 4927 5431 6035 67T6 7744

Imports 4 -19954 -22272 -25638 2901 -31262 -34501 -37969 -4228 -47907Merchardise, c.l.f /a/ 5 -1728 -19772 -22760 -25m -27753 -3035 -33707 -37550 -42530Ron-factor Services 6 -2225 -2500 -2878 -3259 -3509 -3873 -4262 -4748 -5377

RESOURCE BALANCE 7 -6277 -574 -68 -7131 -6907 -7284 -7332 -7483 -7679

Net Factor I n c 8 -1221 -1441 -1728 -2021 -2200 -232 -2m -2519 -2687Factor Receipts 9 501 505 479 374 365 427 S44 635 730Factor Payments /b/ 10 -1m -1946 -220? -2395 -2s6s -2660 -2M -3154 -3416

UMtLT Interest Paid) 11 -1313 -1517 -1857 -2073 -22 -2417 -2694 -297 -3216

Net Current Transfers 12 2261 2674 3223 29z3 2967 3006 3075 3181 33S4Trnsfor receipts f/e 13 2287 2700 3250 2950 2994 3033 3103 3208 3382Transfer Payments 14 -26 -26 -27 -27 -2 -2r -28 28 -28

--URENT BALACE 15 -5237 -4551 -5385 -6228 -6139 -6511 -6635 -68Z2 -7012

Direct Investment 16 208 251 299 350 390 435 489 S57 646Officiat Grant Aid 17 403 405 448 508 678 647 658 673 698Not MULT loans (DRS) 18 1848 3511 3109 4547 4890 S85 5328 5233 4961

Disbursements 19 4090 6191 5946 7470 8016 s87s 927 9762 10474Repayments 20 -2242 -2680 -2837 -2924 -3126 -2933 -3949 -4530 -5513

Other MIILT (Net) 21 - - - - - - - -

Net credit frn ItMF 22 -520 -931 -1071 -907 -632 -462 .329 -134 -12Disbursements 23Repayments 24 -520 -931 -1071 -907 -632 -462 329 -134 -12

Capital ftlows NEI 26 3472 977 1194 1616 1640 1661 1700 1757 1852Non-Resident Deposits 31 1308 1274 1320 1616 1640 1661 170 1757 1852Net Short-Term Capital 25 - - - - - - - - -

Others /d/ 53 2164 -298 -326Errors & Oni#ions /e/ 2r -101 - - - - - - - -

Change in Reserves /f/ 28 -73 339 1406 115 -827 -1556 -1211 -1264 -1133(- a incre_s)

End-Year Reserves (Gross) /el 29 6730 6391 4985 4870 S697 7253 846 9728 10861( # Months of lmports 52 4.6 3.9 2.6 2.3 2.5 2.8 3.0 3.1 3.1

Memo Items:Debt Service Ratio (X) S0 26.9 27.? 26.7 24.1 22.2 19.1 20.4 19.7 19.?Curr Acc Deficit/W8Pnp (X) 51 2.3 1.8 2.0 2.2 2.2 2.2 2.2 2.2 2.1

................................................................................................................... 6

/a/ Net of crude petrolem exports.lbI Includes IMF interest; Excludes interest on Non-Res Deposits./c/ Includes the Bhopal gas settlement in 1988/89./dt IneludCng reserve valuation changes. rupee trade Imbulanee, etc./e/ As estimated by Government of India./f/ Exeluding Gold.

38

service ratio should decline somewhat (to about 24.0%) because of theprojectedrapid export growth and the slow growth of amortizations.

1.103 In the first half of the 1990s, real export growth of at least 10%p.a. will be critical to relieving the pressure on the balance of payments andreducing the debt service ratio. The 6% GDP growth target will entailsignificantly higher imports, to upgrade the capital stock, to provide inputs,and to generate pressure for greater efficiency. However, with 10% p.a. realexport growth, the growth in current account deficit could be held to about 4.6%p.a. (in current dollars), which would mean it reaches about US$ 7 billion in1994/95. As a percentage of nominal GDP, the current account deficit wouldremain about 2.2%.? Under this scenario, rapid export growth would reduce thedebt service ratio to about 20% and reserves would rise to the equivalent of 3months of imports.

1.104 The major negative factor in the current account deficits will bethe large projected increases in petroleum and petroleum product imports. Theseare expected to rise from US$ 2.8 billion in 1988/89 to US$ 7.8 billion in1994/95, a growth rate of 18.3% p.a. (This contrasts with the mid-1980s, whendeclining world petroleum prices reduced India's import bill by about US$ 2billion and allowed an expansion of intermediate and capital goods imports.)Other imports are expected to grow somewhat faster than real GDP. Overall, realimports are projected to grow about 7.7% p.a., compared to the PlanningCommission's scenario of 10% for exports. Of course, to the extent that higherimport growth proves necessary to sustain the growth of manufacturing, exportgrowth in excess of 10% p.a. also will be necessary to achieve the currentaccount projections and avoid excessive increases in external debt.

1.105 The scenario for the rest of the current account in the 1990sreflects a) continuing improvement in non-factor services (mainly tourism), b)stagnating remittances and c) rising interest payments. The rise in interestpayments in turn reflects the hardening of average terms on debt because of therising fraction of non-concessional loans in India's debt. This will bepartially offset by declining interest payments to the IMF.

1.106 Financing the rising current account deficit and rebuilding India'sreserves will require a substantial absolute increase in concessionaldisbursements (and new commitments). Existing concessional commitments andrecent disbursement patterns suggest that grant and concessional lending (gross)will grow from about US$ 3.1 billion in 1989/90 to US$ 4.2 billion by 1994/95(6.4% p.a.). Within that total concessional lending -- IDA and bilateral loans-- would increase from about US$ 2.6 billion in 1989/90 to about US$ 3.7 billionin 1994/95 (7.5% p.a.). Annual bilateral flows would rise by about US$ 1.3billion by 1994/95 (13.5% p.a.), but this will be partially offset by a projecteddecline in annual IDA disbursements of about US$ 200 million. This decline inIDA disbursements reflects the decision by the donor governments to reduceIndia's share of IDA to accommodate increased flows to China and Africa,beginning in 1984/85. To ensure that bilateral concessional flows grow at this

T a rzeal tegm. the deficit would be about 22 of GDPs the difference reflects the "sumed improvement ofthe rcal edchange eat,.

39

rate, about as fast as nominal GDP, close attention will be needed todisbursements. Untying a greater percentage of concessional aid would help toraise disbursement ratios, as well as to increase the benefit of such aid Indiaby allowing purchases from the lowest cost suppliers.

1.107 Non-concessional lending will increase somewhat faster thanconcessional inflows, continuing recent trends. Within the non-concessionaltotal, IBRD disbursements are projected to be reach about US$ 2.8 billion in1994/95, versus a projected US$ 1.7 billion in 1989/90. Although thisrepresentsa large absolute increase, it is a much smaller increase than occurredin the last half of the 1980s. This slower growth of IBRD disbursements reflectscompletion of the adjustment of disbursements to the sharp increase in IBRDcommitments in the mid-1980s. Moreover, annual amortizations of the rising stockof IBRD loans will increase from about US$ 400 million in 1989/90 to a projectedUS$ 1 billion in 1994/95. Hence, net disbursements of IBRD funds will only beabout US$ 400 million higher in 1994/95 than in 1989/90. Annual lending by othermultilateral agencies will also rise but only from about US$ 300 million to aboutUS$ 700 millon. Commercial lending will have to provide the remainder of thefinancing, with gross flows increasing about 10.5% p.a. and rising somewhat morerapidly in the early 1990s. Finally the other traditional source of balance ofpayments financing, inflows into NRI deposits, is projected to remain constantin real terms (net of interest and repayments). Of course, commercial borrowingwould have to grow even faster if the current account worsens more than projectedor other components of the capital account grow less rapidly than projected.And any shortfall from projected concessional flows would raise the projecteddebt service.

1.108 Under this scenario, MLT debt would rise to about US$ 74 billion.Non-concessional debt would represent somewhat more than 40% of publiclyguaranteed MLT debt. The debt service ratio would decline somewhat, to about20% of GDP, owing to the moderating influence of the projected growth inconcessional flows on the one hand and rapid export growth on the other.

1.109 The foregoing scenario for India's balance of payments in the 1990sis quite sensitive to achieving higher export growth, particularly in the nextfeN years, because of the already large current account and trade deficits, andthe effect of compounding interest on the growth of debt. This sensitivity canbe seen by noting that the current account deficit in 1994/95 would be nearlyUS$ 2 billion larger if real exports grew by 8.5% p.a. rather than 10% p.a. Withthis difference necessarily being financed by commercial borrowings, the debtservice ratio and current account deficit would begin to rise in the mid 1990s.This would have serious medium term implications for India's creditworthinessand jeopardize longer-term growth prospects. Hence, there is a risk inattempting to sustain imports and GDP growth in the face export shortfalls withunsustainable levels of commercial borrowing. This risk is in addition to therisk inherent in the increased reliance on commercial lending, which is ofshorter maturity and more unstable than concessional lending.

1.110 In light of these risks, it would be prudent to exercise tightcontrol over monetary and fiscal policy in the early 1990s, in order to relieveany potential pressures on the balance of payments, at the same time increasingexport profitablity and reducing protection on universal inputs and capital

40

goods. Once it is clear that exports are responding at the required pace, a moreexpansionary stance could be taken, largely through growth of credit to theprivate sector. This approach would result in a gradual acceleration of growthto the desired higher levels, while ensuring balance of payments stability.

1.111 Increased inflows from the Consortium, based on growing commitments,are an important factor in India's balance of payments. Increased Consortiumfunding demonstrates the support of the international donor community for India'srecent performance and reforms. Finally, larger Consortium funding, particularlyconcessional funding, is needed to support the Government' s anti-poverty efforts,described in Chapters 2-6 of this report. In sum India's performance and needswarrant a substantial increase in Consortium support.

1.112 Over the next few years, moot of India's external financingrequirements will continue to be met by Consortium members, despite the projectedincrease in commercial borrowing. Gross Consortium disbursements (concessionaland non-concessional) are projected to rise from about US$ 3.7 billion in 1987/88and US$ 4.2 billion in 1988/89, to about US$ 5.1 billion in 1989/90. By 1994/95they are projected to rise to about US$ 7.8 billion (8.5% p.a. over the 8thPlan).

1.113 Achieving this growth of disbursements during the Eighth Plan willrequire considerable attention to maintaining disbursements ratios on the partof the Consortium members and the Government of India. It will also entailcontinued growth in pledges from the Consortium, especially of concessional aid.Specifically, to ensure these levels of Consortium disbursements, pledges by theConsortium members of concessional aid will need to increase at least 10%, fromlast year's US$ 3.9 billion to at least US$ 4.3 billion, and total commitmentsfrom USS 6.3 billion to US$ 6.7 billion.

41

Chapter 2

POVERTY IN INDIA: INCIDENCE AND UNDERPINNINGS

A. IntroductUon

2.01 Chapter One describes India's rapid recovery from the economicdownturn caused by the failure of the 1987 monsoon. As noted, this strongrevival of India's economic fortunes reflects well on the approach fashioned tocontain the impact of the worst drought in 25 years. The initiatives takenincluded increased external borrowing to finance emergency commodity imports,steps to enhance output in sectors (e.g. irrigated agriculture, industrialexports, and power) which are partially insulated from monsoon-related shocks,as well as provision of fodder, food, and drinking water in hard-hit pockets.

2.02 India's anti-drought strategy also relied upon increased expenditureson schemes such as the Integrated Rural Development Program (IRDP), the NationalRural Employment Program (NREP), the Rural Landless Employment Guarantee Program(RLEGP), and the Minimum Needs Program (MNP). During 1987/88, over Rs 7.3billion was spent thrbugh IRDP, enabling some 4.28 million beneficiary householdsto undertake subsidized investments valued at Rs 19 billion (Rs 4,475 perhousehold). Another Rs 17 billion was spent on NREP, RLEGP and the EmploymentGuarantee Scheme (EGS), which is funded and run by the Government of Maharashtra,to create the equivalent of 2.1 million man years of work on various communityinfrastructure projects. The 1987-88 outlay on MNP, which makes public servicesavailable to :Ae poor, was Rs.28 billion. Major elements of MNP include ruralprimary health care; initiatives to eradicate adult illiteracy and increaseprimary school enrollment and retention levels; supply of essential consumergoods *a subsidized terms through the Public Distribution System (PDS); thevarious activities encompassed in the Integrated Cild Development Services(ICDS) scheme, rural electrification; rural roads, housing, and drinking waterfacilities; and improvement of sanitation, housing, and water supply facilitiesin urban slums.

2.03 The Government's program contributed greatly to -itigating thedrought's worst effects. The efficacy of the anti-drought strategy is seen moststrikingly in India's avoidance of the deep, widespread falls in consumption thathad occurred during earlier droughts (1965/66, 1971-1973) and which have beenobserved in the 1980s in Ethiopia, Sudan and elsewhere in Africa. Thanks toquick action channeled through these established programs, the population wasalso spared the disabling and longlasting effects on productive capacity thatdrought can inflict.

2.04 The existence of IRDP, NREP, RLEGP, MNP and related schemes reflectsthe prominent position accorded poverty alleviation as a development objectivein India. The preeminence of the goal of eradicating poverty has been reiteratedrecently in the Approach Paper to the Eighth Plan, the Prime Minister'sIndependence Day Speech (August 15, 1988) and in platforms prepared by majorpolitical parties. Meanwhile, the Planning Commission is sponsoring povertystudies by eminent Indian scholars. Issues to be treated include the incidence

42

of poverty in different regions and the implications of different macro andsectoral policies for employment generation and equity.

2.05 After a period in which the issue of poverty in developing nationswas eclipsed by the debt/adjustment crisis, there has been a revival ofinternational concern about the social costs of adjustment and the best meansof balancing the objectives of growth and equity. Multilateral organizationssuch as the World Bank, UNICEF, and the ILO have all brought out analyses andrecommendations pertaining to poverty issues recently. For instance, the WorldBank's 1988 Task Force on Poverty Alleviation makes a case for more preciselydefined and concentrated anti-poverty efforts in individual countries.Development agencies in donor countries have also undertaken broad reviews oftheir assistance programs from the poverty vantage point.

2.06 This report addresses many of the issues that have arisen in theIndian and international discussions of how to reduce poverty. Our point ofdeparture is the finding that real wages and real expenditures by the poorestrose and the proportion of the population below the poverty line fell during the1970s and early 1980s. The reduction in poverty occurred in the context of onlymoderate overall rates of growth and continuing high population and labor forcegrowth in this period. These achievements suggest that more rapid reductionsin poverty may occur in the future in view of the higher growth path which theeconomy appears to have attained (see Chapter 1). The analysis in Chapter 1ind.cates that a growth rate in the 5-6% range (implying annual increases in percapita consumption of 3% or better) is within reach. Sustained expansion at thispace would bring poverty rates down sharply, to 15% or less by the year 2000,provided gains are distributed uniformly within the population or with a pro-poor bias (Anderson).

2.07 However, this hopeful finding needs to be juxtaposed with otherstylized facts in the current scene. First, despite recent gains the number ofpoor remains very large. In addition, the face of poverty has changed. The poorare increasingly concentrated in regions (e.g. the Eastern and Central states)which face serious development and financial constraints. Irrespective ofregion, the poor, and especially the poorest and most vulnerable stratum,increasingly consist of casual wage earning households who possess few assetsand are dependent on the health, energy, literacy and other skills of familymembers. Reaching these households has proved to be more difficult than im"ginedwhen the numerous anti-poverty and social service programs were initiated inthe 1970s and 1980s.

2.08 Secondly, many of the factors such as spread of irrigatedagriculture, provision of credit to poor beneficiaries, and subeiivision of landholdings that contributed to poverty reduction in the 1970s and early 1980,appear less likely to be effective in the next 10-15 years. It will be necessaryto develop new strategies and instruments to address the problems of the verypoor. However, this will be difficult considering the lack of room for maneuverin India's public finances. An anticipated reduction in overall expendituregrowth (even with higher economic growth rates) will make it harder to fundlarge, new poverty reduction initiatives.

43

2.09 The question is how to speed up the gradual decline in poverty thathas been taking place. To answer that question this report looks back at factorsthat have reduced poverty in the past and then asks whether those factors willapply with the same intensity in the future. The casual labor market is the mainarbiter of the fortunes of the poorest rural group, landless wage-dependenthouseholds, as well as many of the urban poor. Hence, the framework for muchof the analysis is the labor market. Demand and supply factors, operatingthrough labor markets, help account for regional differences in wage andexpenditure increases and poverty reduction. Demand and supply forces (includinginadequate access to social services) also help explain continuing poverty inrural wage-earning households. This approach also serves as a convenientframework throughout this report for assessing existing 'poverty' and socialservice programs and considering whether changes in the direction and scope ofgovernment initiatives are warranted.

2.10 A key finding of this report is that many of the factors, includinggovernment programs, that contributed to poverty alleviation in the last fifteenyears are unlikely to yield a similar reduction in the future. Alternativeoptions and instruments are needed to deal with emerging features of the povertylandscape, notably the high incidence of poverty in particular regions and amongspecific occupational groups, and the background of somewhat improved economicgrowth prospects, but deteriorating public finances.

2.11 In agriculture, a "life saving' (i.e. protective) irrigation strategyin surface schemes and greater marketing of groundwater in the East and Centralstates will be crucial in creating employment. Even with these changes, however,agriculture will only absorb a falling share of the labor force productively (dueto technological and market constraints and employer's aversion to depending oncasual wage workers). This implies that new strategies will be required toencourage productive job creation, particularly in industry where rapid outputgrowth has brought only modest increases in employment in the factory sector.What is needed is a shift to an aggressive, outward-looking strategy thatsupports growth and increases employment in general. This would entail extensivechanges in a still heavily protectionist trade regime along with the eliminationof capacity licensing, further easing of small scale industry reservations andconcessions, and imaginative programs to protect and promote reabsorption ofdisplaced workers. In addition, improved and more efficient social servicesdirected at high risk regions and groups are needed, in part to help the poortake advantage of labor market opportunities, but also because good health,literacy and so forth are desirable in and of themselves. The poor also needto be covered by employment security, pension and insurance scherss. Much ofthe needed strengthening and refocusing of social services can be accomplishedwithout substantial increases in overall social sector spending, although someinter- and intra-sectoral, and inter-regional .eallocation will be required.Greater cost recovery in higher education and curative medical servicesrepresents a largely unexploited means of increasing resources for social sectorspending. Concerning the impoverished Eastern and Central regions, productionand employment gains and essential improvements in health and education statuswill require expenditure increases which go well beyond the financial resourcesof the states in the region. Therefore, changes in revenue sharing arrangementsto target the pooiar states, the allocation of larger Plan resources orestablishment of a special regional fund to underwrite the large investments

44

needed should be considered. Finally, consideration should be given toreshaping programs such as MPDP and PDS which have not been as effective anti-poverty initiatives as had been hoped.

2.12 The rest of the present chapter surveys the incidence of powerty interms of characteristics such as average expenditure, wages, nutritional level,health and educational status and gender. It then examines tt e factors bearingon the welfare of wage-dependent rural households. Attention is directed to themechanisms (including targeted anti-poverty programs) that have influenced thelabor market prospects of the poor and that appear to lie behind the favorabletrends observed in the 1970s and early-to-mid 1980s. Subsequent chapters explorewhether the factors that contributed to poverty reduction in the last fifteenyears constitute a viable strategy for the future. Chapters 3 and 4 focus onsectoral employment prospects. These chapters suggest measures to sustain job-creation at a pace and at productivity levels that will provide continued growthin the earnings of wage-dependent and other poor households. Chapters 5 and 6assess the publicly provided social services, which are crucial to the wellbeingof the poor and to their labor market prospects. Suggestions are offered on howto improve the effectiveness of health, primary education, family welfare andother service delivery efforts.

B. Dimensions of Poverty

B.1 Expenditure Levels

2.13 The prevalence of poverty in India fell during the 1970s and early-to-mid 1980s. However, different regions did not participate equally in thiswelcome trend. The incidence of poverty in terms of consumption and wage levelsdeclined only gradually in the Eastern and Central regions, while the downwardmovement in the poverty rproportion was rapid in the South.' Other indicatorsof poverty, such as the infant mortality rate and female literacy attainment,also point t4Q limited gains in the Eastern and Central states compared to otherregions. Poverty patterns within regions have changed as well. In particular,the share of wage-dependent households amongst the rural poor has been risingand that of self-employed families falling. Another important development isthe growing relative importance of the urban poor.

2.14 The scope and intensity of poverty are perhaps best indicated byconsumption ver capita in the lower expenditure deciles. Raw data are drawn fromthe 25th (1970/71), 32nd (1977/78), and 38th (1983) rounds of the National SampleSurvey (NSS).2 Trends in real per capita expenditure are constructed using

IIn thlis ceport, the Southern region refers to Andhra Pradesh, Karnataka, Kerala and Tamil Radug theWestern region c4iprlses Gujarat and Mahnrashtra; Eastern Iadis consits of Bihar, Orissa, West Bengal and Assam(when data are available), the Central Region encompasses Madhya Pradesh, Rajasthan and Uttar Pradesh; and theNorthwestern retion is made up of Haryana, Himachal Pradesh, Jmuz and Kashmir (data permitting) and Punjab.

2A rcert revlev (MLnhas et. 1. 1988) has examined the relLability nd valiLdity of NSS data. It foundthat NSS expenditure estimates generally hold up well vis-a-vis those developed from national accounts data andother sources. (See also Footnote 4.) This report noted that the intentional exclusion of homeless people fromNSS coverage msy result in modest underestLmates of the extent of poverty; hoaever this systematic omisslonshould not deteact from the use of NS1 date for comparative purposes.

45

deflators developed for this purpose by iMnhas et. al. (1987a and b).Unfortunately the data series ends in 1983.3

2.15 Real monthly per capita expenditure (MPCE) in the lowest two ruraldeciles increased by a modest 11% (0.83% annual rate) during the 1970/71-1983interval (see Table 2.1). For the rural population as a whole, MPCE grew by13% (0.97% annual rate). The NPCE of the lowest two urban deciles increasedslightly faster by 13.6% (1% per annum) in this period, resulting in a slightwidening (in relative and absolute terms) of urban-rural differences in the lower

Jabte 2.1NONTHLY PER CAPITA EXPENDITURES IN RS. CURRENT AND

ONSTAMT (1970) PRICES, INDIA 1970/71-1983

RURAL URBANOecites Deciles

0-20 20-40 Pop.Ave 0-20 20-40 Pop.Ave

193 (1983 prices) 50.75 73.72 112.62 68.84 104.42 169.93

1983 (1970 prices) 17.97 26.10 39.88 24.16 36.64 59.63

1977/78 (1970 prices)16.50 24.50 36.45 22.30 33.67 55.?2

1970/71 (1970 prices)16.20 23.75 35.31 21.27 31.73 52.85

Growth Rates X p.s. (0.83) (0.75) (0.97) (1.02) (1.15) (0.97)

Source: 25th, 32nd, and 38th rounds of the NSS; price deftators fromNinhas (1987, 1988).

deciles. Mean expenditure for the urbaa population as a whole grew by 12.8%(0.97% per annum) in the same period.4

2.16 Thie All-India averages obscure large differences in both the levelsand rates of growth in HPCE in the lower expenditure deciles in different areasof India. Rural (and urban) MPCEs are considerably lower in the Eastern, Centraland Southern states than in the West and Northwest regions, even after takingaccount of persistent state and class-wise differences in consumer prices (seeFig. 2.1 and Annex Tables 2-1A and 2-1B).5 After adjusting for pricedifferences, rural Eastern India emerges as by far the poorest area followed bythe rural South. However MPCE has been rising fairly steadily in the South

3RaRoss of findngs from the recently completed 43rd round (1988) is expected in a year or two.

4 he average grovatl rates shown in Table 2.1 are quite close to the rate of growth in per capita privatefinal consumption (1.6X) %&Lch is mplied in National Accounts statistics for this period.

51988 figures hav been derived by lflating expendlture levels in each docile by the 3 8 percent growthin disposable Incme Ln the 1983-1988 Interval estimated by the Central Statistical Organization (CSO). Noattempt vs mad to control for the uneven regional impact of the 1987188 drought.

46

(0.77% per mnnum). Growth has been slower (0.25% per annum) and more variablein the slightly better off Central region.

2.17 Figure 2.1 also shows how real MPCE changed in different regions inthe 1970/71-1988 interval (see also Annex Table 2-2). In this period there weresustained gains in the real MPCE of the poorest rural deciles in the Western andSouthern regions. However, the consumption of the poorest deciles first felland then returned to the initial level in the Eastern regions. A comparablepattern emerges in trends in real MPCE for urban areas (Annex Table 2-2).

2.18 Within states, there are also group-wise differences in MPCE. Forexample, mean expenditure was 14% and 28% lower for rural "scheduled" (i.e.legally identified) castes and tribes respectively than for the entirepopulation; such differences are especially large in the South and East (Annex

Figure 2.1

Auerage Rural Ionthly Per Capita Eenditurein the Lowest Two tkIles by Region

in R.. at 1!?fp prices4 bNorth

vest

30 '1 1

All

1 2 3 4 5 6REGIONS

Source: See notes to Table 2.1.

Table 2-1). Comparing only the lowest two deciles, consumption among scheduledtribes is roughly 80% of the mean for these deciles in most states. Theseresults point to the continuing economic weakness of these communities despitecompensatory schemes employed to overcome the effects of past socialdiscrimination.

2.19 There are differences as well in the consumption levels of differentoccupational groups. Rural households primarily dependent on labor marketearnings are typically much pocrer (in terms of decilewise MPCEs) than thelargely self-employed (Table 2.2). Agricultural laborers in Bihar, Orissa, andMadhya Pradesh, many of whom have tribal or scheduled caste backgrounds, haveespecially low MPCEs.

47

82 Agdcultund Wages

2.20 Strong corroboration of these NSS-based results is found inagricultural wage earnings data, which thte Ministry of Agriculture regularlycollects at selected locations in most districts in the country. Thisinformation, which is available fir the entire 1970-85 period, has beenaggregated to obtain estimated earnings trends in real terms for 58 agriculturalregions, each comprising 3-7 districts.6 Wage payments are not of course theonly source of livelihood for the poor. Moreover, incomes in labor-dependent

TabLe 2.2

AVERAGE PER CAPITA EXPEDITURE IN THE LOWEST TWO DECILESFOR DIFFERENT RURAL OCOIPATIOONAL GROUPS

8 MAJOR STATES AND INDIA, 1983 (1983 PRICES) LS

Rural Householdself Emdtoved Labor

sdg_. Ngn-gri. Agr.. "ther(1) (2) (3) (4)

........... ...................... ... .... .... ....... .... ...... _.............. ...

Andhra Pradesh 60.1 57.4 48.3 54.6Bihar S1.4 48.8 39.3 40.5-Ka metaka S.2 52.S 47.3 57.4Kerala 55.4 51.4 45.2 44.7Nadia Pradesh 52.1 53.4 43.3 49.1Maharashtra 61.1 57.4 50.6 S8.9Oriesa 50.5 48.2 41.8 47.6Rajasthan 60.2 65.0 58.1 67.8INDIA 54.2 52.5 42.5 51.7

..... .............. .............. _.................. ............ .......................... ..........

Source: National Sauple Survey, 36th Round.jg Date have bAn adjusted to take account of state and classwise

price differences.

households are also affected by the number of days worked and family size, whichmay vary. Still, wage earnings do correspond closely to incomes and expendituresin the lower MPCE deciles--on a cross-sectional basis differences in laborearnings typically account for 60% or more of the variation in MPCE in the bottomdeciles.

2.21 Wage patterns and trends in rural India are captured in Figures 2.2and 2.3 (see Annex Tables 2-3 and 2-4 as well as S. Acharya, 1988). For the1982-85 period, real wages were between 2.5 and 4 Rupees per day for men and1.75-3.25 Rupees for women in about three-fifths of the regions. Punjab and

6Nomnal wage fl8ures were deflated by the state 4Aricultural Laborer Price Inde with 1970171 as baseyear. The divis in of the coumtry into sgrocliamticelly hoeogeneous regens is that employed by the NSS. Thequallty of these vage data has been carefully reviewed by V.K. Rao (1972), D. Lal (1984) and others who flndthat they correlate well wlth N38-based vwe estimates (in paire comparisons) and can be relled upon incomparative analysis, i.e. depicting cross-sectional patterns end capturing mdium to long tenm trends.

Figure 2.2

REAL WAG S: MALE LABOR REAL WAGES: MALE LABOR1970/71 - 1972/73 1982/83 - 1984/85

Rs. 4.00 & Above

Rs. 2.50 to 3.99

Less than Rs. 2.50

L Data Not Available

Source S. Acharya. 'Agdcufturat Wages in Indix. Trends and Regional Varbdons*.

Figure 2.3

REAL WAGES: FEMALE LABOR REAL WAGES: FEMALE LABOR1970/71 1972/73 1982/83'- 1984/85

Rs. 3.25 & Above

Rs. 1.75 io 3.24

.$ BLess than Rs. 1.75

v 2 Data Not Available

Sourc S. Achwa. OAOw"l Wages In InclE Trends and Renl Vwtons*.

50

Haryana, and selected areas in Gujarat and Kerala represent high wage zones,while very low earnings prevailed in parts of Orissa, Madhya Pradesh, Tamil Nadu,Maharashtra and Karnataka. There is clearly substantial overlap between low realwage and low dPCE states (for instance, Bihar and Orissa) and between high wage-high MPCE areas (Punjab and Haryana).

2.22 Figures 2.2 and 2.3 suggest that a rising trend in real wages hasbeen operating in many regions. Male and female wages were 2.5 Rupees or lessin fewer than a fifth of the areas surveyed during 1982-85 as compared to aroundtwo-thirds of the regions in 1970-73. Thus, wages in many areas rose to a higherbracket during the 1970s and early 1980s (Annex Tables 2-3 and 2-4). During thisperiod, regional wage and MPCE trends corresponded closely to one another. Forinstance, real daily wage earnings (males and females) rose at 2% per annum ormore in Gujarat between 1970/71 and 1984/85 (Annex Table 2-5); MPCE for thelowest two deciles increased by 1.4% per annum in the same period. Finally,Figures 2.2 and 2.3 show the diversity of rural change within large,agriculturally heterogeneous states. In Madhya Pradesh, for example, wages grewrapidly in the Chhatisgarh and Vindhya zones but only moderately in the centraland southern areas of the state.

8.3 Nutrilional Status

2.23 Those in the lower rural deciles typically allocate 70% or more oftotal expenditv-es to food; for the urban poor the food share was 60% or morein 1983. Nevertheless, absolute levels of spending were low (Figure 2.4).especially in four of the rural regions and in urban areas of the Southernregion. Not surprisingly, malnutrition appears to be prevalent amongsvt India'spoor.

2.24 The incidence of rural malnutrition emerges most clearly in villagestudies. For example, a 1981 survey (Prasad et. al.) of 12 communities in sixregions in Bihar found that 89% of the landless, most of whom had scheduled casteaffiliations, felt they were not getting enough food, and over half suffered fromvarying degrees of malnutrition; 25% were in the two most vulnerable nutritionalcategories. The incidence of hunger and malnutrition, although much lower thanin farm labor households, was still high in the rest of the sample. Nearly aquarter of those owning a hectare or more of land reported insufficient food and7-15% of landholding families were judged to be at severe nutritional risk.Similarly, surveys in the semi-arid villages routinely monitored by ICRISAT havefound mean caloric intake in landless labor and small farm households to besubstantially lower than in medium and large farm units (Subbarao).

2.25 Micro studies also point to an especially high incidence ofmalnutrition amongst children in poor families. For instance, the ICRISATvillage surveys found that a large proportion (25% to 46%) of children in the1-3 and 4-6 age groups in landless labor and small farm households were under-nourished; those under age three were most at risk. The nutritional intake ofchildren in medium and large farm units also was unsatisfactory although not tothe same degree. A 1984 study of four of Delhi's low income neighborhoods foundthat the incidence of malnutrition decreased sharply with age: 28% of those

51

Figure 2.4

NotbuI P1w Capita Food Expenuiituo In tho lat 1wo cils bgUhgion,Thawal aud Ur1an,1983Cb.in 19U3 Prices)

18

78 Al India Centra

60 Bas,I t...,__.

1 2 3 4 5 6

Source: See notes to Table 2.1.

under one year of age were observed to be malnourished as opposed to 16%, 10%,and 5% in the 1-2, 2-3, and 3-6 age groups (National Institute of Health andFamily Welfare).

2.26 More generally, NNMB data show that child malnutrition (moderate an,'severe) is extensive in all the states covered except Kerala (Table 2.3).

Table 2.3NMTRITIONAL STATUS OF CHILDREN (1-5 YEARS) IN THE

SELECTED STATES BY WEIGHT-FOR-AGE(percentages)

................. ... .... ... .... ............ ........ ................ ... .... _.........

Moderate SevereState 1975-79 1982 1975-79 1982

.......... .................... .. .................. ........ ......................

Kerola 33.5 17.4 4.8 1.5Uttar Pradesh 26.8 6.1TaUil Nadu 35.3 34.6 6.5 5.2West BengaL 39.6 23.0 6.6 0.0Karnataka 39.5 37.2 7.7 5.6

Andhra Pradesh 36.7 38.5 7.8 5.9orfssa 33.3 42.3 9.3 8.9Gujarat 43.0 44.4 9.4 15.2Maharashtra 42.0 40.7 11.3 6.9Nadyh Pradesh 40.2 - 11.5

.................... ......... .................. ..........................

Source: Natloaml Nutrition lln1torfrS Bureau (1983).

52

Unfortunately, the NNMB data cannot be disaggregated by social class or otherbackground variables. This omission can be overcome in part by referring tobaseline data collected when various Integrated Child Development Servicescenters were opened. As seen in Table 2.4, the proportions malnourished amongstscheduled tribes and castes were typically well above average. Maharashtra,along with the States in Eastern and Central India, had the highest incidenceof grade III and IV malnutrition.

TabLe 2.4PERCENTAGE OF MALNOURISHED (GRADES III + IV) CHILDREN

IN ICDS PROJECTS BY CASTE STATUS, 1981

Average Scheduted Castes Scheduled TribesSn. 0-36 0-36 0-36No. State mths mths uths

1. Andhra Pradesh 9.6 10.4 9.92. Bihar 31.8 39.5 40.93. Gujarat 7.3 6.0 11.74. Haryana 4.6S. Himachat Pradesh 5.3 7.06. Karnataka 8.8 10.1 S.07. Kerala 7.7 11.0 17.58. Madhya Pradesh - 24.39. Maharashtra 15.8 16.7 23.710.Orissa 16.7 19.011.PunJab 8.6 13.912.RaJasthan 8.2 17.3 8.113.Tmil Nadu 8.1 10.114.Utter Pradesh 13.1 17.1 16.315.West BengaL 19.9 Z6.5 17.0

Source: Compited from Child In India. A Statistical Profite, Ministryof Velfare, Government of India.

2.27 Micro studies in villages in Punjab, West Bengal and other northernstates have found a higher female nutritional disadvantage, especially amongstchildren and young adults in poor households. However, other inquiries includingthe ICRISAT survey have found no evidence of a systematic nutritional biasagainst women in states like Andhra Pradesh and Tamil Nadu. Some suggest thatfemale nutritional "equity" generally improves from North to South (Chatterjee,1988b). However, NNMB findings do not lend solid support to this proposition.

2.28 A final point is that malnutrition amongst the poor involves not onlycaloric deprivation but also serious deficiencies in consumption of proteinsand micronutrients such as ascorbic acid, calcium, iron, beta-carotene (vitaminA), and iodine. Micro studies show that this form of malnutrition affects youngchildren, adolescent girls, and pregnant and nursing women most acutely.

8.4 Mortality and Morbidifty

2.29 Given the incidence of malnutrition, it is not surprising thatIndia's poor are subject to high rates of mortality and morbidity. The poor are

53

prone to nutritional disorders such as goiter, cretinism, vitamin A blindness,and iron-deficiency anemia. Malnutrition is implicated, moreover, as a causativeand a contributory factor in the high susceptibility of poor children to variousdiarrheal diseases. The recurrent and prolonged episodes of diarrhea experiencedby malnourished children not only retard physical development but add to theduration and severity of various infectious diseases. The poor are particularlyvulnerable to communicable diseases such as poliomyelitis, diphtheria,tuberculosis, measles, pertussis, tetanus, and cholera; malaria, leprosy andvarious respiratory ailments also remain problems. Recent epidemics of choleraand gastroenteritis in Delhi and other cities have demonstrated how exposed thepoor are to virulent diseases.

2.30 Poor girls and women are disproportionately burdened with sicknessand its consequences. This is seen in the generally lower survival rates offemale infants and children and the high rates of maternal mortality whichprevail in India. Fertility remains high -- total fertility rates of 5.5 orhigher are the rule amongst the poor, especially those living in Bihar, MadhyaPradesh, Rajasthan and Uttar Pradesh. Deaths related to childbirth account fora quarter of female mortality overall and nearly a half of the deaths in the 15-24 age group. Complications of abortion, hemorrhaging during delivery and

Figure 2.5

Estimated Infant Mortality Rates bg Region,Rural,1976 and 1985,and Urban.19M

X80 India Central North vest

Source:HFa

149 Eas.t

in9 Southis 19ch Rural

ceE 1ide Rul I

49 Y

1 2 I2 4 K .

Source: Family Welfare Programme in India Yearbook 1986-87, Ministry oilHealth and Family Welfare.

toxemia are among the major causes of pregnancy-related death. But perhaps aquarter of all such mortality is due to anemia which both complicates and isexacerbated by pregnancy and which is a major cause of low birth weight, (aquarter of births were in this category), lower child survival chances and otherconsequences. These pernicious effects are especially evident when intervals

54

between births are short as they tend to be amongst poorer women. It isestimated that maintaining a two-year gap between births would significantlyreduce maternal deaths and would also lower infant mortality by ten percent ormore (Chatterjee, 1988b).

2.31 Susceptibility to various diseases is reflected in high mortalityand morbidity rates. The overall death rate has fallen only gradually in Indiaand the infant mortality rate has declined even less rapidly--life expectancyrose from 46 to 57 for men and 44 to 56 for women between 1965 and 1985.However, gains in survival rates have mainly occurred in the South, West andNorth West regions (Figure 2.5). Death rates remain very high in the East andCentral regions where there are large concentrations of poverty. Officialestimates for 1985 show a nearly five-fold differential in infant mortalitybetween Kerala (31) in the South and Uttar Pradesh (142) in the Central region.However, surveys carried out in 1987 under the au pices of the Family PlanningFoundation found infant mortality rates well above 250 in impoverished pocketsof U.P. and M.P. and tribal areas of Orissa (Patil).

2.32 The limited information available suggests that the poor are oftensick. The ICRISAT village study discover-d, for example, that the incidence ofillness, i.e. the proportion of individuals with morbid signs, varied between14% ana 28% during a 52-week period of observation. A July-October 1984 surveyin four of Delhi's low income areas found that 8% (males) and 10% (females) ofthose aged six and over had been ill in the previous 24 hours (Bhatnagar et.al.). High prevalence of illness was also documented in a 1988 case study ofslum areas in Baroda (S.C. Jain). Of the families covered in this survey, thevery poorest lost 40 working days per year because of sickness and other healthcontingencies, while the less indigent lost 20 working days.

B. 5 Use of Public Services: Education

2.33 Education is a critical social service which the poor have continuedto "underconsume,n despite substantial changes in the education profilis of thepopulation as a whole since Independence. Overall, primary school enrollmentgrew by 6.2% per year between 1950/51 and 1984/85, and the literacy rateincreased from 16.7% in 1951 to 36.3% in 1981. Literacy at ages 10-14 rose from23% in 1951 to 57% in 1981. Nonetheless, the spread of literacy to poorer groupshas been disappointing. The low rates of adult literacy that prevail indifferent states are shown in Table 2.5. In terms of literacy attainment amongstthe poor, Kerala is an outlier with its high male and relatively high femaleliteracy rates in both rural and urban areas. Maharashtra and Karnataka havemade some headway but only amongst men in rural areas, but low literacy ratesfor rural men and even lower rates for women prevail elsewhere. Two-thirds ormore of poor urban males are literate. However, illiteracy remains commonplaceamongst poor urban women.

2.34 Prospects for a rapid increase in literacy rates amongst the poorappear to be mixed at best, judging from observed patterns of school attendancefor low income children. The highest attendance rates are in urban areas (Table2.6). However, even in cities less than 60% of the low income boys and lessthan half of the girls age 5-14, attended school. These proportions wereparticularly low in Bihar and Rajasthan. In rural areas, less than 40% of the

55

Table 2.5

PROPORTION OF ADULTS (AGE 15+) LITERATE BYINCOWE QUINTILE FOR 8 MAJOR STATES AND INDIA, 1983

(percentages)

Rural Urban0 - 20 20 - 40 ean 0 - 20 20 - 40 eanN__ F F N F N F N F F

Andre Prades 22 5 29 8 38 14 56 23 70 34 76 45Bihar 20 2 32 4 41 10 52 15 65 23 73 38Karnataka 32 10 42 15 48 21 58 34 73 4 78 57Kerala 77 61 33 67 87 73 86 72 90 78 93 82Nadhya Pradesh 20 4 34 6 42 11 66 26 78 44 80 48Naharashtra 43 14 31 16 59 23 74 39 85 54 87 63Orissa 29 5 45 14 43 20 60 26 75 34 81 48RaJasthan 21 2 30 4 36 7 54 21 65 28 71 34INDIA 32 8 44 13 50 20 63 32 76 46 805S

Source: Draft State reports, and draft All-India report, NationalSaupLe Survey, 1983.

boys from poor households attend school with only three states, Kerala (83%),Maharashtra (59%) and Andhra Pradesh (46%) above that figure. Patterns of female

Table 2.6PRORTION OF CHILDREN AGES 5-14, CURRENTLY ATTENDING SCHOOL

BY INCOWE 01NTILE FOR 8 NAJOR STATES IN INDIA, 1983(percentages)

.. .......................... ......... ............................................................ ...

Rural UrbanState 0 - 20 20 - 40 Mean 0 -20 20 - 40 Neon

N F M F N F N F N F N F....... ............ ............ ....................... .. ..... .... . .... .....

Andhra Pradesh 4 21 50 26 55 33 59 47 68 62 76 67Bihar 21 7 33 11 43 19 38 24 45 27 59 44Karnataka 39 22 40 26 50 33 58 50 69 62 73 68Kerala 83 78 86 83 88 86 83 81 92 89 91 90Maiya Pradesh 29 8 39 16 48 23 62 49 77 65 78 64Naharashtra 53 29 61 40 6 47 65 60 77 72 83 78Orissa 33 11 43 21 52 32 53 5 56 51 70 63Rajasthan 34 6 46 13 51 15 50 33 67 38 68 49INDIA 38 17 49 27 55 35 57 46 68 58 74 52..................... ......... ............... .... ...... ............... ................................. ..........

Source: Draft State reports, and draft All-India report, National SampleSurvey, 1983.

56

attendance were even more discouraging. Apart from Kerala, only in Maharashtrawere a third or more of the girls from poor rural backgrounds in school. Infact, low female attendance was the rule in all income deciles in Bihar, MadhyaPradesh and Rajasthan. In Bihar, Orissa, Madhya Pradesh and Rajasthan a fifthor less attended school. The district-wise information for Andhra Pradeshassembled in Table 2.7 suggests, however, that the picture is remediable.Clearly, there are districts even in states of modest overall achievement inwhich a substantial (between a third and a half) portion of the chiidren fromlow income families are attending school.

Table 2.7PROPORTIONS ATTENDING SCHOOL IN THE 5-14 AGE GR W

BY HOUSEHOLD INCOME LEVELSIX ANDHRA PRADESH DISTRICTS, RURAL, 1986

(percentages)

East WestGodavari Krishna Godavari Kurnool Anantasur NahabuhnaaarN F N F N F N F N F N F

Very Poor 1 37 23 36 20 49 40 35 22 54 35 22 15

NoderateiyPoor 4436 49 28 69 52 38 40 77 58 31 12

Non-Poor 3 60 38 46 41 69 68 75 187 1 38 42 13

ALl 49 32 39 33 60 52 39 26 62 42 29 14

Average per capita monthly expenditure Re. 62.6.2 Average per capita monthly expenditure Re. 87.9.3 Average per capita monthly expeiditure Rs. 141.2.

Source: Tabulations of the National Sauple Survey, 1983 Andhra Pradesh.

8.6 The Vulnerability of Poor Women

2.35 Previous sections have referred to the higher incidence of death,ill health and malnutrition among poor women, and their acute disadvantage interms of literacy. Poor women are handicapped in still other ways. Togetherthese various disabilities suggest that the distress, risks and vulnerabilityexperienced by poor women extend well beyond what is encountered by low incomemen.

2.36 Outside the health and education spheres, special femaledisadvantages are seen in the constraints they face in labor and asset markets.Women are sometimes barred from performing non-'domestic' tasks. More typically,the sexual division of labor which prevails in most areas prevents them fromseeking various agricultural and non-agricultural jobs. These restrictionscreate an economic dependence on men which is reinforced by difficulties womenencounter in inheriting property. Without land as collateral, women have alsobeen excluded from institutional credit and thus have been unable to secure

57

capital for self-employment except through the more costly informal creditsystem.

2.37 Poor women often lack the means and the opportunities to challengethese legal, bureaucratic and customary conventions. They are difficult toreach, hard to organize into groups, and lack the literacy skills and 'knowhowlneeded to interact with officials and others in the public arena. In addition,despite some notable exceptions, women have not yet become active participantsin the civic and political arena--most elected officials, administrators, policeofficers, lawyers, judges and religious leaders are men.

2.38 Because of their dependent position, poor women face a constantthreat of a sudden, sharp decline in welfare when normal sources of support arewithdrawn. The grimmest prospect is widowhood, especially when children areyoung or if there are no surviving adult sons. Unmarried women and those whoare divorced or rejected because of infertility or an inability to bear sons arein a comparable position. For such women, the loss of land and other assets isalmost inevitable, either through distress-sales to finance purchase of food andmedicine, transfer to relatives in return for often perfunctory income supportor through fraud and forcible expropriation.

2.39 The special disadvantages and vulnerability of low income womenexplain the strong son preference which lies behind the continuing high fertilityrates and low contraceptive use of the poor. In the poverty setting, sonsrepresent an insurance policy not only for old age security but as a means ofprotection and income support if husbands die prematurely.

B.7 Below Poverty Une: Proportions and Numbers

2.40 No one indicator can fully capture the merous facets of povertyamong which low average consumption and wages, inadequate nutritional intake,vulnerability to various diseases, low literacy rates and gender-relateddisadvantages have been discussed. Nonetheless a single summary index is usefulin encapsulating trends and patterns and framing issues. The population belowthe poverty line is one such widely employed measure. The poverty line is theexpenditutb level at which minimum caloric intake and indispensable non-foodpurchases are assured. Poverty-lines of Rs. 49.09 and Rs. 56.64 per capitaper month were defined by the Planning Commission for rural and urban areasrespectively for 1973/74.

2.41 Different procedures have been used to update and then apply thispoverty cutoff line. Using the price deflator that is implicit in the CSOprivate consumption expenditure series, the Planning Commission derived povertylines for 1977/78 and 1983, the years in which NSS expenditure surveys wereconducted. These poverty lines were then used to estimate the absolute numberand proportion of individuals with below-poverty line income in each survey year-- 307 million, 48% in 1977/78 and 271 million, (37%) in 1983. The 1983 figuresalso reflect an across-the-board increase of 21% in NSS expenditure estimates,an adjustment that was introduced to align NSS consumption estimates with thoseproduced by the CSO. The Seventh Plan projects a 29% poverty prevalence rate

58

for 1988/89, implying a figure of roughly 230 million people with below-povertyline incomes.

2.42 An alternative method of estimating poverty proportions uses a pricedeflator series developed by the NSS and the Indian Statistical Institute tocalculate updated poverty lines (in current prices) of Rs.55.2 (rural) andRs.68.6 (urban) for 1977/78, and Rs.89.0 (rural) and Rs.111.2 (urban) for 1983.'In addition, adjustment factors reflecting cross-sectional differences in priceswere used to calculate state-specific poverty lines (S. Gupta). These procedureswere applied to unadjusted NSS data for each survey year.8 Estimates based onthis set of procedures are shown in Figures 2.6 and 2.7 and Table 2.8 (see alsoAnnex Table 2-6). The following findings are worth highlighting.

The proportion living below poverty line in rural areas declined by8% between 1970 and 1983, and is estimated to have fallen another 3% by 1988(Figure 2.6).9 There were small increases in the total number of poor in the1970-83 and 1983-88 intervals. However, the number of ultra-poor fell inabsolute terms during each of these periods (Figure 2.7).

e Between 1970 and 1988, the regional concentration of poverty becamemore pronounced--the combined poverty share of the Eastern and Central regionswhich account for 54% of total population increased from 56% to 60% (60 to 65%for the ultra poor), while actual numbers below Poverty line and below the ultra-poverty line grew significantly. The number of poor in Bihar alone grew by athird in this period. On the other hand, the number below poverty line in theSouth fell by over four million-- this decline occurred mainly in Kerala and TamilNadu. There was a decrease of over nine million in the number of ultra poor inthis region.

o The proportion of urban citizens below poverty line fell sharply.Nonetheless, the absolute number of urban poor grew by 28% and 8% respectivelyin the 1970-1983 and 1983-1988 (Annex Table 2-6). Urban areas accounted for 22%of the total number of poor estimated for 1988 -- 322.3 million -- whereas in1970 this share was 17%. The number below poverty line grew substantially inthe East and Central regions but showed only a modest increase in Tamil Naduand Gujarat. Still, urban poverty was less concentrated regionally than ruralpoverty as the South, East, and West blocks of states all contained metropolitanareas with large numbers of low income households. A quarter of India's urbanpoor live in the Central region.

7The rural end urban indices that are constructed relate to the 1970171 consumption pattern (i.e.veights) of the three middle decL..s who constitute a crucial sving group as regards the computation ofpoverty line eatimates (Minhas et. al.. 1987- and b).

8A panel vhich examined discrepancles between consumption estimates derived from different sourcesrecommended against making wholesale adjustments to bring NSS data in line vith CSO figures (Minhas, at. al.,1988).

9Estimates for 1988 ver derived by assuming that the recorded 3.6S rile in per capita disposable incomeln the 1983-88 interval (including a 2.1S decline during the 1987188 drought year) occurred uniformly acrossthe expenditure distrlbution.

59

Figure 2.6

Propwtion of Ibral Population below Pogv Line

"T AllBu SouthIndia

6S 76

30

1 . 3 4 5,UGIONS

Source: Calcu'ated from National Sample Survey, 25th and 38th rounds.Figure 2.7

RNhbews of Rural Population below Pau"and Ultra-Pouorty Lines

(in illiomn)

East90 v83 s88 Central

4il, E53 hSouth , tbrth70 _ '7868

so

38 793U

iJtraPow $ *S

1 2 3 4 5

Source: Calculated from National Sample Survey, 25th and 38th rounds.

60

Table 2.8PROPORTIONS fELOW POVERTY LIME 1X DIFFERENT

RURAL OCCUPATIONAL GRPS(peren-gs)

.......... .................................. ...... ......... -_................__. .... ..... ......... _

Persons in PoorS1tf EMwloved Lob. r Labor Hosneholds

Non- 4Share of atlAgriculture Agriculture agriuLa OLthe mra Eor

(1) (2) (3) (4)... .. ............................. ........... ......... ........ *....

Ardhre Pradesh 34.3 38.2 56.8 42.3 54.0BIhar 42.4 53.4 77.0 64.7 42.3Kamntaka 31.0 36.0 57.6 36.9 48.0Keralm 19.2 25.1 - 43.8 36.1 38.9Na*" Pradosh 48.7 48.8 72.4 59.2 40.6Maharashtra 35.1 39.S 45.3 43.1 56.6Orissa 45.3 46.5 68.0 62.2 51.4Rajasthan 39.0 43.0 53.8 49.2 28.1

INDIA 37.7 42.8 63.6 4.4 45.6................................................................ ............... .

Sa.ree: Calculated from Natirnal Sample Survey, 38th Rord.

a In 1988 Scheduled caste and tribe households accounted for a thirdof the poor (26%-44% by region) and 38% of the ultra-poor (30%-55%) i.. ruralareas, but only 13% in urban areas (15% of the ultra-poor).

a Persons in wage-dependent families (including those working in non-agricultural jobs) comprised 46% of the poor in rural areas, up from 44% in1977/78. Such units account for over half of the rural poor in states likeAndhra Pradesh, Orissa, and Maharashtra. For agriculture labor households, 64%were below the poverty line in 1983 (this proportion was over 70% in Bihar andMadhya Pradesh). Self-employed households constituted the other large block ofthe rural poor. Over a third of these units were below poverty line, accountingfor 39% of poor persons overall.

C. Some Underpinnings of Poverty

2.43 Previous sections have outlined some facets of Indian poverty.Briefly, the incidence of poverty in terms of low expenditure and wage levelsfell substantially in the 1970s and early 1980s. Despite this welcome trend,there remain large numbers of poor, of whom roughly half have expenditures 25%or more below the poverty cut-off line. Besides low per capita expenditures,the poor are also characterized by the prevalence of malnutrition and ill health,by their limited involvement in the education system and by gender-related risksand disadvantages.

2.44 The above discussion has brought out, moveover, that the povertypicture has become more uneven. There are marked regional differences in ruralpoverty levels and trends. This is seen in the wage and expenditure gaint (inthe lower deciles) and the substantial fall in the poverty rate which occurredin the four southern states. There are also striking differences in the

61

prevalence of poverty within areas--the most indigent rural stratum, wage-dependent households, account for over half of the poor in some states. Finally.despite declining incidence, the number of urban poor is growing and a fifth ofIndia's poor now live in cities and towns.

2.45 What accounts for these features of the poverty scene and whatlessons can be gleaned for pulicy purposes? We tackle these questions byconcentrating on the poorest ruval group, those households that rely on labormarket earnings. We first idantifv the demand and supply mechanisms that impingeupon their welfare. We then look at bow these demand and supply influences haveoperated at the state level and in urban areas to produce observed differencesin poverty-incidence.

C.1 Labor Markets and the Rural Poor

2.46 The number (and proportion) of rural families dependent on labormarket earnings is large and rising. Out of 101 million rural households, 37.5million were labor-dependent (82% with agriculture as primary occupation) in1983, up from 35.2 million (out of 96 million) in 1977/78 and 14.1 million (outof 60 million) in 1963. The share of labor-dependent i.n total households waswell above average in the South (48%), West (43%) and the East (42%). As justdiscussed, poverty is highly prevalent in laior-dependent households--61% ofthose in such units were below the poverty line in 1983 (64% in 1977/78) ascompared to 39% (41% in 1977/78) for self-employed households.

2.47 Despite increasing nunbers, the real earnings of labor marketparticipants rose in many areas in the 1970-1985 interval (see Tables 2.2 and2.3). These advances resulted from the interplay of factors in the rural labormarket which has become crucial to the fortunes of the poor. A briefcharacterization of this market mechan-sm follows.

3 The rural labor market is increasingly a market for casual laborers,hired on a daily basis. In 1983 only about 18% of rural employees had jobcommitments--for example, as farm servants--of more than two months, as comparedto 3'"% in 1972 (Minhas and ffazumdar).

o e Recent village studies suggest that markets are localized (becauseof constraints on worker mobility) but operate, nevertheless, in a fairlyimpersonal fashion as regards caste and social status.'0 The pool of employersis typically large and of varying composition, as is the supply of workers. Acontinuous resorting of employers and workers was observed in recent micro-studies, while there is littie evidence of the patron-client ties or labor-tyingvia interlinkage of labor, credit, and other transactions which are thought tohave narrowed laborer's options in the past (Bhaduri; Hayami and Kikuchi).

a One attribute which does seem to matter in rural labor markets isgender. In the sexual dtvision of labor which prevails in many regions, women

0She field studies consulted Ln preparing this section include Drese en Mukherjee (1983-84 resurveyof Palanpur in Uttar Pradesh), Walker et. a.l (ten villlges in aeit-arid Andhra Pradesh, Mbharashtra, Gujarat,and Madhym Pradesh Xo=-tored Ln the 1970a and 1980. by ICRISA!), Reddy (1985 case study of Eastern NaWmrashtra),and Prasad at. &I. (1981-83 survey of 12 BLhar villages).

62

are primarily involved in specific operations like weeding, transplanting andheadloading; men specialize in digging and ploughing while also performing mostother operations. Women are also heavily involved in domestic work, gatheringand pracessing of food and fuel and handicrafts. Women generally work 10-30%more hourc than men per day (Welker et. al.). Male daily wage earnings exceedfemale earnings by 20-40% in most regions (Annex Tables 2-3 and 2-5). But femalewages either rose in step with or moved marginally closer to male rates indifferent regions during the 1970/71-84/5 interval (Figures 2.2 and 2.3, AxnaxTable 2-5).

O Wages in rural labor markets seem to broadly reflect demand andsupply-side forces in the medium to long run. Demand-side influences,particularly the expected productivity of hired workers, have been documentedin numerous studies. For instance, there is a strong association between thevalue of agricultural output per worker and average daily wage earnings at thestate level (See Figure 2.8) and also at the NSS-region level (Jose, Acharya).

Figure 2.8

Agricultural Wages and Productiuitg - 1984/5HA

Money 14 HPWage . ,jRates j.Ra1te A zP IPU = 6.699RS4 + .001Z39 NDP/worker

18 _--B Tel..Ž'rn R2= 0.7714

8 n101P OR

KA61900 2988 3008 4089 5488 6088 7888 8898 9883 1S88 11i8

NDP per Worker in Agriculture

Source: Data used in Jose (1988).

-anagement and village surveys have identified various yield and revenue..acing factors that have increased the use of hired workers. These includeoduction of irrigation, fertilizers, and high yielding varieties; multi-ping; changes in cropping patterns (such as introduction of cotton or

horticulture crops like grapes); availability of bullock power; favorable soilquality and rainfall patterns; and access to credit, roads and marketingfacilities. Studies have also captured the positive wage effects associated withdemand in nearby urban or rural non-farm labor markets, and the negative effectsof investment in labor displacing machinery.

0 The demand for hired labor is ir.fluenced by human capital attributesincluding nutritional and health status, experience and skills. The ICRISAT

63

village studies show, for example, that more robust workers attracted a wage-premium from employers. As mentioned above, such individuals are in a minority,as malnutrition and illness are extensive in labor households. Apparently,laborers with highv- energy levels and better health get selected (or selectthemselves) for more strenuous, higher wage jobs, and are less vulnerable tobeing laid off in slack seasons. Less robust participants, including olderwvrkers, must vie for less arduous and generally lower paying tasks. Obviously,the 5-10% of the laboring group who cannot participate because of illness,pregnancy or related reasons (need to c2re for children or sick familymembers)lose out entirely. Schooling was statistically significant but much lessimportant than the indicators of health and nutritional status in explainingvariations in wage 'offers.' This is not surprising given the low literacylevels in the ICRISAT sample.

0 Supply-side factors also exert a powerful influence on wages. Thesupply of wage workers in local markets depends on the size of the working agepopulation (reflecting past fertility and mortality rates and net-migrationtrends) as well as labor force partici?ation decisions. Surveys and villagestudies consistently find that labor force participation is lower and labormarkets 'tighter" where there is greater access to farmland, pumpsets and-1vestock. Human capital and non-tangible assets such as preferential entry toparticular product, input, or occupational markets, and access to certain "free"village resources have similar effects. The number, age, gender, health,nutritional, and marital status of family members have a demonstrated bearingas well on such calculations, as do the strength of leisure preferences andpressures (which tend to be less for those of scheduled caste and tribeaffiliation, widows and spinsters, and the poor in general) on women to remainat home (Bardhan).

o Wages do not, however, fully clear the labor market, especially inthe off season. Involuntary unemployment, especially in slack seasons, is acommon feature in the casual labor market. The 38th round of the NSS found 8%(men, 7.5%; women 9.0%) of the entire rural labor force to be jobless on anygiven day, with Kerala and Tamil Nadu showing the highest and Nadhya Pradesh,Rajasthan, and Uttar Pradesh the lowest rates. Unemployment rates were highestfor labor households (roughly five times the rate for self-employed units) andfor low income families. The jobless rate among the poor was roughly twice thatfor the non-poor in 1983.

o The persistence of involuntary employment suggests that wages arenot fully responsive to supply-side conditions. Many studies show that labormarket entry and earnings, especially piece-rate payments, are (inversely)influenced by high unemployment levels. However, micro-studies indicate thatdaily wage rates remain rigid downwards for extended periods. There is nodefinitive explanation for downward wage inflexibility over time or for aparallel phenomenon of uniformity in wages (for adult males, etc.) at a giventime. However, competing hypotheses all suggest that the textbook model ofperfectly competiti-re labor markets needs modification. For example, collusionamong workers (due to feelings of self-respect, or group loyalty, or concern thatpay cuts may initiate a downward spiral of wage reductions or that cuts may notbe restored in high demand periods) or employers (as a way of providingincentives, reducing haggling and other transaction costs, and facilitating

64

enforcement of contracts) figure in many analyses (Dreze and Mukher3ee; Walkeret. al.).

0 The growing importance of rural labor markets (as allocativemechanisms) and the associated phenomena of downward wage rigidity and highunemployment point to limits in the absorptive capacity of agriculture. Thosemost vulnerable to sharp reductions in income and consumption are those lackingcash, land or other liquid or marketable assets to fall back upon during periodsof weak labor demand. By contrast, those with small or even marginal holdingsor equivalent assets can use family labor intensively (beyond the point wheremarginal productivity equals the established wage) and can keep family membersat least partly occupied during slack seasonsi.

C.2 Regional Patterns of Agricultural Change and Wage Growth

2.48 The various demand and supply factors mentioned above are helpfulin accounting for regional wage-differences. One cluster of low wage states inFigure 2.8 lies in Eastern India which includes Bihar, Orissa, and West Bengal(the Eastern portions of Uttar Pradesh and Madhya Pradesh are often included inthis region as well). Agricultural yields (production per hectare) and wageshave stagnated in this region because of diseconomies to scale in small andfragmented operational units, restricted use of modern inputs and recommendedpractices, susceptibility to kharif flooding due to lack of water controlstructures, and the limited availability (due to low investment) of surface andgroundwater irrigation and electrical power. Even in these states though thereare pockets, such as the intensively cultivated Mahanadi delta in Orissa, inwhich land productivity rose and wages increased rapidly .

2.49 Yield-raising investment in Eastern India has been held down byinstitutional deficiencies including weak marketing facilities, limited accessto credit, and uncertainty (except for West Bengal) as to the legality ofconflicting tenancy claims. Production of foodgrains, which covers over 80 percent of cultivated acreage in the region, grew half as rapidly (1% p.a. during1970/73-1982/85) as total and working age population. Disappointing foodgraintrends have not been offset by advances in other crops or in non-farm activitiessuch as fisheries, forestry, and rural industry. Nor has migration to otherregions or urban centers provided much relief. Apart from flows of Bihari andOriya farm workers to the Punjab, Haryana and Western Uttar Pradesh, there hasbeen little net out-migration to date: urbanization in the region rose somewhatin the 1971-1981 period, but the share of the population living in cities andtowns remains exceptionally low (see Section N below). Because of these factors,continuing increases in numbers have "backed up" and spilled over into low wagesand persistently high poverty rates.

2.50 A very different situation prevails in the Northwest region whichincludes Punjab, Haryana, Himachal Pradesh and adjacent districts of Rajasthanand Uttar Pradesh. Sustained growth in output of foodgrains and various non-cereal crops have exceeded the high population growth rates in this area.Productivity has grown thanks to investments in surface and groundwaterirrigation and heavy use of fertilizer and other inputs. This has contributedto very low poverty levels and high wages. But wages have stagnated (at high

65

levels), possibly reflecting growi: g reliance on mechanical threshers and otherlabor-displacing inputs as well as the inflow of migrant farm workers.

2.51 The picture is more variegated elsevhere. Like Eastern India, Keral.and the coastal areas of Karnataka and Maharashtra have high populationdensities, significant but seasonally concentrated rainfall, and a terrain whichinhibits development of storage facilities for dry-season irrigation. Theseconstraints were reflected in a continuous fall in foodgrain production in the1970s and 1980s. But this decline was more than offset by agriculturalproductivity gaias in the horticulture and plantation sector which helped to keepwages rising. The strong trade unions operating in Kerala also raised wages.Off-farm opportunities must also have contributed to the observed rise in wagesand decline in poverty. A significant share of Kerala's rural labor force nowdepends on non-farm and even non-agricultural income sources.

2.52 Finally, production possibilities in the dry belt, comprising muchof Andhra Pradesh, Maharashtra, Gujarat, Karnataka, Madhya Pradesh and Rajasthanhave been limited by low and unpredictable rainfall and heterogeneous butgenerally poor soils. Indeed, cereals production grew at less than 2.3% perannum in 90 of the area's 156 districts in the 1959/60-1983/84 period (Walkeret. al.). This area has suffered extensive deforestation and erosion, becauseof overgrazing and other inappropriate land use (often by the poor themselves).This has added to the problems of low income families who have relied on forestsand other open-access areas for fuel, fodder, and other products.

i 2.53 Fortunately, there have been mitigating factors that have broughtmodest productivity and wage gains and declining poverty incidence in the drybelt. These include high yields and intensive cropping in the (limited) areasof irrigated agriculture. This contributed to rapid growth in foodgrains inAndhra Pradesh and parts of Maharashtra and Gujarat, and enabled relatively highproductivity levels to be attained in the past in Tamil Nadu. In addition, newvarieties have spurred output increases in various rainfed crops (e.g. kharifjowar, groundnut, cotton, soyabean) and horticulture and plantation products.It appears though that the incremental labor requirements associated with hybridjowar and cotton were negligible. This and factors like selling off non-viableholdings (see below) which increased labor force participation may account forthe low wage growth observed in Maharashtra. With non-foodgrain crops claimingover 30% of the acreage in Gujarat, Andhra Pradesh, Maharashtra, Karnataka andTamil Nadu, a significant share of the labor force has moved out of foodgrainsor out of agriculture entirely. (Some have entered newly revived occupationslike toddy tapping or become heavily involved in public works programs such asMaharashtra's Employment Guarantee Scheme.) Finally, population density is lowerin this broad region than in Eastern India, and demographic expansion hasgenerally been slower, reflecting early downturns in mortality and fertility.

C.3 Access to Land

2.54 An important factor affecting labor market participation has beenthe broadening of access to land. Between 1970/71 and 1980/81, the number ofoperational holdings increased from 70.5 million to 89.4 million (AgriculturalCensus, 1980/81). The ?7th round (1982) of the NSS found a 30% increase during

66

the same period in the number of landowning families as opposed to a 26% increasein the number not owning any land. Clearly, a significant share of the landlessobtained at least a small parcel of land.

2.55 Land has been transferred through market transactions, distributionunder different land reform statutes, and the demographically-driven subdivisionof holdings among family members following or prior to an owner's death. It isestimated that the distribution of ceiling surplus land accounted for 3.2 millionof the 18.9 million new holdings that appeared between 1970/71 and 1980/81(Bandyopadhyay). Of course, the stringent ceiling laws enacted in a number ofstates also may have hastened the sale or subdivision of family holdings. Itis difficult to ascertain how important land markets are as a means oftransferring title. The ICRISAT survey found though that as much land was boughtand sold as was partitioned in the study villages in the 1950-1982 period.

2.56 Most of the new operational units are small. The number of holdingsof one hectare or less grew from 36.2 million to 50.5 million and those in the1-2 hectare range increased from 11.1 million to 13.4 million in the 1970/71-1980/81 decade. The number of large holdings (10 hectares or more) fell from2.8 to 2.2 million. Moreover, many of the remaining large holdings are infertileand/or located in inhospitable agro-climatic zones. The share of marginal andsmall farms in total area owned grew especially rapidly in the 1961/62-1982period in Bihar, Kerala, Orissa, Uttar Pradesh and West Bengal, but fell sharplyin Maharashtra.

2.57 Overall then a downsizing of the landholding pattern is underway.Clearly this process cannot continue indefinitely without Tmarginalizing" theentire holding structure--there may be 100 million units by 1990, of which 60%will be small (one hectare or less) and possibly non-viable. Moreover, thlsnumber is sure to rise sharply with continuing population growth (and in theabsence of other opportunities). This looming problem should not obviate thefact that land transfers have enabled many families to achieve a modicum ofsecurity (in the form of a marketable asset and some certainty in income flows)and to benefit from new income earning opportunities. Even a small hutment lotwith space for a garden can make a qualitative difference in a household'slivelihood strategy. The ICRISAT study found that increased access to landplayed a large role in the real income gains of the poor in the semi-arid zonein the 1970s and early 1980s. This contribution stemmed from output producedon family holdings, and the higher wages available in labor markets whichtightened when former participants began to devote more time to their own plots.

2.58 The expanded earning possibilities afforded by even modest landownership is seen in figures on average consumption. As sten in Table II-2, percapita expenditure in the lowest two deciles is about thirty percent higher incultivating as opposed to wage-dependent households. Table 2.9 shows averageper capita expenditure levels for households owning different amounts of landin six Andhra Pradesh districts. In absolute terms, the gap in expendituresbetween agricultural labor (0.00-0.06 acres) and marginal farm households islarger in the irrigated districts than in the dry zone. It is striking thataverage r' onsumption in marginal farm units in irrigated East Godavari and Krishnaexceeds :hat in large farm households in non-irrigated districts.

67

Table 2.9AVERAGE TNHL1 PER CAPITA EXPEINITURE FOR DIFFERT LAWD

HOLDING GM"S, 1983, IN SIX RiUAL AKItHRA PRADESH DISTRICTSCr)

_......___.._______ __._ ....................................................................................... ....

IrrilataL i, Unirr teted Eat west

Distrlct/ Anuntaptr Kurnool Nahaboobnagmr Codmrt Godsvari KrfIhnaLand HoLdingGrow (acres) (1) (2) (3) (4) (5) (6)

... .. ................... __.... ._ ._.......... ............... ................................. ......

0.00-0.05 68.0 60.9 73.2 94.8 86.7 93.1

0.06-2.49 80.3 77.7 100.0 131.8 95.3 120.2

2.50-4.99 87.3 68.3 85.6 140.3 110.4 135.7

5.00-10.00 83.0 76.1 9f.4 188.2 169.3 154.3

10.00 and above 101.1 83.2 100.4 283.6 132.6 219.6

AtL Cuttivators 87.9 79.S 9f.4 152.3 116.9 154.7

Sairce: National SsIple Surey, 38th Rosaid.

2.59 One unfortunate side of this changing land holding pattern has beenthe privatization of areas and resources that had been available to the entirevillage community. These common property resources (CPRs) typically comprisepastures, forests and woodlots, threshing grounds, river banks and beds,watershed catchments and drainage channels, ponds and tanks. The fuel, fodder,manure, silt, food, raw materials and marketable items derived from such areasremain important in the life of the poor, especially during droughts and othercrises. One estimate found that CPRs in villages in tLe semi-arid belt accountedfor 15-23% of the income of the poor in 1982-1985, but only 1-3% of that forthe non-poor (Jodha). 11

2.60 There is evidenee, however, that the extent of village common areashas been considcerably reduced. For instance, the above cited study by Jodhafound that CFArs had decreased by 26-62% in survey villages in the 1952-1982period. A major source of this decline has been the appropriation of commonareas for private use. This resulted in part from land reforms and relatedschemes which gave low-income families legal title to such "waste' lands. Mte

1 Its the wommn within poor households who are mainly responsible for colleoting fuel, fodder and otherCPK materials. Indeed, collecting CPP "producte', although not acknowledged in conventional definitions ofployment end labor force participation, represents gainful activity of crucial inportance to the family incoma

af the poor. Once such work to included along with market ead farm-based tasks, the estimated participationrate for a11 rural wern ricLs fro S39X to 511 (Beanett).

68

most common form of privatization, however, probably was unauthorizedencroachment by individual villagers who managed to obtain legal sanction afterthe fact. It is estimated that well over half of CPRs entered the private domainin this fashion (Jodha). Not surprisingly, as the availability of CPRs hasfallen, overuse of remaining common lands by poor families has broughtdegradation and a decline in benefits.

2.61 Privatization of CPRs is one of several ways in which villageinstitutions have changed to the detriment of the poor. Traditional ruralsociety was hierarchical and unequal in India. Nevertheless, mutual obligationsand responsibilities were recognized which defined certain rights andentitlements for thok poor, conveying thereby a degree of protection and security,and provided a framework for necessary collective actions (such as constructingand maintaining water tanks and other assets, protecting forests and so forth).With commercialization, the opening up of villages to outside influences andstepped up population growth, much of the old patron-client system with itsreciprocal duties and responsibilities (and attendant institutions) has falleninto disuse, leaving former dependent households exposed to new pressures (likeloss of CPRs, changing work opportunities). The rural poor have generally beentoo indigent and too heterogeneous socially to be able to work towards commonobjectives. Indeed, a frequent reaction is to expect the government through itsmany programs and agencies to assume various 'insurance' and organizationalfunctions once handled by village patrons.' 2

C.4 Poverty and Social Sector Programs

2.62 Government poverty and social sector programs should also be includedas factors influencing participation in rural labor markets and wage trends.These initiatives include programs that foster self-employment or offer wage-earning opportunities, which together aim to build up the rural asset base(individual and community).13 By generating employment these schemes lowerparticipation in rural labor markets and help prop up wages. Of course, in themedium-term, the assets created should operate as demand side factors in locallabor markets.

2.63 One such initiative is the Integrated Rural Development Program(IRDP) which assists low income families in financing investments in minorirrigation, and purchase of livestock, bullock carts and other self-employment

FAU aareness of thls Institutional weakness in the village coamunity has long figured in Indiandevelopment thinking. For example, the seminal 1961 Report of the Study Grmuo on the Welfare of the WeakerSections of the Villase Community, that vas chaired by Jayaprakash Narayan, warned that the CommunityDevelopment program and related government schemes would not succeed without 'the acceptance by the villagec^mmunity of the responsibility for the welfare, employment, and livelihood of all its members. This is of thegreatest Lportace fron the polnt of vlew of the weaker sections in the villageo (Ministry of CommunityDevelopment nd Cooperatlon, page 55).

13As outlined in the 1989190 budget, spending on different employment-creating rural development schemes,soclal service delivery schems and food and cloth subsidLes is expected to amount to Rs. 94 .84 billion. Theprogram-wlse expendltures anticipated In the Central Plan are: Rural Works Schemes, Rs. 17.1 blIlions IRDP andrelated programs, Rs. 5.0 bllion; other rural development initiatives Rs. 485 milliont and Welfare, Health andHuman Resource schemes, Rs. 33.95 billion. Neon-plan outlays include Rs. 14.2 billion covering delivery ofvarious soctil services and Rs. 22 bllion and Rs. 2.1 blllon on the food end cloth subsidles respectively.

69

ventures. Introduced on a limited basis in 19'8/79, IRDP has operated on a largescale during the Sixth and Seventh Plans. Some 16.6 million households gotsubsidized loans through IRDP during the Sixth Plan (1980-85). Total investmentamounted to Rs. 47.4 billion, of which Central and state subsidy paymentsaccounted for Rs. 16.6 billion and bank credit the rest. The subsidy portioncomprises 35% of an average investment of Rs. 2,787. During the first threeyears of the Seventh Plan another 11 million families were included in thescheme, with investment per client averaging Rs. 4,215. (A second, smallercomponent of IRDP called TRYSEM for Training of Rural Youth for Self Employmentorganized technical instruction for nearly 940,000 individuals aged 18-35 duringthe Sixth Plan.)

2.64 During its life span, IRDP has already reached roughly 27% of India'srural households. (Annex Table 2-7 shows the state and region-wise coverage ofhouseholds in the scheme). A sense of the household-level impact of the programemerges from surveys of ItDP beneficiaries. A small sample study of IRDP'simpact in twelve Uttar Pradesh districts found positive short run effects.Nearly 75% of beneficiary families reported income gains of more than 15% in theinitial two years after purchasing the asset. Most households noted both areduction in family labor time allocated to wage earning and other outside workand a significant increase in the number of family members involved in household-based income generating activities. No information is available, though, on theamount of additional demand which IRDP-financed enterprises generated in locallabor markets (Pulley).

2.65 However, longer term IRDP consequences were somewhat less favorablein this sample, and also in the concurrent evaluation covering all states.Specifically, productivity dropped sharply in the third year after an investmentand retention of assets fell, so that by the end of the fourth year over 40% ofbeneficiaries had liquidated or otherwise lost their investments. These findingsare discouraging since IRDP was expected to provide the finance that marginalfarmers and other rural poor need to become economically viable. They suggestthat this major initiative has not yet demonstrated it can be effective as amedium to long term supply-shifter and anti-poverty-instrument. (Reasons forthe diminishing returns and high attrition associated with IRDP investments areexplored in Chapter 3.)

2.66 National and state-run employment frograms have also a&hieved broadcoverage in rural areas. The National Rural Employment Program (NREP), whosecosts are shared equally by the Center and the states, created an average of 355million work-days annually during the Sixth Plan and 360 million in the 1985/86-1987/88 interval. The labor employed and funds spent--Rs. 6.8 billion (includingfoodgrain releases) annually since 1980/81 when the program began--in NREP havebeen used to construct rural roads, school buildings, minor irrigation structuresand other community assets. A second employment scheme of national scope, theRural Landless Employment Guarantee Program (RLEGP), became operational in1984/85 when it created 260 million days of employment. RLEGP, which providedan average of 282 million work days per year in 1985/86-1987/88 with meanspending of Rs. 5.7 billion (including more than 660,000 metric tons of cerealsreleased annually through the program), is funded entirely by the Center as anadditional instrument to improve the community asset base in rural areas. RLEGPwas initially modeled on Maharashtra's Employment Guarantee Scheme, a state-run

70

program. EGS has operated on a much larger scale- -it generated an annual averageof 170 million work days (1978-1984) in a single state--than NREP or RLEGP,largely because job provision and program funding are "guaranteed' and mandatedby statute (the 1977 Employment Guarantee Act) rather than based on annualbudgetary allocations. (Other facets of the two national programs and EGS arereviewed in Chapter 3.)

2.67 Despite their large scale (relative to the past and experience inother countries), these programs have typically had but a mci est, short runimpact on non-agricultural employment. Average daily employment generated onNREP and RLEGP in 1985/86-1986/87 was 1.67 million, amounting to about 0.6% ofaverage daily rural employment. The average number of days of employment eachrural household received each year th ough NREP and RLEGP varied from 1.1 inHaryana to 16.4 in Rajasthan (Annex Table 2-7). The impact of EGS, especiallyin particular districts, ha-.4 been more substantial. Average daily attendanceon this scheme was 550,000 in the 1982/83-1984/85 period, comprising 3.5% ofdaily rural employment overall and 12% of daily employment for indvidualsspending 100 Rs or less a month. While each rural worker got 10 days of EGSlabor per year on average, this figure was as high as 14 in the drought-hit zonesof the state. With state-level attendance exceeding 1 million per day in someperiods, over a quarter of the rural labor force has participated in EGS in someblocks. The EGS work force is largely drawn from landless labor and marginalfarm households, many with scheduled caste and tribal affiliations; half or moreof participants are women (half of whom are above age 40), many of whom wouldotherwise have withdrawn from the labor force. For these families, EGS isimportant as an income source--the scheme accounted for 10-60% oflandless/marginal farm household income in different studies. But the realsignificance of EGS lies in its reliable provision of employment and incomeinsurance, a function which has broadened the material options of the poor andreduced if not eliminated the extreme vulnerability which is a facet of poverty.Among other things, the ready availability of EGS work has enabled many familiesto withstand drought and other contingencies without selling off land and otherproductive assets.

2.68 In short, apart from the activities of EGS in some regions ofMaharashtra, employment schemes have not contributed significantly to risingwages by "removiny" individuals from the agricultural labor market on a largescale. Nor have these programs achieved much success in creating land-based orhuman capital assets which add to the productivity of the rural labor force.The quality of the road and irrigation works, land reclamation and so forthcarried out under NREP has long been a source of concern--exeoution by villagepanchayats with only limited technical inputs from state agencies accounts forpoor construction standards and indeterminate economic impact. RLEGP hasattempted to improve on these practices by requiring all schemes to be reviewedin Delhi, but such extreme centralization has created new problems. Many ofthese difficulties have been avoided in EGS by placing design and implementationin the hands of line agencies which execute EGS projects along with schemes fromtheir own regular work program. The large number of check dams built, roadsconstructed and so forth suggests that positive economic and environmentaleffects must have ensued. There is, however, no systematic evidence with whichto test this proposition. Finally, one disappointing aspect of EGS has been the

71

failure to use the scheme as a vehicle to improve the health and educationalattributes of workers and their families.

2.69 Government health, nutrition (including food subsidy), education andfamily planning programs have affected rural labor supply and wages in diverseways. Health (and nutrition) investments can increase participation and rewardsin the labor market by reducing mortality and morbidity; increased schoolattendance is typically associated with lower labor force involvement in theyounger cohorts and higher wages and on-farm productivity once labor forceparticipation begins. Unfortunately, data are not available to identify laborsupply effects in the (relatively few) states with vigorous primary health andeducation programs.

2.70 Some broad inferences may be developed, though, concerning the laborsupply implications of food subsidy and family planning programs. First, thepublic distribution system (PDS), a major means of making subsidized foodavailable, has traditionally operated most intensively and effectively in urbanareas, with subsidized wheat and coarse grains reaching rural areas mainlythrough in-kind payments to NREP workers. Only Kerala, Tamil Nadu, AndhraPradesh and Gujarat have established an operating rural PDS and it is in thesestates that labor market effects have oeen noticed. The clearest case is thatof Andhra Pradesh where the PDS is "topped off' with an additional, statefinanced subsidy in the Rs. 2/kilo rice scheme. Observers have linked a sharpincrease in the number of casual wage earners to the introduction of this scheme.Formerly, such laborers worked as regular farm servants or share tenants inreturn for advance consumption payments from landlords. The Rs. 2/kilo schemehas allowed workers to take their chances in the labor market. Similarly, thepresence of accessible PDS outlets has helped to make high unemployment ratesfor casual laborers more tolerable in Tamil Nadu and Kerala.

2.71 Because of continuing high fertility rates in many regions, theeventual labor force effects of government-provided family planning servicespromise to be substantial. The family planning program was initiated in 1951,but large scale efforts to promote contraception only began in the late 1960s.In terms of contraceptive prevalence rates, the program was most successful inthe 1970s in Andhra Pradesh, Gujarat, Haryana, Karnataka, iKerala, Maharashtra,and Tamil Nadu. Punjab an-d Himachal Pradesh joined the ranks of high prevalencestates in the 1980s. Total fertility rates fell especially sharply in the South(where lower rates already prevailed) and West during the 1971-1981 period(Figure 2.9). Decreasing fertility has not yet resulted in actual reductionsin the size of cohorts of labor force age. However, it is noticeable in a fallin the relative size of younger working age groups in some states. For ipstance,the 15-19 age cohort in Kerala and Tamil Nadu was 17% larger than the 20-24 groupwhile in Uttar Pradesh the younger cohort was 31% larger (Annex Table 2-7). Asdiscussed in Chapter 3, the major supply-shifter effects of declining fertilitywill begin to sho- up only ln the early 1990s, when those 5-9 in 1981 will beentering the labc4 force in large numbers. Comparing the 5-9 and 15-19 cohorts(Annex Table 2-7), It is clear that Kerala, Tamil Nadu and Pinjab are set toexperience a more gradual rate of increase in population of working age than thestates in Eastern and Central India.

72

D. Urban Povrtyq: Rising Numbers but Declining Pralence

2.72 The low and decreasing share of the urban population who are pooris a surprising t-nding given the rural focus of government poverty alleviationprograms and the widespread apprehension that the qualicy of life in cities andtowns has deteriorated due to "excessive" in-migration from the countryside.

Figure 2.9

Total Fertility Rates by Rbyion in 1971 and 1981

7 East Central Neoth VestIndia vest

6South

5

Nmber Of 4

2 1971

1 : ,__E.E:: *19 120

1 2 3 4 5 6REGIONS

Source: Rao, Rele and Palmore (1987).

Trends in urban poverty prevalence suggest, in fact, that the problem isessentially solving itself (i.e. unassisted by various special schemes). Howhas this happened? Can it continue as it has?

2.73 At first sight, the supply-demand framework used above seems tovalidate concerns that incteasing poverty is in store for India's cities. Afterall, urban demand for laboi, as estimated by the growth of manufacturedemployment in the Annual Survey of Industry was less than 2.6 per cent per annumin the 1973-1985 period overall and averaged only 0.2 per cent per annum in thefirst half of the 1980s (Hanson and Sengupta). Meanwhile, urban numbers havebeen increasing more rapidly than before. The city and town population rose by46% (3.9% annual rate) in the decade after 1971, with urban centers larger than100,000 growing by 4.6 per cent annually. These developments have contributedto a perception of explosive, chaotic growth with consequences such as risingunemployment for many and low productivity work sharing in the informal sectorfor the rest, squalor in teeming slums, congestion, water and air pollution anddeteriorating infrastructure and services. This pessimistic view pervades theSeventh Plan which notes the large absolute increases in urban numbers andsuggests a vigorous attack on this 'serious situation" especially via theintegrated development of small cities.

73

Tabte 2.10GROITH INI ETROPOLITM CITI.'

,,,,........._. ........ .. .... ................ ................................... _._._..........

LatiXn i90Q AnwaL Orah Ran Q nrn veariQn Nit.rl Hi2 - nte_40nd

1951-61 1961-71 1971-81 1919-81................... ...................... _*....... .. . ... .. .. ,...............,._

Cateutta 9165 13U7 2.26 2.05 2.69 3.04oaby 8277 1273 3.42 3.70 3.26 5.09

DelhI St13 2073 5.08 4.45 4.59 5.63Nadra& 4276 972 2.33 5.01 3.04 2.93Daatore 2913 1127 4.42 3.27 S.82 3.40Hyerabad 2528 642 1.03 3.71 3.42 5.08...... ....... .. ... .. .... ......... _.................._..

Source: Nahan an Pent.

2.74 However, the phenomena just described are not representative of thechanges taking place in urban India. Understanding the urban poverty picturerequires a closer look at the supply and demand mechanisms which are operating.First, urban population growth has been lest rapid and dysfunctional thangenerally thoulght. Overall, the urban share of the population was only 23.7%in 1981, up from 17.6% in 1951. Moreover, the 4.18 per cent growth rate in 1971-1981 for cities already over 20,000 in 1971 was only marginally higher than therates (3.85 and 3.59%) recorded in 1961-1971 and 1951-1961. Similarly, annualgrowth in cities of 100,000 or more increased from 3.43 to 3.62% in the tworecent census decades--the 4.6% figure cited above and in the Seventh Plan ismisleading because it includes in the 1981 total those cities which crossed thecut-off line in the 1970s.

2.75 The highest growth was not found in the four metropolitan cities(2.82 and 2.95% in the census decades) but in the 1-4 million (4.14 and 2.99%)and 250,000-500,000 (3.35 and 4.04%) categories. Table 2.10 shows the growthrates for the largest cities and the satellite towns and cities in thesurrounding metropolitan areas. In line with trends in metropolitan regions,the urban population in Maharashtra, Tamil Nadu, and West Bengal has grownre,atively slowly in recent decades. Urbanization picked up in Haryana, WesternUttar Pradesh and Punjab, stimulated most likely by rapid agricultural gains inthe surrounding areas. Stepped up growth rates in Eastern India represent acatch-up phenomenon--these are amongst the least urbanized areas in the world--and a response to mining and industrial investments in the region. Analysisof data on migr&tion trends also supports the broad conclusion that the longanticipated 'shaking loosen of the Indian peasentry is not occurring in anexplosive fashion (Skeldon).

2.76 Apart from the overall pattern of urban growth, there are othersupply-side considerations that need to be noted.

O Rural-urban migration is not an undifferentiated flow but comprisesseveral groups with distinctive characteristics. Observers often contrast twostreams: 1) those "pushed" from impoverished rural backgrounds (with limitedassets and skills) who migrate temporarily without families and without severingvillage ties, taking whatever work can be found at wages perhaps only marginallyhigher than their anticipated rural earnings, and 2) migrants from moderate to

74

substantial land owning households who have fairly specific work objectives (andexpectations of assistance from city-based ielatives or caste-linked contacts)and whose 'reservation wage" or supply-price assumes a long-term familycommitment (with attendant housing requirements, contingency margins, and soforth) and reflects higher literacy skills and lower (compared to rural areas)likely earning possibilities for wives and children. As discussed below, thelatter group of family migrants has been able to command a higher demand pricebecause their productivity (seen as linked to their stable life style) more thanoffsets higher wage costs (Mazumdar).

O The pressure of increasing numbers in urban labor markets is easedby school attendance rates in the post-primary phases which are considerablyhigher than those in rural areas (and labor force participation rates which arelower). For India as a whole, 50% of urban men and 35% of urban women aged 15-19 were enrolled in school in 1983, as compared to 32 and 11% respectively inrural areas. However, only 38 and 22% respectively of the urban poor (lowestfour deciles) in this cohort were in school. The lower overall labL: forceparticipation rates in urban areas stem not only from longer school attendancebut also the more limited involvement of older people and women in general. Ofthose age 60 and over in urban areas, 37% (59% for men) were in the labor force,as opposed to 49% (76% for men) in rural areas. Amongst women aged 15 and over,only 18% we. e labor force participants in urban areas as compared to 32% in ruralareas; for those -'i the lowest four deciles these figures were 23% and 35%respectively.

O As in rural areas, labor supply and earnings are inhibited bynutritional and health problems. Although death rates are, on average,considerably lower in India's cities, the urban poor face mortality riskscomparable to those in backward rural areas. In fact, disaggregated data suggesta higher incidence amongst the urban poor of communicable diseases such astuberculosis (probably because of deteriorating sanitation, air and waterquality) and as high a susceptibility to malnutrition and morbidity. Mentionhas already been made of the study documenting the large number of working daysand income lost in poor households in Ahmedabad (Jain). Illness probablyaccounts for participation rates amongst iow income males which are 10-20% lessthan those of the urban non-poor.

O Although participation is held down by school enrollment, sicknessand "voluntary" withdrawal from the labor force, excess labor supply is evidencedin high unemployment rates. Over 9% of urban male workers and 11% of femaleswere jobless on any given day during the 38th round, with the highest incidencefalling on the four lowest expenditure deciles (11.3% and 10.7% for men and womenrespectively). The impact of these rates is probably mitigated to some extentby the age and educational pattern of unemployment. Those most affected wereyoung adults (males aged 10-14 and 15-29 and females 15-29) of whom 13-19% werejobless, and those who had completed middle or secondary school(10.6% for men and 22% for women) and who were presumably able to engage in apossibly lengthy search for suitable work.

2.77 On the demand side, the situation may not have been as bleak as theabove-mentioned figure for industrial employment growth would suggest. The 0.2%rate of increase cited above refers only to registered manufacturing enterprises

75

(in urban and rural areas) which are formally subject to factory labor laws andwhich are covered in the Annual Survey of Industry (ASI). These organized sectorunits can include small scale operations with as few as ten employees (if poweris used). However, it is thought that most smaller enterprises actually operateoutside the purview of stringent labor legislation, and thus are not covered inthe ASI.

2.78 This large group of unregulated manufacturing units includes thoselocated in households. Census data indicate that total workers in such familyoperations grew at only 0.4% per year in urban areas in the 1961-1981 intelval.However, estimates show that employment grew rapidly- -5.7* per year in the 1970s--in the mainly urban-based non-household, non-large factory sector. Observershave linked the step-up in urbanization that occurred in the 1970s to thesustained growth of employment in small workshops and factories. In fact, thehighest rates of growth of urban non-household manufacturing jobs occurred instates such as Haryana, Orissa, and Rajasthan in which urbanization was rapidwhile non-houschold industry and urban numbers grew relatively slowly inMaharashtra, Tamil Nadu and West Bengal (Mohan, 1987).

2.79 The non-factory manufacturi sector encompasses numerous productsand large differences in level of technoplogy, capital intensity and growthexperience. Many units derive some legal or policy related advantages(subsidies, protection through tariffs and reservations and so forth) but manageto circumvent applicable labor laws. Others receive no benefits but arenevertheless affected by vari^wus central, state, and city government actions.The same is the case for the other component of what is usually (confusingly)called the informal sector.

2.80 The unregulated urban service sector which is as heterogeneous inoutput, technology, mode of operation, and "vulnerability" to re-strictiveregulations as non-factory manufacturing has also been a locus of job creation.Overall non-agricultural, non-manufacturing employment grew at a 3.34 rate inthe last census decade.

2.81 Labor market processes are themselves indicative of the resilienceof the urban economy. With over two-thirds of vrban households dependent on thelabor market, survey data (see Annex Table 2-8) show wide variations in urbanwage and salary earnings. For males aged 15-59, the lowest wages were for casuallabor in urban-based agriculture (which still accounts for 8.8% of thoseemployed), and in the mostly small scale enterprises producing textiles, leatherand related products (industry codes 20-29), personal services and otheractivities. Earnings in these occupations were only 3-19% above the average wagein rural non-primary activities. In fact, earnings in rural non-primary (manual)employment were higher than the wages paid in a number of urban occupations.Lower paying urban casual work is typically performed by young, unskilled,temporary migrants who provide a link to rural labor markets. These individualsare also recruited for somewhat better paying construction jobs- -the higher wagein such work may be necessary to attract stronger, healthier laborers and mayalso represent the sort of rewards to skills and experience that lie behindhigher earnings in technically-demanding manufacturing (codes 30-39) andtransport jobs. (Wages in the latter activities are only just below meanearnings in the regulated transport sector.) Besides me--hanical skills and

76

endurance, worker attributes such as reliability and motivation are valued byemployers. Characteristics such as age, sex, educational level, ethnicity, andcaste which are often found to have a significant effect on wages may becapturing such qualities.

2.82 All in all, the urban poverty scene should be regarded with neitherdespair nor complacency. The observed fall in the incidence of poverty in citiesand towns owes much, it appears, to the job creating potential of the unregulatedsector. Also of note are the indications that rural-urban migration isresponsive to economic opportunities. This hopeful stance needs to be temperedthough with an awareness of the concentrations of poverty which persist in urbanareas and the distinctive housing, water, environmental and health problems ofcity residents. Moreover, the gains that have been attained cannot be assumedto be permanent since sluggish job creation in agriculture or industry may resultin a rapid increase in the number of urban poor.

2.83 One worrisome feature of the urban poverty scane is the extensiveunderutilization of available family labor time. This is seen in high 'open,unemployment rates in tl-e lower deciles but also in the very low recordedparticipation rates of urban women. The limited involvement of women is puzzlingsince their educational qualifications are somewhat better than those of ruralwomen, school attendance rates are higher (children are more likely to be outof the home), and opportunities to collect fuel and food from CPRs or to engagein other home-based supplementary income earning tasks are more circumscribed.Research is needed to ascertain why, despite an apparently low supply price, sofew females seem to be in the urban job market--poor health and nutrition,limited educational and job experience, language and cultural barriers andunderenumeration of actual activities are possible explanations.

2.84 In addition to the specific disadvantages faced by women, urbanemployment growth has been constrained by various central, state and municipalpolicies (see Chapter 3). For instance, although small scale enterprises havebeen exempted from minimum wage and other labor legislation and aided byrestrictions on the capacity of large companies (thereby cutting smallenterprises off from numerous desirable linkages to expansion in large firms),these promotional measures and other regulations have greatly raised the cost,especially 'oor the smaller firms, of doing business and have createddisincentives to expansion beyond a threshold size. Expansion and accompanyingjob creation have also been inhibited by distortions in subsidized creditschemes, administrative rationing and other misallocation of non-subsidizedcredit and foreign exchange. Meanwhile, various financial restrictions, laborcodes, and land sale prohibitions make it difficult for "sick' (insolvent) firmsto "exit" (move elsewhere or go out of business), but prevent successful city-based firms (which use relatively abundant skilled labor) from expanding.

2.85 It appears then that urban job growth and poverty reduction willdepend increasingly on removal of disincentives to hiring labor in large andsmall firms. Urban poverty alleviation will be linked as well to initiativeswhich reduce crowding and improve the availability and quality of housing, waterand sewerage services in cities and towns. Congestion and lack of access tosatisfactory housing and water supplies characterize living conditions not onlyfor the poor but a growing proportion of the urban non-poor. This phenomenon

77

is at once a "spillover" from the rapid expansion of slums, and a consequenceof rapid but uncontrolled, and largely unplanned growth, and low levels ofcapital and recurrent spending on infrastructure which is overburdened anddeteriorating rapidly.

2.86 Many of the costs of this worsening urban environment are non-pecuniary and are seen, for instance, in still high morbidity and mortality ratesin slum areas (e.g. the apparently rising incidence of tuberculosis and otherrespiratory infections in some Bombay neighborhoods), and the air and waterpollution, and drainage problems encountered generally. Meanwhile, the poor andnon-poor have been spending relatively little on upkeep of infrastructure, water,and sewerage services and so forth. For instance, successive NSS rounds indicatethat the share of rent in total spending by poor households actually fell between1978 and 1983 for urban India overall and in states like West Bengal, Maharashtraand Tamil Nadu with large urban population (Thalwitz). This reflects theemergence of new slums on "common" lands and also the regularization, i.e.provision of legal occupancy rights, of older squatter settlements. A worrisomefinding though is the rising proportion of spending on energy in poor uroanhouseholds.

2.87 The ability of the urban poor to rely on various low quality but freeservices appears to be becoming increasingly limited. As just noted, this isseen in an increasing energy (fuel and lighting) share in total householdexpenditure--as urban areas become more built-up. foraging for twigs, manure,and discarded waste materials will become increasingly difficult, requiringhouseholds to purchase fuel wood and charcoal. Moreover, payment of often veryhir,h rents, illegal sales of water (often by the bucket) and so forth arebecoming commonplace in slum areas, and can be expected to take up a risingproportion of household spending in the future.

2.88 The poor will be increasingly vulnerable, moreover, to priceincreases and other consequences of an inevitable rise in the fees municipalitiesmust charge non-poor customers and especially firms for various services. Thebuoyancy and job-creating process of the informal sector owe much to the abilityof such firms to avoid paying for infrastructure and vital services. Excessiveuse of underpriced facilities, though, has led to deteriorating urban housing,water, electricity, sanitation, and transport. Increased public spending onurban infrastructure is clearly a necessity. However, major repercussions willfollow the rise in prices for urban services that will be required to covercosts. First, the goods and services sold by the informal sector to a marketdominated by the poor will become increasingly expensive. Secondly, even withsuch price in:reases, many small scale firms will be forced out of business, withadverse wage and employment consequences for the urban poor.

2.89 These observations suggest that policies bearing on urban employmentand provision of municipal services need to be mutually consistent. The currentbody of 'protective" work laws, entry, exit and location regulations and so forthhas fostered a pattern of urbanization in which many constituent firms,employees, and customers have avoided paying and are unable to pay for the upkeepof municipal services. Accordingly, future expenditure on urban infrastructureneeds to be accompanied by changes in the regulatory environment which areconducive to sustainable growth of productive employment. In particular,

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incentive packages should not attempt to prevent firms with good potential forexpansion, technological upgradation and strong linkages with small enterprisesfrom establishing themselves in urban settings. Similarly, the relocation ofolder, less productive and less skill-intensive industries to rural areas shouldnot be impeded.

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Chapter 3

LABOR FORCE GROWTH ANDAGRICULTURAL EMPLOYMENT PROSPECTS

A. Bakground

3.01 The previous chapter showed that the incidence of poverty declinedin India during the 1970s and early and mid-1980. There has been a gradualdecline in the incidence of poverty in rural and urban areas, and average dailyearnings in rural labor markets have risen in real terms in most regions.Nevertheless, the number of low income families remains very large and the poorcontinue to be subject to malnutrition, ill health, and under-consumption ofeducation and other key social services.

3.02 This chapter and the ones that follow sxamine the prospects forfurther reducing poverty over the medium term. One novel feature of the currentscene is the likelihood of more rapid economic growth rates. However, it is notclear whether growth will lead to significantly increased labor demand and higherwages. Also, can the factors and government programs that contributed to povertyreduction during the last fifteen years be counted upon in the future? If not,what are the alternative options and routes that could reduce poverty?Continuing the labor market focus of Chapter 2, this chapter takes a brief lookat the likely increases in the supply of labor and then turns to an examinationof the prospects for labor demand in agriculture and policies that could increaseit, particularly those that could improve the 1y of the poor. The next chapter(4) focuses on the prospects for labor demand in industry. Chapters 5 and 6focus on the other side of the market, improving the quality of labor supply,and on bettering the quality of life through improvement in the provision ofsocial services to the poor.

B. Projected Increases In Working Age Cohorts

3.03 The fundamental supply-side factor in the labor market is theincreasing number of individuals of labor force age. India's population growthhas slotwed somewhat. However labor force growth reflects thi3 only slightly.This is because the increases in the labor force today basically reflect thehigher fertility rates of fifteen years ago (taking fifteen as a conservativeestimate of the entry age into the labor force and assuming that migration andimmigration are negligible). For this reason the numbers of potential entrantsto the labor force and labor force growth between now and the turn of the centuryare known with some accuracy - all the entrants are alive today.

3.04 Growth of the young adult cohort, ages 15-29, broadly sets the sizeof the tasks of absorbing new labor force members, endowing them with skills andknowhow, and matching them with other production factors. World Bank estimatesindicate that a large rise, roughly 110 million, will occur in this cohort,between 1980 and 2000 (Tab.e 3.1). This increase is 59% larger than the increase

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(69 million) registered between 1960 and 1980. The growth rate of the cohortis 2.4% per annum over the period, the same as between 1960 and 1980, reflectingthe continuance of high population growth and fertility rates through the 1980sand the still-limited impact of family planning services. Thus, as a first orderof approximation, demand for labor will need to grow about as fast in the nexttwenty years as it did in the last twenty in order to sustain the reductions onpoverty.

3.05 In the different regions, the young adult population grew at similarrates, 55-70%, in the 1960-80 interval (apart from the numerically insignificantNorthwest). However, during 1980-2000 growth in the young adult population willdiverge significantly across regions. The most rapid growth will be in theEastern and Central regions. In particular, the proportionate increase in youngadults in the Central region will be more than double that in the four southernstates and 75-85% higher than the rise in the western and north-western zones.This outcome is due to large recent and current differentials in contraceptiveuse and fertility behavior between different regions. A fertility transitionis well underway in the South and in the western and north-western area, andachieving replacement-level fertility by 2010 may be feasible (although stilldifficult). In the central and eastern zone, though, only a modest downturn infertility has been discerned, and many obstacles must be overcome before asustained decline can occur. Hence, an important finding is that a growing shareof future labor force age increments will be accounted for by the Central andEastern states--65% during 1980-2000 compared to 51% in 1960-1980.

3.06 Changes in fertility today will affect labor force growth only after2000. Hence the projection must be extended to at least 2020. Under optimisticassumptions -- a sharp decline from 1985's estimated figures of 2.01% per annumpopulation growth and total fertility rate (tfr) of 4.40 children per woman toa growth rate of 1.59% per annum and a tfr of 3.18 for 1995 -2000 -- the netgain projected for the young adult population in the 2000 - 2020 interval wouldbe "only" 35 million. This optimistic population projection is driven. by anassumption that replacement level fertility (net reproduction rate, NRR,equalling one) is attained in 2010; also, the infant mortality rate is expectedto decline from 84 deaths per thousand births (1985-90) to 51 (2005-2010). Amore gradual decline in fertility shows up, however, in continuing largeadditions to the young adult cohort. For instance, a ten-year delay in achievingNRR of one implies an increment of 65 million in the number of young adults in2020 over the figure in 2000; a thirty-year delay raises the incremental figrreto 93 million (not shown in Table). At the regional level, the areas in whichfertility is already falling are set to experience only modest increases in theyoung adult population, while this cohort grows rapidly elsewhere.1 A delayedfertility decline in Eastern and Central India would mean that this broad regionwould account for over 70% of all labor force increments after the year 2000.

The scalm of thls growth deperd. on when rapid daeldnu begis. Assuming MR-i1 a attained ln the2010-2020 interl, the net increment In the young adult cohort wil amount to 31X in the Central and BEaternstates ln the 2000-2020 interval. A delayed fertility transitlon (NRR1 Ln 2040) vil result ln a 50S increasein this cohort In these areas durLng the same period.

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3.07 These findings point to a demographically-driven build-up of supplypressures, particularly in the Eastern and Central regions. This could lead toa leveling off or reversal of recent trends in real wages and poverty prevalenceunless labor demand also increases. Fortunately, the Indian economy appears tohave shifted to a higher growth path in the last decade or so. Moreover, stillhigher growth rates appear to be possible. This suggests that the economy asa whole has the potential to accommodate future labor force increments and tocontinue the downward trend in poverty provided employment advances are broadlyshared. Of course, growth opportunities axnd constraints vary by sector. Thischapter examines prospects for labor demand in agriculture where a decline, atfirst gradual and then probably accelerating, in the sector's share of totalemployment seems to be in the offing.

C. Agricultural Employment Prospects

3.08 Agriculture remains the major employer in India, especially for thepoor. The 1983 round of the NSS found that agriculture employed about 64% ofa total labor force estimated at 269 million (199 million men, 70 million women),and over three-fourths of a rural labor force estimated to be 210 million (150million men, 60 million women). By comparison, industry (including mining andconstruction) employed 15% of the labor force and services the remaining 21%.

3.09 Among low-income households, agriculture accounts for four-fifthsof employment in rural areas and 15-20 per cent in urban areas. Notsurprisingly, incomes in poor households appear to be closely linked to levelsof agricultural labor demand in different regions (see Chapter 2). The poorestareas are those in which agricultural employment growth has not kept pace withthe supply of potential workers.

3.10 No definitive view can be offered here on prospects for agriculturalemployment and real wage growth. Instead, this chapter examines the differentmacroeconomic factors and programs that are likely to influence agriculturallabor demand trends. In the near term, employment opportunities in agricultureare likely to continue to grow. Indeed, NSS data for the most recent surveyinterval (e.g. between the 38th round in 1983 and the 32nd round in 1977/78)shows continued employment growth in agriculture.2 Some 15 million agriculturaljobs were created, more than in any other sector.

3.11 In percentage terms, however, agriculture fell from 68% to 64% oftotal employment. Agriculture accounted for less than half of the net increasein employment, 31 million, in the inter-survey period. This slight reductionin agriculture's share of the labor force suggests that India may have entereda phase of declining relative and eventually absolute numbers in the agriculturalwork force. India's situation may be likened to countries that experiencedsignificant structural changes in employment once agriculture's share fell tothe 60-65% range such as Mexico, Malaysia and the Philippines (see Table 3.2).

2 Sector of employment data, of course, h ve well known lLmitatIons. For instance aome agriculturaljobs may have been mistakenly classified as industrial or services-based. A likely offsetting influence thoughwas the record harvest in 1983184 whLch aCst have attracted labor to agriculture from other sectors.

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Table 3.1ESTINATED AND PRoJECTED MJUG ADULTPOPULATION (AGES 15-29) IN DIFFERENT YEARS

... ... .... . ................. ................................... ......

1960 1960 2000 2020 Lb 2020 La,,,, . .. ... , . ,.. . ,,.. . ..,.. . .. .. . ............ . _ .

1 2 3 4 5

A.P. 8914 1271S 22322 25261 27781Karnataka 5736 9490 15585 17792 1.942Kerale 4119 7441 9068 10510 10956T. Nadu 8657 12770 17740 19742 21067

S. TOTAL 27426 424& 64715 73305 79256

Assm 2979 5172 8558 9566 11327B1har 11005 15563 32615 37305 47822Orissa 4384 6306 10804 12323 14431W. Bengal 8971 14957 22025 26067 31077

E. TOTAL 27342 41990 74002 a8261 104657

N.P. 8124 12316 23220 26911 33724Rajasthan 4998 8180 15611 18417 23W427U.P. 17760 28064 472Z0 52912 67169

C. TOTAL 30882 48560 86051 98240 124320

Gujarat 5166 9155 14304 16619 18395Naharashtrs 10074 15688 2570S 28968 31780

W. TOTAL 15240 24843 40009 45588 50175

Naryana 3358 5831 6749 3119.P. - 1061 1734 1980 7587Punjab 4939 La 4651 6753 m79 2157J & K 925 1581 2574 2838 8536

N.W. TOTAL 5864 10651 16892 19306 21399

INDIA 1083 177634 287275 324268 352124 Ld.......... ........... ..................... .... ....... ..... ......... ......

Source: Vu, Bos, and Sulutoo, "Asta Regfon Poputation Projections,1968-89 Edition", Population and Hunan ResourcesDepartment, the World Sank; and special projectionsprepared by E. 8os, Population and Humen ResourcesDepartment, The Wortd Bank. Lg

Lg Includes Haryane and H.P.Lb Asswms NRR=1 In 2010.IS Assumes NRR1 earlier (2020) in the West, South and Northwest

than (2040) In the Central and Eastern regIn4s.Ld Assumes NRRuI In 2020.LA Details of assLutions and methodology svaitable on request.

3.12 The declining share of agriculture represents a nearly universalpattern. There is, however, no uniform pace of structural transformation,although the share of agriculture does seem to have declined faster in faster

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growing countries. We curn now to a review of the technological, labor andproduct market, and policy-linked factors likely to affect how quicklyagriculture's share in India's labor force will fall.

3.13 Looking first at technological possibilities, t.ere is clearly scopefor further employment growth in virtually all of India's regions. Inparticular, opportunities remain to exploit the country's water resources. Asnoted in Chapter 2, irrigation development made a key contribution to povertyreduction during the last fifteen years by raising demand for labor in the pr.-irrigation slack season and reducing variability of output in the rainy seas.£A.It is estimated that about 40% of identified irrigation potential remains to be"developed". Apart from Maharashtra, most of the remaining unexploited waterresources ara in Central and Eastern India, notably in Bihar, Madhya Pradesh andOrissa where less than half of the available potential has been developed. Thisis fortunate since this is the region with existing higher poverty levels andlarger expected labor force Lncrements. Irrigation can serve as a catalytic"leading input" which can continue co push the labor demand curve outward inthese regions. There also is much room for increasing cropping intensity andyields in existing irrigated areas through more efficient watering practices,increased input use, and so forth. Many of these changes will increase labordemand. There also are expansion possibilities in rainfed areas, throughmoisture conservation and appropriate use of fertilizer and crop varieties.

3.14 These technological opportunities for employment growth are aot,however, inexhaustible. For instance, calculations show that if current ratescontinue, development of surface water will be complete in 20 years andgroundwater in 10 years. There is concern, moreover, that the ultimate potentialin Eastern India and other regions has been overestimated and needs recalculatio-nusing more realistic assumptions about realizable flows, use patterns, waterlosses, (rising) construction and maintenance costs, difficulties of resettlingoustees, etc. Meanwhile, employment increases in existing irrigated areas willentail investments and better farm managment. For example, increased multi-cropping and higher productivity in surface commands will require betterconstruction standards, improved farm management, land reclamation, and bettercontrol of water applications (through use of sprinkler systems etc.). The scopefor gains in rainfed areas should not be exaggerated. Recent promising researchdevelopments have not been taken up on a large scale, and in any case mayultimately affect only a third of unirrigated cultivation (World Bank 1988c).These observation suggest that the technological options for Indian employmentgrowth in agriculture appear to be more restricted than the menu of possibilitiesthat existed fifteen years ago.

3.15 There are other reasons why the employment content of agriculturalproduction increases seems likely to fall below what prevailed in the 1970s andearly-to-mid 1980s. Diminishing returns to labor (actual or threatened) in smalland fragmented farm units are one factor that can be expected to adversely affectlabor absorption. As discussed in Chapter 2, the pervasive downsizing in thelandholding structure that is occurring has greatly increased the proportion ofmarginal and small farms in total area owned. Many of these holdings cannot beintensively cultivated because of poor land quality, non-availability of water,and an inability, due to low income levels, to bear the risks and costs offinancing investment in inputs sd neglect labor market opportunities. Many

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owners of marginal units are likely to sell or to rent their land to those withlarger operational holdings. The latter units typically do use proportionatelymore hired labor (thus absorbing some of the newly landless). However, they alsomay make greater use of family labor, and they appear to be investing extensivelyin tractors, threshers and other labor-serving equipment.

3.16 The responsiveness of employment to output change also is likely tofall because of employers' sensitivity to actual and prospective cost increases.Difficulties in managing laborers, resistance to wage cuts when esrnings fallbelow an accepted floor level, conflicts with militant workers, and other"transaction" costs encourage use of labor saving techniques, and impingeadversely on employment elasticities. There are signs of "premature"mechanization in states like Madhya Pradesh and Tamil Nadu, to which interestrate subsidies have contributed.

3.17 Employment elasticities appear to be falling already in a aumber ofstates, according to the Ministry of Agriculture's cost of cultivation data(Bhalla). An average employment elasticity of 0.59 emerges from the cost ofcultivation surveys for 1971/72-1983/84. This is somewhat less than the estimate(0.77) for the 1968/69-1978/79 interval (Tyagi). The 0.59 figure is a compositenumber which. reflects different regional and crop-spccific experiences. The costof cultivation data confirm, for instance, that irrigation is a powerful engineof employment generation. The survey found an impressive 2.65% annual increasein gross cultivated acreage (largely due to irrigation) between 1971/72 and1983/84. However, the same data set shows that this source of increased labordemand through 'area expansion" was offset in four states (Punjab, Haryana, UttarPradesh and Madhya Pradesh) by a negative trend in labor absorption per croppedhectare. In addition, per hectare growth in employment was not significantlydifferent from zero in Rajasthan and Orissa. Survey results suggest in fact thatlabor-saving technologies and crops are being employed increasingly in manysettings. For example, wheat, barley and sugarcane have generally shown negativegrowth in labor intensity; labor absorption in paddy production has been risingin most traditional rice growing areas in the South but falling in non-traditional regions (Punjab and Haryana) and also in Uttar Pradesh and MadhyaPradesh. On the other hand, cultivation of groundnuts and new superior cottonvarieties has been responsible for employment increases in Gujarat and severalother states. However, labor absorption in traditional cotton varieties hasfallen in Punjab and Haryana.

3.18 These results are worrisome (from an employment standpoint), sincethey suggest an actual reduction in the demand for agricultural labor in the nextdecade in states like Punjab, Haryana, Uttar Pradesh, Madhya Pradesh and TamilNadu. This decline may be quite significant if the pace of irrigation expansionslackens. In general, landless, wage-dependent households are likely to bearthe brunt of reduced employment elasticities. A reduction in labor demand inPunjab, Haryana and Western Uttar Pradesh would adversely affect migrant laborflows from Bihar, Orissa and Eastern Uttar Pradesh.

3.19 Another key element in determining the demand for labor inagricuLture is the growth of demand for agricultural products. At constantrelative prices this depends mainly on the growth rates of GDP and population.Looking ahead, predictions are for growth in cereals consumption (2.5% per annum)

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Tabte 3.2SEClCRA LAUOR FOdCE SNARES

........ ......... _..............................

Share of Lbor ForceAgriculttr Indu try S rv1r

Ecsnoy 1960 1960 1960 1960 1960 1960.,,...... .................................................................. .... ...... __..............

Primry-orientedVenezuet 35 18 22 2? 43 55Maaysia 63 50 12 16 25 34Iran 54 39 23 34 23 2Iraq 53 42 18 26 29 32Algeria 67 25 12 2S 21 S0Ecuador 58 52 19 17 23 31Cote dIvoire 89 19 2 4 9 17

Other tlrgeSpain 42 15 31 40 39 45Yi.oslavia 63 29 18 35 19 36Argentina 20 13 36 28 44 59Brazil 52 30 15 24 33 46Mexico 55 36 20 26 25 38Turkey 78 54 11 13 11 33Korea 66 34 9 29 25 37Colombia 51 26 19 21 30 53Phitippines 61 46 15 1? 24 37Thaitand 84 76 4 9 12 15Egypt 58 5s 12 30 30 20IndIa 74 69 11 13 15 18

Other smaelGreeco 56 37 20 28 24 35IreLand 36 19 25 37 39 44Portugal 44 24 29 36 27 40Uruguay 21 11 29 32 50 57Toiwan 56 19 11 43 33 38Chite 30 19 20 19 50 62Costa Rfco 51 29 19 23 30 48Tunisia 56 34 18 33 26 33Peru 52 40 20 19 28 41Daminican Rep. 6? 49 12 18 21 33Syr"a 54 33 19 31 27 36Quateiate 67 55 14 21 19 24Morocco 62 52 14 21 24 27Kenya 86 78 S 10 9 12

............ ......................... ... .... _....____.. .. . ...... .......

Source: Chenery. Robinson and Syrqaln, Iustr:iazastjon andj Growth: A Comarative Stud& Oxford University Press, 1986.

to only slightly exceed population growth and thus be lest than potentialincreases in production (Bhatty et. al.). Reducti.kns in demand for farm laborare likely to result, in the absence of higher CDP growth, or new sources ofdemand or alternative products. Nigeer GDP growth than in the 1970s and 1980swould increase the demand for agricultural products, though less thanproportionately because the income elasticity of demand for agricultural goodsis less than one. However, assuming the impetus for higher growth comes mainlyfrom the urban sector, then employment in agriculture would likely fall und realwages increase as has occurred in the cross-country sample in Table 3.2.

3.20 In the 1970s and early 1980s, growth of domestic agriculture, avd

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thus demand for labor in agriculture, was given a filip by import-substitutionin cereals and by the government's policy of building up its foodgrain stocks.However, the latter policy led to large accumulations of wheat and rice suppliesin government warehouses in the mid 1980s, that was only brought down by the 1987drought.

3.21 One exit route from the product demand cul-de-sac that was used inthe 1980s, would be releases of publicly purchased foodgrains through the PublicDistribution System (PDS) network and related channels, and through payment inkind to workers employed in NREP and other public works schemes. This isintended not only to enhance effective demand for major farm products but alsoto underwrite capital formation and direct employment creation in rural areas.This use of wsurplus' food to build capital and retain labor in rural areas wasforeseen by A.M. Rhusro and V.M. Dandekar in the 1950s.

3.22 Unfortunately this approach yielded unsatisfactory results in the1980s when tested on a large scale. One difficulty was that the main employmen.schemes, NREP and RLEGP, were ineffective means of simultaneously attractinglarge numbers of workers, constructing assets that augmented productive capacity,and distributing foodgrains (see discussion paras 3.63 ff). A second problemwas that the procurement, storing and transport of food to deficit areas forrelease through PDS and other outlets proved very costly and resulted in a'release' price that was beyond the reach of the poorest conrumers, thusdefeating the aim of bolstering demand. The relatively low offtake from PDSchannels led to an accumulation of foodgrains (reserves rose to over 3' milliontons in 1986), well above those needed for contingency and buffer stock purposes.Apart from high prices, other factors, including lack of access to distributionpoints especially in rural areas and resupply problems, have prevented PDS frombecoming an effective distribution (and anti-poverty) instrument Many of theoperational problems of PDS and the employment programs are remediable, at a costthough which probably precludes relying on these schemes as a major source offuture agricultural demand. (The experience of Kerala and Karnataka offerslessons on how to reorient PDS to better serve the poor.)

3.23 This analysis suggests that it will be essential to develop newsources of demand for agricultural products. Faster GDP growth will help bygenerating a more diversified demand pattern. This will result in some increasein demand for agricultural labor in activities such as annual husbandry, dairyfarming, horticulture and food processing. Market-led production shifts to fruitand vegetables, and animal husbandry and dairy products are already occurring;they could be enhanced through revision of procurement policies, and by removalof price controls, subsidies and excise taxes which make it more attractive toproduce cereals. Additional employment benefits would come from reductions intrade restrictions, particularly controls on rice exports. Simulation exercisessuggest that such a step would benefit the rural sector was a whole (Quizon andBinswanger). Nevertheless, these studies indicate that the poorest rural groupsare unlikely, aecause of their vulnerability to higher food prices and thenegligible employment and wage gains associated with low supply elasticities,to benefit from free traAe in rice. Cotton may have greater employment-generating potential as an export crop than rice. However, cropping patternshifts to various oilseed or other import-substitutes may be labor saving onbalance relative to cereals (Walker et. al.).

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3.24 To susmarize: a falling share of employment in agriculture is anunavoidable and indeed a desirable concomitant of development and risingproductivity and per capita income levels. However, the pace at which theagricultural share falls can vary (see Taole 3.2). Too slow a growth in theagricultural labor demand curve can clearly be harmful to rural wage-dependenthouseholds and the poor ara increasingly dependent on rural wages. This isespecially true if employment opportunities are changing slowly in other sectors.In fact, reductions in labor absorption per hectare already seem to be occurringin some Indian regions, may begin shortly in others, and could foreshadow a sharpfall in agriculture' s share of incremental productive employment. Moreover, non-agricultural empioyment in the factory sector especially, has been growing slowly(see Chapter 4). All this suggests a continuing need for initiatives thatcontribute to the productive absorption of labor in agriculture, help offset theeffects of reductions in labor market opportunities, and ease the transition fcrworkers to non-agricultural employment. In addition to the mainly macroeconorAicfactors mentioned above there are a number of existing programs in key areas--land distribution, water, research and extension, credit and rural works schemes--that influence the demand for labor at the margin. These are examined belowwith a particular emphasis on improving the status of the poor.

D. Land, Water, Pemarch and Extension Policies

3.25 It was suggested in Chapter 2 that land transfers have had favorableshort run poverty effects by contributing to a tightening of labor markets andproviding opportunities for intensive use of family labor. There remains a largeamount of land--3.24 million hectares out of an identified surplus pool of 7.77million hectares (Mid-Term Appraisal)--"available' for distribution tobeneficiaries. This suggests a continuing anti-poverty role for land transfers.Other considerations, however, point to a different conclusion. For one thing,more of che remaining "surplus" (actual or potential) land is either of marginaleconomic value or is tied up in litigation or protected by loopholes andexemptions which will be difficult to eliminate. Legal means might, of course,be foun,J to end the logjam in the courts and to transfer remaining surplus landto eligible beneficiaries. However, the judicial and administrative process thatwould be entailed would involve large direct costs for compensation,strengthening the bureaucratic machinery implementing reforms and so forth, aswell as potentially sizable indirect costs (crop losses, disinvestment instructures, livestock etc.). It is also questionable whether a further roundof land transfers would be justifiable on anti-poverty grounds sinco theemployment and income benefits accruing to land recipients would be wholly orpartly negated by reduced wages and work opportunities in local labor markets.The magnitude of this offsetting effect depends, of course, on the level atwhich ceilings are defined, current levels of labor utilization in landless andlanded households, and other factors which vary enormously even within statesand which would be next-to-impossible to take note of in land ceilinglegislation.

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3.26 Financial and administrative resources would probably yield greateranti-poverty effects if applied to the reform of water policies, rather than landholding patterns. Water remains the most critical agricultural input which canraise labor demand and transform the production possibilities of even thesmallest farm units. NSS data on average mor.thly per capita expenditure(MPCE)are suggestive in this regard. In 1983, MPCE in marginal farm units (0.75hectares or less) in three irrigated districts in Andhra Pradesh was 35* higheron average than in three uniirigated districts. The benefits of access to wateraccrue to farm workers as well--NPCE in wage earning households was 36% higherin the irrigated Ciistricts (Radhakrishna et. al.).

3.27 Unfortunately, various d3sign, construction, and organizationalproblems have seriously limited the availability of irrigation servicesparticularly for marginal cultivators who, because of lack of water, are forcedto rely increasingly on casual wage labor. One failing of surface irrigationsystems is that water reaches only a part of the targeted area and results inoutput and employment gains far below what could be achieved. This "tailend"problem may be due to the poor quality of construction, and neglect ofmaintenance. A second, compounding factor is the weak institutional set-up forregulating water allocation in public canal systems. Existing arrangements,which run bureaucratically with virtually no involvement of users, aspire toregulate both the cropping pattern and the amount of water delivered within acommand area. Evidence suggests failure in both respects. Prescribed croppingpatterns are often violated (with impunity) because more water intensive cropspay higher private (although not social) returns. A typical consequence of suchdeviations is inferior irrigation service, in terms of quantity and reliability,for those not well situated in the command.

3.28 The preference of farmers for water-intensive crops, despite anadverse water balance overall, and mandated allocative arrangements and sanctionsis seen in the cultivation of sugarcane in Maharashtra. This crop is favoredbecause it can be sold at a guaranteed price which is remunerative--net incomeper acre was two to nine times higher than that for other crops in the early1980s. However, the popularity of sugar does not mean that its cultivation issocially preferable. Data show that this crop takes six to eight times as muchwater but generates much lower product value per unit of water than alternativecrops. Estimates suggest, moreover, that water currently utilized for sugarcanecould, under different rotations and irrigation scenarios, greatly expand thearea covered. For instance, assuming continued intensive cultivation (i.e. threecrops a year) of existing plots, some alternative crop rotations not onlygenerate greater net income but free up water sufficient to increase areairrigated by 30-100% (Rath and Mitra).

3.29 However, an option with even greater potential impact on the poorwould be to aim for the widest possible spread of scarce water resources. AGovernment of Maharashtra Committee estimated that the irrigation coverage inthe state could be tripled if only lightly irrigated cropc received water(Dandekar et.al.). This "life saving" irrigation strategy, originally proposedin the 1983 Report of the Irrigation Enquiry Comm'ttee, would be suitable notonly for Maharashtra but for other water-scarce areas of India. The approachcould be implemented by supplying each outlet with predetermined amounts of

89

water, in proportion to the amount of cultivable land in the local area, atspecified intervals. Autonomous village or outlet associations could then takeresponsibility for allocating available water resources within the outlet area.(With such an approach, much of the current direct controls and penalties inregard to water applications would no longer be needed.) Various procedurescould be used by local associations to share scarce water supplies. The simplestrule would be to gi-e equal water rights to each village household, regardlessof amounts and location of land operated. A less radical step would be toallocate equal minimum water shares (enough to cultivate an 'irrigated dry" cropon a single acre) and to distribute any remaining water according to size offamily holding. Landless households could sell their water rights to interestedfarmers.

3.30 The major equity issue, then, in surface irrigation systems is theintensity (and reliability) of water distribution within a potential servicearea. In groundwater development, equity concerns focus on the inability ofsmall farmers to afford deepwells, tubewells and pump-sets. While access tocredit has improved thanks to IRDP and related programs, groundwater investmentsare unlikely to be remunerative unless a minimum area can be irrigated. Thisproblem of scale, which is especially salient in Eastern India, in principle canbe overcome through public or cooperative ownership and operation of wells.However, publicly-run tubewells, cooperative lift schemes and so forth have yetto demonstrate they can overcome chronic problems of poor maintenance, highrunning costs, lack of cost recovery and inadequate cooperation among users(Kolavalli, et. al.). An alternative mechanism is for small farmers to buy (orsell) water through spot or longer-term arrangements. There is a risk thoughthat more substantial farmers will control village groundwater markets asoligopsonists, and that the considerable potential that exists for increasedintensity of irrigation and cropping by small holders will be underutilized.

3.31 It appears that this syndrome can be overcome in areas of amplegroundwater, e.g. Eastern India, by drilling holes for tubewells at publicexpense, wherever requested augmenting power supplies, improving the energyefficiency of pump sets and employing other measures that increase availabilityin local water markets. Good small farmer access to irrigation water, affordablecharges and rising real wages are reported, for instance, in those parts ofEastern Uttar Pradesh in whi'.h a "saturation' approach to groundwater mining hasbeen followed (Chambers and Joshi). Conditions in this region also seemappropriate for a program, similar to that successfully adopted in Bangladesh,which endows landless groups with pump sets which can then be rented out, withpaid labor services sometimes included to small farmers (Wood).

3.32 Other approaches may be needed in water short regions. For example,in Gujarat a bias against small farmers arises in part because they are late-comers to groundwater development. Groundwater mining was typically initiatedby larger farmers at a time when extraction yields were high and costs low. Aslate exploiters, smallholders have had to contend with higher drilling andextraction costs. Larger operators can cope with such increased expenses byinvesting in more efficient but costlier pumps. And increasingly, this largefarmer advantage in water extraction (and in local water markets) has beenlegitimized by policies designed to prevent overexploitation of water tables.For instance, spacing norms which specify a minimum distance to be maintained

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between high capacity wells favor early exploiters. In some (of the growingnumber of) grey' areas where water availability may have fallen permanently,new wells may not be permitted at all (Shah).

3.33 Policy measures can be identified which would make groundwaterresources more accessible to small farmers. For instance, making provision forsubsidized credit and licenses for wells operated by ad ho water-usercooperatives or "pani panchayats" would give impetus to small farmer irrigationdevelopment. In addition, pumping in particular hydrological zones can beregulated by requiring all well owners to pay fees (set to insure that watertables are not overmined) and by imposing rising incremental rates for use ofpower. Revenues raised in this fashion could even be used to finance loans forirrigation development by small holders.

3.34 Irrigation reforms aimed at small and marginal cultivators will needto be backed by effective research and extension services and good access tocredit. Zonal research substations are investigating problems specific toparticular agro-ecological settings, including irrigated areas where yieldstypically remain well below potential. So far 100 substations have been set upand another 21 are being constructed. To be effective, this system will needto evolve ways of formulating research priorities which flow from diagnoses oflocal problems. One potentially useful mechanism is the zonal status report--it is important that opportunities and constraints for the poor be highlightedin these reports. With the first wave of results from this fledgling systemonly beginning to come in, it may be several more years before there is asubstantial flow of usable, location-specific findings. In the meantime, theperformance of the large body of research staff needs to be scrutinized.Management and supervision procedures and worker incentives need to be devisedwhich yield stepped-up efforts to solve problems, especially those of poorcultivators.

3.35 Research results are expected to reach farmers thro.h regular visitsby extension workers. From the poverty vantage point, the Training and Visit(T and V) system of agricultural extension, which has been or is beingestablished in all of India's major states, has a number of advantages. A fixedvisit schedule, use of "representative" contact farmers, and frequent interactionwith individual cultivators and the community at large are all conducive toreaching the poor, while the emphasis on professionalism, exclusion of non-extension tasks, close supervision, and regular in-service training shouldimprove the advice reaching cultivators and insure that feedback to problems toresearchers, input suppliers and bankers.

3.36 Despite these positive features, studies suggest that the extensionservices often operate mechanically and have not yet evolved into a flexible anddecentralized tool for problem solving (and poverty eradication). Problems stemfrom poor intra- and inter-departmental coordination and follow-up, recurrentattempts to add non-extension tasks to the field-workers's responsibilities, highstaff turnover at senior levels, sometimes conflicting incentives and signalsfrom subsidy-based special crop schemes operating in parallel fashion, andunsatisfactory qualifications which prevent field workers from gaining theconfidence of cultivators, providing sound advice and exercising initiative indiverse and unanticipated situations (World Bank, 1987a).

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3.37 The quality of available research recommendations has an obviousbearing on the effectiveness of extension. This issue is especially saliert inrainfed farming which is riskier than irrigated agriculture. The need forstepped-up research for unirrigated zones is self-evident. Farmers in theseareas face formidable technical and socio-economic constraints and are generallythe poorest in the country. Cropping intensities and yields are low (andunstable), while the farmer's resource position is typically too meager tosupport substantial investments in inputs and land improvements.

3.38 There have been some promising developments. For instance,approaches have been evolved to retain moisture through soil management, contourcultivation and vegetative bunding. Given adequate moisture, fertilizer,improved seeds and careful crop management can result in increased yields. Muchfurther research is needed though to follow-up preliminary findings obtained inquasi-experimental settings. Moreover, despite progress in particular locations,it would be inadvisable to expect developments in rainfed farming to contributesignificantly to poverty alleviation. For one thing, research is unlikely toyield much of substance in the next five years. Secondly, moisture conservation-based approaches work best in the medium rainfall (750-1150 mm/year) zone,comprising only a third of the area under rainfed crops, where moisture andfertilizer responsive varieties are already available or are "researchable".In the arid/semi arid (less than 750 mm) and the heavy rainfall (more than 1150mm) zones, the picture is much less promising with uncertainty about the timingand volume of rainfall in the former and problems of managing excess moisturein the latter constituting almost intractable problems (World Bank, 1988c).

3.39 Even in the more favored areas the output and employment effects ofwhat are likely to be gradual improvements in crop intensities and yields figureto be less-than-dramatic. A further obstacle, in all rainfed zones, is thevulnerability of cultivated lands to the erosion and degradation of adjoining'waste' lands. Finally, production advances in the medium-rainfall locationsand elsewhere will require a qualitative improvement in agricultural extension.Instead of bearing specific messages, the T and V worker will have to serve asan analyst and all-round advisor for farmers facing diverse ecological andeconomic constraints. Extension agents will need specialized training inmoisture and soil conservation practices, environmental issues and communityorganization techniques.

E. Rethinking IRDP

3.40 Assured access to banking services has long been seen as a crucialinstrument of rural income and employment growth and poverty alleviation. The1954 All-India Rural Credit Survey identified relianre on credit from moneylenders and landlords as a major constraint on rural productivity. Theestablishment of the State Bank of India in 1955 provided an early means ofexpanding the institutional credit system in rural areas. The same objectivelay behind the support given to cooperatives beginning in the 1960s, and playeda role in the nationalization of commercial banks (CBs) in 1969, regulationsstipulating how much banks must lend to agriculture and the "weaker sections",and establishment of Regional Rural Banks (RRBs) in 1975 with an anti-povertyfocus.

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3.41 IRDP is the latest and arguably the most ambitious attempt torestructure rural credit arrangements. As with previous initiatives, IRDPbeneficiaries receive loans at subsidized interest rates. A novel element thoughis the capital subsidy which amounts to up to half of the loan principal: IRDPis not only a subsidized credit scheme but a vehicle for endowing the poor withassets. This dual role, i.e. as a component of the institutional credit systemand an asset-transfer scheme which looms large in the government's anti-povertystrategy, has led to implementation difficulties.

3.42 IRDP has achieved wide coverage (see Chapter 2). The number ofbeneficiaries now exceeds 27 million households, distributed fairly evenly byregion (Annex Table 7), of which five million units have received a secondallocation of assistance. The Concurrent Evaluation Survey (CES) which beganmonlt,&ring the scheme in 1985/86 shows that 64% of participating families hadincomes below Rs. 3,500 per year in 1984/85 and another 21% were in the 3500-4800 range. A large share, 35%, of beneficiaries were of scheduled caste ortribal background.

3.43 This impressive coverage has been achieved through complexarrangements and procedures. Identification of beneficiaries is entrusted toblock revenue department staff who assist families in selecting investments andcompleting applications which are forwarded to banks which have preassigned areasof responsibility. CBs and RRBs account for most IRDP lending. The 10% interestrate, repayment schedules, grace periods, and other parameters are fixed byNABARD which also provides refinance for the program. Once an application isapproved, the subsidy of 25 to 50% of the loan amount is made available--tribalsqualify for the highest subsidy. Banks have only limited authority and (asdiscussed later) few incentives to turn down loan applications.

3.44 A crucial program feature is use of lending targets, anadministrative device to insure that IRDP meets its anti-poverty objectives.Financial and physical (total number, and for specific uses and by gender, casteand income level) targets are determined for each district and block in thecountry by government administrators. Originally, all blocks received identicaltargets and funding allocations. Targets now vary according to estimated povertylevels. Despite this change, the system is still driven by targets and theavailability of subsidy funds rather than demand for credit.3 Thus, allocationsof loan funds are tied to the pace of subsidy disbursements rather than variousperformance, capacity or need-based indicators (such as £X an or e nost ratesof return to investment, rates of repayment, and levels of infrastructure andskills).

3.45 These target-driven impulses have introduced an unhealthyintermingling of transfer and efficiency (financing high return investments andrecovering funds for reuse) objectives. Specifically, reliance on targets hasdiverted attention from the longer term impact of money lent through IRDP. Therelevant questions include whether assets have been retained by clients, and if

3 Re-hUM targets for disbursement of IRDP ubsidies ls a key indicator of perfomance for block levelrevewe officials.

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Table 3.3

MEASURES OF SUCCESS FOR IROP La............. .. ...... ............................... .......................................... .... _........... ....................... .

X X MOi.& I ElS.&X Intact X Intact Eti1.8 Crossed Crossed& Sme & No Crossed Pov. Line P. Line &

X Invest. Repayent Credit X thi. Poverty 8 Repoid No Creditatior States Intact le of Credit Over Benmfitd tine se So Credt gnerd

. ............... ....... ........ *.............. .. .. .. .... .... .. ... ..

Andhra Pradesh 80 65 34 100 9 7 1Arunachal Prad.sh N.A. 3 38 N.A. 4 0 4AssaD 58 41 6 76 9 7 2Bihar 78 62 18 94 3 2 1Gujarat 89 79 43 100 4 4 0Haryno 58 40 15 76 0 0 0Himechal Prsdesh 79 73 45 99 29 27 3Jammu & Kashmir 87 75 50 94 19 19 0Karnataka 77 48 25 98 4 3 1Kerala 61 69 19 80 5 5 0Nadhya Pradesh 76 60 26 97 6 S 0Iaharashtra 70 59 30 94 10 9 1Orissa 65 43 19 100 7 5 2Punjab 68 74 57 91 18 18 0Rajasthan 44 35 15 79 9 8 1Tamil Ndu 70 49 28 95 3 3 0Uttar Pradesh 88 63 41 91 5 4 1west Bengal 86 75 23 90 8 6 1other States &

UTs lb 52 25 28 90 8 3 5

NATIONAL AVERAOE 71 56 29 92 7 6 1.. _.. ....... ......... ........ ................ ..... ......... ... .... .................

Source: Cited ir Kurian.La Notionat Concurrent Evaluation of IRDP, Round Two.Lb Nanipur, Neghalays. Magatand, Tripura, A & h Isl., Chandigarh, Dadra & NN, Delhi, Goa,

Lakshuadeep, Nizorma, Pondicherry.LS Proportion of IROP investments that rmined fully operational after two years.

Proportion of Beneficiaries with pre-IRDP income less than Rs.4800./e Proportion of Beneficiaries with pre-IRDP income less than Rs.4800 and income greater

than Rs.6400 after 2 years In current price terms.

so, whether incomes have risen. Also of interest is whether beneficiaries haverepaid their loans and subsequently received additional short and long termcredit from rural banks.

3.46 The findings of the CES (Table 3.3) are not revealing on thesepoints. For instance, 71% of beneficiaries had retained their assets after twoyears and 56% had retained assets and partially repaid these loans, while only1.3% had repaid loans and also achieved significant income gains. Clearly, whatis needed is a longer term perspective on the effects of participating in IRDP.Accordingly, reference is made below to findings obtained in follow-up interviewsin Uttar Pradesh in May 1988 with 960 IRDP beneficiaries originally covered inthe first round of the CES. Respondents, who were drawn from 12 districts, 48blocks, and 192 villages, were those who had taken loans four to five yearsearlier and still possessed their assets when interviewed in the CES.

3.47 A varied picture emerges from the Uttar Pradesh sample (Pulley).

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On the positive side, nearly 60% (as compared to 88% after 2 years, see Table3.3) of respondents still retained their assets and 58% had overdues of fivepercent or less after five years. On the other hand, only 30% had achieved rerlincome gains greater than 15% in four years; only 16% had increased theiw incomesand also re-paid their loans, while only 7% had successfully closed their IRDPaccount and received unsubsidized loans outside of IRDP. These facets of IRDPneed to be looked at in turn.

3.48 First, retention of IRDP assets fell by about 30% in the third andfourth years after the loan was received (Table 3.4). Initial income level

Table 3.4

IROP RETENTION IN UTTAR PRADESH

After 2 Years After 4 Years

Fully intact 82X 59XPartially intact 4X 72Sold 11X 21Xother 3X _il

1002 1002

Source: Follow-up of Survey of 10P Beneficiaries.

is one likely determinant of asset retention. Not surprisingly, the pooresthouseholds had the lowest (46%) retention rate while the less indigent groupshad a better (64-75%) performance.

3.49 Poorer households obviously face higher opportunity costs and haveless capacity to "wait' for investment payoffs. Still, nearly half of the lowestincome households were able to hold on to their assets. Analysis of whataccounted for 'asset retention" (e.g. possession of the asset after four years)in the Uttar Pradesh sample, shows that background factors such as initialincome, land holdings, literacy and skill levels, caste status, and motivationto be self-employed were important explanatory factors (Pulley). The overallretention rate can evidently be raised through more careful use of clientselection criteria. What is also noteworthy is the contribution of "process"variables which together convey a sense of how purposefully the scheme has beenimplemented. For instance, failure by a bank to follow procedures (by issuinga pass book) and a request that a household pay an illegal "facilitation" feeboth lessened the likelihood of retention. Similarly, the retention probabilitywas lower for beneficiaries living in villages with a history of loan defaults,and for those with assets (goats, pigs) which could easily be sold.

3.50 IRDP overdues are generally 12-20% higher than those for unsubsidizedagricultural loans. The statewise picture for IRDP repayments is shown in AnnexTable 3-1. Moreover, some lenders have counted the capital subsidy towardsrepayment and have thus understated overdues levels. The effect of this dubious

j accounting practice is to exaggerate repayment by nearly 30%. In the UttarPradesh sample, low repayment was characteristic of the poorest households andthose with casual labor occupations, while access to marketing facilities andhigher investment returns raised repayment probabilities. One proceduralvariable, in-cash disbursements of IRDP loans, strongly raised the likelihood

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of repayment, arguably because it increases bargaining power and enablesborrowers to purchase higher quality assets. Repayment was also higher forhouseholds who had participated in credit-camps (which are not the same as "loanmelas') in which bank and block officials inform prospective clients aboutprogram features, investment options, and repayment obligations. Lastly, adisappointing finding of the survey was the small proportion, 11%, of borrowerswho had turned to banks for follow-up loans, and the even smaller share, 7%overall, who had received additional credit (Pulley).

3.51 To sum up, the Uttar Pradesh sample indicates that some poorhouseholds are able to derive medium term benefits and repay IRDP loans asscheduled. This finding implies that appropriately-chosen low-income househcldshave the capacity to be included as regular, viable customers of rural banks.The Uttar Pradesh results reveal, however, major inadequacies in the currentfunctioning of IRDP. These relate to selection criteria (inclusion of householdslacking the skills, education and motivation to be self-employed), evidence ofmisappropriation of benefits and other forms of administrative misconduct, theabsence of a loan repayment ethic in particular villages, and inappropriatelending (non-issuance of passbook, failure to orient new borrowers and to follow-up loans) and monitoring (treating subsidies as loan repayments) practices.Perhaps the most discouraging result was the inability of successful IRDP clientsto become regular bank customers. It must be noted that these results are onlysuggestive since they are based on a relatively small sample. Additional workis needed using larger and more geographically varied samples and covering longertime periods. The results of the third and subsequent rounds of the CES willbe helpful in this regard. In addition, it may be worthwhile to carry outspecial longitudinal surveys using questionnaires which "piggyback' on the CES.

3.52 The government has responded to well-known implementationdifficulties with various mid-course adjustments in program design andprocedures. The latest of these is the Service Area Scheme (SAS) which isexpected to become effective in 1989/90. SAS goes beyond previous coordinationexercises by assigning specific villages to bank branches, and making the managerresponsible, under the oversight of a Block Level Banking Committee whichincludes revenue and technical officers, for preparing credit plans and"deploying" credit in the service area.

3.53 Like other recent remedial measures, this new action plan reinforcesthe target-driven impulses which have motivated IRDP from its inception but whichare inconsistent with key features of the rural credit scene. First, the demandfor and capacity to absorb loans are assumed to be uniformly high, with noconsideration given to the inherent vulnerability of small scale enterpriseslacking risk bearing capacity and expertise. (See para 3.49 for a discussionof the influence of background variables on retention in the Uttar Pradeshsample.) At the same time the payment of a capital subsidy has artificiallysupported demand by attracting loan applications from those seeking short termliquidity. By selling assets and using proceeds to repay the loan, borrowerscan make a cash gain equal to the subsidy amount. 4 The Uttar Pradesh surveysuggests that a significant share, estimated at 12%, were attracted by this facet

4L.a deprzcl.tion, interest patd, and tranacttoo costs.

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of the scheme.

3.54 Overlooking differences in the ability to use credit has producedhigh arrears, a chronic oversupply of funds and a continuing search for new'deployment" methods. Here a second, insufficiently analyzed dimension of therural scene is the inability of financial institutions to assume the complex"social banking" functions assigned to them. IRDP is financially unattractiveto banks which incur "delivery" costs averaging 9% of total credit outflows.The fixed 10% interest rate is roughly what banks pay to mobilize funds. NABARDfinance at a 6.5% rate helps to lower the overall costs of money used in IRDP.But when delivery costs are included, banks incur a sizable net loss on eachaccount, even assuming that beneficiaries repay their loans. Moreover, overduesare very high, and banks are only compensated for 65% of losses by the DepositInsurance Scheme. The new Service Area Scheme is likely to increase exposureto default risk since lending will be concentrated in areas which may bedisporportionately affected by drought. This adverse incentive structure helpsto explain why banks do not see former IRDP borrowers as part of an expandingclient base. Moreover, on bank loans (as opposed to IRDP loans) a majorincentive for repayment is the desire to get another loan--this incentive maydisappear on existing loans not made by the designated lead bank.

3.55 Costs are high because of the staff-intensive nature of socialbanking. Successive efforts to micromanage the scheme more carefully have addedto the tasks of field staff. The Service Area Scheme gives additionalresponsibilities to local branches, including identifying eligible beneficiaries,monitoring lending by cooperatives, and assessing forward and backward linkageswhich has previously been performed by revenue department staff. Thetractability of the new array of responsibilities has not been tested indifferent settings.j However, it is clear that higher levels of motivation andcompetence and a long term commitment will be required of branch staff. Thiswill present problems since banks are already having great difficulty attractingpersonnel to work in rural branches.

3.56 The desirability of banks exercising these broad (and correspondinglymore costly) responsibilities is not obvious. There is a clear risk that thecrucial banking functions of appraising and then sanctioning or rejectingproposed investments according to their prospective returns, costs, and riskswill be de-emphasized or disregarded. If this happens, IRDP will have becomemerely a means of channeling cash entitlements. To forestall this eventuality,the key bank responsibility of discriminating among alternative investmentsshould not be amalgamated with various administrative and social welfareactivities.

3.57 All this suggests that a major rethinking is needed if IRDP is tohave an impact on low income borrowers. Though broad coverage has been achieved,the incentives operating in IRDP have effectively reduced it into a one time

5Caza lRank is currently *xplorlng way. of raising the quallty of lerding. Of lnterest Ls the use of*rural service volunteers who give intensive attention to 120 case accounts, as opposed to the usual 500 ormoe, and who assist in caomiunty organization tasks. PrellmLrauur results tuggest that the high level ofstaffing lnvolved in this approach would not be affordable.

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opportunity for the poor to obtain credit, which may easily be seen as a "grant".This means that the income gains associated with IRDP are likely to be short-lived because of a lack of opportunity to replenish working capital and financenew investments. It also means that rural financial entities have not acted asbanks, i.e. by assessing projects, monitoring results and granting additionalcredit to successful borrowers, but as a means of transferring funds. Thiseventually will mean government funds will be necessary to compensate depositors,when arrears become very large. It also may soon sap bank's project evaluationcapacity. The Government's response to implementation problems has been totighten up operations, expecting that administrators and bankers will learn fromexperience. This course of action ignores the fundamental design flaws notablythe built-in tendency towards over-supply of loans relative to demand andincentives to banks.

3.58 A reshaping of IRDP could make it more effective and efficient. Theresults cited above suggest that IRDP has not worked as well as hoped in reachinga large segment of the poor, i.e. those without the experience, skills, andmotivation to be self-employed. This question needs further investigation.However, it appears as though the needs of many of the poorest households canbest be addressed through other initiatives. Still, many poor families canderive sustained benefits from the opportunities offered through IRDP. To servethese households, what is broadly required on the banking side is much moreattention to whether projects are viable and how loans are used (rather than howmany people have access to funds), a longer time-horizon, interest rates highenough to cover various associated costs, and greater expenditure on loanapproval and supervision. In short, banks need to be freed of social developmentand welfare dispensing tasks so that they can revert to the conventional roleof appraising projects, disbursing funds, and monitoring results. Banks willneed incentives though to improve the quality of their portfolios and to continuelending to poor households. Banks need, for instance, to be able to chargehigher interest rates to cover the substantial costs of lending to numerous poorclients. There are ways, moreover, of easing the problems banks face inidentifying creditworthy borrowers and assuring repayment. An option worthexamining is to replace the current capital subsidy, which is paid when the loanis provided, with an interest rebate to eligible borrowers who maintain a perfectrepayment record. Meanwhile, those whe regularly repay loans should be eligiblefor additional credit, with the portion of the credit that is offset with aninterest rate rebate falling in successive loans.

3.59 Banks will also need to tighten up operations to better performappraisal and monitoring tasks and to contain costs in difficult rural settings.A case in point is the RRBs which were established with a poverty mandate andhave been heavily involved in IRDP. These banks were originally expected tocombine the local "feel" and low-cost structure of cooperatives with the resourcemobilization potential and management practices of commercial banks. However,they have not demonstrated entrepreneurial flair or developed much expertise inhandling poor customers, and have not capitalized on local roots and connections.Indeed, there is considerable doubt as to whether they have built up the localfamiliarity and credibility they need. The 1986 report of the Kelkar Committeewhich reviewed RRBs observed that staff were unappreciadive of rural problemsand lacked the skills and knowledge needed to deal with rural borrowersindividually or in groups (Ministry of Finance). If RRBs and other banks are

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to effectively perform traditional banking tasks, they will have to experimentmore actively with different rural staffing, training and supervision formats,marketing and educational strategies and appraisal techniques.

3.60 There are several other crucial institutional functions to be carriedout in this revised approach. District and block officials need to concentrateon certifying eligibility, controlling against administrative abuse and politicalinterference, informing beneficiaries and their organizations about IRDP andtheir rights and obligations, and taking strict action against defaulters.Another useful service would be to help organize skill/literacy trainingopportunities for those seeking self-employment (the new National LiteracyMission may be useful in this regard).

3.61 Currently the key function of helping low income clients to formulateviable project proposals is being performed rather ineffectively by officialsand bank staff. An attractive alternative would be to mobilize and involvedifferent promotional entities (Copestake). These could include informal groupsof potential borrowers, cooperatives, voluntary agencies, parastatal bodies,and government line departments. The role of a promotional agency would be tohelp selected groups of poor households identify investment opportunities,prepare and submit formal proposals (including budget, financing andimplementation plans and so forth) to banks for approval, and (if sanctioned)assist in project implementation.

3.62 Some of the attractive features of this broad alternative approachdeserve to be noted.

O The flow of credit would not be governed by targets but by the demandfor bankable projects, relative to given area-wise allocations of funds.

0 Promotional bodies would not have exclusive rights to developprojects for particular schemes, areas or activities. Nor would bank brancheshave monopoly powers in specific areas. The competition that would be fosteredshould improve quality in all aspects of the program.

o The fixed division of tasks and responsibility should make banks andother factors more accountable and quality conscious.

o Local government authorities could treat subsidy funds as a resourcepool to be allocated flexibly to support proposals for specific activities ortarget groups, depending on how the project fares at the appraisal stage.Leakages could be controlled by releasing such funds in tranches linked toproject execution.

O Depending again on appraisal results, liability for default on loanscould be wholly or partly assumed by sponsoring entities and/or localauthorities.

o By permitting households to take on only affordable amounts of debt,the scheme envisages a continuing involvement of clients in the banking system.Good repayment by individual customers or groups of clients would be rewardedwith continuing access to credit.

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F. Establishing a Safety-Net: Some Options

3.63 The thrust of the recommendations concerning IRDP is to reduce thetransfer element which has worked at cross-purposes with the efficiency objectiveof this credit program. The proposed reforms aim at improving access to creditand quality of lending for those among the poor with the motivation, skills andexperience to become self-employed. India will continue to need transfer schemesthough to provide income and employment benefits to the very indigent, many ofwhom depend on casual labor earnings and for whom farm employment prospects arenot buoyant.

3.64 Besides IRDP, the other major schemes with transfer or "safety net"features are the Public Distribution System (PDS) and the variev.a ruralemployment programs. The poverty impact of the PDS has been limited by factorssuch as lack of access to distribution points and resupply problems. Except forthe Southern states and Gujarat, PDS coverage of rural areas is wetk. Stateslike Bihar, Madhya Pradesh and Uttar Pradesh with large concentrations of povertyget a disproporticnately small allocation of PDS supplies, while big citiesreceive a relatively large share. The Union Territcries, particularly Delhi andChandigarh, got nearly a quarter of PDS supplies in 1983/84, the last year forwhich data are available. Fortunately, some positive lessons on how to use PDSto benefit the poor are available. Kerala has succeeded in making PDScommodities available throughout the state, and in using passbooks and otherinstruments and eligibility criteria to restrict leakages of PDS goods to thenon-poor. Karnataka has begun to use a system of color-coded cards (green forthe poorest, saffron for the less-indigent) to indicate the quantity of rationswhich families are entitled to.

3.65 Income transfer was among the key objectives of iREP and the RuralLandless Employment Guarantee Program (RLEGP), the two rural job creation schemeswhich have been in operation throughout the country. These programs have alsopursued other goals including construction of durable and productive rural worksand providing financial organizational support to Panchayati Raj (localgovernment) institutions. But as with IRDP, the multiple roles allotted to NREPand RLEGP have led to implementation problems. As discussed in Chapter 2, theseCentrally-backed schemes have operated on a comparatively modest scale,generating an average of 1.76 million jobs a day in the 1985/86-1987/88 interval.By contrast, Maharashtra's EGS provided an average of 592,000 jobs (and incometransfers) a day in a single state. Besides attaining only a limited scale inthe aggregate, the impact of kSEP and RLEGP appears to be disappointing in otherways. Concerning NREP, two recent reports, the first Concurrent EvaluationSurvey (1985-86) on NREP and a 1987 Planning Commission assessment, provide agenerally discouraging picture (also see Ofstad, 1988).

O On average just over half of the villages per block have benefittedfrom NREP works since the inception of the scheme in 1980. Coverage wasespecially low in key states like Bihar, Uttar Pradesh and West Bengal which havehigh poverty rates.

o NREP attracted poor male workers of scheduled caste and tribalbackground, but has been less successful in getting women to participate.

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Although findings on local level effects are often inconsistent, the programappears to have had a positive but small and intermittent impact on employmentand income in poor hoteholds in areas closely studied. However, the scheme hasevidently not exerted a strong influence on local labor markets.

O Only 758 of works had been inspected by state and district officials;less than 40% were visited in Orissa, Uttar Pradesh, West Bengal, HimachalPradesh, Karnataka, Madhya Pradesh, and Rajasthan. Moreover, a common criticismwas that the works actually taken up diverged from NREP guidelines and were notcoordinated with the programs of other departments. Many works remainedincomplete or in poor shape because of lack of maintenance. At the nationallevel, only 42% of NREP assets were found to be maintained properly. Over 60%of the structures in Uttar Pradesh, GuJarat and Bihar were not being maintained.

o In some areas, NREP funds were diverted to line departments toaugment plan resources. Elsewhere, NREP served as a vehicle for channelingfunds to be used by village panchayats for coumunity infrastructure. In suchstates, however, satisfactory mechanisms had not generally been evolved fordetermining local priorities, preparing projects of requisite technical quality,involving political leaders and so forth.

3.66 For its part, the RLEGP has not emerged as a superior alternativeto NREP. As suggested in a 1988 Ministry of Agriculture "theme paper" (presentedto a National Seminar on Poverty Alleviation Programs), this program has not metthe objective of providing up to 100 days of work a year to at least one memberof each rural landless household. What is more, hoped-for improvements inprogram directior,3 md asset quality have not materialized. Stated prioritiesin the selectior of works and maintenance procedures have been ignored.Contractors and middlemen have involved themselves in the scheme, resulting inleakages of funds, while local government institutions have not participat-.dfully.

3.67 There is clearly considerable room for improving the execution ofNREP and RLEGP.6 However, efforts to reform the country's rural works schemesneed goals and guidelines which are feasible and compatible. In respect of theincome transfer/safety net objective, the issues to be resolved include whethermarket, below-market or minimum (generally above market) wages are to be paid;whether to offer employment benefits seasonally, only during droughts or othercrises or regularly throughout the year; whether to guarantee the job offer insome fashion; and how to ensure that employment benefits are provided promptlyand reach the most indigent. The concerns that flow from the efficiencyobjectives of such programs are quite different. These relate to the selection,design and implementation of works, the quality of construction and the eventualupkeep of completed assets. Illustrative questions include whether works

°These schemes ar to be merged, beginnigs In 1989190, and are to become part of a now expanded ruralemployment program, the Javahar Rosgar Yojana. The Jwahvar Yojna will cover the entire countrys poorerdlstrlats vlll b selected for more iatenive coverase usLng a fozuais mswed on the level of agriculturalproductivity and the population shares of scheduled cst.s and trLbes and agricultural laborers. Four-filfthsof funding vill come from the Center, and the rest from the States. Works projects will be identified andmanaged by local government bodies which will be reaponslble for selecting beneficariesa workers are expectedto receive the minlmum wage. The quality of exeoution is to be assured by assLgning a greater number of junLorengineers to assLit in design and supervLsion of construction.

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programs can and should shift thetr focus from roads, irrigation facilities, andsocial infrastructure to large scale, integrated wasteland reclamation andenvironmental improvement activities, and how to develop and retain a projectwork force with adequate motivation, energy and skills.

3.68 There are financial, organizational and institutional issues to besorted out as well. Costs vary with the program objectives and design that areadopted, and there are alternative ways of funding rural works schemes. Choicesalso need to be made regarding arrangements for implementing these programs,and tI.e linkages to be established with local government institutions(specifically how to elicit loc'il involvement in the design, execution andmaintenance of works).? These various questions are interlinked in diverseways. For instance, the seasonal pattern and scale envisaged for a safety-netscheme have implications for the type and quality of projects which can be takenup, and vice versa. NREP and RLEGP provide few positive lessons in thinkingabout these diverse issues. However, the experience of EGS offer some guidanceon the safety net benefits that can be delivered via employment schemes andassociated risks and costs.

3.69 The transfer mechanism in EGS has a number of specific elements.First, the wage has beeut intentionally kept below prevailing market rates. Thisself-targeting feature has dissuaded healthy adult males from participating inEGS work except during seasonal lulls or when drought or other disasters havehit. Laborers, who are invariably drawn from landless and marginal cultivatorhouseholds, are primarily (at least 60%) women who are attricted by the proximityof work sites (most have to walk less than 3 kilometers), by the self-pacingruture of the work (piece-rates apply), by the pattern of working in groups, andby the practice of paying wages directly to laborers without intermediation bycontractors or the panchayat.8

3.70 However, what distinguisl-',s EGS from other rural employment programsis the statutory, judicially-upheld work guarantee which represents anunavoidable obligation to all rural adults in Maharashtra. The guarantee hasmade EGS a social fact, a perceived right and entitlement, and form of insuranceUhich the poor can bank upon. The EGS Act itself provides a legal precedent andframework through which the poor can, and do, claim their rights. The employmentguarantee is crucial not only in shaping public expectations and directlyaddressing the pervasive vulnerability which the poor, especially women,experience, but as a measure which keeps government personnel on course in

7A related issue ls whether institutional development is central to the mLssLon of works program.Such schees may be seen as useful Lnstruments for financLng and raising the effectLveness of panchayet rajInstitutions. This objective looms large in the newly announced Javahar Yojana. Some potential drawbacks arealready discernible in this new scheme. First, by operating throughout the country the resources available tothe very poorest areas wlll be diluted. Second, decentralisation of decision making to the panchaysts will helpinsure the selectLin of projects of prlorlty to the coamunty, but may also increase the politicLsatlon of theprogram. Third, payment of the normally above-market minimum vage will likely lntroduce serious distortlonsinto local labor markets. It will mske such schemes a preferred source of employment, creating a difficultproblem for the panchayat of how to select among prospectlve beneficiaries. Pinally, the quality of work willnot necessarlly Lmprove despite the presence of more junior engineers.

Sy design, EGS eschews formal ties with village bodies, although panohayat leaders de help inLdentlfylng possible project sltes and ln Lnsuriag worker disciplLne. There are close MGS-panchayet raj linksat the district level where a committee of officLals and poiticians provides genrally useful oversight.

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operating a complex program. 9 The guarantee is deli-4ered through unusualarrangements which for EGS purposes put the Revenue Department, by virtue of itsemergency powers, in charge of the normally independent technical departments.Revenue officials must be prepared to provide work (on demand), but it is theirrigation, agriculture, forestry and other departments which draw up advanceplans (which are compiled in the tehsildar's office) for works in groups ofvillages, and then on instruction, execute individual projects using EGS labor.Carefully evolved official instructions (backed by unwritten but highlyinfluential informal guidelines on how to supervise laborers and otherwiseexecute projects) and extensive monitoring, unscheduled field visits, andvigilance tours by officials at various levels help keep this administrativestructure from unravelling. These arrangements, which are at once flexible anddurable, have been capable of accommodating (unlike other such programs in SouthAsia) substantial numbers of workers over lengthy periods.

3.71 Although designed with safety-net objectives foremost, EGS has beenmore successful than NREP and RLEGP in controlling the type of works taken upand the quality of implementation. The program has been used mainly for majorand minor irrigation and soil conservation works which have accounted for 60%of expenditures. In this way, EGS has been a vehicle for substantial directlyproductive ivrestment in semi-arid nreas. (Regretably, no systematic assessmentis available of the agricultural benefits accruing from numerous EGS-built checkdams and percolation tanks.) Recently, however, EGS expenditure on one low-priority item, roads, has risen sharply while new productive tasks are beingsought to replace a dwindling number of minor irrigation investmentopportunities. One option being explored is to use EGS to carry out all of thesoil and moisture conservation, afforestation, land leveling and related measuresentailed in planned development of micro-watersheds. This EGS-fundedComprehensive Watershed Development Program (COWDEP) is a logical sequel to thesingle activity treatments (such as c.reek-training) which have been taken up inthe past. But this breaks sharply with EGS practice in other respects by, forexample, carrying out projects on private property and focusing expenditures onparticular villages (excluding, for a period, other communities). Of specialconcern is the likely quality of the work, which will depend on closecoordination of EGS inputs with the plans and activities of other departments.In the past, soil conservation activities were taken up by EGS on an ad hoc basisand proved costly and unsuccessful as rehabilitative measures.10 Such work isadversely affected when excessive numbers of laborers have to be employed incrowded conditions. Meanwhile, serious deterioration can occur when under-attendance requires work to be postponed. Another problem is that suchactivities, even if well designed and executed, are likely to fail unless theyare part of a sustainable, community endorsed plan for management of commonproperties. All this suggests the EGS and othier works schemes are notappropriate vehicles for pursuing rehabilitation of degraded lands. Success in

9Observers have suggested that by making employment an entitlment, EGS encourages the politicalmobilization of the rural poor, and thereby provides incentives for polLticians to be more sensitive to theneeds of the poor (Echeverri-Gent, 1988).

10 The afforestatLon work done through EGS has also run Into problems Lncluding inappropriate speciesand aLte selectLon and the lack of mechanisms to assure follow-up care and so forth (Nimbkar).

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this difficult endeavor depends on evolving ecologically-balanced land use planswhich provide sufficient access for the poor.

3.72 The possible replication of EGS or a variant of the scheme, possiblyin selected areas of India, represents a difficult decision for the Government.As an experience-tested, self-targeting commitment with legal force, GGSrepresents precisely the sort of income insurance which is needed by the mostindigent--the susceptibility of very poor households to sharp reductions inincome and loss of assets can only be counterbalanced through a non-alterable,fallback arrangement of some sort. Gujarat and several other states haveexperimented with widow's pensions, old age and life insurance and cash grantentitlements. However, none of these possible alternative routes to deliveringa safety net has sustained large scale operations for a lengthy period or dealtwith leakages and other administrative problems as effectively as EGS.

3.73 Nevertheless, the statutory basis of EGS also entails significantfinancial risks. Thus far the program has claimed roughly 10-12% ofNaharashtra's development budget and 1% of state product. Program costs weremore readily absorbed within the budget as long as part of the planned investmentprograms for some departments could be funded through EGS, and while the urban-directed professions tax was providing rising incremental benefits. Now though,expenditure needs in areas (e.g. education and health) that have not benefitedfrom EGS are becoming more noticeable. 1" Moreover, the costs of deliveringguaranteed employment can increase sharply if market or above market (includingstatutoxy minimum) wages are paid and workers are attracted to the scheme fromother jobs. A rrRcent decision to set EGS piece rates in line with the legalminimum wage (as directed by the High Court) may double program costs inMaharashtra. This potential funding crisis can be avoided by exempting ruralworks programs from minimum wage laws. Such legislation is simply incompatiblewith the operation of large scale employment programs, with or without aguarantee. Generally, all possible means should be used to restrict coverageto the very poor and contain costs--wage payments must be kept well below marketlevel to insure self-targeting; the guarantee should be offered only in the mostimpoverished areas where for example wages are low and growing slowly; and iron-clad "exit' clauses should be included in the enabling legislation which allowelected officials to periodically reexamine whether the scheme is needed.

tYLelds from the professions tax which hax been earmarked to support EGS have levelled off because ofthe low upper l1mit set for this regressive and poorly collected levy. It is not clear whethe recentlegislatlon to raise the ceiling of the professions tax will have &M bearing on MS.

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Chapter 4

INDUSTRIAL POLICY AND EMPLOYMENT

A. Background

4.01 This chapter looks at prospects and policy options for promotingnonagricultural employment growth in the Indian economy. For reasons outlinedin Chapter 3, it appears that a secular decline in agriculture's share of totalemployment may be underway. While considerable scope remains for increased labordemand in agriculture, especially in irrigated areas, there are grounds, basedon recent and projected agricultural employment trends and the experience ofother countries (Table 3.2), for anticipating a continuing decline inagriculture's share of overall employment. To a large extent then, the successof India's efforts at poverty alleviation over the medium to large term willdepend on achieving sustained increases in productive nonagricultural employment.

4.02 The high growth rates of manufacturing and services output attainedin the 1980s and projected for the 1990s suggest that a period of buoyantemployment growth is possible. However, some policy adjustments appear to benecessary to ensure that output gains are reflected in expanding jobopportunities. Because of a lack of detailed information on developments in theservices sector, the focus of this chapter is on industrial output andemployment. The limited data that are available though, indicate considerablescope for output and job expansion in a number of service activities. In the1976/77-1986/87 interval, value-added in services rose almost as rapidly as thatin industry (Table 1.1), with transport and storage, communications, banking andinsurance recording above-average gains. (The wage and salary findings reportedin Annex Table 2-8 are suggestive of the dynamism in the services sector.)Considerable work is needed to delineate trends and prospects in differentservice activities. At a minimum, this will require collection and compilationof data, at the two and three digit level, comparable to that currently availableon industry.'

4.03 The key questions to be addressed in this chapter relate to why jobcreation in Indian industry has been so limited in recent years, despiteimpressive industrial output growth, and what policy options are available tobring a 'normal" (by ititernational standards) pattern of changing labor forcestructure within reach. More specifically- what policies and institutions can

The Annual Survey of Industry (ASI) covers manufacturLng firms with ten or more employees. A similarregular survey, wlth proaLsion for tLmely publlcation of results, ls needed for the service sector. hese twoongoLng surveys (i.e. the ASI and one for services) need to be supplemented with occasional sample surveys ofunregulated (less than 10 workers) manufacturing and servlces enterprLses.

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encourage growth of productive employment growth in manufacturing comparable towhat has occurred in several other developing countries?2 The rest of thischapter will be organized as follows: first, recent trends in employment andwages in the organized manufacturing sector will be outlined and analyzed; thiswill be followed by a brief description and analysis of the industrial policiesand labor system which are in large part responsible for the current situation;finally, a set of policies that should contribute to more rapid nonagriculturalemployment growth in India is put forward for consideration.

B. Recent Manufacturing Employment Trends

4.04 An understanding of the behavior of manufacturing employment ishindered by data inadequacies. For instance, estimates of manufacturingemployment for the early 1980s range from the 6.95 million figure (1983/84)derived from the Annual Survey of Industries (ASI) to the 25.1 million and 30million figures that emerge from the 1981 population census and the 1983 NSSround respectively. The total manufacturing employment figure estimated by theASI is clearly far too low--a labor force share of only 2.6% is implied for1983/84. In part, this reflects the ASI use of a 50 percent sample for firmsin the 10 to 50 employee range with power (20-99 without), but even blowing upthe sample would only yield a figure of 8.67 million employees. The implicationis that firms not covered in the ASI employ about 2.5 times as many as thosecovered, which suggests that the total employment figure and share of employment(11.1%) emerging from the NSS may be on the high side.

4.05 More credence may be given to ASI estimates of employment trends--the number of manufacturing jobs appears to have first grown rapidly in the 1970s(from 5.14 million in 1973/74 to 6.8 million in 1979/80), then increased at amore gradual pace between 1979/80 and 1982/83 (reaching 7.18 million), beforefalling slightly (to 6.87 million) in the 1982/83-1984/85 interval. NSS datacorroborate the ASI-based finding of a significant slowdown (although not anabsolute decline) in the growth of manufacturing employment in the early 1980s.3

4.06 Despite data problems, it is possible to shed light on factorsinvolved in the slowdown in manufacturing employment generation. One viewattributes this to special circumstances in the cotton textiles, jute, and foodprocessing industries. The ASI provides some support for this hypothesis. Forexample, the number of jobs in cotton textiles grew, although slowly, in the

2For example, manfacturlng employment ln Indonesia grew at 6.0X ln 1977-85, in MalaysLa at 10.71 p.a.in 1971-81, Ln the Philipplnes at 9.3Z p.a. in 1972-85, ln Thailand at 7.71 p.a. In 1972-80, and ln Korea at13.41 p.a. in 1971-78.

3Same part of the decline found ln the ASI may reflect the coverage of the survey. The ASI consaLsts ofa census of firms vith over 50 employees with power (99 vlthout power) and a 50 percent sample of firms vlth10-50 employees (20-99 without power). If employment growth ln the 19808 occurred mainly in smaller firms, thenlack of coverage and faulty selection wlthin the ASI sample could show a spurious slowdown in employment growth.Underceverage may be particularly important ln food processlng, garments and, recently, the textile sector,where power looms have grown at the expense of mlls. In addition, AS! sample selection way be becamingincreasingly out of date. The recent easlng of both licensing requirements and enforcement of them probablyhave made it more difficult to keep track of firms, particularly the smaller ones. The difference between theestimated growth rates of employment ln the NSS rounds, whlch covers employment from the workers' slde, and theASI suggests that the ASI may have understated the growth of employment in the 1980s somewhat.

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1973/74-1979/80 interval and then reversed direction, so that employment in1984/85 was below the 1974/75 level. At the same time, over half of allmanufacturing jobs added in the earlier period were outside of the food andtextile subsectors, as were virtually all of the 380,000 jobs added in the 1980s.Moreover, employment growth outside the traditional subsectors also slowedsharply in the 1980s to 0.2% per annum, and the output elasticity of employment,0.42, was much lower than in the previous period, 1.25. Thus the ASI datasuggest that the explanation for the stagnation of employment must look beyondthe experience of textiles, jute, and food processing.

4.07 A revealing approach is to decompose employment growth into changeswhich would have occurred had labor to output ratios remained constant in eachindustry, the "growth effect", and those due to changes in the labor to value-added ratio in each sector, the "within-industry" effect (Hanson and Sengupta).Table 4.1 presents the "growth' and "within-industry" effects for 1973/74-1980/81and 1980/81-1984/85.4

4.08 Interestingly, the fall in the weighted average of the labor/valueadded coefficients within industries explains the entire slowdown in employmentgrowth between the 1970s and the 1980s. The "growth" effect actually was verystrong in the second period. If the labor/value added coefficient had remainedunchanged, then employment would have grown nearly twice as fast in the secondperiod as in the first. In the first period, 1973/74-1980/81, the "growth"effect was offset slightly by a small decline in the weighted average of thelabor/value added ratio within industries. In the second period, the growth of

Table 4.1

Decocposftion of Eaploayment Growth in NawwfacturingLa;X per awnun)

Actual Growth a Growth" + "Uithin-fndustry 0 Memo: Growthof Etployment Effect Effect of real VA

All Manufacturina

1973/74-80/81 4.3 4.5 -0.2 4.51980/81-84/85 -0.2 8.8 -9.0 9.4

/a Based on ASI data. "Within-industry" effect calculated as a residual.

manufacturing was only slightly more biased against the labor intensive sectorsthan in the past. (This is reflected in the larger difference between the growthin value added and the "growth" effect in the second period.) However, the"within-industry" effect was substantially negative. This means that acrossindustries there was a substantial decrease in the amount of labor used per unit

4 These periods roughly spilt the sample in a way that would display the sharply different rates ofemployment growth mentloned above. Similar results, in terms of the growth and vithin industry effect, areobtained by spiLtting the sample at 1979180 or excluding food processing, despite the sharp variation La foodprocessing output during the 1979180 drought and the near-agricultural characteristics of some of the foodprocessing subsectors. See Hanson and Sengupta.

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of value added, offsetting all of the positive effect of faster output growthon labor demand.

4.09 A confluence of factors at work in the early to mid-1980s can inlarge part explain the sharply deteriorating performance of Indian manufacturingin generating new employment opportunities, even while it was moving to a highergrowth path in terms of output. Real wage grciwth was much higher in the 1980sthan in the 1970s, and employers not surprisingly responded by economizing onthe use of labor and investing in more capital-intensive techniques. This factorand its impact on employment will ae analyzed in more detail below, but thereasons behind higher wage inflation must in any case be sought in India's broadindustrial policies and system of labor relations, discussed in Section C.

4.10 Another important factor, more transitional in nature, was the needfor labor-shedding in many industries affected by increased competition andsubject to greater financial discipline. Labor-shedding has occurred in numerous"sick" industrial firms, concentrated in certain subsectors, but also in firmsunable to keep up with competition in the more dynamic, rapidly-growingindustries. Even the most successful firms are striving to improve financialperformance by holding down costs, including labor costs, to a much greaterextent than in the past. Overmanning and excess capacity inherited from the pasthave allowed substantial growth of manufacturing industry output, accompaniedby only very small increases in employment and less-than-proportional increasesin capital. This means that productive efficiency in Indian manufacturing hasbeen improving, a welcome trend which can be traced to industrial deregulation.5

The real question, which is hard to ascertain and may vary greatly acrossindustries and subsectors, concerns the extent to which this adjustment processhas been completed. It is possible that continued labor-shedding will lead tolow growth of manufacturing employment for several yeara to come.

4.11 A final key factor has been the direct impact of various aspects ofIndia's industrial policy and labor system on employment growth. For example,restrictions against retrenchment and closure raise the real long- term (risk-adjusted) cost to firms of hiring additional labor and undoubtedly havecontributed to slow employment growth in the organized sector. The same is trueof acrimonious, dysfunctional labor relations. These factors will be looked atclosely in Section C.

4.12 Overall, despite substantial progress in many respects,liberalization and deregulation of Indian industry have not yet impelled factorchoice in the labor-intensive direction consonant with India's factor endowment.Incentives may even have been skewed in the direction of capital intensification,at least in the short run. These problems should not be attributed to thefundamental direction and content of policies pursued so far, which have resulted

5Though data are inadequate for precLse calculations, it appears that 'total factor productivity', ameasure of the efficiency with which labor and capital are converted into industrial output, rose substantiallyIn the 19SOs, after staguating in the 1960. and 1970s (see Hanson),

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in improved efficiency and faster growth. Instead they are mainly the resultof sharply-rising real wages, short-run adjustments, and the anti-employment biasof the system.

4.13 The rest of this section will be devoted to a better understandingof the wage-employment relationship in Indian manufacturing. The rising realcost of labor to firms appears to have been a major proximate cause of theobserved fall in labor-output ratios. Whereas real wages in terms of cost toemployer (nominal emoluments per worker deflated by the wholesale price indexfor manufacturing) fell by 1% p.a. in 1973/74-1979/80, they rose by anastonishing 7.2% p.a. in 1979/80-1984/5. In part this reflects substantiallyhigher inflation in consumer goods prices than in industrial wholesale pricesin the 1980s. Nevertheless, there was also substantial acceleration in real wagegrowth measured in terms of workers' consumption basket (from 1.7% p.a. in1974/5-1979/80 to 3.4% p.a. in 1979/80-1984/5). Employers not surprisinglyresponded to sharply rising labor costs by economizing on the use of labor, i.e.by virtually stopping new hi.ring and retrenching existing workers to the extentpossible.

4.14 Table 4.2 presents estimated employment functions for India'sorganized manufacturing sector and for broad subsectors. The estimates are for

Table 4.2ESTINATED LABOR DENAND FUNCTIONS 1974/75-1984/85

Coefficients (Elasticities) of atlticsSubsectors Real VA Real Cost Lagged R SSRCovered of Labor Employ. (adj.)

All Nfg. 0.31" -0.37" 0.55** .993 0.93095(0.037) (0.051) (0.046)

Two digitSuhsectors 0.29" -0.35" 0.56" .992 0.6854720-29 (CITC) (0.061) (0.077) (0.070)

Two digitSubsectors 0.34" -0.41*" 0.52** .995 0.1709330-38 (NtTC) (0.044) (0.067) (0.059)

Uote: ** Statistically significant at M9X or better. No DurbinWatson statistic Is reported because the data are a cross sectionaltime series. However, the coaputed statistic is about 25 suggestinglow auto correlation. NITC refers to National (Indian) InrstrialTrade Classification, which Is broadly similar to the U.N.0s StandardIndustriaL Trade Classification.

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the pooled cross section and time series data, using a constant and subsectordummies that are not reported here.6 The coefficients of real labor cost andoutput should be interpreted as the average cross sectional responsiveness ofemployment to real labor cost and to output around the subsector means.

4.15 The estimates are fairly robust and point to a significant tradeoffbetween the higher real cost of labor and employment. (See Lucas for similarresults on earlier data). This suggests that the faster growth of real wagesin the 1980s indeed did play an important role in slowing employment creation.The estimated long run elasticities, clustered around -0.8, imply that the annualincrease in the real cost of labor of 7.2% in the 1980s reduced the annual growthemployment by 5.7%.

C. Disincentives to Industrial Employment Growth

4.16 The key question is whether manufacturing employment growth willresume, reversing the thus-far disappointing results on the job front duringthe 1980s. More precisely, what policies and institutional changes willencourage accelerated employment growth in Indian manufacturing? This is aquestion that has not been intensively explored by Indian policy makers, despitea longstanding commitment to employment generation as a key national objective.For example, The Seventh Five Year Plan Chapter on "Employment, Manpower Planningand Labor Policy," touches only briefly on industrial employment opportunitiesand fin4s that these are not significant. Instead, the concern for job creationhas centered on the need to enhance work opportunities in agriculture and alliedactivities including works programs.

4.17 This is not to say that industrial employment issues have been deniedattention. However, the predominant approach has been protective of existingjobs and oriented towards specific firms and industries rather than beingconcerned with the overall growth rate of industrial employment (Byrd). Thishas had three consequences. First, as discussed below, the overwhelming emphasison preservation of existing jobs, as opposed to the generation of additionalemployment in commercially viable activities, has resulted in strongdisincentives to new job creation in the aggregate. The defensive approach mayhave yielded benefits in the short run, but these have been overwhelmed byadverse long-term consequences for employment growth.

4.18 Secondly, the micro level focus on firms as generators of employment,rather than on the overall environment for employment in Indian industry, hasresulted in distortions in their behavior and disincentives for them to increasetheir labor force substantially even when expanding. Moreover, tLa relativeneglect of the overall environment for employment generation has meant that bydefault, some strongly anti-employment policies instituted to pursue otherobjectives have not been rejected or even subjected to thorough questioning.

4.19 Thirdly, protection of jobs and industries has been the most widely

6 The subsector dumies, Which are available on reques., capture the effect of the average amount oflabor used In the indu try and its relation vith the averase real cost of lbor wage and real output ln theindustry.

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used employment policy. This fits in with the defensive orientation mentionedabove. In larger firms, individual job positions are protected againstretrenchment by the regulatory and legal system. The small-scale sector as awhole is protected against competition from large firms in numerous "reserved"product lines. In the entire manufacturing sector, jobs are protected to agreater or lesser extent from foreign competition through a complex structureof tariffs and quantitative restrictions.

4.20 This overall approach has meant that attention has been focussed onprotecting particular individuals in their existing jobs and maintaining orraising their incomes. Paradoxically given the general concern about employment,this has resulted in serious disincentives against rapid employment growth inthe organized industrial sector. Attitudes and policies toward employment havenot been inconsistent with the broad approach to industrialization that Indiahas pursued, however. Various consequences of this overall industrial strategyare well-known and need not be reviewed here.7 But it is worth pointing out thefacets of this industrial policy which were inimical to employment generation.

o Protection from imRorts has harmed the dynamism. efficiency.flexibility and competitiveness of Indian industry, ultimately reducing itsgrowth potential and emlogment generation capacity. The protective regime hascreated scope for excessive wage rises, with workers claiming part of the "rents"gained as a result of protection (Bhagwati and Srinivasan). This has discouragedemployment growth in the industries concerned, and contributed to wage inflationthroughout the organized sector. Other adverse effects involve reduced exportpotential and promotion of capital intensive industries at the expense of morelabor-intensive activities. Table 4.3 indicates that industries with higheffective protection (over 70%) in 1986 used more than five times as much fixedcapital per employee as those with low protection, and twice as much electricityper unit of value added. This suggests that employment and output growth wouldhave been higher if some of the investments in highly protected sectors hadinstead been made in sectors with low protection.

o The licensing of capacity runs counter to employment generation byencouraging mononolistic tendencies. engendering surplus capacity. or bypermitting excessive numbers of investments, each well below minimum economic|sale,. More generally, licensing restricts the autonomy of firms, reducing theirability to adjust quickly (e.g. by expanding output and employment) to marketopportunities.

o 'Backward areas" incentives have succeeded in sRreading industry moreevenly throughout the country. but it is not clear that they have ir.reasedemployment. Since most incentives are related to capital, they have probablyencouraged greater capital-intensity in the economy as a whole, and in particulara shift of capital-intensive rather than labor-intensive activities zo backwardareas. This is often just the opposite from the most economically appropriatepattern of adjustment. Other consequences have included reduced efficiency,

7See World Bank (1987) and the numerou references cited there on India's industrialization aver thepast four decaes.

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Table 4.3INDIA: EFFECTIVE PROTECTION OF MANUFACTURING INDUSTRIES

Effect1ve X Share Fixed Cap. Av.Lab.CostProtection No. of X Share Persona X Share 000 MIW (Re 000)/ (Re 000)/(1986) Sectors Fixed Cap. Engaged VA VA (Rs 000) Pers.Eng. Pers.Eng.

High 21 53.2 18.5 30.0 409 92.5 15.83Ned. 5 3.5 3.4 5.8 123 32.4 18.04Low 30 43.1 77.7 54.9 199 17.8 9.36Misc. 3 _._ 0.4 0. 3 79 _L! .L8All Industries 59 100.0 100.0 100.0 266 32.1 10.86

Source: World ank (198?).

extra infrastructural investments, and higher training costs. To a large extentthese dispersal policies have acted as a drag on industrial growth in the largeurban centers, by providing attractive incentives to set up new plants that enjoyartificial advantages compared to eListing firms.

O It is unlikelv that the shift of resources into SSI has resulted inany net increase in manufacturing emlo2ment. Gains in employment due toprotection of SSI are probably largely offset over the long run by thedistortionary effects of such protection and by reduced entry of larger firmsinto labor-intensive activitles. Moreover, the smallest size class of firmsoften is not the most labor intensive within a given subsector (Little, Mazumdar

and Page). Concessions designed to encourage small scale firms often lower thecost of capital artificially to them and hence encourage an overly capital-intensive factor mix, which may be inefficient and in any case defeats theobjective of employment creation. (Little, Mazumdar and Page; Suri). In fact,in a wide range of activities, small firms are at least as capital-intensive aslarger enterprises (Sandesara). To prevent larger firms from 'appropriatinghSSI benefits, liA*s between small and large firms are limited legally,discouraging the kind of ancillary relationships between small and large firmsthat have stimulated industrial growth and employment in Japan and Korea. There

are few incentives for SSI firms to expand production and employment, since bydoing so they would lose the benefits associated with smal' size (Ghosh). Thus

what should be a highly dynamic part of industry, a constant source of changeand micro-level innovation, is actually a relatively weak sector, where aconsiderable amount of employment may have to be shed during what will probablybe a difficult period of rationalization and adjustment.

4.21 Turning specifically to the environment, institutions, and policies

directly affecting labor relations and wages, the following consequences should

be noted:

o The legal framework and government anoaratus regulating industrial

labor and labor-management relations have 8enerated disincentives to employment

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growth in organized manufacturing. Labor laws and regulations apply primarilyto workers in large and medium-sized firms. Though designed to further theinterests of workers, these laws and regulations increase the direct as well asthe indirect and long-term costs of hiring labor and thus constitute a potentdisincbntive to employment expansion.

O Regulations restricting retrenchment of workers and closure offactories are a disincentive to exDansion of organized-sector emDloym=nt. sincefirms are stuck wLth the labor they have hired even if business declines or ifwarkers do not perform well. Restrictions against retrenchment have beenprogressively strengthened over the years through amendments to the IndustrialDisputes Act of 1947. In 1976 firms with over 300 employees were required tigive 90 days' notice to the relevant authorities before closing down, and theGovernment was given authority to refuse permission for closure. In 1982 therequirement of government approval was extended to establishments with more than100 workers, which vastly increased the number of firms covered by the law.Econometric analysis suggests that the 1976 anti-closure regulation inducedemployers to move to lower long-term levels of employment, as a means ofminimizing the risks and costs associated with the new law (Lucas). The declinein employment was greatest in industries where the proportion of employees 1nlarge private-sector establishments with 300 or more workers was highest4.Progressively stronger restrictions against retrenchment and closure henceprobably contributed to the stagnation in organized-sector manufacturingemployment in the 1980s. Moreover, this legislation is not effective inmaintaining employment over the long run, since industrialists have found variousmeans by which they can get around the regulations.

o The statutory jDayment of annual bonuses and o-ther benefits hasstrergthened disincentives to hire workers. Moreover, bonuses, which amount to8-20 percent of earnings, have been. a source of industrial disputes and may havethus affected employment incentives indirectly. Similar observations apply tovarious other nonwage benefits mandated by Central and state governments. Forinstance, factories and other establishments with 20 or more employees arerequired to contribute 6.25% of their total wage bill to the Employers' ProvidentFund; in 1984 the contribution rate for firms with 50 or more employees wasraised to 8%. Establishments subject to the Factory Act also have to pay intoa health insurance fund. And establishments with 10 workers or more are requiredto provide a gratuity to those terminated after continuous service of more thanfive years. Further extension of such benefits to firms with as few as 10employees would constitute a severe disincentive to employment expansion beyondthe "threshold". Hence the phenomenon of small firms splitting up into several'sister" plants, underreporting employment, taking on casual labor, and so forth.

O The direct cost of labor to emplc;Lers has increased sharply in recentyears. in nart due to the substantial overindexation of wages which occursthrougp the system of "dearness allowance". Over time, dearness allowance hascome to comprise an increasing proportion of total compensation. This reduces

8 This is exactly what might be expected, given that the new law would have had a minimal Imp-et onpublic sector flrms (where there has been substantial job security and protection agaLnst retrenchment allalong) and an eatablIlsheAts wlth less than 300 workers.

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wage flexibility and builds in future wage increases. Especially damaging toincentives for organized-sector firms to hire additional labor is the practiceof "double linkage", under which dearness allowance is related both to changesin the cost of living index and to changes in base pay levels, sometimes leadingto increases in the wage bill higher than the rise in the cost of living. Thoughlegislation has not been directly responsible for the near-universal use of thedearness allowance in the organized sector, the Government apparatus responsiblefor settling labor disputes (see below) has helped to legitimize this practice.

O The ease with which tinv unions can be recognized. and the lack ofa clear framework for a single union to gain undisguted authority to representa firm's labor force. undoubtedly contribute to difficult labor relations anddisincentives to labor hiring in the organized sector. Moreover, the processof compulsory arbitration provided for in the Industrial Disputes Act of 1947is cumbersome and time-consuming. Critics have argued that the whole apparatusof government intervention in labor disputes and compulsory arbitration inparticular has weakened unions by forcing them to rely on legal devices ratherthan collective bargaining. The tine required (often three years or more) andthe backlog of unresolved cases mean that many unions and workers are forced tocome to voluntary agreements with management, to salvage some benefit. Althoughcompulsory arbitration may not have resulted in sharply higher wage costs, ithas introduced time-cons,uming delays, and hindered the development of stable andeffective unions.

4.22 Employers engage in a variety of strategies to further theirobjectives in labor relations. Their ultimate sanction, closure, can occur underthe guise of a strike or lock-out, or gradually by eliminating individualoperations and work units. Large firms can delay reporting closure. under theseconditions and avo.d penalties. Retrenchment can also be effec-ad through"voluntary retirement schemes", which typically pay higher compensation than ismandated by law. Relocation of activities to regions with lower labor costs andless unionization (facilitated by the incentives for investment in backward areasdiscussed earlier); spreading production across a number of small plants toreduce the concentration of workers and diminish the impact of strikes (whichcan be offset by higher production elsewhere); greater use of contractual orcasual labor; and even replacement of older workers by their children (at lowerwages) are all devices used by employers to reduce wage costs. Playing for timeby making use of the legal or administrative machinery (e.g. IndustrialTribunals) is another approach which can be used by management, though it maybackfire. Over the medium term, industrialists have been able to reduce laborusage despite the restrictions against retrenchment and closure.

4.23 The stagnation of the Bombay organized-sector labor market providesanother example of the impact of the protective approach to labor policy. TheAll-India trends of unionization, rising real wages, increasing frequency andseverity of labor disputes, and management responses began relatively early inBombay. Union strength and penetration (to smaller firms) as well as legislativeprotection for workers have all increased recently. At the same time,competition has increased the financial pressures on firms to hold down laborcosts. The result has been stagnation in employment, even in relatively healthyfirms, as managers substitute capital for labor, retrench, and relocate.Moreover, the regulations have not been completely effective. In sick industries

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extensive labor shedding has actually occurred despite the safeguards againstthis. (Further discussion of the Bombay labor market appears in Annex 1). TheBombay labor market, if it is suggestive of future trends for India as a wholeunder the present set of laws, institutions, and practices, makes a strong casefor major reform.

0. Optilons for Accelerating Employment Growth In Indian Manufacturing

4.24 Under the present system, India has achieved rising real wages, jobsecurity and other protections and benefits for existing organized sectorworkers, even in a labor-abundant economy. These accomplishments should berecognized. However, the present system appears to be costly in terms of slowgrowth of employment in the manufacturing sector as a whole, the debilitatingeffects of labor problems, and incentives skewed toward capital intensification,especially in the organized sector and in small scale firms with access tosubsidized credit.9 Given India's huge need for productive employment generationover the next several decades, these costs seem very high.

4.25 Accordingly, new strategies, instruments, institutions, and policiesare needed. The required changes cannot occur instantaneously. Moreover, someof the basic protections for workers built into present legislation should bepreserved and extended to cover the informal sector where feasible andappropriate. Nevertheless, the case for major reforms is compelling. Someoptions for consideration are set forth below.

4.26 A New Orientation of Employment Policy. More important than changesin particular policies and practices is the need for a major change in theapproach to employment policy. A shift is needed from the defensive approachof preserving employment and upgrading jobs in existing firms to a aggressivepolicy of promoting substantial job gains through higher growth and ensuring thatgrowth is translated into higher labor demand.

4.27 The Structure of Protection. Reduction in the bias against labor-intensive industries and in favor of capital-intensive activities inherent inthe current structure of protection in the Indian economy would be highlydesirable. While such a major change in the structure of protection would haveto be implemented over a reasonable period of time, it would have a number ofimportant benefits in terms of employment generation as well as other aspects.Capital would be encouraged to shift from less labor-intensive to more labor-intensive investments, and labor-intensive export.. would be stimulated (withconsequent increases in employment). Moreover, to the extenit that excessivelyhigh wages in the more capital-intensive industries have been permitted by theprotective regime, upward pressures on wages in these industries and inorganized-sector manufacturing as a whole would be eased. The change in traderegime would also reduce the need for administrative "protectionw of many labor-intensive activities undertaken by small-scale firms, and for the complex,

9A V.milar positLo Ls articulated in the 1988-89 Economic Survey (para 9.12) which states that 'The slowgrowth of employment in the organized induatrial sector in recent year ... points to the naod to reformpolicies tn such a canner as to promote greater labor absorptLon in manufacturlng."

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distortienary, and costly export incentives which are in force at present.

4.28 Labor Legislation. The general approach should be one of simplifyinglabor regulations and speeding up reviews of disputes. Codes and procedures needto be evolved that provide a few key minimum safeguards (e.g. safety in the workplace) for workers, which can be enforced even in small-scale firms. It is therethat workers most need some basic protection.

4.29 Unionization and Labor Relations. Changes are needed in the wayunions are established and the conditions under which they represent workers.The appropriate directicn of reform has already been suggested by the 1958 IndianLabour Conferenice, the National Commission on Labour in 1969, the 1978 IndustrialRelations Bill, and the Sanat Mehta Committee Report of 1982. Therecommendations common to all of these are: trade union recognition should bebased on a minimum proportion of a factory's workforce; collective bargainingshould be conducted by a sole bargaining agent approved by a majority or at leasta large share of the workforce; and the Government apparatus for industrialdispute settlement should be reorganized. Concerning the last point, an optionworth considering is to abolish the legal mandate and dismantle the apparatusfor compulsory arbitration, except possibly for a few highly sensitive andstrategic activities. Also, secret ballot would be the appropriate means ofdetermining which union represents a firm's workers in collective bargaining.These reforms would help reduce the proliferation of ineffective unions and wouldstrengthen the identification of workers with the unions and union leadersrepresenting them, as well as enhancing the accountability of the latter. Thoughthe ability of unions to further workers' genuine interests would bestrengthened, the problems of management in dealing with fragmented, divisive,and often politically-motivated unions also would be eased. Thus there wouldbe little or no trade-off between benefits for labor, managers and owners, andthe economy as a whole.

4.30 The Small-Scale Sector. It would be unrealistic to expect majoremployment gains in this sector while larger firms continue to be discouragedfrom expanding employment. Though SSI may continue to account for a largeproportion of incremental employment generation in manufacturing, as it has inthe past, it cannot generate dynamic industrial output and employment growth onits own, particularly if hobbled by the present regulatory and incentiveenvironment. The 'multiplier" effect from employment expansion in large firms,as well as desirable links of various kinds between large and small firms whichcould emerge over time, would stimulate SSI dynamism and employment generation.Similarly, broad-based personal income growth in the economy as a whole willresult in higher demand for the products and services of small-scale firms. Theoptions outlined above hence will stimulate employment growth in the informalsector as well as in the organized sector.

4.31 Looking at policies specifically directed toward SSI, the reservationof products for exclusive production by small-scale firms should be graduallyeased. This, combined with reductions in the substantial fiscal benefits forsmall-scale firms now in place, would remove the incentives to remain small,which are still strong under the present regime. A more competitive and lessprotective environment may carry some transitional costs in terms of slowergrowth of employment, and perhaps declines in some industries dominated by SSI.

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But these would be more than offset by subsequent gains, and in any case theycannot be avoided over the long run. SSI reforms should be combined with theforeign trade reforms suggested earlier, which would give a boost to labor-intensive export-oriented activities, many of which would be undertaken by small-scale firms.

4.32 Credit for Small Firms. The small-scale sector requires credit atunsubsidized rates which will not encourage excessive entry or an overly capital-intensive factor mix. Credit programs for small f'.rms need to be carefullydesigned and implemented. One example of what appears to be an effective programis the Small-Scale Enterprise Program (SSEP) being implemented by the CalcuttaMetropolitan Development Authority (CMDA). This program directs commercial bankfinancing to urban small entrepreneurs, identified with the help of CMDA staffassigned for this purpose and NGOs. After some initial difficulties, SSEP hasgrown rapidly and achieved considerable success, as is shown by the resultingemployment generation and income growth for borrowers, and by the manageablearrears position, unusual for lending to the informal sector. Unlike in otherprograms, all financing i-s provided by participating commercial banks, motivatedby the potential for gaining other business (as well as a statutory requirementthat 1% of total lending go to economically weaker sections of the population).Loans for poorer borrowers are at a subsidized interest rate of 4% p.a., whilethose for middle-income borrowers and new borrowers carry a somewhat higherthough still subsidized interest rate of just over 8% p.a. However, the subsidyis only ex-post, i.e. rebated to the borrower in the event of timely repayment.Better iff and established borrowers pay unsubsidized commercial rates. SSEPis exclusively a credit scheme, without provision of infrastructure, technicalassistance, or extension. Its success suggests that credit is the key constraintfor many urban entrepreneurs, and that substantial stimulus to growth andemployment expansion in the urban informal sector can be provided without theimplementation problems associated with extension, technical assistance,training, etc.

4.33 Facilitating Retrenchment and Exit. Though early notice and paymentof reasonable compensation probably should continue to be required by law, theneed for Government approval of all retrenchment and closure decisions in theorganized sector constitutes excessive interference in business management andmainly raises costs while not effectively preventing labor shedding over time.Moreover, support for insolvent industries has the unintended effects ofencouraging sickness in margi'tal firms and preempting the market of healthyenterprises. All this increases the financial burden on society, and discouragestimely adjustment. Apart from power and various strategic activities (which arelargely handled by the public sector anyway), restrictions against retrenchmentand closure should be eliminated. Obviously this major change would need to becoordinated with measures discussed above to improve labor relations, so thatclosures related primarily to union-management conflicts would not ensue. Also,adjustment would be facilitated by well-designed programs for retraining andplacement of workers subject to retrenchment or closure.'° Insolvent firms will

l0The Government is currently looking at how to assist workers who might belaid off in three industries--jute, cotton textiles, and engineering--with manynsick' firms. A proposal being reviewed involves negotiating with firms and

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find it easier to satisfy all creditors and provide adequate compensation toworkers if they are allowed to reap the full benefit from selling off assetswhich they control. Hence there should be no restrictions (other than legitimatezoning stipulations as part of municipal development plans) on the sale of landor other assets by these firms. Greater freedom of retrenchment and exitundoubtedly will carry some short-run costs in terms of unemployment, but thelong-term benefits are so great that these costs should be borne (perhaps withsome transitional assistance from Government, which in any case would not be moreexpensive than the whole array of subsidies and assistanc. now rendered to sickindustries). The pay-off will be a more flexible, dynamic, efficient industrialsector, with greater long-term employment generation potential.

unions to make payment in full of benefits and dues to affected workers as wellas intensive training (jointly financed by the Government and firms) andimprovement of job placement/self employment advisory services.

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Chaper 5

SOCIAL SERVICE PROGRAMS AND THEIR FUNDING

A. Introduction

5.01 Social services are important te the poor in two major ways. First,they can contribute to the labor market prospects of low income wage earners andenhance thte productivity of those who cultivate their own holdings or areotherwise self-employed. Evidence suggests that good health, high energy(nutritional) levels and educational 4ttainment often command a premium fromemployers in rural and urban labor markets. Moreover, temporary or permanentwithdrawal from the work force because of illness, pregnancy and its aftereffects, and nutrition-related weakness can have particularly devastating effectson the household income of the poor because of their vulnerability. The humancapital attributes of the poor are likely to become even more important in thefuture as the economy loses its agricultural-rural character and as dependenceon labor markets grows. Secondly, good health, adequate nutrition, andeducational achievement are not merely inputs that can raise earnings andcontribute to economic growth; they are qualities which are obviously desirablein and of themselves. Hence they are important facets of the standard of livingof the poor.

5.02 This chapter and the one which follows focus on public provision ofcrucial social services to the poor. As discussed in Chapter 2, the poor remainsusceptible to ill health and malnutrition and tend to underconsume educationalservices. The Government recognizes these problems and has introduced a numberof large scale programs to remedy them. However, these initiatives have yieldeddisappointing results. This chapter and the next explore what lies behind thisperformance and discuss ways of enhancing the effectiveness of service delivery.The largely unchanging social status of the poor appears to be due to inadequatefunding of key social services in conjunction with weaknesses in program design,in particular the complex, top-heavy and staff intensive (and intrinsicallycostly) nature of the delivery systems being established and the aim of providingcomprehensive (client and task-wise) services through integrated deliveryarrangements. The present chapter provides further information on the socialcondition of the poor and looks briefly at how different service initiatives havefared. The discussion then turns to trends and regional and intra-sectoralpatterns in the funding of different social services, and discusses ways ofensuring that services crucially needed by the poor receive adequate funding.Chapter 6 examines the design of ongoing service delivery efforts in differentsectors and offers suggestions on how to reorient and enhance the effectivenessof these initiatives.

5.03 One facet of the social sector scene Is the weak information base.For instance, health and family welfare policy formulation are handicapped byinadequate vital registration, cause of death, and morbidity data, poor servicestatistics tnd the limited availability of KAP (knowledge, attitudes and

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practices) survey findings, and program, cost and budgetary information.Nutrition planning is constrained by uncertainty as to patterns and trends innutritional attainment by income class and other categories. Major educationdata gaps pertain to the activities of 'unrecognized' private sector educationalinstitutions, information on teachers (their qualifications, turnover/attritionrates etc.), public and private expenditures (and unit costs) at differentschooling levels, repeat and drop-out rates for students, attitudes toward femaleschool attendance, and perceptions about the economic returns to schooling.

5.04 Despite data inadequacies, the unsatisfactory health, nutritionaland educational status of the poor is clearly discernible. There was a gradualfall in the death rate and the infant mortality rate in the 1970s and early/mid1980s, wvich followed a more rapid decline in the 1950s and 1960s in much ofthe country. However, mortality risks remain very high in Bihar, Madhya Pradesh,Rajasthan and Uttar Pradesh and in other economically backward areas and amongstthe poor in general (Figure 2.5). The continuing high mortality in lower incomeareas obviously keeps the average death rate high for the country as a whole.While life expectancy in India (57 years) is higher than in Pakistan (52 years)and Nepal (47 years), it is less than in China (69 years), Thailand (64 years)and a number of other low-income countries.

5.05 The greatest threats to health occur in infancy, especially forfemales, and during the reproductive phase for women. Infant deaths are mainlydue to diarrhea (usually non-bacterial), acute respiratory illness and pneumonia,malnutrition (low birth weight), and to a lesser extent, immunizable childhoodinfections such as poliomyelitis, diphtheria, pertussis tetanus, and measles.Approximately three-quarters of all deaths in India are related to communicablediseases. Diarrheal and acute respiratory illnesses, particularly in the youngerage groups, account for the largest share of this group of causes. The datasuggest in fact, that diarrhea alone is a far greater threat than the immunizablegroup of diseases (Krister). Unfortunately, prevention of diarrheal illness doesnot lend itself to the sort of control program based on targets for coverage andother measures that is possible with immunizable infections.

5.06 Other communicable diseases like malaria, leprosy, tuberculosis,filariasis, kala azar, and dracunculiasis (guinea worm) are major killers, causesof high morbidity and low productivity within the population as a whole andespecially in particular regions. Large numbers of children and adults also areaffected by various nutritional deficiency disorders. Clinical signs of(protein-energy) malnutrition were observed in 4-11% of the children covered inseveral large sample surveys in Southern India (Bidinger et. al.). As discussed,the incidence of severe (protein-energy) malnutrition is especially high amongtribal and scheduled caste children age three and below (Table II-4). VitaminA deficiency, which can result in blindness, is prevalent in rice-eating regionssuch as the South and Northeast, while endemic goiter is a threat to survivaland physical and mental development in millions of children, mainly but notexclusively in iodine-deficient Himalayan areas.

5.07 Finally, iron-deficiency anemia, a conseq-uence of poor ironabsorption from predominantly cereal-based diets, affects about half of the ruralpopulation to some degree, impairing physical stamina and productivity. Anemiais especially threatening to women of reproductive age because, together with

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low overall nutritional status, small physical size, and high sickness rates,it influences chances for successful motherhood and survival of a healthy infant.Anemia accounts for a quarter of the large number of maternal deaths in India.Other major causes are bleeding during delivery (attended normally by untrainedmidwives--dais), puerperium, toxemia, and complications due to abortion.

5.08 One set of factors that contributes to high maternal and infantmortality rates is the syndrome of early maternity and frequent pregnancieswithin the childbearing period. An estimated 42% of birth-related deaths occuramongst women below age 25. Infant mortality is also high among the newborn ofvery young mothers. In addition, infant death risks increase with birth order--more than 20% of births are of order five or higher. Finally, short birthintervals raise the risks of infant death. The mortality rate for children born1.5-2.4 years after a previous birth is half of that for births within a 1.5 yearinterval.

5.09 These birth-related threats to the survival of mothers and infantspoint to the health benefits likely to accompany use of contraceptives. Familyplanning is now widely practiced in India's cities, and in rural areas of theSouth, Punjab, Haryana, Maharashtra and Gujarat. Fertility has fallen in theseareas (Figure 2.9). For India as a whole the total fertility rate (tfr) fellfrom an estimated 5.8 in 1951-56 to 4.8 in 1976-81 and 4.4 in 1985. However,fertility remains high--a tfr of roughly 5.7--in the Central and Eastern stateswhere only a quarter of couples practice birth control in some form. Income isone factor that influences the use of means of family planning--national surveysrepeatedly show that contraceptive prevalence amongst the poor is half that forother couples.

5.10 Educational attainment of mothers is an income-linked variable whichstrongly affects contraceptive behavior (and fertility). For instance, only aquarter of illiterate respondents in a 1980 national survey knew about the pilland IUD, while over 60% of women who had completed primary school were familiarwith these methods. Illiteracy also is associated with ignorance about diseasecausation, appropriate means of prevention and what can be expected fromgovernment facilities. The strong inverse relationship between mothers'education and estimated child mortality levels in Tamil Nadu and Madhya Pradeshis brought out in Table 5.1 (Stout). The heightened prospects for child survivalthat are linked to schooling help account in turn for the reduction in familysize preferences associated with increases in educational status. Finally,educational attainment plays an important role (through mechanisms such asreduced family size targets and greater awareness of contraception) in the useof family planning. Survey data indicate, for instance, that nearly half of thewomen who have completed primary school use modern means of birth control ascompared to less than a quarter of illiterate women.

5.11 These linkages between education, fertility and mortality areindicative of the substantial social costs associated with continuing low levelsof female literacy and school attendance in rural areas. Literacy is lower inrural areas, especially in the poorest income classes (11% in the bottom fourdeciles, see Table 2.5). Among poor rural women, there is virtually uniformilliteracy in Andhra Pradesh, Bihar, Madhya Pradesh, Orissa, and Rajasthan.

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Table 5.1

CHILD MORTALITY BY EDUCATIOAL LEVEL OF MOTHER, 1981

.... ..... . .. ... .... .. ..... ...... .. .......... ................ ........................

Total Rural Utben......... ............... .......................................................... ...................

Illiterate 115 121 93Literate but below Middle School 73 79 71Middle School 55 49High School 43 56 35

i W~~~~~adhWa Pradesh-Illiterate 151 156 102Literate but below Middle School 87 100 68MiddLe Schoot 58 3 50High School 44 59 41

Nufter of deaths by age two per loo0 live births.Source: Occasional Pacers of the Census of India 1981, 1987.

The situation is only slightly less bleak in Karnataka and Maharashtra; incontrast, well over half of poor rural women in Kerala were literate. However,1981 census data indicate that female literacy was also exceptionally low inrural Haryana and Uttar Pradesh. In contrast, over 55% of urban females age 15and over (versus 80% for men) were literate in 1983; literacy rates were lower(39% for female in the bottom four deciles) amongst poor urban women.

5.12 The Government, which is aware of the unsatisfactory health andeducational status uf the poor, has responded with major service delivery effortsdirected at disadvantaged households. The most recent of these initiatives isthe 1986 National Policy on Education (NPE), a wide-ranging program aimed atrevitalizing the education system and a,7ieving universal primary schoolenrollment and other goals. Implementation of NPE began in 1987/88. Earlier,the 1982 National Health Policy redefined program priorities (and the packageof services offered) in line with the objective of providing 'an integratedpackage of services to tackle the entire range of poor health conditions. Thiswas followed by the 1986 revised Family Welfare Strategy which has strengthenedpublic provision of mother and child health (MCH), and family planninginformation and services. Another important intervention is the Integrated ChildDevelopment Services (ICDS) scheme, begun in 1975, which delivers a package ofbasic health, nutrition and pre-school education services to children under sixand to pregnant and lactating women.

5.13 To date, the Government's social sector initiatives have notsucceeded in reaching the poor with reliable and high quality services. TheChallenge of Education document prepared by the Education Ministry in 1985provides a cogent analysis of problems experienced in extending primary schoolingand basic literacy services to the poor. The Ministry's assessment shows, forinstance, that rising enrollment has been confounded by a tendency for studentsto withdraw from school. The dropout rate for grades 1-5 has fallen only

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slightly, from 67% in the early 1960s to 60% in the early 1980s, and remainsespecially high in Eastern India as well as amongst girls in general and membersof scheduled castes and tribes. NSS data indicate that less than a quarter ofpoor rural girls (43% for boys), age 5.14, went to school in 1983. This figurewas 12% or less in three of the states (Bihar, Madhya Pradesh, and Rajasthan)for which data are available. However, attendance rates for low income femaleswere well above average in Kerala, Maharashtra (Table 2.6), and particulardistricts in states like Andhra Pradesh (Table 2.7). Performance was better inurban areas. Over half of the low income girls age 5-14 (62% of boys) in urbanareas were attending school in 1983 (Table 2.6).

5.14 The Challenge document attributes high dropout rates to theinadequate availability of facilities (only 60% of primary schools hadblackboards in the late 1970s and only 30% had some sort of library) and toteaching deficiencies. Over a third of India's primary schools employ a singleteacher to handle three or four classes. It is not unusual for teachers to haveto deal with 70-80 students on a given day. Not surprisingly, absenteeism onthe part of teachers is not uncommon; schools often remain without instructorsfor lengthy periods, while in some areas, classes are handled by unqualifiedindividuals who have been recruited by the appointed teacher. The Government'sreview document suggests that admission into teachers' colleges is not based onmerit. Because of this, teachers are poorly trained, and are especiallyunprepared to attend to the needs of disadvantaged and female students.Moreover, there are few incentives for excellence in teaching, while supervisoryand disciplinary procedures are not sufficient to prevent teachers fromneglecting their duties.

5.15 Teaching deficiencies lie behind the low retention of literacy andnumeracy skills by those who attend school. A 1986 study of disadvantagedstudents in Bombay found that most pupils were seriously deficient in languageability (Henriques). Results for standard two students in rural Naharashtra wereequally disappointing (Kurrien). Unsatisfactory retention of reading, writing,and computational skills is also a characteristic of products of the ambitiousNational Adult Literacy Program, launched in 1978 to combat adult illiteracy.This scheme, which reached only 17 million of an estimated target of 100 millionpeople in the 1978-84 period, appears to have had little or no impact on literacylevels.

5.16 Similar problems have been encountered in other sectors. Evaluationshave found the primary health and family welfare system to be operating at lowefficiency levels and probably at high unit cost. The coverage of the poor hasremained limited, particularly in states with the highest mortality and fertilityrates. Studies in Bihar, Orissa, Rajasthan and Uttar Pradesh reflect similarpatterns. Less than a third of all males and ten percent of females are shownto be familiar with or utilize publicly run health services; tribal localitiesare worse off than other areas (Krister). A 1985 Indian Institute of Managementreview concluded that lack of success in reaching poor beneficiaries wasattributable to financing problems (seen in staffing vacancies, lack offacilities, and also in limited funding for recurrent costs), various managerialweaknesses, and low levels of staff performance. Studies have also highlighteddifficulties in the functioning of ICDS. Concerns center on the low coverageof pregnant women and children under age three, poor coordination with health

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workers, inadequate training of staff, and vacancies in key field and supervisorypositions (Subbarao).

B. Social Service Spending Pattems

5.17 The performance of Government social service initiatives has beenimpeded by inadequate funding as well as inappropriate program design. Fundingissues are examined in the remainder of this chapter. The topics treated includetrends and patterns in overall and sector-specific social spending, the roleplayed by the Center in increasing outlays and shaping &-ctoral priorities, andways of overcoming the resource shortfalls which are apparent. The followingchapter explores the choices that need to be faced in each sector because ofcontinuing funding constraints and suggests strategies for reaching priority(i.e. high risk) groups with critical social services.

5.18 A review of expenditure trends indicates that public outlays onsocial services and welfare increased from 5.3% of GDP in 1976/77 to 7.6% in1986/87, and real per capita spending in these areas rose at a 5.65% annual ratein this decade (Ravishankar). However, the absolute level of spending, Rs.114per capita in 1986/87 on recurrent items (Figures 5.1), remaitns extremely low.Roughly 70% of outlays on social services and welfare goes to education andhealth (including family welfare and water supply). However, education andhealth accounted for only 57% of the increased spending in the 1976/77-1986/87decade. A rapidly rising share of such expenditures has been allocated tovarious welfare schemes, including subsidized sale of foodgrains through thepublic distribution system, relief measures in areas which experienced naturaldisasters, and housing and other subsidies directed at specific groups, e.g.scheduled castes and tribes and handicapped persons.

Figure 5.1Per Capita Revewu Exmpeiture on Social Sorulces

In ns. at 198841 prices

ith oSh~~Wt160 'ot meet W | tne India~~~~~~~~~~~~~

Source: RBI Monthly Bulletin, variou issues.

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5.19 A varied picture obtains at the regional and state level. Despitesome growth, social service and welfare spending in the East and Central regionsstill lags far behind other regions (Figure 5.1). Public outlays were especiallylow in Bihar and Uttar Pradesh, while high spending states included AndhraPradesh, Kerala and Himachal Pradesh (Annex Table 5-1). Andhra Pradesh recordedthe largest increase in the share of social services in total outlays (largelybecause of its rice subsidy scheme), while the largest decline in share occurredin Bihar.

5.20 Central grants finance about 9% of state social spending, a sharethat has remained fairly constant. The Center's direct "influence" (includingmatching grants) is only 10%, but there are great differences in the degree offinancial impact by sector. For example, the share of central grants in statehealth spending has been around 20%, as compared to 1% in education (through1986/87). These shares do not reflect spending on ICDS, a centrally-sponsoredscheme with 40% or more central funding. Central spending is usually contingenton creating ladditionality", i.e. assuring that Central funds add to and do notsubstitute for state outlays in a particular scheme. The Center's influence willbe less to the extent that states are able to shift their own resources to otherpriority areas while relying on central health, education and other funds to dowhat they would have done anyway.

5.21 Since central social sector grants have grown less rapidly than, forinstance, grants for economic services, states have had to fund increases fromtheir own revenues or by cutting other types of spending. Financial constraintshave clearly been responsible for the relatively slow growth in social serviceoutlays in some states. This is seen in the strong rank correlation (0.736)obtained when states were ordered according to a measure of financial health (lowdebt-service ratio) and the recorded increase in the share of social sectorexpenditures. Bihar is one state in which lack of resources seems to have helddown social spending. After growing by 35% per year in the 1976/77-1980/81interval, overall development outlays (current prices) rose by only 15% annuallyin the 1980s. Real spending on social services increased only marginally overthe 1980/81 figure (Annex Table 5-1).

5.22 Some states drew on resources from other sectors or shifted resourceswithin the social sectors to fund increased outlays on specific programs. Theclearest example is Andhra Pradesh, where rapidly growing social expenditureshave been allocated largely to the state's (subsidized) Two Rupees per Kilo ricescheme. Rapidly rising food subsidies in Andhra Pradesh, the only state withwelfare expenditures amounting to over 30% of social outlays, have beenaccompanied by maintenance of health and education spending at about the nationalaverage and by a sharp decline (from a fifth of all outlays in 1976/77 to a tenthin 1986/87) in capital investment in irrigation and power projects.

C. Education Outlays

5.23 Government educational expenditures increased from 2.6% of GDP in1976/77 to 3.4% in 1986/87. Still outlays remain far below the levels neededto achieve objectives such as universal elementary school attendance anderadication of illiteracy which India has set for itself. The absolute level($10 per capita in 1986/87) and share of government education opending in GDP

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in India are much less than those in many other developing countries includingThailand, 4.2% ((34); Malaysia, 8.5% ($156); Kenya, 5.5% ($16), and Egypt, 4.2%($32). As mentioned, the consequences of chronic underfundirg are detailed inthe Challenee of Education, the official document which prepared the ground forNPE. The Challenge paper draws attention to regional and rural-urban disparitiesin educational outlays. These funding shortfalls are manifested in the lack ofschools in 20% of India's villages at the time of the Fourth Education Surveyin 1978/79, and the large shares of schools without permanent buildings (40%),blackboards (40%), or drinking water (60%). (The just-released Fifth EducationalSurvey indicates that the share of schools without permanent buildings had fallento 14% in 1986.)

5.24 An updated view of spending trends end patterns by region appearsin Figure 5.2. Compared to the national average of Rs. 61, the real educationaloutlay averaged only Rs 44 (1986/87) per capita in the central states, Bihar andOrissa, a region (347 million people) with very low literacy levels and highschool drop-out rates (Annex Table 5-2). Per capita spending in these statesis 40% below that in Kerala and 20% below the level attained in Gujarat and

Figure 5.2

Per Capita Revenr Expeuditurm on EducationIn Is. at 19M1 prices North

980 vest vest

iM East B r 11~~~~~~1196F

ASource: RBI onthly Bulletin, various issues.

I ~and Maharashtra, two states which significantly increased educational outlays.On the other hand, spending in Tamil Nadu and Haryana was relatively lowconsidering the importance of industry and trade in the economies of these twostates. Bihar, Orissa, and Uttar Pradesh registered relatively low growth ratesof educational spending in the 1980s, despite low literacy and attendance rates,the lack of schools in villages and the absence of teachers, permanent buildings,drinking water etc. in sany schools (see Challenge of Education for details).

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5.25 This lack of significant relationships between expenditure levelsand needs (literacy and attendance rates), end between spending growth and needsis partly due to the limited role of central funds. As mentioned, through1986/87 education grants represented only 1% of state expenditure. Total centraloutlays, including grants and money spent in centrally run institutions,accounted for only 10% of government educational funding. The National Policyon Education (NPE) set out to alter this pattern of limited central involvementand to transform the spending picture in education. In 1987/88 NPE wasresponsible for an increase from Rs. 1.85 billion to Rs. 4 billion in centralspending on primary and middle schools, and for an increase from Rs.3.50 billionto Rs.8 billion in the annual plan allocation. However, the total allocationhas increased by only Rs. 90 million and Rs. 140 million respectively in 1988/89and 1989/90, less than the amounts needed to maintain real spending levels, andconsequently many of NPE's targets have been scaled back or postponed until theEighth Plan.

Tabte 5.2

EXPENDITURE AND REAL GROWTH OF SCMOLSCAM'WAL GROWTH RATES)

. . ..... .... ... .. .. ... ... ...... ... ... .. .... .. ..

1950/51-60/61 1960/61-70/71 1970/71-80/811980/81-86/87~~~~~~~~~~~. ................................................................... ............................................ ..............

Expenditure an Schools(nominal) 10.7 13.8 14.5 16.9

Elemmntary 10.2 13.3 14.4 16.6Secondary 11.6 14.6 14.6 17.4

Wu,er of Schools 5.6 3.0 2.2 1.6L2Etementary 5.5 2.8 2.1 1.5L%Secordary 9.0 7.8 3.3 3.61.

udber of Teachers 6.3 5.3 3.0 2.411ELementary 5.7 4.6 2.7 1.6ftSecondary 8.9 7.8 3.8 4.2

Mono: Consruer Price Index 1.9 6.2 8.0 9.0. .. .. .. ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

La Refers to the period 1980/81-84/85.Source: Ninistry of Human Resource Developnent, Selected Educational

Statfstics, different issues.

5.26 An examination of the composition of education expenditures showsdiscrepancies between needs and outlays. Some misallocation is indicated in themore rapid growth (relative to elementary level) in the number of teachers andschools at the secondary level (Table 5.2). Low elementary school attendancerates and high drop-out rates suggest that a "tilt" in outlays towards theprimary level would be desirable. However, the share of different levels intotal education outlays remained virtually unchanged in the 1976/77-1986/87period (Table 5.3). In contrast, a recent study shows that developing countrieshave typically devoted 60% or more of educational expenditures to primary (grades1-5) schooling alone during the "drive" to achieve universal attendance (Colletta

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and Sutton).

5.27 Some surprising shifts in composition have occurred in individualstates. For example, the spending pattern changed in West Bengal towards greatersecondary but away from primary level expenditures. This change in allocationis difficult to comprehend in view of the high primary school dropout rates inWest Bengal. An explanation may lie in the ability of private secondary schoolowners to lobby for and obtain state support. West Bengal government grants toprivate "aided" secondary schools increased six-fold in the 1976/77-1986/87 andnow exceed primary level outlays.

Table 5.3

COPOSITION OF EDUCATION EXPENDITURES(percentages)

rIndia vest Benral1976/77 1986/87&b 1976/77 1986/87

Elementary Level EL 47.5 46.8 42.7 39.6Secondary Level 32.3 32.6 37.6 4.1Technical and Higher Level 20.2 20.6 19.7 16.3TotaL 100.0 100.0 100.0 100.0of whichCentral Furds 10.7 10.3 N.A. N.A.State Funds 89.3 89.7 N.A. N.A.

La Includes prim-ey and middle schools.lb Estimated from Ministry of Human Resources data.Sourcees: 1. Combined Revenue and Finance Accounts of Center and States,

1976/77.2. West Bengal Goverment Budget, 1976/m and 1986/87.

5.28 Spending on "aided" schools may lie behind a puzzling feature of theoverall education funding picture. As seen in Table 5.2, educational expendituregrew more rapidly in the 1980s thatu in previous decades despite relatively slowgrowth in the number of teachers and schools. This increased funding does notappear to have been used to upgrade existing facilities--The Challenge ofEducati document makes no mention of any ongoing improvement efforts in itssurvey of the elementary school scene.

5.29 Alternatively, expenditure increases may have been used to raiseteacher's pay allowances. Staff salaries, which account for 85% of allexpenditures (95% at the elementary level), are adjusted for price increasesthrough the payment of dearness allowances (D.A.). However, these inflationsupplements are only paid in government-run institutions which account for 40%of school outlays. DAs are not paid in many aided schools operated by panchayatsor private trusts (nor are teachers' unions active in these schools). It isunlikely therefore that teacher's salaries as a whole grew faster than theinflation rate. If average salaries grew in line with the CPI then salary costswould have grown by 8.3% in the 1950s, 11.8% in the 1960s, 11.2% in the 1970s,and 11.6% in the 1980s. Actual expenditure grew at a much higher rate in the

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1980s, 16.9%.

5.30 These calculations point to large leakages in public educationalexpenditures. Roughly 60% of school funds are allocated as grants to aidedinstitutions over which, apart from occasional and perfunctory inspections,state authorities have little control. These schools may be absorbing fundingincreases without providing additional services. There appears to be a need toincrease accountability and control over how money is spent.

5.31 A final point is that fees and other revenues represent aninsignificant aspect of India's education funding scene. The most recent(1981/82) all-India data show that receipts for educational services representedonly 2.11% of expenditures. Such revenues constituted a negligible share (0.29%)at the primary level, but this is justifiable in view of the high social returnsto basic education. However, the modest contribution of tutition and fees atthe secondary (2.8%), technical (3.6%) and university (2.7%) levels is much lessdef.ensible, because of the non-poor background of most students in suchinstitution* and the enhanced income-earning prospects which. await them.

D. Health Expenditures

5.32 Public spending on health-related services amounted to only 1.6% ofCDP in 1986/87, up from 1.2% in 1976/77. The share of health spending excludingwater and sanitation rose from 0.96% (1976/77) to 1.15% (1986-1989). Brazil(2.4%), Malaysia (2.5%), and Kenya (1.8%) are among the developing countriesinvesting proportionately more of GDP in public spending on health (not includingwater). Low average levels of spending per capita are noticeable in the numerousinfrastructure gaps and staff vacancies in the primary health system (See Chapter6). At the state level, Bihar, Madhya Pradesh and Uttar Pradesh had the lowestoutlays per capita (Table 5.4). Spending per capita remained constant in MadhyaPradesh during the 1976/77-1986/87 decade while the share of health in revenueexpenditure, an indication of program priorities, fell by nearly half. A numberof other states, including Andhra Pradesh, Karnataka, and Kerala, experienceda falling health share, suggesting that little or no "additionality" accompaniedthe substantial flow of Central funds into this sector. Kerala, which fell fromsecond te ninth among the states in outlays per capita, seems to have encounteredproblems in continuing to finance a program that has brought broad-based healthbenefits.

5.33 The composition of health spending is difficult to determine becauseof the involvement of numerous ministries and departments in funding oradministering health and related services. Medical services (includinghospitals, dispensaries and medical stores), public health (including theprograms for controlling malaria, tuberculosis, and leprosy) and medicaleducation are under the Department of Health, in the Ministry of Health andFamily Welfare. Rural and urban family planning centres, payment of incentivesand awards for family planning, and expenditures on mateinal and child health,including universal immunization, mass education and training of village levelhealth workers are all under the Department of Family Welfare. Meanwhile, theICDS field worker, who falls under the social welfare department (except inGujarat where the program is run by the health department), has variousprotective and promotive health tasks in ker job description. Finally,

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Table 5.4INTER-STATE COIPARISON OF NEALTH EXPENDITURE A

Share of Totatl Revee Real Per-caft Revenua eExuau ture mU Exaditur

(80/St R8.) k......_...._. ...... ............ .......... .................. ._........................................... .

1976/77 1986/87 1976M 1986/87..... .___;.;...... .. ... .;.;.;..... ;......... _........... ....

ndhra Pradesh 10.8 8.7 18.1 30.4Sihar 10.1 8.7 8.7 1S.0GuJorat 9.8 10.1 20.2 39.6Harywna 8.6 9.7 20.4 37.5NImchal Pradesh 9.8 10.8 31.4 63.7Karnataka 10.5 7.4 20.0 23.2Kersla 11.4 8.6 24.8 29.3Nadhy Predesh 12.6 7.0 17.6 18.3Naharashtre 8.9 11.1 20.3 44.7Orfssa 9.4 11.0 15.7 VI.2Punjab 8.9 8.3 24.1 32.8Rajasthan 11.9 11.4 21.4 32.8TMI I adu 12.7 11.4 22.9 33.3Uttar Pradesh 8.3 9.3 10.0 19.1vest Sengat 14.1 9.3 22.0 25.4IDIA 11.1 10.6 17.6 29.5......... ................. _. ........ ............ .......................... ._........... ....

iQ Including fanily weltfare and water supply.- Derived using CPI as the deflator.Source: ReI Nmnthity Butlethn various Issues.

expenditure on drinking water and sanitation was under the Ministry of Healthuntil 1973, but was subsequently transferred to the Ministry of Works andHousing; at present, urban water supply is under the charge of the Ministry ofUrban Development, while rural water supply is the responsibility of theDepartment of Rural Development, in the Ministry of Agriculture.

Table 5.5CENTRAL GRANTS TO STATES (HEALTH SECTOR)

.................... .................... ............................................................................... _

19766/77 1980)81 1986187 (RE)X of State X of State X of state

Re. Govt. Exp. Ro. Govt. Exp. Rs. Govt. Exp.(billion) (billion) (billion)

........................................... ........................................................................................

Fe ily Welfare 1.39 85X 1.14 841 4.72 801Vater Supply - - .97 201 2.94 201PubtIc Health .54 451 .62 291 1.12 n.a.Total Health Sector 1.93 211 2.73 171 8.78 201................... ................. ............................ ................. ............................ .....

Source: 1. Ninistry of Finnce, Indfan Econouic Statistics, Decebor, 1987.2. Central Governmmnt Budget, 1987/U.

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5.34 A further complication is the large role (compared to education),played by the Center in developing health-related services. Not including itsICDS outlays (an estimated Rs. 15.2 billion in 1987/88), the Center financesabout a quarter of public expenditure in the sector and a fifth of the spendingby state governments. Central grants have been directed mainly towardspreventive health under three major budget headings--family welfare, water supplyand public health. Trends in spending, category-wise, are shown in Table 5.5.

5.35 Given this pattern of health administration and accounting, theallocation of funds, for example, between curative and preventive or rural andurban services cannot be precisely identified. Rural primary health services,for inistance, appear both under 'medical services" and under "family welfare",and it is not easy to separate out the rural component of "medical services" inthe old budgetary classification (that is, up to 1984/85 accounts). The

Table 5.6CHANGING COMPSITION OF HEALTH EXPENDITURES La

Present Cofmosition Real Growth (X D.a.) /b76/77 88J 86/87 77-81 81-87

Wedical Services 45.6 43.0 10.8Medical Education 6.5 6.9 54.4 13.9 5.2Public Health 13.3 13.4 12.7i Famity Welfare 17.4 8.4 13.7 -6.3 17.1Water Supply 17.2 28.3 31.9 27.7 10.1

Total Health Sector 100.0 100.0 100.0 12.5 7.9of which:

Central Furds 27.6 22.1 24.5 6.4 9.9State FuLds 72.4 77.9 75.5 14.6 7.4

/ Including revemwe expenditures and capitat outlay of Central andstate governDents.

Lb Derived using CSOs deflator for private household conswption ofhealth services.

Sources: 1. Central Government Budget, 1987/88.2. Ministry of Finance, indian Economic Statistics, December, 1987.3. Combined Accounts of Union and State Goverments, 1976M7 and

1980/81.4. RBI Monthly Bulletin, October 1987.

different elements of health sector expenditure are shown for India as a wholein Table 5.6, and for one state, West Bengal, in Table 5.7. As envisaged in theNational Health Policy, the share of expenditure for medical services,medical education and public and public health declined from 65% to 54% overthe previous decade (and especially since 1980/81), while the combined share offamily welfare and water supply rose (Table 5.6). Expenditure on water supplygrew most rapidly in the late 1970s (real growth rate of 28% per annum), while.azrily welfare, largely funded by the Central Government, has been the

131

fastest growing subsector in the 1980s. Data for West Bengal (Table 5.7)show that within medical services, the share of rural services has risen,indicating that the share of urban curative services has fallen even moresteeply than the combined share of medical and public health shown in Table5.6. This suggests that the National Health Policy has brought changes in thecomposition of health expenditures, at least in one major state.

Table S.7WEST BENGAL: RURAL CONPONENT OFHEALTH SECTOR EXPENDITURE La

(Re. millions at current prices)

........................................ ............................................... _..... .. .. .19716M7 1980/81 1966/87

Rural Health Services 124.2 180.8 394.3Altopethf 119.2 170.5 366.3Sub Health Centers 75.7 123.4 276.3Primary Health Centers 5.2 6.0 8.1Hospitals & Dispensaries 38.3 41.1 81.9

Indian Systems 5.0 10.3 28.0Rural Family Welfare Services 18.1 26.4 181.5Rural Water Supply 49.4 125.8 174.7Total Rural Services 191.7 333.0 750.5Total Health Sector 827.0 1344.1 2597.2(Rural Share) (23X) (25X) (29X).................................................................. ................................................. .. .

La Refers to reverme expenditure.Sources: West Bengal Governient Budget, 1978/79, 1982/83 and 1988/89.

5.36 The composition of government expenditure on drinking water supplyand sanitation services is shown in Table 5.8. What stands out is the low andfalling share of sanitation and sewerage, which are as important as cleandrinking water for health and hygiene. Unfortunately, the composition of totalexpenditure in recent years is not known, and centrally-funded outlays, forwhich details are available, only account for 20% of total expenditure. In1986/87, centrally funded expenditure amounted to Rs. 323 crores, of which 96%was on rural water supply programmes and only 3% on sanitation.

5.37 Finally, fees and other revenues comprised only 6.5% of healthoutlays in 1981/82, the most recent year available. Revenues account for 10%of spending on curative services and less than 3% of outlays on piblic healthand family welfare. Although these shares are larger than for education, theyremain modest and could be raised substantially. Modest user fees are collectedin a number of states. For example, district hospitals in Maharashtra and Punjabcharge according to a schedule which differentiates between the type of servicerendered and the emp'.oyment status (government employees get free services) andincome of the patient (Mahar). However, less than 1% of total costs is recoveredin these states; the fee system may cost more to administer than it generatesin extra revenues. Moreover, all revenues are transferred to State revenuedepartments, with no guarantee they will be returned to the health sector.

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Tabt@ 5.8CNIPOSITION OF EXPEIIDITRE ON

A1Et SUPLY AN SUNITATION... ,, .. .......... ................ .. ........ ........... ...............

1976m - 19081Re. Cr. X Rs. Cr. I(miltitn) (miltUs)

,.,,........... ........ ........ ................ ,...... .... ...... 4................. ............

Rural Water Swppy Progr 602 38 2590 52Urban Water Supply Progra 593 34 1256 25Sanitatici & Sewerage Srhw 74 4 98 2Ninism Needs Progrm 87 5 447 9Nachinery & Equipment 27 1 109 2Director & Administration 177 10 216 4Others 124 7 307 6TOTAL ig 1754 100 W502 100

,. ._. _... .... .. _..................... _..............

L& Including expefditure of central mid state oovernmnts.Swrce: Combined Revemis and Finance Accounts 1976M ed 1980181.

E. Overview and Options

5.38 To summarize the discussion thus far, data on social service fundingpatterns are weak and contain puzzling features (e.g. growth in the number ofteachers and schools much below the rate of increase in expenditures, uncertaintyas to exact amounts spent on rural, non-curative health services). Nevertheless,the evidence points to several problematic aspects in the funding picture.First, resources allocated to the social sectors have been far below what isrequired in view of the continuing low educational and health status of much ofthe population, and the amounts invested in those developing countries that havereached much higher life expectancy and literacy levels. Second, the allocationof available funds across states and between and within sectors has not beenconsistent with demonstrated needs. Social spending remains much below averagein the states with the lowest educational and health indicators. At the sametime, education and health have lost ground in many states to various welfareschemes in the allocation of social sector resources. And within the health andespecially the education budgets, there has been no significant shift incomposition towards services (e.g. primary schooling and health) which benefitthe poor disproportionately.

5.39 A number of factors have contributed to this generally adversepicture. Apart from Kerala, state governments tend to regard education andhealth-related programs as social services which compete with other welfaremeasures, not as essential inputs for development. They find it more convenientto launch broad-based, largely untargeted programs (such as the Two Rupees perKilo rice scheme in Andhra Pradesh and the Chief Minister's Mid-day Neal Schemein Tamil Nadu) which are easier to administer and have greater public acceptancebut which tend to be more costly overall and less effective in reachingdisadvantaged groups. This welfare view makes states less anxious to monitorexpenditures and evaluate the effectiveness of programs.

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5.40 The funding picture is unlikely to improve dramatically in the nearto medium term. Hea'lth and educntion expenditure needs continue to grow byvirtue of population growth. Moreover, the goals of universal schoolattendance, increased literacy and reduced fertility and infant mortalitytranslate into large levels of additional remedial spending that will need tobe sustained. Clearly one option is to reorient and reduce the scope of theprimary health and education services currently being provided. As discussedin Chapter 6, existing multi-tier management and staff-intensive delivery systemsare costly undertakings in which service quality quickly deteriorates (resultingin underutilization) when needed resources are not available. Opportunities mustbe sought for introducing sharper priorities, better targeting ana more efficientprocedures in delivery efforts--some suggestions along these lines are providedin Chapter 6.

5.41 Incentives for cost-effective performance need to be enhanced notonly in primary education and health care, but throughout the social sectors.Currently, the complex system of intergovernmental transfers and spending bydifferent agencies under assorted headings discourages cost control. The database, including service statistics and cost information, will have to be improvedif efficiency issues are to be tackled. Moreover, greater economic input intohealth and education planning will be needed. Unfortunately, the economics ofhealth and education have been neglected in Indian universities.

5.42 Financial exigencies suggest that, in addition to efficiencyimprovements, a more determined effort needs to be made to recover servicedelivery costs or otherwise raise revenues from beneficiaries who can afford topay. The government's Challenge of Education document took a clear position inthis regard in its finding that "there is no justification for subsidising highereducation to the extent it is being done today' (para 3.40). As mentionedearlier, only two percent of expenditures on higher education are recovered fromtuition fees and other payments (less than c.ne percent of elementary outlays andthree percent of secondary level spending are so recovered). The case forsubsidizing higher education is not strong, inasmuch as gains accrue primarilyto the beneficiary rather than to the society as a whole and since the poor areunable to afford the tutoring and other private costs involved in reaching higherschooling levels and thus are underrepresented in student bodies. The Challengereport suggests raising funds by reducing subsidies at all levels above primary,levying special taxes and encouraging private contributions. A shift to greaterprivate financing of higher (or secondary) education would need to becomplemented by provision of widely available student loans and scholarships,awarded on the basis of economic need anid academic merit.

5.43 Similar considerations apply in the health sector, where revenuesrepresent a tenth or less of outlays. The system of large, nearly uniformsubsidies introduces numerous distortions. For example, modest fees encourageclients to use high cost hospital services, even though their needs could beaddressed by out-reach workers or in local clinics. Meanwhile, the externalitieswhich characterize preventive health initiatives are not present in the case ofcurative services. The latter represent largely private goods which non-poorbeneficiaries can and should pay for. The extensive recourse to private medicalpractitioners points to a willingness and ability to pay across much of theincome spectrum. NGOs have also demonstrated that clients will 'accept" modest

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fees, especially if services are of high quality. 'What this suggests is thatpayments (for drugs, specific medical services and so forth) be used moresystematically. Moreover, other arrangements including wider coverage ofinsurance schemes, health maintenance organizations and the like need to befostered. Finally, experi.entation is needed on ways of preventing such chargesfrom reducing the income of the poorest households. The experience of NGOs inIndia with a modest basic fee and income-linked charges for other services seemspromising in this regard.

5.44 As long as public health and education expenditures have to berationed and choices have to be made in the allocation of public resources, thepublic sector should concentrate on provision of services that have largeexternalities and that the nongovernment sector either cannot or is not likelyto provide. The private sector has the potential to provide health and educationservices to consumers who are willing to pay. Private suppliers (includingNGOs) already play a large role in health (rural and urban) and in education(urban areas), providing services to all but the most indigent. These activitiesare tacitly acknowledged in some states where an informal division of labor asregards service delivery may already be emerging.

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Chaptr 6

IMPROVING MANAGEMENT AND DELIVERY OF SOCIAL SERVICES

A. Stucue of DOlswry Systems

6.01 The health, education, and nutritional status of India's poor is reasonfor serious concern. Yet, as discussed in Chapter 5, the programs designed toimprove social conditions have encountered funding constraints, resulting inshortages in infrastructure and trained staff and quantitative and qualitativedeficiencies in services. Efforts are needed to find additional resources tosupport critical social initiatives, particularly in states with the largestconcentrations of poverty. This will likely involve shifts in Central and statelevel sectoral spending priorities (e.g. allocating more to education and healthand less to food subsidy schemes which are insufficiently targeted) as well asreductions in subsidies to higher education, curative medical care and otherservices which generate few externalities and which are heavily used by the non-poor.

6.02 At the same time, since resources are likely to remain constrained itis important to look for opportunities to make better use of the funds nowallocated to primary health, education and related initiatives. This willinvolve identifying high priority functions and activities and focusing servicedelivery on high impact tasks. This chapter explores ways of improving thedelivery of crucial social services. The issues and key choices that arise inthe context of individual sectoral programs are discussed first. Suggestionsare then offered on how to reorient and sharpen the focus of service deliveryactivities.

6.03 Government social service initiatives in different sectors have muchin common. They all seek, for instance, to reach the poor by establishing aninstitutional presence, including trained staff handling various service deliverytasks and functions, at the village level in rural areas. (The neighborhood isthe focus of attention in cities and towns.) Community-based staff are backedup by supervisory and specialized support personnel operating at the district,block and sub-block levels. Arrangements for delivering various social servicesin rural settings are depicted in Figure 6.1.

6.04 In the health and family welfare svstem, services are delivered bythree cadres of "peripheral workers", including male and female multipurposeworkers (HYWMs, MPWFs), and village based health guides (VHGs) and village dais(midwives) who have been trained by the Government. A male and female pair ofMPWs caters to approximately 5000 people dispersed in four or five villages.There are currently over 100,000 MPWFs, 90,000 MPWMs, 390,000 VHGs, and 538,000trained dais working within the rural health system. MPWs operate out of Sub-Centers (SCs) located in nodal villages--there are 100,000 such centers.

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Figure 6.1

Socfal S§e$vie Detivery Arran.mment In Rural Areas

Nealth/Famly Wetlfre ICDS Education

District

Civil District District DistrictSurgeon Rea th Project Educationa District Officer Officer L OfficerHospital

Block Child AssistantHealth Asst.. " Medical Development EducationFeale Officer Project Officer Officer

\ I l ISub Block Multi-purpose Nukhy School Inspector

Workers: Sevika: 30-40 schools5000 pop. 20000 pop.(Female Male)

Vlatt Village Health Angsmadi School TeacherGuide, Trained Worker: at least 2: 300 pop.1kDal: 1000 pop. 1000 pop. upto 4:1000 pop.

. ............... ........ , ,,, ,, , _ ,,, ,, ,,, ,, ..........................................................................

Note: Cn oly In districts ihich are s 70X covered.lb Under Operation Blackboard and New Edueatfon Policy.

6.05 Health services are also delivered by para-medicals and doctors atPrimary Health Centers (PHCs). PHCs formerly served an entire block (100,000-120,000 people). These establishments are being upgraded and renamed Communit-Health Centers (CHCs), which are to provide surgical, gynecological and otherspecialized curative services (in theory on a referral basis), while PHCs arebeing set up for every 30,000 people at the 'sub-block" level. Over 14,000 PHCsare currently in existence. The scaled-down PHC team is expected to consist ofa medical doctor (designated as officer-in-charge), a community health officerwith administrative and supervisory duties, a block extension educator whoorganizes training, education and mass media programs, male and female healthassistants who supervise MPWs, a laboratory technician and a data processor.

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6.06 The ICDS scheme has village-based Anganwadi Workers (AWWs), with otherpersonnal, Mukhya Sevikas (MS, one per twenty AWUs) and Child Development ProjectOfficers (CDPWs, one per block) being responsible only for supervision andadministration, and not for service delivery per Ae. There are over 160,000AWWs, 5,000 MSs and 1,009 CDPOs currently working in ICDS. The 2rimary educationsystem is structurally analogous to ICDS. There is one category of peripheralworker, the village school teacher, with supervisors in place at the sub-blockand block levels. However, unlike ICDS, there is supposed to be more than onefunctionary per village school. Some functional specialization like that in thehealth set-up also occurs in the education system, i.e. separation of lower anldhigher primary (middle) schools and secondary schools. There are over 500,000primary schools and 60,000 secondary schools in operation.

6.07 A second common feature of these programs is the assignment of numerousand diverse activities and responsibilities to field staff. For example, thejob description of the "multipurpose' female health worker lists 47 separatetasks to be undertaken on a regular basis, including curative care for a widerange of ailments, various duties relating to promotion of family planning andthe health of mothers and children, training of midwives and female leaders,vital registration, and numerous record keeping, administrative and maintenancefunctions. The work of the ICDS field worker, the AWW, encompasses a whole hostof nutrition, health, and child care (pre-school-related) tasks, while thecommunity teacher's activities include conducting classes for students ofdiffering ages and backgrounds, tutoring, assistance to adult literacy programs,community liaison activities, and record keeping.

6.08 The large number of jobs allocated to field workers is clearly linkedto the objective of providing integrated packages of services to broad audiences.For instance, the National Health Policy aspires to provide "health for all" bytackling "the entire range of poor health conditions," while the mandate of ICDSis to facilitate the "total development" of the child by making availablemutually reinforcing health, educational, and nutritional inputs.

6.09 However, the multi-purpose character of the field worker's assignmentis also related to another shared characteristic of service delivery initiatives,uncertainty as to the scope and intensity of demand for specific services. Thisarises in part because some of the items being offered, e.g. temporarycontraceptive methods, immunization, growth monitoring, adult literacy, etc.,are relatively new and not well understood by many in the potential audience.Uncertainty about the strength of demand is also due to the presence of competingprivate providers in many settings. Studies typically find that consumers,including the poor, turn to private physicians, ayurvedic workers, pharmaciesand so forth, for most curative needs (Stout). Meanwhile, private providers ofprimary level and other education services are commonplace, especially in urbanareas. Uncertainty as to what the market wants also stems from the weak linkagesestablished with local communities, probably because fieldworkers areoverburdened and lack the time or motivation to build rapport with clients,ascertain local circumstances and needs, and respond to their requirements.

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6.10 Task multiplicity is associated with management problems at differentlevels -- these difficulties have been encountered in all of the programs underreview. For fieldworkers, a paradoxical outcome of this overloading of jobs,including many ad hoc tasks allocated by superiors, is to impart an open-ended,"to be filled in" dimension to all field activities. This is because there areoften too many tasks of apparently equivalent priority to be performed in thetime allotted. This gives workers some freedom in deciding how to manage theirtime, what to attend to and what to ignore. Additional degrees of freedom (anduncertainty) derive from the fact that functionaries may receive instructionsfrom several supervisors, and from the delegation of similar or at leastoverlapping tasks to several workers oper&ting in the same locality. Thechallenge for supervisory level staff is to manage cadres of often hard to reachfield personnel, many of whom are not well trained, lack motivation and adequate

; understanding of their responsibilities, and are unable to provide qualityi service. Each of the programs under review relies on pre-service and in-service; training to improve fieldworker performance. There is clearly scope as well for

better defining workers' activities and responsibilities and setting realisticand appropriate priorities.

6.11 A final shared characteristic of these management and staff intensivesocial service programs is their vulrerability to funding constraints. All ofthese programs are currently making do with a less than full complement of staffand less than adequate infrastructure support. Resource shortfalls are reflectedin reductions in service supply in the short run and in a lowering of servicequality, which can have costly longer term effects on demand and on the publicimage of programs. Since funding is likely to remain scarce, it is importantto identify the incidence of resource constraints, to prioritize functions andactivities and to focus service delivery on the tasks which can have the greatestsocial impact. These issues are now addressed in the context of individualsector programs.

B. Health

6.12 The primary health care system has achieved an impressive physicalpresence in a relatively short period of time and at low levels of investment.However, because of shortages which persist in infrastructure and trainedmanpower, this extensive coverage has not been accompanied by intensive use,especially by the rural and urban poor. The number of facilities at thebeginning of the Seventh Plan is shown in Table 6.1. The Mid-term Appraisal ofthe Seventh Plan indicates that additional PHCs and SCs were opened as scheduledduring 1985/86 and 1986/87, but there was a shortfall in the number of new CHCs.The establishment of centers is not itself a valid indicator of the availabilityof usable facilities--studies show that many centers have been hastily openedin unsuitable locations, while rented offices, which predominate in the case ofthe most crucial of all facilities, the subcenter (SC), are often located inpoorly maintained structures which lack living quarters for staff. By the endof the Seventh Plan only 42% of SCs are expected to be housed in facilitiesdesigned and constructed according to service requirements.

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Table 6.1SEVENTH PLAN: PRIMARY HEALTH CARE INFRASTRUCTURE

.. ..... ...........................................

Total Position Target forRequired La an of 4/1/85 198S-90

1. Commity Health Centers 5417 649 1.5532. Primary Health Centers 23.000 11.000 12.0003. center 137.000 83,000 54,0004. Sub-centers with own

building 137,000 33,475 23.837......... ... .................. .............. ................... .............. .............................. ..... ........... .

Source: The Seventh Five Year Plan, Votunc 11 Plaming Commission,Goverrunent of India.

La As per coverage according to population norms.

Table 6.2HEALTH OFFICER VACANCIES

Percentage ofCategory Vacancies Budgeted Posts

PHC maedical officers 3,730 16.8%Health Assistants (male) 3,890 13.6XHealth Assistants (femaLe) 4,001 18.8XMulti-purpose worker (male) 5,020 5.68Multi-purpose worker (female) 7.283 6.4X

......... .................... ._.................... ................................................ .

Source: Ministry of Health and Fa_lmy htefare, February 1968|

6.13 The position as regards vacancies of key staff is shown in Table 6.2:The figures suggest substantial shortages in the medical officers and supervisorystaff (Health Assistant) categories. There are more serious shortages at thestate level. For example, Andhra Pradesh has a 25% shortage of medical officers(who run the local primary health system); similarly Madhya Pradesh, Maharashtra,Bihar, Kerala, Orissa and West Bengal have severe shortages of MPWFs, andHimachal Pradesh, Maharashtra, Punjab, Tamil Nadu and West Bengal have manyvacant MPWH positions.

6.14 The effects of these and other manpower shortages is exacerbated byless than adequate preparation and direction of existing staff. Surveys and casestudies have pointed to various consequences of weak pre-service and in-servicetraining, and inadequate supervision of workers in different positions.' Theseinclude the limited technical competence of MPWFs (50% of those interviewed ina 1988 survey did not know how to prepare oral rehydration salts or the lengthof time to sterilize a syringe between injections); serious gaps in the knowledgeand basic skills of health guides (VHGs); limited appreciation on the part of

iThJ section draw* mInly ea S.J. YrLttr'- 1986 review of wvailable servIce utilltion stv4ies.

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different PHC staff of the need for teamwork and the specific tasks assigned toother workers; difficulties experienced by staff at all levels in interactingwith and establishing good working relationships with community leaders,indigenous medical practitioners as well as prospective clients; and poormanagement skills of block medical officers (no longer required to have a diplomain public health) who face daunting challenges running a multifaceted programthat is supposed to serve up to 100 villages.

6.15 Inadequate in-service orientation and supervision may account for theoften cited lack of sensitivity of workers, and the indications that staff areoverburdened. (Field workers often admit to feeling isolated, helpless, confusedabout their priorities, incompetent and frustrated.) For instance, the Ministryof Health's handbook on Job Responsibilities of Staff of the Primarv HealthCenter does not specify how to set priorities among the 47 tasks assigned toNPWFs. This allows workers some scope for determining use of time, but alsoincreases the likelihood that most effort will be devoted to meeting targets.It is estimated that more than half of all health worker activities are directlyassociated with family planning, simply because Centrally determined targets needto be met (Krister). The targets assigned for other schemes, such as theUniversal Immunization Program (UIP), have added new imperatives. Given such#guidelines," there is little encouragement for medical officers and staff tocarry out the local situational analysis needed to respond to clients' needs.

6.16 Operational difficulties do not stem entirely from deficiencies instaff training and supervision. Selection criteria are sometimes faulty. Forinstance, female VHGs could have dealt more effectively with village healthproblems than the males initially chosen (Krister). Other factors includeinadequate supplies of drugs, a health information system which scarcelyfunctions, intezference in personnel matters by politicians, and poor livingconditions which lead to high turnover and frequent absences.

6.17 These problems account for the low use of facilities by the poor.For instance, only a third of the rural men and 10% of the women in Orissa,Rajasthan, Bihar and Uttar Pradesh utilized PHC services. Participation rateswere even lower in tribal areas where staff vacancies are endemic (Krister).These studies attribute non-use to ignorance of poor people about the range ofPHC functions and the duties of staff; unpopularity of the health system, in partbecause of past coercive initiatives in family planning, previous unsatisfactoryexperience of medical officer or staff unavailability, lack of drugs, and chargesfor so-called "free" services; and a rarity of outreach by health workers in moreremote villages and tribal areas.

6.18 This discussion suggests that attention needs to be given tostrengthening the performance and quality of PHC services and establishing thesystem's credibility in the public eye. Additional resources will help to reducestaff vacancies, improve training and so forth. However, stepped-up budgetarysupport needs to be accompanied by a clearer vision of the purposes andpriorities of the multi-tiered, staff-intensive PHC network.

6.19 Currently, the health care system aspires to provide a broad spectrumof services irrespective of the epidemiological and other characteristics ofparticular areas. This uniform package covers all age groups and encompasses

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everything from emergency treatment and specialist curative care on an out-patient or in-hospital basis in CHCs to "low tech' field-based initiatives withpreventive and/or motivational objectives. At its current level of developmentand funding, the system cannot deliver all of these services at acceptable levelsof quality. Therefore, service provision needs to be focused somewhat moresharply and staff tasks, training, and management need to be adjusted and toned-up in line with a reorientation of purpose. Some suggestions follow onreordering program priorities in the PHC system.

o The focus should be on women. infants, and young children. Women,especially those in the reproductive ages, are a crucial entry point because oftheir vulnerability to health problems, their low utilization of existingfacilities and because they are instrumental in the health care and practicesof other household members. A key premise here is the centrality of thehousehold as a physical setting (shared water, cooking, sanitation and sleepingfacilities) and a decision-making unit in which health (as well as reproductiveand nutritional) outcomes are determined. Providing nourishment, maintainingcleanliness, and caring for the young and the sick remain the preserve of women,making them the 'guardians of health."

o The main objective of health 2olicy. in this aWproach. would be toiprove the capacity of women in their role as the primary health resource anddecision maker in families. This represents an activist, out-reach basedstrategy aimed at establishing a durable relationship and dialogue with femaleinterlocutors. This 'channel" can be used to broaden health skills andcompetence generally, and to convey information on specific health problems andpreventive and curative options. It follows that the primary responsibility offield workers is not the delivery of particular services but the establishmentof a sustained relationship with local women.

o SThe exact services to be provided ought to be determined through aconsultative 2rocess. resulting in a package of services that fits local needs.This requires a careful review of disease patterns, nutritional needs, householdperceptions and preferences, and locally available resources. Clearly, the samepackage is unlikely to be appropriate in all circumstances. For instance, theattention given to diarrhea control, nutritional deficiencies, and treatment ofrespiratory infections may be larger in some areas than that allowed in theexisting uniform "menu" of services. Interventions could comprise a "corepackage" of services which would be delivered state or nationwide, and whichwould probably include a number of alternative contraeeptive methods,immunization, diarrhea control, detection and referral of high risk pregnancies,and treatment of acute respiratory infections. The services made available couldalso respond to particular local needs--for example, to treat diseases such asgqiter or lathyrism which may be concentrated in particular areas or amongparticular client groups--ana to local perceptions of needs, even where thesemight not seem to be of the highest priority in strictly epidemiological terms.

o The work of the MPWF is crucial to an outreach-based approach and|me needs to be made more tractable and her work more effective.

Currently this field worker is supposed to perform 47 separate tasks, while, onaverage, serving a population of 5000 (3000 in tribal areas), includingapproximately 800 couples of childbearing age, 400 children under four, and 150

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pregnant women at any given time. In theory but only to a limited extent inpractice, the MPWF*s efforts are supported by other village level staff--theMPWM, the VHG, and the trained dai. Most MPWFs are unaware of central governmentguidelines limiting their attention to households with ante- or post-natal casesor infants (about 400-500 families). Most work to ins ructions which call fora monthly visit to all households, i.e. 50 or so a day, an impossible task.Unable to do everything, MPWFs concentrate on easier tasks (they spend most timewith families living near SCs) and on those they are pressured to perform (e.g.assigned targets for sterilization and now, immunization).

o Since not all potential clients can be visited regularly a systemof rationing or grioritizing is needed to enhance the MPMF's effectiveness.Calculations suggest it would not be reasonable to exiect this worker to keepin regular contact with more than 256 households (16 days a month x 4 hours dailyx 4 visits an hour) as opposed to the present 'target" of 400-500 families.Two guidelines may be suggested for determining which 250 or so households toselect for intensive coverage. First, all 3regnant women and women with children0-6 months (about 150-200 per subcenter area) should be visited. There arestrong technical reasons for this. On the health side, ante-natal care and theidentification of high risk pregnancies are high priority interventions; so isspecial care for the young infant, given high rates of infant mortality. Onthe nutrition side, better feeding and vitamin and mineral supplements duringpregnancy are critical for the avoidance of low-birth-weight babies at higherrisk of both mortality and morbidity; and good nutrition during lactation isimportant to ensure adequate supplies of breast-milk. On the family planningside, the relationshtp built up through continuous care during pregnancy andlactation is likely to be the strongest basis for the acceptance of familyplanning. A second. more flexible set of criteria revolves around those in mostneed ot service. This would include households where follow-up is required toservices already given (for example, new acceptors of contraception), thoseidentified as being at high health or nutritional risk, and those fromparticularly disadvantaged social groups. Special attention would need to begiveu to tribals, whose children are often severely malnourished and who may beparticularly discriminated agsinst in their access to services.

o Efforts should be made to eliminate the social distance betweenMPlWFs and clients. Tow the extent possible, local women from the same communityas most: clients should be recruited, while provision of housing to MPWFs, whetherthey are locally recruited or not, will increase their accessibility (at allhours). Village health committees ana informal groupings can greatly facilitatethe MPJF's work.

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o More and better training for NPFWs and HAFs will be requir,ed to bringabout changes in work focus and practices. and to inculcate an emphasis onquality of care. 2 Training needs to encompass work planning, including task andclient prioritization; technical skills; supportive supervision (of dais, VHGsand others); community organization techniques; interpersonal counseling andmotivational work. There appear to be strong advantages, in terms of team-building and taking account of local needs and conditions, in training staff fromthe locality together Xn situ. In-service training capacity at the district orCHC level needs to be developed. Finally, training needs to be supporteA1by aneffective Management Information System supplemented by regular surveys whichprovide feedback on service quality (particularly how clients from differentbackgrounds are treated by PHC staff) .

o Lines of authority, management styvle" and other facets of the PHCset-upD will need to adiust if the outreach-based strategy is to work.4 MedicalOfficers (NOs) need to develop the large and diverse PHC staff into an effectiveteam that can have a catalytic effect on health practices in the area. To beeffective, MOs need to be free rcf routine duties, highly mobile, and fullycognizant of local conditions and capacities. This implies a shift from norm-based, target-driven operations to one featuring the orchestration of diverseinitiatives taken by PHC staff in response to local needs. Some NGO-run schemes,e. g. Jaikhed and Narangwal, offer clues on how to motivate staff (and toestablish a concept of team responsibility), and establish support andcredentials with the local community. MOs will need special training to improvetheir planning and management skills- -pre-assignment trair.ing covering managementand public health problems should be mandatory. MOs could also be guided throughuse of systematic audits covering in-service training, worker productivity,resource use, community relations, service utilization and coverage. Indonesiahas developed a system of this kind which rates health centers (and outreach)on performance. Based on such audits, incentives and rewards for distinguished

2 The salience of quality comes out clearly in a recent United States Public Health Servlce study of the*Determinnts of HMD Success.' Successful Health Waintenance Organizations (Hms) were characterLzed by aconcern for quallty, manifested in a thorough knowledge of and a comitment to being accepted in themarketplace. This entalled contlnuous monitoring of customer preferences, careful selection of advertisingmassages, attention to the physical appearance of doctors' c"fices, a wllingness to respond to feedback fromconsuners, careful selectlon of staff (based on technical, inter-personal and managemnt skills) and the useof incentives to encourage high perfomance from staff (Fox, et. al.).

3The results of a Bangladesh goverament decisLon (based on many years of experience vith the Matlabresearch project) to increase the ratio of lts Family Welfare Workers (the local equlvalent of the HPWF) from1:4,000 to 1:2,000 clients need to be closely studied. Hovever, a move to a similar ratio in India wouldprobably not be a sensible course of action, for several reasons. First, it would be an extremely costlydecision, which might divert funds from fIlliAg gaps In the still incomplete existing Infrastructure network.Second, it may be a higher priorlty to put lLmited training resources into filliag the many existing MMvacancies and upgrading the quality of HPWFs already in service, than to create new posts. ThLrd, and mostimportantly, the large discrepancies between the performance of individual KPWFs working in similar envlronmentssuggests that substantial overall productivlty Increases could be achieved within the existing staffing patternby measures to bring the performance of poor and average HPWFs closer to the high performers.

4 The anomalous practlce af financing staff costs fro different program headings needs to be eliminated.

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service by MOs could be developed. Currently, promotion prospects are mainlylinked to seniority.

o It is doubtful whether the emerging tier of CHCs. a third of whichaL in glace. is needed at this time. The aim was to provide first line hospitaland emergency services in each block (100,000-150,000 people). However,utilization is likely to be disappointing because higher level hospitals aresometimes in reach and due to difficulties of recruiting and retaining specialiststaff. Also, provision of nurses, technicians, equipment and supplies andopportunities to visit PHCs and SCs is not adequate to support the work ofspecialists.

o After 15 years of experimentation. evaluations suggest that the VHGcan handle minor curative tasks but has had little impact on health promotion.Selection of females, careful task selection, training and community oversightwill all be needed to upgrade performance of this part-time worker. Theincreased outlays required for stipends and supplies are probably worthwhile asa relatively cheap way of providing general preventive and some curative servicesin villages.

e Priority in 2ursuiljt_s._outreach-based strategy needs tqbe givento low _erformance states. but th-is recuires new funding arrangements. Thedisappointing impact of the PHC system in these states is due (in part) tolimited resources for operational purposes. Increased plan a'locations areneeded, perhaps as a regionally-oriented program analogous to the Special RiceScheme in Eastern India. In addition, ways of sharply stepping up non-plansupport need to be devised. Combined central and state government task forcesmight be used to recommend options. A special planning fund could be placed atthe disposal of these task forces. Efforts are needed in all states to devolveplanning and allocation of health funds. The out-reach based strategy requiresincreased regional and local autonomy in resource management. Experiments withfull or partial fiscal delegation (with built-in incentives for cost recovery)could begin immediately in high performing states (e.g. Kerala, Tamil Nadu andNaharashtra).

o An outreach-based approach can be effectiye in resolving healthPioblems of the urban Roor. Here there are two broad options. One is toestablish urban health posts providing all except higher levels of medical careon the pattern of SCs, with outreach by MPWs. These units, which would operateindependently of existing hospitals and clinics, would be relatively expensiveto build, staff and operate, even if located mainly in slum and developmentareas. Moreover, there is a strong possibility that bypassing them and goingto the large city hospitals would be commonplace. The second option is toestablish local health offices, such as the Health Administrative Units developedin Calcutta. These are small centers created for supervision of outreach ratherthan direct provision of care; they rely mainly on referral facilities =nd ontraining volunteer health workers to establish close contact with slumhouseholds. Such Health Units could establish a network with existing hospitals,NGO clinics and possibly private practitioners.

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C. Family Planning

6.20 The accomplishments and deficiencies of the family welfare programare well known, as are the general lines of remedial action which need to betaken. An estimated 32% of all couples are now effectively protected againstunwanted pregnancy. However, the heavy reliance on sterilization, which accountsfor 70% or more of all births averted in 11 of 14 major states, limits prospectsof substantially decreasing fertility. India's fertility transition is likelyto resume only when couples begin using temporary methods on a large scale. Thisis unlikely to happen without farreaching changes in the orientation and approachtaken in the family welfare program.

6.21 A major %isadvantage of a sterilization-based approach is that thismethod is typically adopted only by those who have already reached their familysize target, particularly the desired number of sons. The mean age of tubectomyacceptor was 30.3 in 1985/86 (down only slightly from 31.4 in 1973/74) Vwile meannumber of living children per acceptor has remained at 3.5 since 1977/78 (Stout).Prevalence can only rise through "recruitment" of younger acceptors, but theseare the clients wbv have not attained their family size (and composition) goalsand who have not s own interest in irreversible methods. If the current methodmix does not change, then sterilization would have to be adopted by a quarterof women aged 20-24 and over half or those age 25-29 if replacement levelfertility is to be achieved by the year 2020--a most unlikely scenario. (SeeStout for further details.)

6.22 It is clear then that much greater use of reversible methods, e.g.pills, IUDs, condoms, implants, injectables and so forth, is needed if prevalencerates are to rise. An important obstacle to such a contraceptive transition isthe continuing strong programmatic and institutional orientation towardssterilization. Despite the beginnings of change, the entire PHC system, withsupport from staff from the Revenue and other departments, contiiaues to be gearedtoward achieving ttrgeted numbers of sterilizations. This has brought the sortsof problems alluded to earlier, including an unflattering public image due tovarious abuses and the diversion of field workers' attention from crucial taskssuch as outreach, health and family planning education and motivational work,and provision of temporary methods. Most critically, the program's emphasis onterminating childbearing on the achievement of desired family size weakens itscapacity to influence high infant mortality which continues to underlie weakcontraceptive demand. Meanwhile, better-educated and wealthier individuals, whoprefer smaller families, have bypassed the public system with its gaps in theavailability and quality of services and turned to private providers.

6.23 The way out of this programmatic cul-de-sac is known, at least inbroad outline. For instance, the Revised Family Welfare Strategy (1986)acknowledged that 'poor quality of services, non-availability of staff, lack ofempathy of the staff, poor management" and other flaws have resulted innNfavorable public perceptions of the scheme. The way forward that is envisagedinvolves filling vacant posts, delineating job tasks more carefully, upgradingskills, improving service incentives and conditions, emphasizing temporarymethods, and so forth. This strategy also gives centrality to the use ofcommunications techniques, with messages differentiated according to thecharacteristics of specific target groups.

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6.24 The thrust of this broad approach is unexceptionable. However, someof the key components and implications of the revised strategy have yet to befully recognized. The outreach-based mode of service delivery discussed aboveappears to be an indispensable feature of a revised strategy. This approach willstrengthen the capacity of the PHC system to inform and serve key target groups,in this case, women under age 30. A widening of the coverage of services toinclude temporary methods will entail more detailed planning of the location offeciltties and the allocation of workers, while improved quality will requireconsiderable investment in staff training and redefinition of the tasks of fieldworkers and their superiors (see above). Developing systematic procedures forensuring frequent and high quality interaction with beneficiaries will beespecially challenging.

6.25 The outreach-based approach cannot work unless the way targets areused as an administrative and motivational tool is changed.5 All field workerscurrently have targets, formulated in terms of expected numbers of sterilizationand IUD acceptors, which reflect objectives established at the state and districtlevel. In principle, target-setting may be useful in monitoring performance.The contenL and format of this evaluative mechanism system can have a profoundeffect though on the overall direction (including quality and viability) of aprogram, since targets are the clearest signal available to managers to guideworkers. It is worth noting that state level program managers in each of thenine states reviewed in a recent study (ASCI, 1988) candidly and consistentlyspoke of their frustration with the near exclusive focus on family planningtargets as a performance measure. Because of the negative repercussions thatare widely reported, the replacement of sterilization targets by otherperformance indicators is critical for further advances in family planningprevalence in India.

6.26 Target-based procedures need to be replaced by evaluation te_hniqueswhich are meaningful and helpful to workers at different levels. Currently theManagement Information System (MIS) does not produce family planning outputindices such as local method-specific acceptance and discontinuation rates. Thelack of local data makes the MIS useless for administrators who must allocateresources wisely in their own a-rea of operation. The service statistic systemis also hardicapped by an orientation toward data collection rather thanutilization. Recent estimates suggest that 25-30% of the MPW's time is spenton maintn'ning 15-18 different registers, with little understanding of why thedata are being collected (Stout).

6.27 Bangladesh's experimental Matlab project has shown that improvingthe availability and use of data on key indicators of family planning and MCHperformance is both feasible and helpful in improving performance. Key aspectsof the system include a demographic surveillance system which allows programmanagers to monitor performance indicators, including acceptance and continuationrates for target groups, and rapid feedback systems to facilitate use of dataink program planning. The MIS used in Matlab is user-friendly and provides each

5 Thia sectlon draws on the Population Council's 1987 review of Ponulation Polbilen and Prosrams inIndia. undertaken for USAID (Brown, Jain and Gill).

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worker with case history information for all individuals in her area. The samesystem provides supervisors with feedback about the pace of work, the contentof services, and workers' problems. Accountability for performance is enhancedthrough regular group discussions and peer comparison of performance (Phillips,et. al. 1988). In India, the Bavala experiment is using microcomputer technologyto facilitate rapid data analysis, and provide block and district level medicalofficers with timely information on output rates and worker performance. Anobvious direction for MIS reform is to develop indicators based on a refineddefinition of program focus and desirable demographic outcomes, using locallymeasurable denominators, such as numbers of currently pregnant women. Such astep would need to be accompanied by regular contraceptive prevalence surveys,which can provide a check on service statistic reports while also covering bothprivate and public sources of care.

6.28 Stepped-up, more carefully targeted marketing activities are partand parcel of the outreach-based approach suggested above. To date, the stillhighly centralized information, education, and communications (IEC) effort hasrelied almost exclusively on the electronic and print media, thereby failing torecognize that the most important opportunities for gauging customer reactionsand changing attitudes, beliefs, and practices occur at the point where fieldworkers and clients come into contact--in primary health centers and sub-centersand during household visits and group meetings. However, no amount of radio,television, newspaper-based publicity can replace the impression that clientsreceive if PHC staff or medical supplies are not available, if doctors chargefor services which are nominally free, or if staff are unresponsive to needs andrequests. In short, satisfied "customers' are the best advertisement. Improvingoutreach capacity and the quality of services are critical IEC interventionswhich depend on specific procedures and skills, e.g. eliciting feedback fromclients on the use and likely side-effects of particular temporary methods,providing effective answers to clients' questions and advising on specificaspects of maternal and child health. In addition, staff need to haveappropriate materials to work with as well as training in how to tse thematerials in organizing group discussions and transmitting specific messages.Here it is noteworthy that district level IEC staff in Andhra Pradesh havesucceeded in producing their own materials, with results more salient to localneeds than materials emanating from Hyderabad or Delhi.

6.29 Careful message design and pretesting to achieve a close fit betweenthe audienice's beliefs and practices and message content is also a prerequisitefor IEC success. In a break with the past, family planning messages in Hindiare now stressing the importance of women's health, the right to education andpersonal growth of girls and the benefits of contraceptive use by young brides.Building on and "localizing' these messages will require considerabledecentralization. A variety of low cost tools- -focus group research, participantobservation, point of sale surveys, and the like--are now available for localuse, while local firms can be hired to carry out market research and developmedia campaigns. A lack of staff trained to manage IEC activities at state anddistrict level is a major constraining factor. Vacancies for district levelmedia officers have persisted in several states, making it difficult for thinlystaffed state level mass media and health education officers (typically two perstate) to interact effectively with Block Extension Educators or their districtlevel counterparts.

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6.30 Compensation for sterilization and IUD acceptance is another strongsignaling device employed in the family welfare program. Outlays on compensationaccount for 20-35 percent of program expenditures in different states, with thecentrally recommended incentive payments, Rs. 150 for sterilization and Rs. 11for IUDs, frequently topped off by state and district authorities, and in severalcases NGOs or private firms. Little is known though about how compensationpayments affect demand. The current use of incentives should be reviewed if onlybecause they signal a strong positive ettitude with respect to sterilization,and provide no reward or positive reinforcement to clients (or to serviceproviders) for temporary method (besides IUDs) or utilization of other PHCservices.

6.31 Some recent experiences in India and elsewhere may be helpful informulating an incentives policy which encourages adoption of 'spacing' methods.One such experimental approach, being tested by an NGO in Awmanpettai in TamilNadu, uses small bonus payments to encourage village women to use oral pills andother temporary methods. Eligible women, e.g. those who are married, between18 and 35, not sterilized and whose youngest child was not less than 6 monthsnor more than 10 years old, are given Rs. 30 per month for trying contraceptivesof their choice, for each month of participation in which they do not becomepregnant. The program has been very popular, with more than 80 percent of theeligible women joining; temporary method use rates among participating women haveremained high relative to a "control" population in a nearby PHC. Meanwhile,in Karnctaka, the Family Planning Foundation has helped a local Mahila Handalto invest the incentive outlays which would normally have been used to compensatesterilization acceptors. At the same time, the Mahila andeal ias promotedtemporary contraceptive methods, leading to an increase in prevalence from 12percent to 76 percent in 3 - 4 years. This approach resembles the communityincentive schemes which have been successfully tested in Thailand.

6.32 A hallmark of ar outreach-based approach is cooperative "networking"with other potential service providers who are accessible to and retaincredibility with the poor. There is evidence that both rural and urban poorperceive private sources of care as more readily available and as providinghigher quality of care. Current utilization of private health services by thepoor is primarily for curative purposes. There are many opportunities, though,for a beneficial public-private partnership in preventive health care delivery.Indeed, there have been several important collaborative efforts in India,including cooperation with organized sector firms like TISCO and Hindustan Lever.For instance, TISCO' s current family welfare program for employees and residentsof Jamshedpur has shown remarkable success in targeting family planning messagesto particular groups and in involving trade union personnel anu leadership inthe development of the program. The results include significant annual increasesin ante-natal care and contraceptive prevalence (now about 60% in Jamshedpur)for employees and among residents in the area.

6.33 Experience in other Asian developing countries and in developedcountries has shown that active partnership with private for-profit providersof care, institutional as well as individual, provides a valuable means ofextending service coverage. Thailand's remarkable success in family planningseems to stem from the Government's active cooperation with private and NGOsources (Klitsch and Walsh). Family planning programs in developed countries

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already rely heavily on private providers, particularly for the distribution ofspacing methods (which require resupply), often using government subsidies toattract private participation in service delivery, and to provide a mechanismfor assuring service quality.

6.34 Although close study of the potential effectiveness of differentalternatives is needed, the range of options for promoting private sectorprovision in developing countries is becoming clearer. One model of potentialapplicability in India is to continue to rely on public sources for provisionof clinical methods, while using private providers to increase access to non-clinical methods. This would include greater use of commercial outlets(including pharmacies), and marketing channels to distribute subsidized condomsand resupply of other spacing methods. In addition, steps can be taken to induceprivate physicians and privately-run clinics to play a larger service-deliveryrole, thereby broadening coverage, and allowing limited public resources to beused for services targeted at the most indigent. This option is likely to bemore feasible in urban settings, in the short term. Possible facilitativemeasures include contracting out services to private providers, use ofreimbursable vouchers for purchase of family planning services, technical andmanagerial assistance, subsidized loans to potential suppliers, removal of pricecontrols and tariffs, and tax relief.

6.35 The various initiatives just discussed, e.g. adoption of an outreach-based orientation in PHCs; emphasis on attentive, high quality care backed bygood IEC messages and materials; and collaboration with private providers, canhelp foster greater use of reversible contraceptive methods amongst the keytarget group of women under 30. The measures will not be easy to implement sincethey involve reorientation of attitudes, tasks, and procedures within and outsidethe family welfare program. Clear direction and informed, supportive managementand supervision, particularly of the large cadres of field staff, will be neededif a shift in direecton is to be achieved. Health still appears to have lowpriority, apd much more can be done to bring health and family welfare issuesinto the public arena. For example, family welfare could be discussed withinI.he National Development Council; state Chief Ministers could be more energeticand resourceful in backing the scheme; and state health ministers could do moreto enforce basic rules, e.g. those concerving recruitment, in their departments.

6.36 It should be noted though that measures such as those suggested areunlikely to yield immediate results, i.e. a sharp increase in prevalence andreduced fertility rates. This is because the factors like high infant mortality,low female literacy, and reliance on family members for old age, widowhood and"contingency" insurance which underpin large family size targets and strong son

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preference are changing slowly, and will continue to be influential in the mediumterm. Surveys continue to show that the great majority of couples want threeor more children, including at least two sons. These demand-side forces cannotbe overcome merely by improving the supply and quality of services, althoughdemand will certainly respond to services which entail lower monetary, social,and psychological costs.6 Consequently, the Ministry of Health and FamilyWelfare cannot be expected to bring about rapid changes in the family planningpicture by itself. In this context, "beyond-family planningw programs, whichgive prior access to publicly provided goods and services to low fertilitycouples, are sometimes seen as a way of affecting the demand for children.However, such schemes, besides raising ethical issues, are staff and dataintensive, leakage-prone, and cumbersome to operate. It seems best instead topress ahead vigorously with improvements in female literacy (adult, adolescentand primary level) and health services, expanded programs of employment, lifeand old age insurance, measures contributing to labor demand and otherinitiatives likely to undermine the traditional supports to high fertility.

D. ICDS

6.37 Changing over to a full-fledged outreach-based approach will make iteasier to coordinate the activities of PHC staff with those of the anganwadi-based ICDS worker, the AWW. This is important because health is often felt tobe the weakest of the various services which the AWW delivers. ICDS, which beganin 1975, had brought its package of basic health, nutrition and pre-schooleducation services to roughly 1800 of the targeted 3000-3500 relatively backwardblocks by April 1988. Coverage of additional blocks iF limited by fundingconstraints mainly at the state level. States are responsible for the foodexpenditure component, notionally expected to amount to 60 percent of total ICDSoutlay. Food aid defrays some of these costs. Still, some states prefer tofinance alternative programs (e.g. mid-day meals and subsidized rice schemes)which also bring some nutritional benefits. This leads at time to long delaysbefore sanctioned ICDS projects begin operating, and also shows up in arelatively slow expansion of the overall program. Thus, approximately 160 newblocks per year were added during the Seventh Plan (first three years), withalmost half of the targeted blocks still not included in the program. Fundingproblems are evidenced in other ways. For instance, key supervisory staff (theblock level Mukhiya Sevika, MS, and the district level Child Development ProjectOfficer, CDPO) are not in place in some areas; supplementary food is sometimesnot available for long periods;7 and facilities and materials for pre-service andin-service training are often lacking. Such gaps in the training and supervisionof staff at different levels underlie the concerns just mentioned about how

6The above-Olted Population Council study concluded that *There is little doubt that some unmet demandfor reverslble methods exists Ln India.... At the same time, the avaLlable evidence strengly suggests thatthe x3tent of unmet demand, Lncluding the potential that can be realized through ZEC efforts, ia lower than thelevels required to achieve nation&l demographic objectives" (page 77).

7 One study showed that average number of "feeding days' in a three-month period varied fron 35 inMaharashtra to 89 in Tamil Nadu (NutrLtion Foundation of India).

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effectively ICDS delivers health (or other) services.8

6.38 ICDS has compensated to some extent for resource constraints by givingpriority to areas with greater health and nutritional needs. During the SeventhPlan, blocks with concentrations of scheduled caste and tribal groups and urbanslums are slated to get precedence. ICDS also has other features which increasethe likelihood that services will reaca target groups. For instance, there isa clear definition of those to be served, e.g. children 0-6 and pregnant andlactating women. In addition, the AWW unlike the MPWF has a fixed village base,the anganwadi. Another great strength of ICDS is its (intended) use of localworkers as AWWs--these women should have an entree into the community and anunderstanding of local needs. Unfortunately, the potential of this feature ofthe scheme is threatened by the installation in some areas of appointees who maybe uncommitted or ineffective because they are from higher castes than theirclients, and by the need in tribal areas to bring in more educated candidates.The latter workers have proved less able to establish rapport with localcommunities. ICDS may want to provide functional literacy training for localcandidates, at the cost of delaying the start-up of new anganwadis by a fewmonths.

6.39 Despite a number of exemplary programmatic features, the AWW like theMPWF faces the problem of deciding which of numerous tasks and services are tobe provided to her diverse clientele. This focusing issue arises in part becauseof differences in the emphasis which states give to particular components. Somestates treat ICDS as a pre-school program, and health and nutrition aspectsreceive less emphasis. Elsewhere, it is viewed as a supplementary nutrition(or a pure feeding) scheme, with health and education getting less attention.Studies suggest that, like the over-extended MPWF, the average AWW focuses onthose parts of her work which are easiest and where she has most pressure toperform, and spends less time on other aspects of her duties. Apart from state-level directives, there is usually strong pressure from the local community forthe child feeding program and for preschool education, and it is these activitieswhich are emphasized in practice, although often at low levels of quality. Thus,preschool usually consists of learning repetitive jingles, and memorizing lettersand numbers rather than well conceived early learning experiences. In nutrition,the focus is often on bringing in enough children to satisfy local mothers anduse up the available food, rather than making sure that all needy children(especially those under three who remain at home or at work with mothers) areincluded in the program and that the severely malnourished get rehabilitated -in other words, the program becomes a feeding rather than a nutrition program.This is particularly the case where, as in some areas, there are limits"recommended" to the number of children that can be fed; once the AWW has filledher unofficial quota of, say, 60, she has no strong incentive to go out and findother malnourished children for inclusion.

a Studies shav marked variation La performance at the state, block, and anganvadi levels. As discussedthough, the cooparablilty of fLudings from different evaluation. is in somewhat doubt be.ause of small samplesizes, lack of control groups, differences in focus and so forth.

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6.40 What tends to be neglected are services for pregnant and lactatingwomen who may find it demeaning to come to the anganwadi for supplementaryfeeding; health and nutrition care for the under threes, who are harder toattract to the anganwadi; health and nutrition education, because there is littledemand for these preventive activities; and home visiting, because the AWW's dayis taken up with center-based activities, and because such visits are likely toturn up additional clients for service, further increasing an already fullworkload.

6.41 The activities that take most of the anganwadi worker's time arefeeding and preschool; together, they require 4-5 hours a day. The dilemma facedby the program is that there is little scope for freeing up the AWW's timewithout cutting out one of these activities, a step which is not in practicefeasible- -or desirable- -because it would destroy the basic character and purposeof the ICDS scheme. One way of enhancing the quality of service delivery andinsuring that some activities are not neglected is to increase the number ofanganwadi workers. For example, two AWWs might be employed, one to look afterpre-school, feeding, and health referrals at the anganwadi and the second toconcentrate on the under-threes, pregnant and lactating women, and educationalwork largely through home visits (Subbarao). This would raise program costs,and possibly inhibit expansion of ICDS into new blocks or delay improvement inexisting service areas. Accordingly, the two-AWW model might best be taken uponly in those blocks, say a quarter, with the highest levels of malnutrition.This would entail an additional outlay of Rs. 160 million. (Ways may be found,though to reduce incremental costs. For instance, adolescent girls might beemployed as assistants for a nominal wage together with supplementary food.)

6.42 An alternative, less expensive means of strengthening program impactmight be to change the range of duties and to prioritize the AWW's tasks.9 Forinstance, some health-related tasks can be dropped or adjusted once closercooperation with MPWFs is achieved. A rational division of duties would be forthe AWW to provide monthly weighing, supplementary feeding and other servicesto pregnant women at anganwadis, and for the MPWF to supply the health aspectsof ante-natal care during home visits.10

6.43 With her health load thereby reduced, the AWW would have more time forother tasks. One possible additional responsibility, which need not be time-consuming, is to provide family planning conseling and resupply of pills. Thistask, which is consistent with a mandate to improve maternal and child healthand nutrition, would give MPWFs a further incentive to work with AWWs. Theaddition of family planning activities is suggested, though with two caveats--

9 The relative effectiveness of the one-worker and two-worker models should be tested in differentblocks, wlth all areas involved in the e periment receiving the saw improved supervision and trani"sg Laputs.

10 It is not clear, in any case, how under the current system the AW can provide worthwhile ante-natal care, since this should involve blood pressure and urine testing and the identifLcatLon of high riskpregnancr cases, activitles vhich are more within the competence of the HPF.

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a focus on birth spacing methods (which would be congruent with the health andnutrition goals of ICDS) and ensuring that no wacceptor" targets are set for theAWW.

6.44 It is also suggested that the AWW give greater priority to some of herexisting duties. For instance, no systematic attention has been given to pre-school activities, although these are crucial for the child's development oncehis or her survival is assured through health and nutritional measures. Atpresent, the education component in ICDS sometimes appears to represent littlemore than lightly supervised day-care for children age 3-6. Close cooperationwill be needed with the village school teacher (as with the MPWF) in designinga stimulating early childhood education program which will prepare the way forsubsequent schooling, explaining this to parents, monitoring progress, andensuring that children continue on to primary school.

6.45 The nutritional consequences of ICDS can be strengthened by givinggreater attention in high risk areas to counseling and education (which willrequire good IEC materials) and by insuring, through periodic surveys, that allpotential clients are registered and visited. Growth monitoring, the regularmonthly weighing and growth charting of children, is a potentially important AWWactivity, because all but the most extreme malnutrition is hard to identify byeye. However, improved basic and in-service training (see below) as well asgreater priority to these activities on the part of AWWs and supervisors may berequired. One way of reducing the AWW's workload would be to confine growthmonitoring to children under age three.

6.46 Policy-makers might also consider introducing regular weighing andcharting of pregnant women, since maternal nutrition currently receives lessemphasis than child nutrition, despite its determining effects on the latter.In addition, entry and exit criteria to the child feeding program might beadjusted. Here the issues relate to the relative merits of feeding only thosewith moderate or severe malnutrition (ICDS) or also those who are normal butwhose growth is faltering (as is done in the Tamil Nadu Integrated NutritionProject); whether children who are mildly malnourished but on a positive growthpath need feeding; and the appropriate length of time malnourished childrenshould spend in the feeding program. These technical but extremely importantissues can best be resolved by careful field experiments on the impact ofdifferent approaches on malnutrition.

6.47 Such changes in the field worker's tasks and responsibilities need tobe supported through better supervision and stepped-up training. The currentsupervisor-worker ratio of 1:20 makes it impossible for the supervisor to spendenough time with each AWW to have a real impact on her performance. The brevityof supervision visits encourages the current emphasis on checking registersrather than support and on-the-job training. The number of ICDS supervisorsshould be increased substantially and adequate provision made for transport.Supervision is also hampered by the inexperience af direct recruit graduates.A second desirable policy change might therefore be to fill as many supervisorposts as possible by appointment of outstanding anganwadi workers--a move whichwould not only increase the quality of supervision but would also act as aperformance incentive for AWWs. Also, thorough retraining of existingsupervisors in the practical aspects of anganwadi work is essential. Finally,

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supervision could be focused and workers made more accountable by the developmentof a small number of summary performance indicators which could be displayedpublicly at the anganwadi.

6.48 Concerning training, the rapid expansion of ICDS has brought anunderstandable emphasis on pre-service rather than in-service instruction.However, it will not be possible to bring in new work practices for AWWs untilthis imbalance is rectified. Accordingly, state-wise investment and manpowerplans should be drawn up to ensure that each AWU receives formal in-servicetraining at least once in two years. Also, the existing curriculum should bereviewed to ensure that more emphasis is given to tae task priorities identifiedabove. A third imperative is to professionalize AWW training, and to increaseconsistency in the quality of training between AWW schools. Finally, as in thecase of family welfare, serious consideration should be given to instituting in-service training at block and district level, since a biennial round of formalin-service training is too infrequent to adequately refresh workers' skills.

6.49 Finally, ICDS resembles the primary health program in its failure togenerate extensive community participation. This is related to the commonperception in communities that ICDS is a government feeding and pre-schoolprogram rather than a community self-help program. In some areas, progress hasbeen made by using "mahila mandals' (women's groups) for community health andnutrition education, but in many places, these organizations appear unsuitablefor this purpose, since they focus mainly on income-generation or politicalgoals. It may be preferable to develop new groups of motivated womenspecifically to support ICDS and family welfare activities in the village. Forexample, the AWW could set-up Women's Working Groups to assist her withassembling mothers, weighing children, and health and nutrition educationactivities." A key task though would be to help in communicating both thecontent of the program (in terms of services available at the anganwadi) and itsphilosophy (in terms of its emphasis on family self-reliance), both of which arecurrently poorly understood by the program's actual and potential clients.Analogous groups of adolescent girls could discuss the health, nutrition andfamily planning aspects of their impending motherhood; assist in educating theirown family members in these areas; and help in anganwadi service provision.

E. Basic Education

6.50 The Government's forthright 1985 Challenge of Education paperrecognizes that broadbased educational gains are indispensable for nationaldevelopment and poverty reduction, and draws attention to the serious problemscaused by low funding of basic educational services. The National Policy onEducation (NPE) represents a broad effort to achieve universal primaryeducational (UPE) attainment by 1995 for all children age 6-14, by eliminatingcrucial programatic gaps. This will involve, in the first instance, a large

1 Such Women's Groups have been successfully established on a mass scaleunder the Tamil Nadu Integrated Nutrition Project. This program, which hashalved the rate of severe malnutrition in a population of nine million people,has also developed innovative and effective procedures for inservice trainingand supervision which may have lessons for ICDS.

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increase in resources allocated to the sector. In this respect, the Centar'scontribution to NPE includes Operation Blackboard (OB), a centrally-sponsoredscheme to make available essential primary school facilities, specifically twoall-weather classrooms, and various teaching materials, games andi toys, and asecond teacher, preferably a woman, in all single-teacher schools. Under OB,states are to plan and finance the building of classrooms. The Center will payfor the salaries of additional teachers (so far, only during the Seventh Plan),and the package of educational materials.

6.51 The funds needed to fully implement NPE have not been budgeted. TheCenter, after more tlan doubling its spending in 1987/88, was unable to increaseeducation outlays in 1988/89. Meanwhile, resource constraints have forced manystates to put off, to the Eighth Plan period or possibly later, the sizable non-recurrent allocations needed for the construction component of OB and for otherNPE schemes. For example, NPE envisaged covering all blocks under OB by 1990.However, many states got off to a late start and now anticipate achieving fullstate coverage by the early 1990s at the earliest. Several states includingKarnataka have shifted teachers now supported by non-Plan funds into postscreated and financed under OB. No additional teaching positions have beenrecruited (Chatterjee, 1988).

6.52 Vigorous efforts will be needed then to restore the funding momentumgenerated in NPE. This will requize strong leadership and commitment from theCenter as well as creative approaches to mobilizing resources. At the same time,the most must be made of the funds, facilities and manpower which are available.This will involve identification of measures which are crucial for attaining thegoal of universal elementary school enrolment (UEE), and setting prioritiesaccordingly. In this respect, the situation in education resembles that inhealth a decade or so ago when, drawing on much NGO work, the health guide schemewas launched and the PHC system began to take shape. There is a tradition ofinnovative NGO educational activity in a few states (notably Maharashtra) andsome broad lessons are available from other developing countries, e.g. Sri Lanka,Indonesia, Tanzania and China, which attained UEE through concerted nationalprograms. However, tha sectoral experience 'on tap' in the country may not besufficient to offer clear guidance on critical matters. What follows is a reviewof areas in which detailed thinking-through of issues, and experimentation with(and evaluation of) alternative approaches appear warranted.

a A concerted focus on hlgh risk groups. i.e. those who never enroll orbegin late and those likely to drop out. would yield a high payoff. Indeed,universalization of primary education (or, in fact, any further increase inenrolment over current levels) necessarily entails the inclusion and retentionof previously under-represented groups in the school room, particularly girls,scheduled caste and tribe children, and the poor in general. There is also ageographical pattern of education risk--three quarters of all out-of-schoolchildren are found in Andhra Pradesh, Assam, Bihar, Jammu and Kashmir, MadhyaPradesh, Orissa, Rajasthan, Uttar Pradesh, and West Bengal. (As enrolment growstoward 100% coverage in net terms, the proportions of these various children willhave to increase.) OB requires states to give preference to educationallydisadvantaged blocks having large concentrations of scheduled caste, tribal andother minority households. The same emphasis should be present in otherinitiatives like those relating to curriculum, teacher training and supervision,

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attendance incentives, reform of management and so forth.

o Reaching high risk groups is relatively difficult and costly. andinvolves simultaneous action on several fronts. Adequate facilities remainindispensable. OB is directed at the 190,000 localities which lack a primaryschool, and at those whose school has no proper building, basic equipment ordrinking water. Detailed planning of school locations, based on censuses ofchildren, and expected "consumer behavior" including the timings (and walkingdistances) likely to attract children, especially girls, and required staffingpatterns is required to insure that OB's resources are well used. Experiencefrom Sri Lanka and Maharashtra suggests that utilization as well as instructionalquality may improve by establishing clusters of core and smaller peripheralschools, which undertake joint activities and share resources, facilities andexpertise (Colletta and Sutton, Chicnis). Teaching classes in shifts, andsetting up composite schools, which combine lower and higher primary levels andsometimes the secondary stage, may yield comparable efficiency and educationalgains in other settings.

o Initiatives to widen access to services would need to be accompaniedby efforts to make the content of schooline interesting and useful. This issueis fundamental to the retention of children in schools. In the past, schoolingeven at the primary level has been oriented largely to pushing a select few upthe educational ladder. While examinatio-as and "merit promotions' have beenabolished at the primary stage, their continuation at the middle level (whichallows the selection of a proportion of children for free secondary educationin state schools) inevitably influences the primary level curriculum and methods,making them knowledge- rather than skill-oriented. Basic education thus losesa mass orientation. Moreover, only education that is interesting and relevantto local concerns can begin to offset the opportunity costs of schooling to poorfamilies. Accordingly, starting at the pre-school level and continuing allthrough the primary stage child and family interest in learning need to bestimulated by teaching numeracy, alphabetic and simple skills, in place of thecurrent pedantic approaches which rely on recitation by rote, and blackboard-style instruction rather than tactile or visual stimulation, etc. Although someheed has been paid to the school curriculum and classroom learning materials,efforts are still dispersed, and inadequate in the aggregate. The large quantityof textual and support materials required, for example, and the need to revise,translate (into local languages) and evaluate them call for state-levelinstitutes to handle their production as well as research and training tasks vis-a-vis basic skills (i.e. revamped and expanded State Councils for EducationalResearch and Training, Linked to a dynamic national coordinating body). The armsof these at the district-level (the District Institutes of Education andTraining, proposed in NPE), must also be active in evolving strategies anddisseminating inputs at the taluk-level.

o Different ways of enhancing private and social demand for schooling.especially education for girls. ought to be exK2l1Xed. As with family planning,demand is influenced by many factors, e.g. labor market trends, nearbyavailability of fuel, fodder and drinking water, social and cultural developmentsand so forth which are not within the purview of education authorities.Nevertheless, ways do exist to stimulate demand. For instance, several programs

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have aimed at overcoming the particular constraints faced by high risk groups.The abolition of schoci fees, and incentive schemes, such as the provision offree books and clothes, have reduced ths direct costs of schooling to poorfamllies, while the free meals and boarding facilities available in some areascompvnsate them further. Other schemes, such as monetary scholarships or "fosterchild' programs, have addressed both direct and indirect costs, while specialstrategies, such as increasing the number of women primary teachers, providingtutors or locating schools near scheduled caste hamlets, etc. are concerned withsocial handicaps (Chitnis). Greater efforts could be made though to provide daycare (which would allow older sisters to attend school) through, for instance,sharing of ICDS and primary school facilities. Such a step deserves actentionas a means of raising current and future school attendance.

6.53 The high cost of residential schools limits their potential coverageand makes it imperative to locate them appropriately and monitor their use andmanagement. Scholarships invite leakage unless linked more closely to actualattendance. Use of incentive schemes has also been inhibited by a lack ofawareness among target groups.

6.54 While it is often alleged that such incentives schemes create adependence among the poor, it is perhaps more true that they do not enhance realdemand for education. They have limited success unless accompanied by concertedefforts in the russ media and on the part of teachers, school inspectors andother authorities and community leaders and members to 'motivate" families tosend their children to school regularly and long enough for any educationaleffects to occur. But motivation efforts remain scattered and tentative, oftenlacking the support of political and bureaucratic authorities. The need for suchpublic support is especially critical to increase girls' enrolment, along withattention to supply-side issues (e.g. distance factors, female teachers, separategirls schools, and day care centers). Follow-up of non-attenders should be aroutine aspect of school management, entrusted to both teachers and inspectors.Universalization, in fact, requires an appreciation by education personnel aswell as parents of all children's 'right' to education and that the enforcementof existing rompulsory education legislation is the joint responsibility of 'thepeople' and of government.

o Was of inmroving the gerformance and commitment of the field worker.the village teacher. ought to be examined. Selection, recruitment, training,placement and retention of qualified teachers all appear to mattesr. Despite theimpressive qualifications (85% are "trained") of existing staff, high drop-outrates must stem in part from poor attendance and instruction by teachers, andpossibly factors such as gender or caste. (Surveys in Pakistan suggest that lackof a female teacher is the most critical disincentive to attendance by girls.This finding may be salient to Rajasthan and other north Indian states.) Closestudy is needed of different hiring, assignment and compensation practices,including whether to recruit only from target groups, whether (and how) toattract older women, whether entry qualifications for primary level teachersshould be lowered, and what incentives are needed to get women to teach in rural

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areas. 12 Also deserving of attention are successful experiments in oth,rcountries (including Tanzania, Indonesia, and Sri Lanka) and in India with in-service training for primary teachers.'3 Among other things, such training needsto provide guidance on setting priorities among numerous pedagogical, managerial,"demand"-enhancing, community-oriented and other responsibilities.

0 ImRroved management and supervision will be critical in streangtheninrgthe Rerformance of teachers. Perhaps the most important 'management layer' inthe educational structure is the school inspection system which relies oninfrequent surprise visits by a peripatetic supervisor who concentrates onestablishing school enrolment and attendance. Stiff shortages, lack of fundsfor bus transport and huge distances combir. to limit the effective coverage ofthese inspectors. There is little doubt that the supervision system needsimprovement, both to bring accountability to the school room (in terms ofteacher's attendance, quality of teaching, ecc.) and equally-important in orderto provide systematic support and professional guidance to teachers. Thus,besides requiring administrative adjustments (e.g. increases in travelallowances) the philosophical underpinnings of the 'inspection' system needdrastic revision--to turn the school iuspector, as it were, into a "super-teacher." In lieu of the current 'over the shoulder approach" which rendersteachcr supervision extremely subjective, it may be well to think of periodicobjective assessments of teacher knowledge and skills, linked, for example, toin-service training. It may also be worthwhile to experiment with "learningcoordinators' who are being used in some Pakistan districts to supervise andprovide intensive on-the-job support to a small number (15) of schools Finally,there is clearly a need for an efficient management information system ineducation which will provide timely 'diagnostic' information from the villageschool to the taluk and district levels to allow flexible decision-making andappropriate follow-up actions.

a Problems experienced in funding OB and NPE as a whole suggest that newspproaches to financing education in "high risk" states need to be explored.For instance, ways (e.g. establishing a special fund to make grants, or a specialeducation tax) must be sought of increasing support in the poorest states fornon-plan outlays which account for 90 percent of educational expenditures. Othermeasures also need to be examined to cope with limited resources. Communitiesmight, for example, be asked to donate or construct buildings. However. thiscould conflict with the goal of VEE by leading to long construction delays,inappropriate location choice, poor design and conustruction standards, andinadequate maintenance (especially in poorer villages). On the other hand,greater involvement by local bodies in school management, supervision of teachersand so forth might open the way to more generous community funding. Experiments

12 A pllot project ln Rajasthan li evaluating the effectiveness of Shiksha Karamis, educational workersvlth elementary level qualifications and a month's training who teach for 2-3 hours a day in remote area whichhave trouble attractLng regular teachers.

13 On. Interesting ldea belng evaluated in Andhra Pradesh is establishment of Loeal Tenche 's Centersfor use as meeting places for sharing professional experlences and disseminating information anm nov practices.

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in functional decentralization and local participation should be encouragedtherefore for financial reasons, ar.d also to improve accountability, and tolegitimize (i.e. bolster social demand for) schooling. One interesting effortinvolves village School Betterment Committees in Karnataka which have been givenvarious oversight responsibilities.

O In view of funding constraints. it would be Rrudent to concentrateresources on achieving the ksy objective of UEE (..e. ensuring eight years ofschool attendance for thoss in the 6-14 age range). Accordingly, policy makersmay want to take a second look at the Navodaya Vidyalayas (NVs), the modelsecondary schools, one per district, which are being set up under NPE withCentral assistance. The NVs are not only very costly -- the envisaged outlayamounts to a quarter of that for OB which covers a thousand times as manystudents - - but the provision of improved facilities to a nec-ssarily small groupof students (no matter how qualified) is inconsistent with the principle of"education for all" propounded in NPE. Funds from the NV scheme would be betterspent on upgrading the larger number of village primary schools, preparing theway in due course for wider access to and greater demand for secondary schooling.

o The envisaged use of non-formal education (-FE) initiatives to reachthose who do not enroll. dropouts and illiterate adults runs the risk ofdiverting attention from the need to attain formal system coverage of all newlyeli_gblg children (i.e. 6 year olds). Scarce personnel time and funds are bestspent on this latter group, ensuring their complete enrolment and retention forthe full five years. Alternative progrAms could be introduced more effectivelyas this cohort reaches the problem stage (eg. when they are most likely to dropout, around the age of nine, by which time they would have had three years offormal schooling and, presumably, have developed some interest in learning).By that time the school system could develop program norms for children who mustwork and the skill-oriented and better quality education required to offset theopportunity costs to them of schooling, as well as appropriate mechanisms tofollow them through the alternative programs. The goal of ensuring equitableaccess is perhaps better met by a phased strategy integrating formal and non-formal education than the proposed "cafeteria approach" which may not detect thenou-attendance of children.'4 In short, the educational system seems to beattempting too much at ^nce, and would do better to focus on a one-year cohortat a time, motivating parents through various incentive schemes as well asthrough detailed attention to quality improvements in a phased manner, as onlythese are likely to be sustainable.

O A strategy of Rh sad. targeted implementation. covering specific areasand grouRs. particularly illiterete women. also seems to make sense for the newNational Literacy Mission (NIX). An earlier scheme, the National Adult EducationProgram (NAEP), fell far short of its coverage objectives. Moreover, those whopassed through NAEP appear to have retained few reading and writing skills.NLM's emphasis on increasing the number of female instructore, and improving the

14 There is little in the research literature to justifv OPE's expectotions that NFE can accom¢odate allof those missed by the formal system ln the drlve for UE,s ana Lo capable of dellvering e<quivalent' services.As NWE becoams institutlonalised, it Ls likely to develop the rlgidities of the formal system but will lack thelatter's strengtbs (which include some vestigial credibility).

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quality of instruction (by applying new learning techniques and materials) shouldhelp strengthen acquisition of literacy and numeracy skills. Similarly, theproposed establishment of Jana Shikshan Nilayams (JLNs) each serving 4-5villages, to provide reading materials and other facilities for the continuingeducation of the newly literate has much merit.

6.55 Despite these encouraging features, NIXs goals of enrolling 89 millionadults by 1995 appear to be too ambitious -- NAEP reached only 23 million _= aprojected coverage of 100 million in the 1979-1984 period. Moreover, theintended reliance on different voluntary agencies to assist in training literacyinstructors, operating learning centers and JLNs may have overrated thecapacities of these organizations. A possible strategy would be to direct NLUat areas with the greatest backlog of female illiteracy, e.g. districts in theCentral and Eastern states and Andhra Pradesh. An upper limit of 10 or 15% mightbe used to identify target districts. Based on 1981 census data, 133 districtswould be selected using a 10% ceiling. Within such districts, priority shouldgo to lower literacy talukas and to areas with concentrations of scheduled casetsand tribes.

6.56 Moreover, means need to be explored of eliciting and sustaininginterest in adult literacy programs. PENMAS, Indonesia's acclaimed communityeducation program offers interesting lessons (Colletta). This scheme isimplemented by field officers, who cover the equivalent of an Indian taluka, workwith volunteer facilitators of village-level learning groups and hire part-timeinstructors to teach literacy and practical vocational skills courses to suchgroups. Tutors and facilitators offer village groups several different learningmodes including self-study, apprenticeship, teacher-centered courses, and group-based activities which cnnbine instruction and work. A learning fund supportsthe latter mode with loans for prospective income-generating activities.

6.57 The PENMAS model suggests interesting ways of linking NIM and relatedliteracy skills programs with the activities of other schemes or activitieswhich benefit the poor. For instance, ICDS workers could form village learninggroups made up of potential AWWs. Similarly, farmer training centers, the Khadiand Village Handicrafts Corporation, panchayats, NGOs, agricultural extensionagents, and input suppliers can all help form learning groujs comprising thosefor whom literacy skills is a prerequisite for further formal or informal"training" or technology transfer. Emoloyment schemes also provide a promisingvenue for the formation of learning groups. With assistance from NLM, suchprograms could set aside one paid day a week for literacy training.

Finally, there is a natural affinity between this suggested approachthe Training of Rural Youth for Self Employment (TRYSEM) scheme within IRDP.

.- 'EM offers poor beneficiaries skills training (with expenses and opportunityconcs defrayed by a stipend) which is then followed up with project preparationassistance, credit, raw materials, and marketing assistance. Rural banks anddistrict authorities involved in IMDP could foi-m NIM learning groups ofprospective TRYSEM trainees; groups could also be made up of existing recipientsof IRDP loans.

a Early childhood education actitities need to be seen as crucialelements in a strategy to reduce drgn-out rates. Research results make a

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compelling case for supporting programs which foster cognitive development duringinfancy (ages 0-3) and early cnildhood (ages 3-5). ICDS represents a logicalvehicle for such efforts. However, the AWW needs training and continuingencouragement an-: guidance which appropriately trained primary school teachersand education department supervisors can provide. Pre-primary schools (PPS)catering exclusively to the educational needs of 3-4 year olds represent analternative model which is being tested in Tamil Nadu and Karnataka. PPSsemploy women from the concerned community, but are run by the educationdepartment - - this has helped to facilit- ra coordination with the village schoolteacher. The effectiveness of these and alternative models needs to be carefullyevaluated.

o Resource constraints and the large potential audience that remainsto be reached sugLest that oRportunities for collaboration with Rrivate sectorproviders be explored. The scope, diversity and depth of the services alreadyprovided through the private education sector in India have yet to be recognized.In urban areas, private suppliers have established a strong presence, even inlow income neighborhoods, in all of the formal stages of schooling (includingpre-school), while private providers, on an individual basis or organized infirms, dominate the large and still growing coaching and vocational skill field(Chadha and Singh, Jain and Saiyed). The widespread use of tutors by studentsof all income levels is itself a powerful indicator of the poor quality ofservices delivered by government schools. The "informal" education sector alsoresponds to an imbalance in the job market for teachers. Rising salaries andbenefits and slow increase in employment opportunities in government schools haveleft a large pool of would-be teachers prepared to work on a part-time basis,often as a means of gaining experience. The potential advantages of privatesuppliers include broad coverage (area-wise), ability to offer some services evento the poor, flexibility in responding to needs and circumstances, lesscomplacency amongst teachers and managers, and better facilities and equipment(Hariharan). A constant concern is that the services offered, ale highlyvariable and are 'regulated' only by the market, not by public authority. Thisdisadvantage can be overcome and the positive features of the private educationsector retained through a combination of supply and demand initiatives.Specifically, demand could be fostered through use of tuition vouchers, varyingwith parental income, which students could present to private suppliers whichhad been certified following a thorough but open and expeditious review bymunicipal or state authorities.

F. Common Features and Challenges

6.59 India's primary health system, its revised family welfare strategy,Operation Blackboard and other components of NPE, and ICDS are bold andimaginative social sector interventions of great potential significance to thepoor. Each of these initiatives provides diverse services to an impoverished,and often dispersed, uninformed and sometimes uninterested audience. Thedelivery strategy is similar in each case -- government personnel establishdirect and regular contact with prospective clients, undertake educational andmotivational (demand-creation) work and carry out specific service delivery tasks(e.g. provide curative medical care, nutritional supplements, etc.). Fieldworkers are supported and supervised by specialized staff and institutions (CHCs,PHCs, secondary schools) located at the district, block And sub-block levels.

162

6.60 These social service endeavors have many admirable conceptual features.For instance, the primary health system represe-nts a brave attempt to establishan institutional framework to implement the Alma Ata resolution of "healti forall". ICDS stands out as an ingenious response to the interrelated health,nutritional, skill and social development problems of a much negleoted group,children age six and younger. Yet as just discussed, the common approach whichhas been adopted brings in its wake a number of critical challenges andconstraints. Specifically, program auccess depends heavily on the quantity andquality (training, motivation, supervision etc.) of the staff who are deployed.Even without funding restrictions, these initiatives would have to solvedifficult management problems, many having to do with working out, in a trialand error fashion, the tasks, reporting and peer relationships and other featuresof a host of new field positions. For instance, answers must be found toquestions such as: What are the felt-needs of the poor and others in localcommunities? How can service delivery initiatives acquire a credible image withthe public? What sort of individuals can and should be recruited for differentpositions? ilhat incentives, living - ngements, training, supervision andmonitoring practices will favorably aftect workers' performance?

6.61 Many of these questions have been explored intensively in pilot effortsrun by NGOs. However efforts to work out effective and tractable operationalguidelines in the different publicly run social service programs have beenundermined by funding constraints. Multi-tiered administrative and technicalsupport systems, infrastructure reouirements, and high staffing levels make theseschemes costly by nature, and thua inherently susceptible to reso'zrce cut-offs.

6.62 Such funding shortfalls would be tolerable fosr a time in older, ongoingprograms served by experienced and motivated staff who have strong publicsupport. However, India's service delivery programs are still establishingthemselves and thus are quite vulnerable to underfunding, which interferes withthe evolution of effective delivery arrangements. Here, the dilemma that arisesis whether, in view of funding restrictions, to confine the scope of servicedelivery until start-up problems are solved and effective delivery proceduresare worked out, or instead to try to provide some, albeit lower quality servicesto the widest possible audience. The imperative of "prematurely" expandingprogram coverage is understandable. But the risks inherent in this course alsoneed to be kept in view. A likely result in fact is a syndrome, which isnoticeable in India, of underutilization of lower tiers of the health system,and non-enrollment or non-attendance in primary schools and anganwadis.

6.63 The goal of delivering social services to the poor should by no meansbe abandoned as impractical or excessively costly. However, this objective isunlikely to be realized without a reexamination and reorientation of serviceprovision strategy in different sectors. The theme which runs through thesectoral reviews is the need to concentrate resources on high risk groups andcritical tasks, and to forego the aim of delivering complete, integrated servicepackages. In addition to defining service delivery priorities more sharply,various operational issues will have to be resolved and additional resources tobe generate-' through greater cost-recovery, and through relying on privateproviders to supply a greater share of services.

163

6.64 There are some comon elements in the sectoral recommendationsenumerated above. These include the desirability of focusing service deliveryefforts on the most vulnerable, lowest performance groups and regions;determining tne mix of services and a limited number of priority tasks throughclose consultation with client groups and scrutiny of social and epidemiologiccldata and MIS-supplied service statistics; using out-reach workers to improve thecapabilities and skills of clients, therefore ensuring that service delivery hasmultiplier effects; recruiting workers who will be cre4ible and acceptable inlocal communities; using induction and in-service training to change workobjectives and practices and impart a concern for quality of care; shifting fromtarget-orientea administrative anJ evaluative procedures to team-basedapproaches; complementing field-based activities with media campaigns; developingstrategies to share facilities, coordinate activities of field workers andachieve convergence of various service delivery efforts; and exploitingopportunities to 'network" with private service providers, especially thosealready established in poor areas.

164

Annex OneA Study of the Bombay Labor Market

A.1 Though Bombay's'industrial labor market is not typical of India asa whole, and it has suffered a number of reverses recently, it is neverthelessof interest as a key manufacturing center. The trends of unionization, risingreal wages, increasing frequency and severity of labor disputes, and managementresponses all occurred relatively early in Bombay. Moreover, the Bombay labormarket has been extensively studied, most notably by L.K. Deshpande (1983 andforthcoming). Despite relatively slow industrial growth due to variousrestrictions and discriminatory policies, Greater Bombay remains a key centerof Indian manufacturing. Hence it is worthy of a closer look.

A.2 The 197Ce and early 1980s saw increasing unionization of organizedsector manufacturing in Bombay. Between 1971 and 1985, the number of registeredunions in Bombay increased by 14.4% and total union membership rose by 132%.The unionization rate (ratio of union membership to total non-own accountemployment) stood at over 70% in 1981.1 Of particular importance is theincreasing penetratio- of unions to smaller firms. The extent of labor strifeand -onsequent economic losses have been relatively high. Though the number ofstrikes in 1985 was much smaller than in 1971, the debilitating strike in thetextile industry in 1981/82 is not reflected in the former figure. Moreover,duration and man-days lost per strike were much higher in 1985 than in 1971.There was also an increasing number of lock-outs and closures.

A.3 The overall picture that emerges of the Bombay labor market in themid-1980s is one of stagnation in labor demand. This is evident from a 1988survey of 132 factories in the Bombay area. Total employment in the sample asa whole declined marginally by 1.6% between 1985 and 1987. Stagnation waswidespread in the different industries and sizes and types of firms represented,as can be seen from Table A-1. Only firms with 20 to 50 employees showedsignificant positive employment growth between 1985 to 1987, while larger andsmaller firms had negative growth rates.

A.4 This stagnation contrasts with the sharp employment growth between1986 and 1988 in a small sample of 18 manufacturing firms with under 10 employeesin the former year. Total employment in the 18 firms jumped from 136 to 264,an increase of 94 percent, and average employment per firm nearly doubled from8 to 15. At least five firms originally selected for the sample hadndisappeared" between 1986 and 1988, but there is no way of knowing how many hadrelocated and how many had gone out of existence (i.e. had zero employment in1988). Taking the latter into account would reduce sa&ple employment growth,but it would still be substantial.2

IThLs f£gure as an estlmate based on imperfect data. Prom qualitatlve as well as quantitative evldence,it is clear that the unionization rate in Bombay is high by Indian as well as international standards.

.be dynasic employment generation performance of this sample suggests that this ASI figures may not befully capturlng employment growth in small firms.

165

Table A-1EIWLoYNENT IN A SAMPLE OF

B4OIAY IIDJSTRIAL FIRMS, 1985 - 1987

Number of 1985 1987fl=m EmDtloYmet E"tolyoet X Ckans

Total 132 68,520 67.408 - 1.6

Food 12 15.161 14,90 - 1.7Cotton textites 15 22,345 22,548 0.0Textile prcdxcts 17 2,052 2,014 - 1.9Paper 18 3.083 2,988 - 3.1Rubber, plastics etc. 16 6,247 5,684 - 9.0ChrRAcats 14 7,924 7,695 - 2.9Netals end alloys 14 8,366 8,481 1.4Other manufacturtng 16 1.791 1.785 - 0.3Repair service 10 1,348 1,309 - 2.9

By Firm Size (1985 eMmlowment)

Under 20 13 204 196 - 3.920-50 33 1.215 1,307 7.650-100 21 1.604 1,465 - 8.7100-300 30 4,872 4,714 - 3.2300-1,000 18 8,079 7,936 - 1.81,000 or more 17 52,546 51,790 - 1.4

Source: Information from a stratified random saptle of firms. See Deshpende(forthcoming).

A.5 Perhaps whiat is most interesting about the differential performanceof units of different sizes is the sharply va*rying trends for firms that are

contiguous in the size spectrum. Those with under 10 employees increasedemployment sharply, while firms with 10-20 employees saw a decline of 4%, thosewith 20-50 employees a healthy increase of 8%, and those with 50-100 employeesa decline of 9% (the largest decline for any size category). These patterns mayto some extent reflect the impact of different thresholds where variousrestrictions take effect.

A.6 Given the lack of variation in the 132-firm sample and thepervasivenesrh of stagnation, it is difficult to explain changes in employmentat the firw. level econometrically. Nevertheless, some interesting patterns areevident.3 There appears to be no significant relationship between initial firmsize (as measured by 1985 employment) and employment growth. Similarly, capitalintensity (as measured by total capital per worker) had no effect on employmentgrowth. But the share of casual workers in total production and process workershad a strong and highly significant effect on employment growth suggesting thatfirms with greater flexibility to adjust labor force size were willing to expandemployment more than others. Firms which perceived that competition in their

3 DetdLed regression results are not reported her but are available on reqwwt.

166

product line had increased between 1985 and 1987 showed greater declines inemployment, as might have been expected. Similarly, firms where labor relatienswere felt to have improved showed significantly higher employment growth thanthose where labor relations had remained the same or deteriorated. Firms thathad installed new machinery reduced employment significantly more than didothers. This last result suggests that investments were made to substitutecapital for labor as well as to expand output.

A.7 To explain the stagnation of the Bombay organized-sector labormarket, it is necessary to look at changing patterns of labor relations as wellas the more general industrial liberalization that has been occurring. Thebroader trends or unionization, rising real wages, increasing frequency andseverity of labor disputes, and management responses al' occurred relativelyearly in Bombay. Union strength and penetration (to smaLler firms) as well aslegislative protection for workers have all increased. But at the same time,more severe competition has increased the financial pressures on firms to holddorm labor costs. The result has been stagnation in employment even inrelatively healthy firms and industries, as managers substitute capital forlabor, retrench, and relocate, while in sick industries extensive labor sheddinghas occurred despite the safeguards against this. Not surprisingly, the clashbetween trends in unionization and industrial liberalization has led toincreasing incidence of labor disputes and a rising backlog of cases for LaborCourts and Industrial Tribunals.

Annez Table IA

Nonthly For Capita kzpenditure by State and RegionI the lAmer aour Dls. Rural. Curet Prieas. 1983

Adjusted LA Adjusted LAUnadjusted Adjusted LA Schedulod Caste Scheduled Tribe

Qf ZLf20l40 amam204=D 0 20 020a ZQ g me u0an

.... ............ ,.... ..... ,...... ........ .................... ._... __...... _...... .. ... ......... ....................... ...

A.?. 53.6 75.6 115.7 55.0 73.3 109.7 49.4 66.9 93.6 47.4 67.9 89.9larnatdxa 51.A 75.6 117.2 53.1 72.4 103.1 45.4 61.0 82.6 47.8 60.4 79.6Keral* 63.0 87.9 145.4 49.1 66.5 106.2 43.9 57.7 78.8T. Nadu 46.4 71.5 112.6 49.3 72.8 108.7 42.4 60.9 86.4

S. TOTAL 52.7 76.6 120.3 52.0 71.8 107.4 45.5 62.6 87.1 40.9 56.1 74.2

Bihar 47.2 67.2 93.8 44.8 61.4 83.3 40.6 52.8 68.7 37.0 51.3 72.4Orissa 46.0 70.6 98.9 47.7 71.5 98.9 46.6 64.2 87.8 38.9 53.7 72.3W. Bengal 46.5 72.0 104.7 40.8 60.7 87.0 40.2 56.3 79.3 39.5 52.7 71.3

E. TOTAL 46.8 69.4 98.3 44.0 63.0 87.4 41.3 56.1 76.4 38.3 52.6 72.1

M.P. 46.6 67.6 100.6 50.3 70.2 103.7 49.0 64.2 91.2 44.4 60.2 77.5Rajasthan 50.0 76.4 127.1 62.0 90.5 147.0 61.2 85.1 128.3 46.1 61.6 104.0U.P. 48.1 70.5 104.5 57.2 78.1 116.6 53.3 68.2 99.3

C. TOTAL 48.0 70.8 107.4 56.2 78.2 118.5 53.7 70.0 102.4 45.4 61.0 91.3

Gujarat 65.6 86.5 123.2 66.7 85.5 116.7 62.5 77.0 99.6 50.4 64.6 79.6naharashtra 53.0 73.8 110.9 57.4 74.6 107.6 53.6 67.1 92.2 52.5 64.7 88.9

W. TOTAL 57.6 78.5 115.4 60.8 78.6 110.9 56.7 70.6 94.8 51.5 64.6 84.6

Haryana 74.2 104.9 151.1 88.5 123.3 177.9 76.9 98.8 133.4H.P. 76.2 107.0 151.3 78.3 106.3 147.2 65.5 92.8 123.6Punjab 79.7 116.5 170.6 103.4 151.2 218.6 89.2 120.5 170.0

N.V. TOTAL 77.0 110.6 160.4 93.8 133.6 192.0 81.9 109.7 151.8

All-India 5n.8 73.7 112.6 53.3 73.9 110.1 50.8 67.6 95.2 43.4 57.9 79.3

Source: Calculated from National Sample Survey, 3e-t- Round.La Adjusted for systematic class and statowise differences in prices.

Amex Table 1B

Nmnthly Per Capita Lkp.ndltu by State and RegionIn the Lower Four Deetls. Urban. Current Pr ces. 1983

Scheduled CasteUnadiusted Adj=uted /a Adjusted /a

D_2Q 2040 An 0-20 20-40 MM20 20-

... ..... ............... .............. ........................................................ . ...... ................. ... ...... .......

A.P. 68.6 103.9 161.1 66.6 97.6 148.2 59.2 85.1 132.5Karnataka 66.6 104.2 173.9 69.6 97.5 158.4 60.0 86.2 126.0Kerala 65.4 100.1 179.8 55.1 82.4 148.1 46.1 70.8 112.2T. Nadu 66.5 101.2 172.5 64.3 93.6 153.7 52.4 71.2 107.0

S. ToTAL 67.0 102.6 170.4 65.3 94.5 152.7 55.8 78.9 119.3

Bibwr 64.5 88.7 141.7 61.6 80.6 122.3 53.0 73.1 107.1Orissa 69.9 101.2 154.6 70.5 97.3 149.3 63.2 85.7 113.5W. Bengal 71.9 105.6 176.3 69.7 96.7 155.9 61.1 84.9 122.6

E. TOTAL 69.2 99.4 162.0 67.1 91.4 143.8 58.8 81.3 116.5

M.P. 69:7 99.8 149.3 79.0 108.9 161.0 68.8 91.6 125.0Rajuithan 71.1 105.7 263.2 86.5 120.7 182.8 83.0 109.0 156.1U.r. 61.3 86.1 139.0 70.6 97.0 147.6 66.8 89.7 127.2

C. TOTAL 65.5 93.7 146.5 76.0 104.9 158.1 70.9 94.4 132.9

Gujarat 85.5 115.2 169.2 81.7 105.5 152.1 77.0 103.7 134.5Maharashtra 72.3 110.0 190.4 74.8 101.6 163.1 64.6 81.8 116.6

W. TOTAL 76.6 111.7 183.5 77.0 102.9 1Ui9.5 69.1 89.7 123.0

Haryana 84.4 119.3 101.9 107.1 151.5 243.1 94.2 117.2 186.3H.P. 98.3 165.4 268.8 94.4 154.9 250.3 90.7 117.4 178.8Punjab 77.6 116.5 190.5 101.2 137.8 225.4 90.3 114.9 178.6

N.V. TOTAL 80.9 119.5 161.2 103.1 143.5 232.9 91.2 116.2 180.3

All-India 68.8 104.4 169.9 71.5 102.2 160.8 65.8 88.7 128.6

Source: Calculated from National Sample Survey, 38th Round./A Adjusted for systematic class and statewise differences In prices.

dr,

Anmex Table 2

Average Monthly Exypedlture In the lAer FourDeciles, by State, Rural and Urban, 1970/71,1977178. and 12f3. ln i. £i 1970 uriceR./A

RURAIL URA1970/71 1977/78 1983 1970/71 1977/78 1983

0 200 Q 20-40 02 20-4Q 0_-20 20-4 D-2 20.40 Q2 State/Region

............... __._. _.___. __.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A.P. 18.1 24.3 19.5 26.6 19.5 26.0 22.3 31.8 23.9 33.0 23.4 34.2Karntaka 18.7 25.6 18.2 25.6 18.8 25.6 22.9 31.1 23.9 32.5 24.4 34.2Kerala 12.9 18.1 13.7 20.0 17.4 23.5 15.2 23.3 12.9 21.0 19.3: 28.9T. Yidu 15.7 21.9 16.2 22.8 17.5 25.8 19.2 27.2 19.7 27.2 22.6 32.8

S. TOTAL 16.7 22.8 17.3 24.4 18.4 25.4 20.4 28.) 21.1 29.4 22.9 33.1

Bihar 17.5 23.9 15.2 22.0 15.9 21.8 23.1 31.3 2e.3 27.4 21.6 28.3Orissa 13.9 20.6 13.3 18.9 16.9 25.3 24.3 34.3 20.6 30.1 24.7 34.1V. Bengal 14.8 20.5 14.4 21.0 14.5 21.5 25.9 37.3 23.4 33.5 24.5 339

E. TOTAL 15.9 22.2 14.6 21.1 15.6 22.4 24.9 35.2 22.1 31.1 23.6 32.0

M.P. 16.7 23.3 14.3 18.9 17.8 24.8 25.5 35.6 24.8 33.1 27.7 38.2Rajasthan 19.5 29.1 26.5 38.2 22.0 32.0 29.7 41.5 31.4 41.5 30.4 42.4V.P. 19.2 27.5 22.8 30.7 20.3 27.7 23.1 32.4 26.8 35,9 24.8 34.0

C. TOTAL 18.6 26.6 21.2 28.9 19.9 27.7 25.') 35.1 27.1 36.2 26.7 36.8

Gujarat 19.9 26.6 22.4 30.4 23.6 30.3 26.5 35.7 30.0 39.1 28.7 37.0Maharashtra 20.2 28.4, 21.U 27.2 20.3 26.4 28.1 38.2 29.6 41.9 26.3 35.6

V. TOTML 20.1 27.8 21.5 28.4 21.5 27.8 27.6 37.4 29.7 41.0 27.1 36.1

Raryan, 28.1 41.7 29.5 41.2 31.3 43.7 30.8 48.4 34.7 46.7 37.6 53.2H.P. 30.9 41.4 27.2 35.6 27.7 37.6 32.2 47.9 34.8 47.5 33.1 54.3Punjab 36.4 48.2 32.9 48.6 36.6 53.6 39.4 53.3 32.5 47.3 35.5 48.4

N.V. TOTAL 32.4 44.7 30.7 43.8 33.2 47.3 36.1 51.4 33.4 47.1 36.2 30.4

All-Ind£a 18.4 25.7 19.1 26.5 19.4 26.9 24.7 34.5 25.3 34.9 25.6 35.4

Source: National Sample Survey, 25th, 32nd and 38th rounds.La Data to be adjusted to correct for systematic class and state-vise price differences.

Anmex Table 3

latribution _f Rural Realonh by Reat -aMe Brackets (19701 p1 rims) for Males1970/71-1972I73 and 1982183 - 1984,85

Wage Brackets Distribution of Regions1970-73 1962-85

AP-Inland N, AP-South V, Karnatak-Inland S, MP-SW, Naharashtra-E,AP-Inland 5, Bihar-S, OCrsse-S, Orlss-N, TN-Coastal-N, UP-S.Gujorat-E, Gujarat-Plains N,Karnataka-Intwnd N, NP-Chhatisgarh, NP-Viidiya, NP-C,IP-Nalwa Plateau, NP-SW, NP-N,

leas than NP-SC, aharoashtra-Inltd W,Rs.2.50 Maherashtre-Inland C,

Naharashtra-lnlnd E, Oris-Coastal, Orissa-S, oris-N,TN-Coastal, UP-E, UP-S.

AP-Coastal, Bihar-N, AP-Inlinds, Bihar-S, Krnstake-lInland E,Si ar-C, Gujarat-PLain-N, Kornataka-Inlmnd N, NP-Chhatisgarh, NP-GuJerat-Dry Ares, Vindays, NP-Matl. Plateau, NP-Northern,Karnetaka-lntand E, Mabarashtra-Inlnd W, Naharabtra-Inland

Rs.2.50 to Karntakas-Intand 8, N, horashtra-Inlend C, Naharashtr -Rs.2.99 h hereshtra-Coastal, Inland E, Orissa-Coastal, Rajasthan-S,

Naharashtre-E, Rajasthan- TN-Coastal, UP-C, UP-E.*E, Rujasthan-S.Rajasthan-SE, TN-Coastal,TN-S, TW-Inland, UP-C.

Assam-Plains E, Assan- AP-Inland, AP-IS, Assn Ploins W, Bihar-NPtafns U, Nimachal, UP-V, Blhanr-, Gujarat-E, Sujarat Plains N,

Rs.3.00 to WI-Nfmmlayan, WI-C, WBI-, Gujarat Plains S, Gujerat-S, MP-C, MP-SC,Rs.3.99 WI-E Plains. Maharashtra-Coastal, Rajesthar-SE, TN-S,

TN-indand, UP-V, WI-N1melayan, U4-E,Plains, WB-C, WB-V.

Assam-Nills, Gujarat- AP-Coastal, Assm-Plains E, AssunNOils,Sourashtra, Naryana-E, Himachal, Rajasthan-W, Rajathan-HE, UP-

Rc.4.00 to Kerale-N, KeraLa-S, Hi_mlyenRs.S.49. RJajsthanti, UP-Hiamlayn.

Haryaika-W, Punjab-N, GuJorst-Saurashtra, Karyans-E, Harysna-W,R.5.50 Punjab-S Klrean-N, Kerala-S, Punjab-N, Punjab-S

cbow

Note: Abbreviations, E,W,N,S, and C refer to East, West, North, South and Central,AP, MP, TN, UP, and WI refer to Andh Pradesh, Nadhye Pradesh, Tamil Nadu,Uttar Pradesh and West Bengal.

Source: Different issues of Aaricultural Wanes in India, Directorate of Statistics,Ninistry of Agriculture, Governvent of India, as nalyzed In S. Aherye(1988).

Annex Table 4Distribution of Rural Resions by Real Wane BrEakets (1970T prices) for

fgfqaaes. 1970171-19?273 and 1982/83 - 1984155

Wage Brackets Distribution of Regions190-73 19a2-85

AP-Inlard N, AP-SW, Kernataka-Inlad S, Mahonrshtrna-,Karnatake Inland-S, Naharashtra-Inland E, TN-Coastal-N, UP-S.Karnataka-Inlnd 1, NP-Chhatisgarh, NP-Vindhys,MP-Hahna Plateau MP-SW,

less than MP-SC, Nkharashtre-intend W,Rs.1.75 Naharahtra-Inland 11,

Narahtra-Intnd C, Orissa-Coastal, Orisse-S, Orisse-l,RJaJsthan-S, TN-Coastal, TN-STN-Inlard.

AP-Coastal, AP-Inland S, AP-IjlaNd-N, AP-SW, Karnataka-Intmnd E.Bftear-S. Bihar-N, Bihar-C, Karataka-Inland N, NP-Chhatisprh, NP-Gujarat-Plain-S, Vindhya, NP-NaLe. Plateau, MP-SW,Gujarst-Dry reas, Nahorashtra-lnlan W, Pahorashtra-InLand

Rs91.75 to Karnataka-inland E, N, laharaahtr*-inland C, NIharashtra-ERs 2.49 NP-C, NP-N, Nabarashtra- Naharashtra-E, Orlssa-Coastal, Orissa-S,

Coastal, Rajasthan-u, Orissa-N, Rajasthan-NE, Rejasthen-S,Rajasthan-NE,Rojasthan-SE, Rajasthan-SE, TN-Costat, TN-S, UP-S,TN-Coastal N, UP-S, Ue- WB-E Plafns.Plains, WB-W, UP-E.ME. Rrjasthan-S,Rajasthan-SE, TN-Coastal,TN-S, TN-Inland, UP-C.

AsswnPlain W, Ass_n- AP-Coastal, AP-Inland-S, Bihar-SHills, Naryanu-E, Bihar-N, Gujerat-E, Gujarat Plain N,

Rs.2.50 to Harynw-W, Kerala-S, UB- Gujarat Plain-S, Gujarat Dry Ares,Rs.3.24 Nimlayan, UB-C. IIP-Cmntrat, NP-SC, Nahrahtra-Coastat

Rjasethan-W. UP-Himltayon, UP-C, UP-E,U--Nimlayan, We-C

AsesPlain U, Assam-Hhits, Asses-Plains-E, Asses Plain-U,0aryars-E, Narymna-W, Asse Nilts, Bihar-C, Gujarat-Kerate-S, UP-Himlayan. Saurashtra, Himachal Pradesh,

Rs.3.25 to Kerala-N, UP-U, UB-WRs.4.50

Punjab-N, Punjab-S. Naryna-E, Naryana-W, Kerala-S,Rs.4.50 Pmjab-S. Punjab-N, Punjab-S.andabove

Note: Abbreviations, E,W,N,S and C refer to East, West, North, South anm Central,AP, NP, TN, UP, and U refer to Andhr Pradesh, aedya Pradesh, Tdmil Nadu,Uttar Pradesh and West Bengal.

Source: Different issues of Asrniultural Was in India, Directorate of Statistics,Ninistry of Agriculture, Govenrrdnt of India, as analyzed in S. Acharys(1985).

I

Amex Table 5Distribution of Regions by Trend Growth Rgtes In Resl Wwoes.

1970/73 - 1982185

Growth Rates males Feales

As*a-Plains-h, AsswHfills Assam-Ntlls, UP-HimalaYn.les then Nah-E, Karnataka-:ntand-S,0.00 Punjab-S, Punjab-M.

Niachal, Orissa-S, Ass_a-Plains-V, Kamrntake-Intand S,0.00 to Rajasthan-S, TN-Coastal- Punjab-N, TN-Coastal M, UP-W,0.99 N, TN-Coastal, UP- UP-S.

HIl_layan, UP-C, W-S,i-NHimayan, US-S. Plains.

Sihar-S*, Bihar-N, Bihar-l, Himschal', HP-SI*,Neryww-E, Karnataka-Inland Hashreshtre-Coastal, Rajasthan*-W,

1 to E, HP*-C. NP-SC*', P-SM, RaJathln-NE, TN'-C, TN-Intla,1.99 Neharashtra-Inlandl W, UP-C, SB-HINlmayan, MS-E Plains.

Narashtra-Inland N,Orissa*-N, Rajasthsn-W,RJaJsthan-NE. Rajusthan-SE, UP-M*, W-Plais-C.

AP-Inland*S, Bihar*-C, AP-Inland*-S, Assm Plains'E,.GuJarat -E, Gujarat- Gujarat-Plains Northern', Naryana-Plains'S, Gujarat-Dry- Eastern', Karnataka-Intand* E,

2 to Areas, Haryana-W, Karnataka-Inland' N, Naharashtro-2.99 Karnataka-Inland* M, Inland' W, Maharashtra-Eastern',

HP-aluaa Plateau*, Orissa-Coastatl, Oriss -S*, Orissa-Msharashtra-Coastal-, M*, Rajasthan-SE*, TM-SO, UP-E*,Naharasbtra-Inland* E, Vs-C* Plains.Oriss-Coastal*, TN-P,TN-Inland*, UP-E*,WU-V Plains*.

AP-Coastel*, AP-Inland'-N, AP-C*, AP-Inland*N, AP-S*, Sihar-C*,AP-SW', Assam-Plins' E, Bihar-S*, Gujarat-E*, aujarat-Plain'SGujarat-SaureshtraO, Gujarat-Dry-Aree', Guajrat-

3 and Kerala-N*, Kerala-SP, Saurashtra*, HaryV a-W*, Kerale-N*,above HP-Chhatisfarh*, HP- Kerala-S*, NP-Chhotissarh, hP-

VintayaP, NP-Northemn. Vinhyl*, NP-C', NP-Halte Plateau*,NP-SC', NP-Northern, Naherashtra-Inland* M, Haharhshtra-inltnd* C,HNharashtra-inland* E, Orim-Southern*, RaJesthan-S*, U-V' Plains.

Note: Abbreviations, E,W,N,S aid C refer to East, Vest, North, South and Central,AP, MP, TO, IF, and U refer to Aindhra Pradash, Nbdhys Pradesh, Yamil Xaau,Utter Pradmsh and West Bengal.

Source: Different issues of AariCeultural Wams in India, Directorate of Statfstics,Ninistry of Agrfiulture, Govenment of India, as analyzed in S. Acharys(1w|).

Annl table 64Prwrtiii a aws him Fo.tt Ues

ty State SW Amin, bra, I97, 1993, 19"

I197 19 3 .Rtehil Caste tkile tribe

Preprtil Alrs lo0) Preortim htrs too) PrWpertim biers too) Proertie Nb r 40001 rewrtim ber.s 01001

isle Poverty h Pety 3.3. Wtra khim Pety kli Poety hI tr? hIm PortY hI overty I ItrA kl Pert h Pvty Utr el PvtT kI Po ty i t Ultra

UN Ue Perty "U N Li Poerty Ls ULe Li UN Poverty Lie Use Ui Pvrty Lien io UrU Plmerty Lis

S.F. 51.3 20127 1177o 44.3 2100 943 42.1 2152 1313 53.9 47 i1" 51.1 9m 747

rwetaa 55.4 1252 16 44.U 125W7 7RB 4U.B 279 499 3.5 25J 11351 2.1 1094 145

Keln 12.9 33 Hlo 551.8 51371 6441 4U.2 taw 4313 10.3 1144 IIi - -

T. Ib 47.4 5t952 12334 4.7 17034 9414 4. 11214 91 61.0 479 29

S. TPM. U2.4 114 l245 41.7 6l 3S4 44,1 41.t 36U7 59.1 I3M 1029 59.3 21 312

Iar 43.4 37372 395 44.4 4214 59 13.5 4335 2MW 79.1 143 545 12.1 4394 2913

Obis. 44.2 19 Om2 4.5 12214 451 44.9 22m 401 54.3 2IN 115 15.? 4451 3962

3. h_d U7. 2 5 14 "4. 200 15911 57. 2432 5Is2 U1.9 11n 41 71.3 23 UI5

E. 1il 65.5 9 H5 44715 40.4 NW7 46127 51.4 S1352 41374 N0.1 11131 l153 71.1 11f19 56s

P.A 59.2 2103 1299 51.6 2S23 121535 48 4 23132 117 54A M1 m92tl 44.3 13? S2

klo" 43.5 74 5141 27.9 33l 372 25.1 04 s2 30.0 15% AM 55.1 241 241

U.P. 4.1 349 1752 0.6 NW49 19723 37.t 39319 1717 9.9 11311 5pH-

C. 19il 47.7 44229 S542 4.3 70571 3456 39.3 70516 S31 47.4 14756 61 451.4 l773 63"

61ieat 55.2 10014 475 L. 34 297 29.4 037 2494 41.9 74 24 .5 s3l3 15

h4 strra 47.9 197 go9 44.9 203t2 50e 43.S 2035 tl29 57.5 15 1 0.4 34 19m

V. 1011. 4.9 2411 1R41 41.9 21m 2m9 19.1 23422 12122 52.1 2719 170 0.4 2 3m

Irwya 1751 144 551 *I0.0 10 240 a,4 96 23 17.1. 3Sf 112

t.P. I14 531 146 U4.3 492 192 14.2 653 114 23.9 265 I4

Ptiab 4.9 42 I5 4 6 02 125 3.7 513 It5 7.4 301 i f *

1.1. IOTI. 15.9 2107 90 6.5 27 557 7.1 217 509 12.M 942 22 - -

1195 53.4 2314 5345A 44.9 252116 129555 41.7 252257 1235 S4.2 52337 234" 42.2 31004 ItSS

Srsc: Calculated froe bimia Sbeol Shrv25 ad llt r .

Wes:5e141

Aaam table 69Pro rties aed ber Sloe otrty LineS State a1 Regins, Urba, 970, 1SO 3, ISt3

H.1970 19"3 199 Sc1dwl Clte

Prpotlss big-s t0o) Prawrtio, haers 000) Prowortio heri (0003 Protetite 11lrs (0001elo iovert kin Poventy blew Ultra blow Poverty Blo Poerty belv Ultra Belo Poverty blow Potty Selo. Ultra blw hnrt" ki n owety S lo. Ultra

'Lie Line Powerty Ln Li"e Lte fverty tise List Lit Poverty Lin U Lin Poverty Une

&.P. 9.2 4214 233 41.3 5753 2972 39.3 6269 3019 49.0 714 382Karateks 4.7 3529 2154 3.6 43 254 34.1 5089 ml 44.5 6A URKerala 66.0 2332 1751 50.9 269 1613 4.3 29n 373 II.1 231 1431. Irk 12.1 7695 5391 43.2 1463 M 0.8 0272 4234 .4 1441 n2

S. TOTAL 51.1 17941 1142! 42.3 20523 11421 39.7 22602 .!711 55.5 3t4 Is

sitar 54.1 3119 1914 52.9 574 307 50.2 57 32 6.6 693 436Itius 43.4 903 423 39.5 1411 629 36.4 1527 633 54.3 239 90V. k t1 35.1 3I09 2063 316.6 403 3002 36.1 4"a 3124 S1.2 m 42

E. TOTAL 43.i 7930 400 43.5 1249 669 40.9 139l9 7019 5., 195 1010

No,. 4.4 2796 I1 32.1 3832 15n 29.0 N6 15" 42,4 176 346hastik 31.6 3459 497 24.0 1956 765 21.7 20 771 2L6 36 lS3U.?. 49.0 4056 sip 42.7 164 5044 39.7 105I1 1264 45. 1356 755C. TIAL 4?.? 10201 3365 36.2 15422 7392 33.2 16657 76M5 41,1 239 1236

Sojarat 46.9 3581 1691 31. 3 362 1254 28. 3862 120 32.6 315 113hAb%aU tra 35.e S725 ;57 31.7 7192 3a79 2. 9322 4133 52.9 0 526

U. TOTAL 39.3 9306 .4748 $1.6 1044 5133 29.9 12194 5343 45.6 1221 63Hhryama 21.2 364 170 11.1 354 90 9.5 a56 32 21 94 13LP. 23.9 59 26 13.4 49 li 11.3 50 20 . I9.II IIPfiab 12.3 02 77 15.1 612 219 13.7 93i 10 25.2 25M %6

N.L TOTAL 15.9 945 273 13.9 1214 III 12.1 1239 324 * 22.2 40 0i3

1814 45.5 508 21392 3.4 S4653 31460 33.6 100n 32966 47.3 M205 492

Ltu.exA:xT4I

Annex Table 7Selected Chaacteristics by State

(1) (2) (3) (4) (5)

A.P. 3.59 12.8 5.2 1.20 1.65Karnataka 1.06 14.8 7.1 1.19 1.46Kerala -0.52 14.6 5.2 1.17 1.05T. Nadu -1.35 18.9 8.2 1.18 1.25

S. TOTAL 1.24 15.2 6.4 1.19 1.38

Bihar 0.39 17.7 6.1 1.24 1.81Orissa 1.54 19.4 6.5 1.23 1.48W. Bengal 0.77 8.8 4.1 1.13 1.36

E. TOTAL 0.91ZA 15.0 5.5 1.20 1.59

M.P. 1.90 18.7 6.9 1.24 1.63Rajasthan 1.80 14.4 16.4 1.27 1.62

i U.P. 3.68 20.3 5.7 1.31 1.74C. TOTAL 2.83 18.9 7.8 1.29 1.69

Gujarat 2.97 18.2 4.2 1.17 1.35; aMharashtra 6.79 12.2 5.9 1.27 1.49; VW. TOTAL 5.28 14.3 5.3 1.23 1.44

Haryana 3.39 17.3 1.1 1.30 1.31H.P. 0.64 27.7 4.5 - -Punjab 5.78 17.8 1.9 1.24 1.11

N.W. TOTAL 5.43.b 18.9 1.7 1.26 1.20

All-India 2.70 16.4 6.1 1.23 1.53

Source: Columns 1-3, Ministry of Agriculture; Columns 4-5, Census of India,Occasional Paper Number 3.

Explanation: Column 1 -- Rate of Growth of Food Grain Production 1970/73-1982/85.Column 2 -- Proportion of Rural Households Receiving IRDP Loans,

1980-85.Column 3 -- Average Number of Work Days Per Year on NREP and RLEGP

per rural household, 1985/86-1986/87.Cclumn 4 -- Size of rural cohort age 15-19 relative to cohort age 20-24.Column 5 -- Size of rural cohort age 5-9 relative to cohort 15-19.

LA Includes Assam.& Includes Jammu and Kashmir.

Amse" tabl. 9Hae ad Salary £cainp, By isastry, Rural &Ad Uran Adult (15-59) Haless 1963, R r W ay

Casual kges Sal in

Rural rban ltru

Non- Indstry Persnasl ltl.dinr lmdsstry Persons)Agriculture . Ariculture Agriculture (20-291t3W391 Constrtction Srvices Agriculture) 120-291(34-39) Trade TranspWrt Servicsn Ail

A.P. 6.53 0.04 7.44 10.92 10.78 11.04 i7.59 .5a 116.n 23.49 12.16 19.15 22.72 20.31

Bibar 6.31 10.1 0.2 0.04 6.24 10.91 7.56 S.72 15.61 33.06 14.9 27.6 26.32 2.76

Karnataka 5.56 9.74 7.06 9.53 9.59 1S.79 8.17 9.54 19.56 27.24 11.72 21.4 24.65 22.9

Uratel 14.96 16.19 16.84 14.0 15.93 23.S7 10.25 17.17 16.3 31.01 16.16 29.27 24.38 24.78

flhara!hra 6;36 9.14 7.37 11.96 9.93 12.85 9.48 10.65 21.14 31.19 11.05 27.07 26.M6 26.26

H.P. 4.92 7.6 S.'9 0.23 1.17 11.15 6.63 8.92 14.14 25.91 10.54 17.59 19.2 20.25

Grits * 5.95 6.79 6.74 13.69 10.34 10.91 9.51 10.19 16.28 31.3 14.16 21.42 23.07 23.21

Ristban 6.06 15.83 t1.61 10.04 11.18 11.15 9.45 11.36 15.35 16.74 11.1 21.73 22.48 20.29

INDIA 7.06 10.53 .9.54 10.93 13.57 12.46 9.12 10.89 19.55 25.66 14.62 23.8 24.87 23.72

Swce: Natiosal Ssple Survey, 39th Roind.

Lotus: n6TGA

NaP nd Salary Earimp, lly Industry, Rural ad tIrba Adlit 115-59) Iulusil5-59) Fules 198 Rs per y

Casul YIRS Salriei

Rural Orban grbin

A11 UrbsNao- ltastry P rweal lusludio Itstry er#wal

Agriculture Agriculture Agricalture (20-2tl (30-39) Construttio Services Agriculture) 120-2q)(30-39) trade Trmprt Service All

W.P. 4.38 5.34 4.41 5.22 6.6B 7.04 3.77 5.04 6.44 13.4 14.47 13.74 15.U 14.98

Dibu' 5.77 4.61 4.12 4.13 4.33 9.24 4.3 5.02 1.5 23.46 0 0 20.94' 20.76

Karmtaka 3.97 4.16 '.22 4.76 5.07 5.09 6.40 4.74 6 93.7 1.43 20.U3 15.6 11.17

karal 9.85 6.4 12.17 5.09 2 14.96 9.33 6.65 6.75 25.51 19.1S 22.16 20.20 20.45

aarastra 3.79 4.61 4.05 4.63 6.22 S.9X 3.69 3.49 12.94 24,67 11.16 21.1 20.22 20.78

II.P 4.15 5.42 5.74 5.82 5.6 6.11 3." 5.76 4.97 12.22 3.45 11.05 14.31 11.84

OriUs 4.49 5.04 5.46 3.97 5.4 6.16 3.97 5.05 0 11.5 0 0 12.53 13.17

bjUtaan 5.35 5.71 ; 5.5 4.42 ?.:7 5.K3 5.2 5.35 3.07 10.31 0 1.79 14.65 13.96

INSIA 4.9 5.11 5.03 4.99 4.37 7.1 5.37 5.3 7.97 24.32 14.53 22.71 17.9 17.31

Sce: Natioal Sple Suvey, 36th Rond.

Lotus: atT

Annex Table 3-1

STATEWISE COMPARISON OF IRDP OVERDUES

Proporation of Overdues when Overdues whenSubsidy Counted Grant Subsidy only repayments

Against Loan is Included by borrowersRecovery in Recovery are considered

(Reported Overdues)

Haryana 100. 20% 63%Tamil Nadu 100% 44% 83%Bihar 100% 15% 78%Orissa 97% 35% 73%Maharashtra 92% 40% 67%Gujarat 90% 25% 69%Karanataka 62% 53% 84%Madhya Pradesh 62% 0% 68%Ptunjab 44% 39% 64%Andhra Pradesh 30% 47% 64%Uttar Pradesh 30% 40% 63%Assam 25% 43% 62%Rajasthan 4% 59% 62%West Bengal 14 40% 41%Kerala 0% 514

Total 38% 68%

Source: NABARD

Anmex Table 5-1

Per Canita Revenue Exoenditure on Social Services. by State1980/81 Prices/a. 1976/77 - 1986/87

1976/77 1980/81 1983/84 1986/87

A.P. 70.0 (30.6) 95.3 (33.3) 135.5 (41.5) 175.1 (42.2)Karnataka 73.6 (29.6) 88.1 (28.1) 92.4 (27.5) 138.5 (33.4)Kerala 117.1 (42.9) 139.3 (45.1) 126.5 (42.4) 165.2 (41.6)T. Nadu 79.2 (36.3) 90.1 (30.0) 121.8 (35.4) 141.4 (40.0)

S. TOTAL 80.9 (34.0) 99.0 (33.0) 120.3 (36.7) 155.3 (39.5)

Bihar 33.5 (34.3) 57.4 (32.3) 61.8 (34.0) 67.8 (30.8)Orissa 66.8 (29.8) 92.2 (29.4) 90.0 (32.8) 106.2 (32.5)W. Bengal 72.3 (37.7) 99.6 (37.7) 103.5 (39.3) 125.8 (38.3)

E. TOTAL 53.4 (34.7) 78.8 (33.7) 81.8 (35.7) 95.6 (33.8)

M.P. 59.4 (29.6) 71.9 (25.2) 83.9 (29.1) 102.0 (31.5)Rajasthan 71.0 (30.1) 79.2 (28.8) 91.2 (34.3) 107.7 (31.9)U.P. 42.5 (24.0) 63.7 (29.3) 64.9 (27.8) 73.18 (26.8)

C. TOTAL 51.9 (26.5) 68.6 (28.1) 74.5 (29.3) 86.8 (28.9)

Gujarat 94.3 (35.9) 106.4 (30.3) 123.0 (31.8) 164.7 (36.3)Maharashtra 82.4 (28.3) 105.2 (27.3) 129.3 (31.2) 153.9 (32.7)

W. TOTAL 86.6 (31.0) 105.6 (28.4) 127.1 (31.4) 157.5 (34.0)

Haryana 77.4 (22.9) 103.7 (24.2) 120.0 (25.3) 131.0 (21.9)H.P. 122.3 (31.1) 198.2 (30.3) 180.3 (36.2) 238.1 (34.2)Punjab 115.8 (29.6) 137.6 (32.5) 136.0 (24.7) 153.2 (27.5)

N.V. TOTAL 102.1 (27.3) 132.4 (29.1) 135.4 (26.4) 155.2 (26.2)

INDIA 68.4 (30.2) 87.6 (30.1) 99.5 (32.7) 114.2 (33.1)

Source: RBI Bulletins, Different Issues.

/a Share of Social Service in Total Spending is in parentheses.

wp:a:TIV-2

Annex Table 5-2

Pe Cauitm Revee Enaditure on E_dcation. ba Statg.

190081 Prices, 1976fn7 - 1936/87 /a

1976/77 1980/81 1986/87.*. ........ __...... ..... ............. ............ ........................................

A.P. 36.5 (21.8) 43.3 (19.8) 67.7 (19.3)Karnataka 41.6 (21 7) 46.8 (20.3) 65.4 (20.9)Karal 80.7 (37.0) 84.4 (32.1) 103.0 (30.2)T. Nadu 42.3 (23.4) 48.5 (20.6) 59.1 (20.2)

S. TOTAL 46.2 (24.6) 52.0 (22.0) 70.0 (21.6)

Bihar 17.9 (20.7) 34.0 (25.4) 37.0 (21.4)Orissa 35.8 (21.3) 40.9 (19.8) 49.8 (19.9)V. Bengal 34.9 (22.3) 45.3 (22.2) 68.2 (24.9)

E. TOTAL 27.2 (21.4) 39.3 (23.3) 50.6 (22.4)

.p. 30.1 (21.5) 33.0 (16.9) 46.5 (17.8)Rajasthan 37.5 (20.8) 42.9 (21.2) 60.3 (21.0)U.P. 27.5 (22.9) 31.7 (20.7) 42.1 (20.5)

c. TOTAL 29.9 (22.2) 34.0 (20.0) 46.5 (19.9)

Gujarat 60.7 (29.7) 53.3 (20.0) 81.4 (20.7)I ahexashtra 47.3 (20.7) 61.2 (20.3) 79.6 (19.8)

W. TOTAL 52.0 (23.8) 58.4 (20.2) 80.2 (20.1)

Haryan 46.1 (19.4) 56.0 (18.1) 66.6 (17.2)H.P. 79.7 (19.4) 103.7 (23.5) 118.9 (20.2)Punjab . 61.6 (22.7) 82.8 (25.3) 81.7 (21.1)

N.V. TOTAL 58.0 (21.7) 75.2 (22.3) 80.5 (19.5)

INDIA 38.8 (24.4) 46.1 (22.7) 61.4 (22.1)

Source: RBI Bulletins, Different Issues.

.A Share of education in total spending shown in parentheses.

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Mahar, D.J., "India's Health: Planning and Financing IssuesP, AS4ND/EAS, 1"@8.

Pulley, R.V., 4faking the Poor Creditworthy: The Integrated Rural DevelopmentProgram", AS4CO, 1989.

Ravishankar, V.J., 'India: Government Expenditure on Social Services 1976/77 -86/87", AS4ND, 1988.

Stout, S, "Changing the Signals: Family Welfare Strategy in India', AS4PW, 1988.

Subbarao, K., "Improving Nutrition in India: Policies, Programs and Impact",AS4ND, 1988.

Thalwitz, Margret C., "India Issues in Urban Poverty", AS4CO, 1988.

Vu, M., Bos, E., and Bulutao, R., 'Asia Region Population Projections,'1988-89Edition", PPR, 1988.

World Bank, (1987a) India: Agricultural Extension Sector Raeview.

World Bank, (1987b) India: An Industrializing Economv in Iransition.

World Bank, (1988a) India! Recent Develonment. a nedium Term Issue,.

World Bank, (1988b) India: Review of Public EnterRrises. Pronositions for GreaterEfficiency in the Central Government Public EnteXgrises. Sector Report.

World Bank, (1988c) India: Review Of Rainfed Agriculture And WatershedDMavlogM2nt.

World Bank, (1988d) World Development Renort 1988, Oxford University Press.

OTHER DOCUMENTS. BOOKS. AND PAPERS

Acharya, Sarthi, 'Agricultural Wages In India : Trends And Regional Variations",Tata Institute of Social Sciences, Bombay, 1988.

Bardhan, P.K., "Labor Supply Functiors in a Poor Agrarian Economy", AericanEconomic Review, Volume 69, 1979.

Bhaduri, A., "Agricultural Backwardness Under Semi-Feudalism", EconomiC Journal,Volume 83, 1973.

Bhagwati, Jagdish N., and Srinivasan, T.N., Foreia Trade Reagmes and Ecno2micDeveloment: India, Columbia University Press, 1976.

Bhalla, Sheila, "Trends in Employment in Indian Agriculture, Land and AssetDistribution" Indian Journal of Agricultural Economics, Volume XLII, 1987.

Bhat'nagar, S., Dosajh, U., and Kapoor, S.D., "Health Care Delivery Model In UrbanSlums of Delhi", National Institute of Health and Family Welfare, New Delhi,1986.

Bhatty, I.Z., Sarkar, H., Vashishtha, P., Panda, M., Bhide, S. and Pal, S.P.,"Some Thoughts After The Drought", Margi, June 1988.

Bidinger, P.D., Nag, B., and Babu, P., "Nutritional and Health Consequences ofSeasonal Fluctuations in Household Food Availability", Food and NutritionBulletin. Volume 8, 1986.

Brown, George F., Jain, Anrudh K., and Gill, John, "Analysis of PopulationPolicies and Programs in India", ylation. Council, 1987.

Chadha, Rajesh and Singh, Gurbachan, "A Pilot Study on Private EducationalSpending in North Delhi", New Delhi, 1988.

Chambers, R., and Joshi, D., "Notes, Reflections And Proposals On GroundwaterDevelopment Following A Visit To Gonda District, Eastern U.P.", The FordFoundation, New Delhi, 1983.

Chatterjee, Meera, Implementing Health Policy, Manohar Publishing Company, NewDelhi, 1988a.

ChatterJee, Neera, "Indian Women, Health and Productivity", New Delhi, 1988b.

Chatterjee, Meera, "Primary Education and Health: Directions and Intersections',New Delhi, 1988c.

Chenery H., Robinson, S. and Syrquin, M., Industrialization And Growth, OxfordUniversity Press, 1986.

Chitnis, Suma and Velaskar, Padma, "Education in Maharashtra - SLrengths andWeaknesses', Tata Institute of Social Sciences, Bombay, 1988.

Colletta, Nat J -, 'Non-Formal Education in Indonesia: An Overview", Office ofEducational Planning, Rcsearch and Development, Ministry of Education andCulture, Government of Indonesia, Djakarta, 1976.

Copestake, James G., "The Integrated Rural Development Programme: PerformanceDuring The Sixth Five Year Plan, Policy Implications And Proposals For Reform",1988.

Dandekar, V.M.., Deshmukh, D. and Devskar, V.R., Interim Report o: the Committeeto Study the Introduction of Eight Monthly Supply of Water on Irrigation Projectsin Maharashtra, Government of Maharashtra, Bombay, 1979.

Deshpande, L.K., Segmentation of Labor Market: A Case Study of Bombay, OrientLongmans, Hyde-abad, 1985.

Deshpande, L.K., "Recent Developments in the Bombay Labor Market", forthcoming.

Dreze, J., and Mukherjee, A., "Rural Labour Markets In India : Theories andEvidence", presented at 8th World Congress, International Economic Association,New Delhi, 1986.

Echeverri-Gent, J. "Guaranteed Employment in an Indian State: the KaharashtraExperience", Asian Survey, Volume 28, December, 1988.

Fox, Peter D., Heinen, LuAnn, and Steele, Richard J., "Determinants of HMOSuccess", prepared for the US Public Health Service, Office of Health MaintenanceOrganizations, 19F6.

Ghosh, A., "Government Policies Concerning Small Scale Industries - AnAppraisal", in Suri, K.B., ed., Small Scale Enterprises in IndustrialDevelopment: The Indian Experience, Sage, New Delhi, 1988.

Gupta, Anand P., "Financing Public Enterprise Investments in India: The Case ofCentral Government Enterprises", Indian Instituce of Management (Ahmedabad),Working Paper No. 740, Abmedabad, 7.988a.

Gulati, Ashok "Effective Incentives and Subsidies for Groundnut Cultivation inIndia", Economic and Political Weekly, December 24-31, 1988.

Gupta, Saroj, 'Inter-State Variations In Food Consumption, Nutritional AdequacyAnd Levels Of Poverty", USAID/India Occasional Paper No.4, New Delhi, 1987.

Hariharan, Githa, "Private Spending on Education: Case Studies", New Delhi, 1988.

NAayami, Y. and Kikuchi, H., Asian Village Economy at the Crossroads, Universityof Tokyo Press and John Hopkins University Press, Tokyo and Baltimore, 1981.

Henriques, Jude, "Learning Achievements in Language of Standard I Students ofSome Schools of the Bombay Municipal Corporation", Bombay, Tata Institute ofSocial Sciences, 1986.

Indian Institute of Management (Ahmedabad), Public Systems Group, *Review of theManagement of the Family Welfare Program in Uttar Pradesh", Ahmedabad, 1985.

Jain, S.C., "Effects of Health Contingencies on the Earning Activities of UrbanPoor", Baroda Citizens Council, 1988.

Jain, S.C. and Saiyed, F., "Non-Official Initiatives for Catering to theEducational Needs of the Urban Poor: A Case Study of Baroda Slums", BarodaCitizens Council, 1988.

Jodha, N.S., 'Common Property Resources And Rural Poor In Dry Regions Of India",Economic and Political Weekly, July 5, 1986.

Jose, A.V., 'Agricultural Wages in India", Asian Employment Programme WorkingPagers, 1988.

Klitsch, Michael and Walsh, Julia A., "Finding the Keys to Success: What MakesFamily Planning and Primary Health Care Programs Work?", International FamilyPlanning Perspectives, Volume 14, 1988.

Kurian, N.J., "IRDP: How Relevant Is It?", Economic and Political Weekly,December 26, 1987.

Kurrien, John, 'The Education of Girls and Women in India with Special Emphasison the Poor and Their Employment', Centre for Learning Resources, Puns, 1988.

Lal, Deepak, 'Trends In Real Wages In Rural India 1880-1980", DevelopmentResearch Department Discussion Paper No. DRD103, World Bank, 1984.

Little, Ian N.D., Mazumdar, Dipak, and Page, John M. Jr., Small ManufacturingEnterorises A Comparative Analysis of India and Other Economies, A World BankResearch Publication, Oxford University Press, New Delhi, 1987.

Lucas, Robert E.B., "Liberalization of Indian Trade and Industrial Controls',Boston University, mimeo, 1986.

Malhotra, R.N., 'Growth and Current Fiscal Challenges', L.K. Jha Memorial Lecture1988, Fiscal Research Foundation, New Delhi, 1988.

Mazumdar, Dipak, 'The Rural-Urban Wage Gap Migration and the Working Of UrbanLabor Market", Indian Economic Review, 1984.

Minhas, B.S., "Validation Of Large Scale Sample Survey Data: Case Of NSSEstimates Of Household Consumption Expenditure", Indian Statistical Institute,New Delhi, 1988.

Minhas, B.S., Jain, L.R., Kansal, S.M., and Saluja, M.R., "Measurement Of GeneralCost Of Living For Urban India: All-India And Different States", IndianStatistical Inscitute, New Dolhi, 1987a.

Minhas, B.S., Jain L.R., Kansal, S.M., and Saluja, M.R., "On The Choice OfAppropriate Consumer Price Indices And Data Sets For Estimating The IncidenceOf Poverty In India", Indian Statistical Institute, New Delhi, 1987b.

Minhas B.S., and Majumdar Grace, "Unemployment and Casual Labour in India: AnAnalysis of Recent NSS Data", Indian Journal Of Industrial Relations, Volume 22,1987.

Ministry of Agriculture, Department of Rural Development, "Concurrent EvaluationOf NREP: The Main Findings Of The Survey For Nov. 1987 - Jan. 1988", New Delhi,1988.

Ministry of Agriculture, Department of Rural Development, National Seminar onPoverty Alleviation Programs, "A Theme Paper-, 1988.

Ministry of Community Development And Cooperation, "Report Of The Study GroupOn The Welfare Of The Weaker Sections Of The Village Community", Government ofIndia, New Delhi, 1961.

Ministry of Education, "Challenge of Education - A Policy Perspective", NewDelhi, 1985.

Ministry of Finance, Department of Economic Affairs, "Report of The Working GroupOn Regional Rural Banks", New Delhi, 1986.

Ministry of Finance, (Economic Division), Economic Survey 1986-87, New Delhi,1987.

Ministry of Finance, (Economic Division), Economic Survey 1987-88, New Delhi,1988.

Ministry of Finance, (Economic Division), Economic Survey 1988-89, New Delhi1989.

Ministry of Finance, Indian Economic Statistics (Public Finance) 1989b, NewDelhi.

Ministry of Health and Family Welfare, Family Welfare Programme in India.Yearbook 1986-87, New Delhi, 1988.

Ministry of Human Resource Development (Department of Education), "NationalLiteracy Mission", New Delhi, 1987.

Ministry of Welfare, Child in India: A Statistical Profile, New ie-ihi, 1985.

Mohan, Rakesh, "Urbanization in India's Future", Population and DevelopmentRevie, Volume 11, 1985.

Mohan, Rakesh, "Industry And Urban Employment", Planning Commission, New Delhi,September 1987.

Mohan, R. and Pant, C., 'Morphology Of Urbanisation In India", Economic andPolitical Weekly, September 1982.

National Council of Educational Researeh and Training, Fifth All-IndiaEducational Survey: Selected Statistics, NCERT, New Delhi, 1989.

National Nutrition Monitoring Bureau, "ICDS: An Assessment", Hyderabad, 1983.Nimbkar, B.V., "The Greening Of Maharashtra", Economic and Political Weekly,February 20, 1988.

Nutrition Foundation of India, 'Integrated Child Development Services: A Studyof Some Aspects of the System", Ministry of Human Resources Development, 1988.

Office of the Registrar General, Fertility and Child Mortality Estimates,Occasional Papers, No. 3 and No. 4, 1987.

Ofstad, Arve, "A Review of Evaluation Studies of India's National RuralEmployment Programme (NREP)", Draft, New Delhi, 1988.

Patil, B.R., "Report on Uttar Pradesh, Madhya Pradesh, Orissa, Karnataka andBombay", Family Planning Foundation, 1987.

Phillips, James F., Simmons, Ruth, Koenig, Michael A., and Hossain, Mian Bazle,"Worker-Client Exchanges and the Dynamics of Contraceptive Use in RuralBangladesh', International Centre for Diarrhoeal Disease Research, Working PaperSeries # 10, 1986.

Planning Commission, Seventh Five Year Plan 1985-90s Mid-Term Appraisal, NewDelhi, 1988.

Planning Commission, Seventh Five Year Plan 1985-90, Volumes I and II, Governmentof India, New Delhi, 1985.

Planning Commission, 'Evaluation Report On National Rural Employment Programme(NREP)", New Delhi, March 1987.

Prasad, P.H., Rodgers, E.B., Gupta, S.I., Sharma A.N. and Sharma, B., "ThePattern of Poverty in Bihar", World Employment Programme, Working Paper No. 152,International Labour Office, Geneva.

Quizon, Jaime, and Binswanger, Hans, "Modeling the Impact of Agricultural Growthand Government Policy on Income Distribution in India", World Bank EconomicReview, Volume 1, 1986.

Radhakrishna, R., Reddy, S.S., and Mitra, G.K.,"Determinarts Of Labor ForceParticipation And Living Standards", Centre for Economic And Social Studies,Hyderabad, 1988.

Rama, Rao N., Rele, J.R., and Palmore, James A., "Regression Estimates ofFertility for India 1971 and 1981", Office of the Registrar General and CensusCommissioner, India, Ministry of Home Affairs, New Delhi, Occasional Paper, No.3, 1987.

Rao, V. M., "Agricultural Wages In India - A Reliability Analysis", IndianJournaj of Agricultural Economics, Volume 27. 1972.

Rath, N., and Mitra A.K., "Economics of Utilization Of Canal Water In DryAgricultural Regions", Indian Journal of Agricultural Economics, Volume XLI,1986.

Reddy, C.R., 'World Employment Programme Research", International Labour Office,World Employment Programme Research Paper 10-61 WP75, 1985.

Reserve Bank of India, Report Of The Committee To RevieX The W%r,kji Of TheMonetary Svstem, April 1985, Bombay.

Sandesara, J.C., 'Small Industry Development Programmes in India - EfficacyExplanations and Lessons: Some Field Studies", in Suri, K.B. ed., Small Sc41eEnterprises in Industrial Development: The Indian Exerience, Sage, New Delhi,1988.

Shah, Tushaar, "Transforming Ground Water Markets Into Powerful Instruments OfSmall Farmer Development: Lessons From The Punjab, Uttar Pradesh And Gujarats,Institute of Rural Management, Anand, 1985.

Skeldon, Ronald, 'Data and Persepectives on Migration Patterns in India duringthe 1970s", Population And Developmetit Review, Volume 12, 1986.

Suri, K.B., ed., Small Scale Enterprises in Industrial Development: The IndianExperience, Sage Publications, New Delhi, 1988.

Tyagi, D.S., "Growth of Agricultural Output and Labour Absorption in India*,Journal of Develonment Studies, Vol. 18, 1981.

Walker, Thomas S., and Ryan, James G., with Singh, R.P., Binswanger, H., andJodha, N.S., Against The Odds: Village And Household Economies In India's Semi-Arid Tropics, draft manuscript, 1988.

Wood, Geoffrey D., "Provision Of Irrigation Services By The Landless - AnApproach To Agrarian Reform In Bangladesh", Agxicultural Admin4otr=t4on, Volume17, 1984.

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India Poverty, Employment and Social Services - World Bank ...

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