A Salad Bowl Of Carrots

The resentment that burns in the hearts of Uttar Pradesh’s 170 million-strong population for the government it elected threatens to reformulate Abe Lincoln’s definition of democracy. Their anger emphasises that in this north Indian state-which if it were a country, would be the world’s seventh most populous-democracy is government against the people. A survey ordered by the state government has discovered that the people of UP blame their government squarely for all their problems. Worse, asked to rank their state in corruption, they placed it right after Bihar. Nothing works, they said, in the government or in the services they provide, without ‘suvidha shulk’ (convenience tax)-Diwali gifts, exchange favours or just plain vanilla cash.

No wonder then that the state has taken up comprehensive reforms to turn its financial and welfare delivery systems upside down and push its per capita gross state domestic product (GSDP) growth of less than 1 per cent in the 1990s to 2.2 per cent. One of the important aspects of the reforms will be rooting out endemic corruption.

But how will these reforms be implemented? With a fiscal deficit of Rs 11,341 crore-7.5 per cent of GSDP in 1998-99, the worst among states-and a total borrowing of Rs 50,524 crore as on March 31, 1998, UP is clearly bankrupt. The average UPite pays only Rs 5 as tax out of every Rs 100 he earns-the national average is Rs 8. The state, therefore, had no other option but to go the Andhra way, tap the World Bank. A $511.3 million three-loan package was cleared on April 26, braving US sanctions, and if all goes well, in five to six years, UP could see a total Bank inflow of $2.5 billion.

The UP loans have two unique features. First, the $251.3 million UP Fiscal Reform and Public Sector Restructuring Project loan is the first sub-national single tranche adjustment loan for reforms in public expenditure management, tax policy and administration, civil service, anti-corruption, deregulation, devolution to local bodies, public enterprise and privatisation and financial accountability. UP is the second entity, after Argentina, to get a flexible loan under which the money is not tied to a specific project but will be used for budgetary support.

Secondly, for the first time, a reforms programme is being so closely linked with administrative reforms-in UP’s case, a direct causal relationship has been established between the fiscal mess and corruption. In which case, why so much money? And why to UP? Especially, since neither the current chief minister nor the previous-the all-powerful Kalyan Singh-can be compared to the tech-savvy Chandrababu Naidu. For the World Bank, it was a major decision because of the overall low perception of the state, even among its inhabitants. One reason is obviously political-the BJP government at the Centre has lobbied for Bank support for friendly states, UP and Orissa-for any IBRD credit, there has to be a matching assistance from the Centre (because the Bank cannot directly lend to an Indian state).

More important, however, is the recognition of the fact by the Bank, that "reforms in India cannot be effective unless we are involved in UP"-India’s most problematic, populous, and one of the poorest states-says the New Delhi-based World Bank senior economist, V.J. Ravishankar. Agrees Sushil K. Tripathi, chief secretary, UP government: "UP is the heart of India. So for India to develop, the Bank felt, UP had to develop too."

A heart that has almost ceased beating. Consider the statistics, which only reflect a fraction of the problem on the ground: 41 per cent poverty, 60 per cent illiteracy, only 43 hospital beds per lakh of population, 85 per thousand infant mortality and a fertility rate of about five babies. The state spends one-and-a-half times the revenue collected. Infrastructure is the poorest-78 per cent villages are electrified, yet consumption is only 194 kwh, compared to the national average of 338 kwh.

A state of being that finally struck home-the reforms programme has actually been put together by the state’s bureaucrats, notably Tripathi, principal secretary George Joseph and finance secretary M.H. Khan. Avers Ravishankar: "UP has signalled a clear commitment to improve the quality of governance in the state and reduce corruption, increase transparency at the local level and make public institutions more responsive and accountable."

It all started last year as an increasing fiscal crunch forced UP to seek central bailout and the publication of a white paper on its debt. Says Tripathi: "The white paper has helped in sensitising people who usually tend to believe that the government is endowed with endless funds." The plan to wipe out corruption and increase revenues and ensure user charges came from the bureaucracy itself. For instance, the immediate short-term programme for tax reform came from Joseph. Adds Tripathi: "An MoU was signed on June 4 with the Union finance ministry. All our reforms are based on that, which makes it clear that they are homegrown, not something blindly prescribed by the Bank." Broadly, the reforms entail the shifting of primary debt from high-cost market sources to multilateral/central sources, extracting user charges for power and irrigation, cost recovery for public services, reduction in subsidies, job freeze and reduction in government expenditure. Adding principal repayment obligations, gross financing needs will remain around Rs 12,000-15,000 crore each in the next five years. All this will raise economic growth from 3 per cent now to 3.5 per cent by 2004-05, bring down interest burden from 35 per cent of revenue income to 27 per cent and the tax revenue from 5.4 per cent of GSDP to 8 per cent (see table).

The most important reform measures are in the revenue and power sectors. In the latter, budgetary support and debt write-offs against the past losses eat up 2.7 per cent of GSDP every year, roughly the same as spent on elementary education and health care. "Unreliable and inadequate power supply has been cited by industry as one of the major deterrents against investment. Also, access to electricity is instrumental in reducing rural poverty, as it opens up opportunities for non-farm incomes," says Mohinder Gulati, senior financial analyst, World Bank in South Asia. This will release a lot of money to fund social sector measures and other high-priority areas.

The UP reform project has come at a time when the Bank’s Haryana power loan-yet another new instrument called APL-is in deep trouble and the Andhra experience is prompting the Bank to soon undertake a review of the progress of the state. So in UP, has the World Bank bitten off more than it can chew? It disagrees. For, its experience in UP so far, in terms of integrated social sector projects like the District Primary Education Programme, has made it hopeful about the soil conditions for planting reforms in the state.

In the past one year, troubled states coming to the Centre with relief pleas have had their arms gently twisted. The Centre has linked grants to power and irrigation reforms, even tax reforms-remember the sales tax/vat agreement late last year? The 11th Finance Commission, which will submit its full report in June, has been told to look out for monitorable indicators for fiscal health of states. This is a climate that augurs well for the success of UP’s reforms. And for the enraged UPite.