Further supplementary memorandum submitted
by the Department for International Development
WORLD BANK
LOANS TO
ORISSA
Why does fiscally stressed Orissa take relatively
expensive Bank loans?
1. Orissa is one of the most indebted major
states in India. Orissa's debt to GSDP ratio was 62% in 2002-03,[3]
compared to 27% in 2003-04 for all Indian States.[4]
This compares to ratios of 68% of GDP for Asia, and 92% for Africa-Middle
East.[5]
2. For India as a whole, state level debt stock
has been rising since 1997-98 as a result of:
(i) revision of pay and pensions for government
staff;
(ii) slow-down in revenue growth, leading
to a vicious cycle of an increasing interest burden.
The result in many states has been:
(i) compression of capital expenditure;
(ii) slowing down of real growth of expenditure
in education, and halting of real growth in health; and
(iii)
squeezing of non-wage operations and maintenance
expenditures.
3. A more positive impact has been that
fiscal crisis has become a driver for domestic state level reforms,
in the same manner as the external foreign exchange crisis did
in the early 1990s at the Central level. This driver has been
effective in Orissa, where the state has launched a wide-ranging
reform programme that is supported by World Bank lending (this
year and over three to four future tranches) as well as by the
Government of India's (GoI) incentive programme for fiscal reforms
in states.
4. The focus of policy actions during Orissa's
phase of fiscal correction is:
(i) improvements in efficiency and effectiveness
of public spending;
(ii) expenditure restraint and revenue enhancement;
(iii) reduction in corruption and improvement
in financial accountability;
(iv) improving accountability of service
providers to the poor;
(v) improvement in investment climate; and
(vi) improved systems for monitoring poverty.
Expected benefits of the reforms include:
— more rapid economic growth;
— improved fiscal performance (the
overall deficit is projected to reduce from the current 6.7% of
GSDP to 3.2% of GSDP by 2007-08;[6])
— contribution to reduction of public
sector borrowing;
— enhanced quality of governance and
service delivery; and as a result,
— reduction of poverty.
5. While taking these measures, the Government
of Orissa (GoO) will use the World Bank loan to:
(i) finance reforms that have a fiscal pay-off;
(ii) swap more expensive debt for cheaper
debt; and
(iii) protect expenditures crucial for poverty
reduction, including key social sector expenditure.
The fiscal dividend created as a result of reforms
will accrue in large part to deficit reduction, which will ensure
that the state has to resort to less debt in future than it otherwise
would have, and interest payments are prevented from further crowding
out development expenditures in future.[7]
6. The World Bank loan compares favourably alongside
alternative sources of external finance available to the Government
of Orissa. GoI sets a limit to the amount that states can borrow
on the open market, where interest rates vary between 6.4% to
8.85% per annum and repayment options are inflexible.
Institutional loans (eg from NABARD[8])
cost more (8%-12% per annum). GoI loans are offered at a 9% interest
rate, but most central assistance to states is given as 70% loan
and 30% grant, bringing the effective interest rate down to 3.5%.
There is a moratorium period, repayments are staggered, and interest
is paid on the declining balance.
7. The World Bank loan will be passed on to GoO
on these last terms, with GoI bearing the foreign exchange risk.
Along with the World Bank loan comes a supporting programme of
technical assistance tailored specifically to the Government of
Orissa's poverty reduction aims, delivered jointly by the World
Bank and DFID. The relative attraction of this financing is demonstrated
by the fact that several state governments are using such low
cost external loans to swap older, higher cost loans. In fact,
50% of the first tranche of Bank financing received by Orissa
is to be used for this purpose.
SHARING LESSONS
ON POLIO
ERADICATION WITH
NIGERIA
1. For a number of years, WHO and UNICEF have
both been promoting lesson-learning around social mobilisation
& communication for polio eradication in Nigeria, using best-practice
examples from India. DFID support for polio eradication in India
is provided through WHO and UNICEF, and in response to the worrying
reports from Nigeria earlier this year, DFID India asked UNICEF
India to re-double its South-South lesson-learning on its successful
approach to communication around polio eradication in India.
2. In June 2004, UNICEF India hosted a meeting
in Delhi of all communication planners from the remaining polio
endemic countries (including Nigeria). The meeting proved to be
an excellent opportunity for participants to share ideas, tools
and examples of best practice.
3. UNICEF India also invited some key players
from Nigeria to return to India in August to monitor and observe
communication activities related to the August polio immunisation
round.
4. Given the technical expertise and experience
of staff, there is also WHO/UNICEF staff cross-over between the
two countries.
THE ROLE
OF MIGRANT
REMITTANCES IN
INDIA
1. A March 2004 study for DFID (by Blackwell
and Seddon) gives remittance figures extrapolated from statistical
material made available by the authorities of Bangladesh, India
and Pakistan (BIP). It shows an annual figure of £1 billion
in remittances from the UK to BIP alone, with around £300
million to India. Average monthly remittances are estimated at
between £12 and £30, with household survey data suggesting
figures at the lower end. In 1994 15% of Indian households in
UK said that they remitted funds to India.
2. The Reserve Bank of India assessed that India
received $18.2 billion during 2003 (up from $2.1 billion in 1990)
in formal remittances, ie excluding informal "hawala"
transactions. This represents 3.5% of GDP and is almost 10 times
the level of official development assistance. These figures are
consistent with remarks made by the new GoI Finance Secretary,
Rakesh Mohan, in December 2004. He noted that while India was
receiving 3-4% of GDP on a regular basis through remittances,
it was unclear what the individual recipients actually did with
this "free money". Formal remittance flows into India
are well in excess of total foreign investment (both FDI and portfolio
flows) and have been a significant driver of increasing forex
reserves. As such, they contribute to growing difficulties in
exchange rate management. Taking into account informal remittance
inflows (see below) the macroeconomic impact in terms of both
GNP per capita and the balance of payments is likely to be far
greater.
3. Other research suggests, at the upper end,
that informal, pre-9/11 remittance transfers may have amounted
to 10 times formal remittances, falling to around five times formal
remittances post-9/11. This suggests some $50-$100 billion transferred
into India by informal mechanisms. The highest such single transfer
by informal mechanisms is in the region of $20 million, and one
Manchester textile dealer is reported to pay for all his £5
million annual purchases from South Asia through "hawala".
But the bulk of informal traffic appears to be micro-payments.
Informal money transfer systems and operators are officially illegal
in India. 90% of Indian remittances from UK pass through formal
channels. Private sector initiatives are underway in the UK to
improve payment linkages with other countries. For example, Lloyds
TSB has a pilot "Indian Banking Services" scheme in
two London branches allowing Indian customers to send cost-free
remittances to India, linked to ICICI. However, banks such as
ICICI and State Bank of India currently are not interested in
remittance transactions much below £3,000 in size, too high
a threshold for low-income migrants. ICICI is developing products
within India that will serve the poor in rural communities.
Informal remittance mechanisms
4. "Hawala" or "hundi" transfers
involve mechanisms for transmitting remittances to a receiving
country without a physical transfer. This is done either by direct
contact with a trusted agent in the receiving country or by indirect
contact through a larger hawaladar or hundi wallah who has the
necessary contacts abroad. The hawala system is based on trust,
usually working through either family or regional/linguistic relations,
and customers do not need to be literate. But the procedures involved
cannot be said to be "paperless", as the hawaladar or
hundi wallah has to maintain records to keep track of how much
is owed in both directions. Often records can be quite extensive,
with details of sender, recipient, amount, exchange rate, commission
charged, date and balances. These records can, however, be difficult
to decipher. Hawala is a cheap and quick way for migrant labourers
(in India, or overseas) to send small sums back to their dependants.
It is rapid—transfers can take place in minutes or a few
hours. And cheap—as dealers often charge 3-5% for fund transfers,
as against the 7-17% charged by formal financial institutions.
5. Hawala was developed in India and the Middle-East
before modern banking practices emerged, and remains one of the
leading systems to remit funds worldwide. There is no clear evidence
to evaluate the overall development impact of hawala. There are
some positives (eg boosting rural incomes) and some negatives
(eg reducing government tax income). In rural India, hawala represents
a low-cost village equivalent of cashpoint machines—accessible,
immediate and integral to daily life. Since 9/11, hawala has been
under pressure from security agencies vis-a"-vis money
laundering and traceless transfer of funds around the world—but
it remains widely used because it is cheap, effective and undocumented.
Despite being illegal, hawala is likely to continue to be a feature
of the Indian financial system precisely because it beats formal
banking services. Hard numbers are unreliable, but one estimate
of remittance flows through hawala into India is $100 billion
a year.
6. In India, the "black" or parallel
economy is 30%-50% of the "white" or documented economy.
So hawala also plays a less helpful role in reducing tax income,
facilitating the proceeds of crime, and covertly funding politicians.
In India, hawala has also been used to support capital flight,
cross-border futures trading, and import/export business. Businesses
use hawala as a means of accessing liquidity, evading tax and
managing currency risk—and business use probably exceeds
remittance (or personal) use by some 6:1 in terms of value. However,
the bulk of transactions consist of micro-payments coming from
migrant labourers or settled diasporas.
Developmental impact
7. It remains difficult to assess the developmental
impact of hawala in India. Studies show that some 80% of incoming
remittance flows go to basic household expenses, with the remaining
20% going into either property or education/health. The poorest
Indians rarely receive remittances through hawala or otherwise,
as the poorest of the poor often lack the seed capital to migrate
in search of better paid work in the first place. Remittances
are not evenly distributed across Indian states or across social
categories. International remittances are not significant for
DFID focus areas, nor for the poorest who cannot invest in high-return
high-cost migration and are not as relatively significant as for
some other South Asian countries. High-return high-cost migration,
mostly to Europe and North America, in addition to earlier migration
to East Africa, has been particularly significant for the economies
of Gujarat and Punjab, where migrants have come from landowning
Patel and Jat households as well as Ramgharia households that
have most benefited from agricultural mechanisation and the green
revolution. Apart from some migration to the Gulf from AP, international
migration and remittances are not so significant for AP, MP, Orissa,
West Bengal or even UP and Bihar, particularly the poor.
8. Some 3.1 million Indians are employed in the
Gulf, including 1.5 million in Saudi Arabia; 950,000 in the UAE;
and 300,000 in Oman. They contribute over $7 billion a year to
India's economy through formal channels alone. Remittances to
India from the Gulf (overwhelmingly sent by low-skilled workers)
have long been recognised as a significant contribution to India's
balance of payments. Over half the Indians in the Gulf are from
the southern state of Kerala. Annual remittances to the state—rolling
in informal transfers—amount to seven times the direct budget
support given to Kerala by the central Indian government. Some
26% of households in Kerala benefit directly from remittances.
The direct impact on per capita incomes is considerable. Sustainable
impact on poverty reduction is less assured, and Kerala has had
a particularly poor growth record.
9. Wealthier British Indians have established
individual trusts or charities for projects pertaining to health,
education or infrastructure in their home states or villages in
India. Formal remittances from the US to India are almost double
those from the EU: $4.5 billion in 2003. About 60% of Indians
in America are from the state of Gujarat. Indian-Americans are
largely wealthy professionals, and remittance flows into India
have reflected the IT boom (with growing remittance flows from
the US to Karnataka and Andhra Pradesh).
Internal migrants and remittances
10. Internal migration is an important livelihood
strategy of the rural poor in India. It is estimated that over
20 million poor people rely on short duration, seasonal migration
(one to six months) for survival. This is of major significance
in our focus states of MP, Orissa and AP among tribal Adivasis.
Biharis are also major migrant labourers and many Scheduled Caste
landless Dalits engage in migrant labour or move permanently to
urban areas. In tribal regions of Madhya Pradesh, which are amongst
the poorest in India, migration rates are particularly high during
the harsh dry season when alternative livelihood options are extremely
limited. Research shows that in some of these areas up to 60%
of households have at least one person migrate to find work on
construction and road projects or in more productive agricultural
areas. Research also suggests that as a livelihood strategy, migration
is extremely important to the household economy and often contributes
as much as 80% of the cash income of poor households.
DFID-India support for migrant remittances
11. Under the DFID-funded Western India Rainfed
Farming Project, the Gramin Vikas Trust (GVT) is piloting an innovative
programme that seeks to develop ways of supporting the needs of
seasonal migrants from tribal areas in Madhya Pradesh, Rajasthan
and Gujarat. One of the key innovations involves developing better
methods of saving and transfer of remittances.
12. DFID-India is not involved in the development
of DFID's Remittance Country Partnership programme that
will focus on Bangladesh, Nigeria and possibly Ghana, and is not
a member of the Remittances Working Group. DFID Policy Division's
survey of Remittance Products available in the UK will cover those
available to Indian diaspora in the UK. This information will
be disseminated to the Indian diaspora in UK and to financial
services firms and within Government and to GoI. India is part
of DFID's financial sector development programme.
Remittances out of India
13. Remittances out of India by migrants from
Nepal (one to two million seasonal workers) and Bangladesh (with
possibly 10-12 million Bangladeshi residents in India) are also
significant, with Nepal estimated to receive $1 billion, mostly
from India and Japan.
ANDHRA PRADESH:
ALLEGED SMALL
FARMER EVICTIONS
1. Vandana Shiva has alleged that the Andhra
Pradesh government has thrown small farmers off their land under
a programme supported by DFID, and that DFID withheld information
from the IDC on this programme.
2. Ms Shiva's allegations provide no details,
but they are similar to those made by others following an event
in 2001. These allegations have been rebutted in detail by DFID
on several occasions, including in the UK press.
3. In July 2001, a "Farmers' Jury"
was held in Andhra Pradesh, organised by the Deccan Development
Society, and a number of other organisations. At this event, a
group of poor farmers were presented with three scenarios for
the future of agriculture. The first showed the state taking a
heavily industrialised, commercial approach, and focused on all
the negatives that might arise from it. This scenario was described
as the Government of Andhra Pradesh's plan. It was stated that
its document, Vision 2020, sought to compel millions of people
to shift from working in agriculture to jobs in other sectors
such as services and manufacturing. It was asserted that the World
Bank and DFID were supporting the state government to do this.
The farmers at the event rejected this scenario, and chose the
option that argued for self-reliance and community control over
resources. This scenario was presented in a wholly positive way,
without any of the consequences and issues of this approach being
raised. The media coverage of the event, and the subsequent lobbying
and actions of those involved, focused on the allegation of the
proposed forced eviction.
4. It is incorrect to state that the AP government's
plan, as set out in Vision 2020, was to force small farmers off
the land. Vision 2020 set out development goals for the state,
and it contained many ideas and options that the state could consider
to achieve them. On agriculture, it anticipated that as AP developed,
an increasing number of jobs would be created in services and
manufacturing, mirroring the experience of other countries, and
so changing the pattern of employment. Vision 2020 nowhere suggests
that this shift from agriculture would be coerced, and it contains
many ideas about how the state government could better support
small farmers, for example with better credit and irrigation.
It notes the difficulties for farmers trying to make a living
from small plots of land, and says that one option would be for
the "consolidation of operations", that is farmers working
collectively through co-operatives for example. It does not propose
the consolidation of land, as alleged.
5. DFID has provided no support to Andhra Pradesh
to evict farmers from their land. DFID is funding the rural livelihoods
project, which the IDC members visited. The project works through
the government's watershed programme, and assists poor people
to make a better living, both from the land and from other occupations.
The project includes training in new skills and other activities
to open up new opportunities to poor people, and so lessen the
risks they face in seeking to provide for themselves and their
families.
6. The second allegation made by Ms Shiva is
that DFID withheld information from the IDC. This is not the case.
During the IDC's visit to India in October, DFID India made considerable
attempts to ensure that the IDC members got a range of views on
the main development challenges from both government and civil
society representatives. In Andhra Pradesh, Priya Deshingkar,
an ODI research fellow working on agriculture and rural livelihoods
issues, was invited to meet the IDC to discuss the findings of
her research work in the state. Mr PV Sateesh, who was one of
the main driving forces behind the Farmers Jury, was invited by
DFID India to participate in the roundtable discussion on agriculture
with the IDC held in Mahbubnagar. He and others working with poor
rural communities presented their views to the Committee and had
time to discuss several issues with the members.
December 2004
3 Budget at a Glance-Government of Orissa, 2004-05. Back
4
State Fiscal Reforms in India-World Bank, 2004. Back
5
World Economic Outlook, 2003-IMF. Back
6
Mid-term Fiscal Plan, 2002-03 to 2007-08, as tabled in the State
Assembly. Back
7
World Bank Program Document for Orissa Socio-economic Program,
September 2004. Back
8
National Bank for Agriculture and Rural Development. Back
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