Accelerating Development and SustainingSuccess , :in a Hdl State m T~~ WORLD BANK Poverty Reduction and Economic Management India Country Management Unit South Asia Region Disclaimer All rights reserved. The findings,interpretations, and conclusions expressedherein are those of the author(s) and do not necessarily reflect the views of the Board of ExecutiveDirectors of the World Bank or the governments they represent. Copying and/or transmitting portions or all of this work without prior permission may be violation of applicable law.The World Bank encourages disseminationof its work and will normallygrant permission promptly. Any queries in this regard should be addressed to the Office of the Publisher, World Bank, 1818H Street NW, Washington,DC 20433, USA, fax 202-522-2422, email: pubrights@worldbank.org Photo Courtesy: Governmentof Hirnachal Pradesh, Departmentof Tourism;Government of Himachal Pradesh Official Website Photo of the Week Archives (http://hirnachal.gov.in/archive.hm);SatlujJal VidyutNigarn; and World Bank. Designed & Printed by: Macro GraphicsPvt. Ltd.,www.macrographics.com CURRENCY EQUIVALENTS (Eschange Rate Effective) I -- I Currencyunit Rupees (Rs.) - Rs.1 - USf0.024486 -- US$ 1 Rs. 40.84 L FISCAL YEAR Anrill -March 31 I Vice President Praful C. Patel, SARVP Country Director Isabel M. Guerrero, SACIN Country Manager Faye2 S. Omar, SACIA Sector Director SadiqAhrned, SASPR Sector Manager Kapil Kapoor, SASPR TaskManagers Ananya Basu, SASPR Mohan Nagarajan, SASPR Pararnita Dasgupta, SASPR Abbreviations andAcrowms I AAY Antyodaya Anna Yojana NOAPS National Old Age Pension Scheme lMMR Maternal MortalityRate COPD Chronic Obstructive PulmonaryDisease AG Auditor General O&M Operations and Maintenance MoU Memorandum of Understanding COPU Committeeon PublicUndertalungs A m ActionTaken Report OLTIS On-lineTreasury Information System m MediumTerm FiscalProjections a s Centrally Sponsored Schemes BPL Below Poverty Line PAC PublicAccounts Committee NFBS National Family Benefit Scheme DDO Drawing and DisbursalOfficers C&AG Comptrollerand Auditor Generalof PDS Public Distribution System India DGP Director Generalof Police National Councilof Applied Economic PEMT Project E-Mission Team Research DSCR Debt Service CoverageRatio CAT CatchmentArea Treatment PHC Primary Health Center NPV Net Present Value ELFA Examiner LocalFund Audit CHC Community Health Center PMGSY Pradhan Mantri Gram SadakYojana NREG National Rural Employment Guarantee FRBM Fiscal Responsibility and Budget CII Confederation of Indian Industry Management NRHM National Rural Health Mission PMIS PersonnelManagement Information CMR ChildMortalityRate System L Abbreviations and Acronvms r&U First Referral Unit SHG Self Help Groups PPP Public Private Partnerships IA InternalAudit GDDP Gross District Domestic Product SLA ServiceLevelAgreements PRT PanchayatiRaj Institution IAS IndianAdministrativeService GDP Gross Domestic Product SLL SpecialLocal Laws PS Panchayat Samitis IAY Indira Awaas Yojna GFR General Financial Rules SPCB StatePollution ControlBoard Public Sector Enterprises IMC Industry Management Committee rTnvPlrnmentof-achal Pradesh T&D Transmission and Distribution -- ---------- PSEB Punjab State ElectricityBoard IMR Infant Mortality Rate 1Go1 Government of India TFC Twelfth Finance Commission GP Gram Panchayat IPC Indian Penal Code PWD Public Works Department UC Utilization Certificate GSDP Gross StateDomestic Product IPH Irrigation and Public Health RGAY Rajiv GandhiAwaas Yojna ULBs Urban Local Bodies HOD Head of the Department IRDP IntegratedRural Development ,RKS Rogi Kalyan Samitis Programme HP HimachalPradesh VAT ValueAdded Tax RLB RuralLocalBodies IT Information Technology HPERC HimachalPradesh State Electricity VLC Voucher Level Consolidation RegulatoryCommission IT1 Industrial TrainingInstitutes !RTI Rght to Information VRS Voluntary RetirementScheme ,HPSEB Himachal Pradesh StateElectricity JNURM JawaharlalNehru Urban Renewal Board Mission SEB State Elecmcity Boards WAN Wide Area Network HPTDB HP TourismDevelopmentBoard LMIS Labor MarketInformation System SGSY SwaranjayanthiGram SwarozgarYojana WPR Work ParticipationRate 1HPTDC HP Tourism DevelopmentCorporation MDG EvIillennium Development Goals 1SGRY SampoornaGrameen Rozgar Yojana ZP Zilla Parishads ---- HimachalR o aTraTnpt7J~rp~rauOnn T his Economic Report was prepared by Ananya Ananya Basu (Growth and MDG Overview), Michael Basu (SASPR) and Mohan Nagarajan (SASPR). Haney (SASEI, Power), Rajni Khanna (SASPR, Public Paramita Dasgupta (SASPR) and Ananya Basu Sector Enterprises), Paramita Dasgupta (SASPR, (SASPR) were co-Team Leaders till December, 2006. Tourism), Inderbir Dhingra (SASFP, Private Sector The work was carried out under the overall direction Development), Tanuj Mathur (SARFM, Financial and management of Sadiq Ahmed (SASPR), Fayez Management), Ashish Bhateja (SARPS, Procurement), Omar (SACIA), and Kapil Kapoor (SASPR). The Sangeeta Goyal (SASHD, Education), Rajeev Ahuja team is particularly grateful for valuable formal peer (SASHD,Health), KeFang(SASEI,UrbanDevelopment), review comments from Sudarshan Gooptu (EASPR), Ashish Narain (SASPR, Labor and Employment), Stephen Howes (AUSAID), and Vinaya Swaroop Puja Vasudeva Dutta (SASHD, Social Protection), (SASPR)which have informed this Report. Comments, Rohit Mittal (SASEI, Power), Neha Kaul (SASPR, advice, and suggestions from Dipak Dasgupta Fiscal and Research Assistance), Prachi Seth (SASAR, (SASPR), V. J. Ravishankar (SASPR), and Deepak Watershed Development), and T. C. Jain (Consultant, Mishra (SASPR) are gratefully acknowledged. Shiny Agriculture and Irrigation). In addition, the consultant Jaison (SASPR) provided valuable team assistance. firm of Infrastructure Professionals Enterprise Ltd. prepared a background consultancy report on tourism Team members who provided technical contributions developmentin the state,which has informed the Report. underlying this Report are Daniel Sellen (SASAR, Agriculture and Irrigation), Philip O'Keefe (SASHD, The Report could not have been prepared without the SocialProtection), PierVickers (SASEI,Roads),Mohan close cooperation of the Government of Hirnachal Nagarajan (SASPR, Fiscal), Vikrarn Chand (SASPR, Pradesh. The team is grateful to representativesof civil Governance), Sunil Khosla (SASEI, Power), Richard society, non-governmental organizations, academics, Damania (SASES, Forestry and Environment), Sonia and private sector firms in Hirnachal Pradesh with Chand Sandhu (SASES, Forestry and Environment), whom a wide range of consultations were undertaken. ExecutiveSummary i Chapter I: Himachal Pradesh: A Statewith a Difference 1 A. State Background and Recent Performance 4 B. Key Development Priorities in the Medium Term: Consolidation and Inclusion 9 C. Towardsa Development Strategyfor the State 13 Chapter 2: CreatingFiscal Space to Realize the State's DevelopmentVision 15 A. StrengtheningOwn Revenue Performance 18 B. ControllingExpenditure and Improving its Composition 22 C. ManagmgDebt and Contingent Liabilities 27 D. Refining Medium Term FiscalProjections 28 E. Improving the Budget FormulationProcess 29 E StrengtheningPublic Financial Management and Procurement Systems 31 Chapter 3: Improving the Investment Clunate for Private Sector 35 A. Challenges in Industrialization 37 B. Improving the Business Environment 40 Chapter 4: ExploitingEmerging Opportunities for Revenue Mobilization,Growth, and Employment 49 A. Exploitingthe Untapped HydropowerPotential 51 B. Promoting High Value-Added Cultivation in Agriculture and Allied Sectors 56 C. Developingthe State's Tourism Potential 61 Chapter 5: Promotmg the InstitutionalEnvironment for Inclusive Growth - 67 A. Enhancing the Effectiveness of the CivilServices 69 B. StrengtheningInstitutions for Transparency and Accountability 75 C. Promoting Decentralizationto Improve Local Provision of Services 78 Chapter 6: StrengtheningHuman Development and SocialProtection Strategies 81 A. Education 83 B. Health 87 C. SocialProtection 89 Chapter 7: Promoting Environmentally SustainableDevelopment 95 A. Improving the InstitutionalApproach for Environment Management 98 B. SustainableHydropowerDevelopment 103 Chapter 8: Implementingand Sequencingthe Reform Agenda 107 A. Proposed Reform Options 111 B. PoliticalEconomy Considerations 116 List of Annexes Annex 1: New Initiatives and Reforms Proposed by GoHP 119 Annex 2: Some Human Development Outcome and Access Indicators, HP and Other States 131 Annex 3: TechnicalNote on Estimation of Vulnerability 132 Annex 4: Details of Loss-MakingPSEs 136 Annex 5: Fiscal Projections and Debt Sustainability Analysis 137 Annex 6: Fiscal Data for HP 140 Annex 7: PreliminaryAssessment of Public FinancialManagementand Procurement 144 List of References 155 List of Tables Table 1.1: Local Context, Key Indicators,and Location of HP 4 Table 1.2: Summaryof Key Millennium Development Goals for HP 7 Table2.1: User Charges in HP compared to Other States 21 Table 5.1: Comparative Size of Civil Servicein Selected Indian States 71 Table 6.1: Coverage and Benefitof SelectedProgrammes 90 List of Boxes Box 2.1: Essential Ingredients of Performance Budgeting 25 Box 2.2: Zero-Based Investment Review in Orissa 26 Box 3.1: SpecialIncentives for HP's Industrial Development 38 Box 4.1: Kerala's Approach to Tourism Development 65 Box 5.1: Wage and Hiring Restraint to Control the Size of the Civll ServiceWage Bill 72 Box 5.2: E-Governance Initiativesin Other States 77 Box 5.3: CommunityParticipationin Hospital Management 79 Box 6.1: Measures to Curb Teacher Absenteeism in Other States 86 Box 6.2: Findings from an Evaluationof Social Pension Schemesin Karnataka 92 Box 7.1: World Bank Involvementin Environment Management 102 List of Figures Figure 1.l: Recent Performance in Real Economic Growth and Diversification in HP 6 Figure 1.2: Will HP Attain SelectedMillenniumDevelopment Goals? 7 Figure 1.3: High Central Grants and SocialSpendmgin HP 9 Figure 1.4: Real Sub-sectoralGrowth Rates in HP, 1993-94 to 2005-06 10 Figure 1.5: Structureof Job Creation and Working Population in I-IP 11 Figure 1.6: SomeExamples of Differential Indicatorsof Social Outcomes and Access 12 Figure 2.1: Recent FiscalTrends in HP 18 Figure 2.2: Expenditure Compositionin HP and Selected States 22 Figure 2.3: Debt Crisis in HP 27 Figure 2.4: OptimisticProjections under GoHP7sJNWP 29 Figure 3.1: Key Challengesin Industrial Development 39 Figure 3.2: Major Constraintsfor the Private Sector 40 Figure 3.3: Poor Rural Connectivity in HP 41 Figure 3.4: Labor Force and UnemploymentStructureby Education Level 43 Figure 3.5: HP's Trends in Urbanization 46 Figure 3.6: Financial Challengesin Urban Development 48 Figure 4.1: Untapped Potentialin Hydropower,but Good Outcomesin Power Connectivity 52 Figure 4.2: Projected Revenues from RoyaltyPower 53 Figure 4.3: Financial Challenges facingHPSEB 54 Figure 4.4: Low Irrigated Area and Low Yield of TraditionalFood Crops in HP 56 Figure 4.5: Cost Recovery Issues in Irrigationand Public Health 60 Figure 4.6: HP's Challengesin Tourism 61 Figure 4.7: Findings from HP TouristSurvey, 2002 62 Figure 4.8: Constraints to Developmentof TourismPotentialin HP 63 Figure 5.1: Relative Rankingof Public ServiceDelivery in Indian States,2003-04 70 Figure 5.2: Patterns and Overstaffingin HP's Civil Services 72 Figure 5.3: Low Compliance under RTI, 2005 75 Figure 5.4: Low Corruptionbut DecliningConvictionRates in HP 77 Figure 6.1: Educational Outcomes and Spendingin HP Compared to National Averages 84 Figure 6.2: Teacher Absenteeismin HP and Other States 85 Figure 6.3: Dependence on the Public Sector for Health Services 88 Figure 6.4: Insurance 90 Figure 6.5: Geographicand Household Level Targetingof Programmes 90 s Figure 7.1: Recent EnvironmentalDegradation in HP 98 Figure 8.1: Proposed Elements in HP's Development Strategy 110 T his Economic Report is the first by the World part of the Report, is forward-looking. It describes Bankon the economy of HimachalPradesh (HP), how it might be possible to build on the past success and the first on a hill state in India. It comes in the that HP has achieved, and, at the same time, address context of a request by the Government of Himachal some crucial economic and social transitions that Pradesh (GoHP) to assess the state's progress and will be essential for the state to firmly secure its longer-term prospects. The study has been prepared future: (i) a sustained increase in income levels along as the initial step towards enhancing the Bank's with an enabling environment for the private sector; understanding of the development priorities and key (ii) the creation of suitable jobs based on enhanced constraints for HP. productivityand skills of its young labor force that can shift from public to private sector employment; and HP is a unique state in many respects-most (iii)the utilizationof natural resourceslike hydropower, importantly because of the enormous success it has forests, and water resources wisely and well. There is achieved over the past three decades, despite severe every reason to be confident that HP can meet these structural disadvantages of relative remoteness, challenges. The state's past enviable track record is environmental fraghty, and a difficult hill terrain, testimony to the ability of its people and leadership characteristic of Himalayan states in India. The study to forge a social consensus and compact necessary to sets out to document, &st, the remarkable successthat achieve such goals. the state has achieved in terms of sustained growth and human development, and the underlying reasons The Report seeksto provide an analysis of HP's current in terms of supportive policies and social cohesion. economic situation, and to lay out a menu of reform In this respect, HP makes an important contribution options that can help build on HP's considerable to lessons of success for the other nine Himalayan strengths and opportunities, and address some of the hill states in Lndia. The second, and more extensive main challenges ahead. Himachal Pradesh:Accekrahng Development and Su~tainingSuccess in a Hillstate Himachal Pradesh: A "Unique" social infrastructure and amenities, and helped build an educated and healthy population. HP has achieved State with a SUCC~SS~UIPast but an per capita social sector expenditure which is currently Uncertain Future about double the all-States average in India. The initial infrastructure investments have also started yielding dividends in terms of higher growth. Underlying this HP has some specific characteristics that set it apart remarkable achievement has been an implicit social from other Indian states. It is a relatively small state, compact and cohesion that has stood HP well in with a hilly terrain, a supply of perennial rivers, and the past and will continue to do so in the future. In significant forest cover. On the one hand, the salubrious particular, the state has benefited from wise leadership climate, abundant water resources, and natural touristic throughout the past several decades, irrespective ambience can contribute to the expansion of important of political affiliations-and that, in turn, has been sectors like horticulture, tourism, and hydropower. On based on strong public support for policies that have the other hand, HP faces specificdevelopmentchallenges encouraged socialdevelopment, and delivery of public arising from its high elevation, topography, resource services. Central assistance has been important in the dependence, and ecological vulnerability-as well as process, but primarily because the state has managed it from a changing and more competitive international well to further development. environment.The Government of India (GoI) hasgiven HP the status of a "special category" statein recoption However, the sustainability of HP's success for the of these unique constraints, under which the state is the futurewdl depend on addressingthree major transitions recipient of special central grants and incentives that that the state faces. To a great extent, the state may be have been instrumental to its development. reaching the limits of one of its traditional sources or engines of its growth and socialdevelopment: one that The statehas severalsignificantachievements, in spiteof is heavily dependent on public spending, financed by its natural constraints.After two decadesof slowgrowth borrowing and central assistance. It is thus important since it was granted full statehood in 1971, HP has for the state to look towards self sufficiencyin meeting registered more rapid growth than the national average its challenges. since the 1990s,and the economy has shown increasing signs of diversification. The state is ahead of Indian The first important transition is to shift the growth averages for most indicators of human development, strategy in HP from one that is still far too heavily and on track to meet a majority of its Millennium dependent on public expenditures and debt-to an Development Goals. In fact, HP is performing better increasingfocus on the broad-based contribution from than several more developed states in the plains along other sources of growth, with an enablingenvironment several dimensions of social and economic progress. for the private sector. To an important extent, the state has already begun to move in this direction: the Supportive government policies, a transparent and primary sector has seen signs of diversification to accessible administration, a peacefulpolitical environment, high value cultivation, while the secondary and tertiary and central support have contributed to the state's sectors have seen impressive expansion in recent years. development. In particular, from a focus on building However, much more needs to be done, and a critical transport and infrastructure facilities immediately after role will be played by growth in emerging sectors like its formation in 1971, HP has gradually assigned tourism. At the sametime, the very heavy burden of the priority to expenditures in the social sectors, which state's debt and current expenditures will necessitate a has considerably expanded the availability of basic sustained turnaround in its fiscal position. As they exist, Executive Summary any reduction of privileges as a "special category" state development on the environment, especially or other fiscal risks such as wage revision following the reduced water for downstream uses, will require Sixth Pay Commission awards could hurt HP's already much improved attention to ensure that society as a precarious fiscal situation. The argument, therefore, is whole benefits, and that development is sustainable. not for continued dependency,but for chartinga course Furthermore, a broader environmentally sustainable that will make the state more self sufficient. A fiscal strategy will be essential, for forestry development, turnaround will be crucial to create the necessary fiscal communiry projects, urban management, and water space for the state to invest in the basic development supply. Failure to take action against environmental needs on a sustainable basis, and hence achieve its degradation in a society dependent on its natural considerable untapped growth potential. resource base could ultimately threaten future growth prospects. It is critical to address these challenges The second crucial transition is to create the productive before they start to impact on the state's successful employment opportunities for HP's young and socio-economic performance. increasinglyeducatedlabor force,so that relianceon the public sector as an employer of last resort goes down. Meeting these three transition challenges will not be A better growth strategy and improvements in the easy. Difficult choices in public policies will be needed, investmentclimatewill play a crucial role, as will efforts that mark some break from HP's past development to strengthen the quality and skills base of the state's strategies.The role of the state,in particular, must change labor force in order to ensure the outcome of good jobs increasingly from a direct provider of services and that the state needs to sustain incomes. Achieving this jobs to being an enabler of HP's human and natural while improving the quality of public a h s t r a t i o n is resource development potential, and one where the a central challenge. The immediate political economy core functions will need to be strengthened and its key pressures to add jobs in the public sector d remain institutions revamped towards a modern developmental acute. However, this will need very carefulmanagement state. If these three transitionsare achieved successfully, as, in the end, providtng more unproductive public HP could become the first hill state in India that is sector jobs will be self-defeating. Failure to meet such able to achieve sustainable and accelerated growth with pre-conditions risk two additional problems: (i) high broadly-based social development. unmet expectations of a young labor force that could add to the fiscal burden for the state which already The Approach Paper to HP's Eleventh Five Year Plan functions as an employer of last resort; and (ii) inability (2007-12) seeks to move the state in the direction of to transform the gains in the quantity of education per fiscal self sufficiency and towards the ends of broader head to an appreciableimprovementin incomesthat can social and economic development. The articulated come only from a significantupgradation in the supply development priorities for the state are faster and of skills and education. sustainable growth, and inclusive development. HP's development priorities are a function of its unique The third critical transition that HP will need to make socio-economic characteristics. Unlike the states in the is to better manage its environment and natural plains, GoHP recognizes that growth opportunities resources.This must take several key directions. The lie in some specific sub-sectors in which the state has potential for hydropower development,which is being natural advantages. Even though human development realized at an accelerating pace, has to be judiciously indicators are among the best in the country, the state and prudently managed to support the desired fiscal seeks to further improve living standards, especially for outturns and to invest in the future of the state. At disadvantaged sections and in remote areas where there the same time, the downside effects of hydropower are issues of access to public services. Himachal Pradesh:Accehating Development and SustainingSmcess in a Hill State ley Development Challenges and would be more than 37 percent of HP's current level of revenue receipts and more than double the current =olicyOptions levelof ownnon-tax revenues. However,efforts should not be confined to the hydropower resources alone. Comparisons show potential for raising royalty from Transforming Growth by Creatingthe user charges, in particular. This requires a depoliticized FiscalSpaceto Financethe State's institutional mechanism that can periodically decide Development Vision on appropriate user charges. The major constraint faced by the state in reahng its Expenditure compression efforts should be married development vision is insufficient fiscal resources to with efforts to improve its composition-so as to financeits priorities. Improved expenditure composition contain sahrie~andpensions in particular, and gradually and revenue efficiency will be the basis for the creation phase out non-merit subsidies, while expenditure is of fiscal space. Some recent positive developments-in reallocated towards non-wage O&M and capial ezpenditrre terms of increased non tax revenue ftom the sale of in critical sectors, on the basis of fully budgeted royalty power and the state's 25 percent equity in the maintenance plans for fixed assets. A formal process NathpaJhakriHydropower project in 200445, hlgher tax to criticallyreview and rationalizeongoingprogrammes revenue from the introduction of the Value Added Tax that institutionalizes zero based reviews-possibly (VAT) since 2005-06, expanded central grants under the by establishing some form of an Expenditure Review Twelfth Finance Commission ( P C ) award in 2005-06, Commite+would be a useful supplement to the and compression of expenditure-have brought fiscal existing budgetprocess, andwill alsohelp ensure deficits down from over 12 percent in 2002-03 to efficiency of ongoing initiatives. about 4 percent in 2005-06. These efforts provide the springboardfor deepeningthe fiscal turnaround. In addition, the state needs to better manage debt and contingentliabilities.HP is a debt-stressed state,with First, own tax revenue needs to be enhanced by an unsustainably high debt stock of about 74 percent measures like: (i) improvement of adminbtrative efin'enq of Gross State Domestic Product and moving towards of the system by modernizing tax administration and sustainability could help contain interest payments. plugging weaknesses in implementation in areas such Approximately 45 percent of the state's high cost debt as VAT or stamp duty; (ii) sinphjicationand rationaIlixation stock comes up for repayment over the next five years, of rates comparable to other states (e.g., excise taxes, presentinga good opportunity to the stateto restructure motor vehicles tax, registration duty, electricity duty); high costdebt.Fiscalrisks fromthe operationsof poorly and (iii)introduction of new and innovative taxes like the performingstateowned enterprises and boards must be "green tax" or the Professions tax. minimized by implementing a reform strategyfor these entitiesalreadyoutlined by GoHP in 2000. Moreover, an At the same time, non tax revenue needs to be institutionalmechanism to evaluatecontingentrisks and expanded, with a major source identified as the state's eliminate off-budget borrowings must be developed. natural&dropowerpotential. It is estimated that revenues The risk weighted guarantee exposure can be limited from the sale of royalty power and/or a share of by suitably amending the ceiling under the HP Fiscal the power generated proportional to equity invested Responsibility and Budget ManagementAct. by GoHP in hydro projects with other partners (e.g., Go1 in the case of SatlujJal Vidyut Nigam) could be The state has produced Medium Term Fiscal above 2 percent of GSDP by 2012-13. These revenues Projections (MTFP) that were tabled along with ExecutiveSummary vii the Budget for 200647, but these are based on very Improvingthe GeneralBusinessEnvironment optimistic assumptions. The state needs to refine the for Private Sector Participation. Private MTFP by strengthening policy links and demonstrating industry representatives cite skills of available workers and poor infrastructural facilities as prioritization through reallocation of expenditure, for key factors affecting the investment climate. At instance to capital outlay and non-wage Operations and the same time, unemployment rates among the Maintenance (O&M), besides being consistent with educatedgraduatesand post-graduatesare rising. TFC recommendations. Accordingly, GoHP needs to focus on assessing and projecting the skill needs of the secondary and tertiarysectors;bettermatchingtheprovision Changingthe Role of the State to of technicalandvocationaltrainingopportunities EncourageProductiveEmploymentand to market opportunities; and on improving SuitableJobs the general quality of education with a view to increasingemployability.Simultaneously,thestate Even though HP has grown marginally faster than the should step up efforts to alleviateinfrastructural rest of the country since the 1990s, this performance constraints,especiallyinruralareasandaroundthe follows two decades of slower growth-and the state upcoming industrial agglomerations. Improved connectivitycould help attract the private sector needs to consolidate and sustain this performance if it to remote districts. Since most secondary and is to move towards self sufficiency. HP has been unable tertiary sector industries tend to come up in an to tap the fill growth potential in sectors like tourism urban environment,promotingthe development and horticulture, in which it has significant natural of urban infrastructure can also help to improve advantages. While manufacturing has grown in recent the business climate. years, this is largely on accountof special tax incentives Encouraging the "Right" Sectors. The state's that have attracted investments in the border districts natural situation makes it an unlikely candidate near Punjab and Haryana. These investments may dry for a strategy based on heavy industries or up once the sops are phased out in 2010, unless steps traditionalagriculture. Growth and employment are taken to improve the business environment. potentialin high value-addedsectorsliketourism and horticulture should be exploited-not only Lowproductivityof employmentand amismatchbetween by encouragmg private investment, but also skills and opportunities is a related concern for policy- by directly addressing specific constraints to makers. Despite signs of diversification, 70 percent of the productive expansion of these sectors. For the population still depends on the agricultureand allied example, efforts to improveair connectivity,and sectors-which provides just 22 percent of Gross State revamping the marketing and branding strategy Domestic Product (GSDP). Though manufacturing to project HP as an attractive destination for employment has been generated in the industrial health or eco-tourism would be particularly belts as a result of the state's industrialization strategy important for the tourism sector which has so far failed to attract high-end customers. and central tax sops, there is evidence of a mismatch Activation of the recently established Tourism between skills required by upcoming industries and the Development Board would help promote education provided in the state. Consequentlythe public inter-departmental coordination. In order to sector still remains the preferred source of organized promote sustainable growth in agriculture, it is sector employment,contributingto fiscal pressures. important to focus on the: (i) expansion and intensification of irrigation, with particular In order to address these challenges, GoHP needs to attention to rationalizing user charges which adopt a two-fold strategy. cover only about 2.5 percent of O&Mcosts,and viii Himachal Pradesh:Accelerating DevehpmentandSustainingSuccessinaHHillState moving toward farmer managementof schemes; the relatively less-used central &ght to Information (ii) rationalization of the subsidy regime, which (Rn) (ii) strengthening the powers and An: is inconsistent in its focus on organic farming capacity of the Lok Ayukta; and (iii) reverse on one hand and chemical inputs on the other; signs of weakening pokce capan'vs reflected (iii) modernization of research and extension in declining overall conviction rates in recent services; (iv) acceleration of the process years-to enable the Department to provide of diversification into high value crops; and effective law and order services. E-governance (v) promotion of better marketing, with can be a useful tool for simplifyingtransactions involvement of private parties. and making it easier for the population to access government services, and the sector should be strengthened by focusing on a few Strengtheningthe InstitutionalEnvironment flagship projects of the 40-odd e-governance for InclusiveGrowth projects at present, along with business process reengineeringwhere appropriate. While HP has recorded impressive achievements in 8 There are some issues around skills and human development based on objective indicators, quality of local providers+specially in there are avenues to improve governance and public health, where specialists are in short supply in administration. In fact, user satisfaction surveys show remote areas, and in education, where teacher that there is room for better public service delivery as absenteeism and lack of appropriate teacher well. Appropriate measures as outlined below would training impact on service delivery. In order to also help contain the fiscal pressures, and improve improve deliverymechanisms, the state needs to: public administrationand transparency. (i) decentrab~ation,whichcouldstrengthen promote Panchayati Raj Institutions' control over local 8 In order to enhance administrative efficiency, level providers; and (ii) provide in-service and the state could: (i) reduce staflng ratio^, which are pre-service training to providers to equip them to among the highest in the country at about 4.5 deliver quality services. civil servants per 100 population, and resulting fiscalpressures-based on a departmental review ImprovingHuman Developmentand Social of positions, units, and human resource needs; (ii) rationakxe government by clustering related ProtectionStrategies departments, instead of ad hoc clustering of portfolios across various levels of government, Poverty rates are low at under 10 percent, and social and by improving the speed and transparency development indcators are good in general-in many of file movement; and (iii) improve the tenure cases, better than in richer states. However, the state and stabikg of civil servants to promote effective faces the challenge of promoting inclusivedevelopment implementation of programmes by enforcing for disadvantagedgroups and remote areas. In addition, the average tenure of a minimum of three there are some "second generation" problems in view years, consistent with HP's transfer policy, of economic development and diversification-which while discouraging politicization of transfers include issues around quality and private participation, and recruitment. for example. These go beyond basic "first generation" issues of access to services that affect other less- Althoughcorruptionappearstobelowinthe state as per the Transparency International indicators developed states. which identify HP as the second least corrupt 8 Social infrastructure facilities-including statein India, transparency and accountability Primary Health Centers in some areas, school canbe improved by: (i) aggressivelyimplementing burldings and toilet facilities-need to be Executive Summary ix developed, and the state could experiment with various sectoral activities~specidyin sectors like pilot initiatives like mobile units or telemedicine tourism, manufacturing, hydropower, industry, and to reduce fiscal costs of provision of staticunits. forestry,where activitiescan have significantimpacts on the eco-system. Public private partnership-such as encouragement to private universities and The institutional approach to environment medical facilities--could be an important managementshouldbe improved,particularlyby: avenue to strengthen delivery mechanisms. (i)promotinginter-departmentalcoordnationtoensure These could reduce fiscal pressures, as well as convergence of environmental objectives and improve seivice quality. minimize intersectoralconflicts;(ii)strengthening the Environment Department, which is currently at The social protection system faces the a very nascent stage with insufficient capacity challenges of: (i) improving existing saj& nets and powers, in order to capitalize on the state's throughbetter administrationand record keeping, comparative advantages and use environmental stronger involvement of PRIs, and periodic resources as growth drivers; (iii) improving the impact evaluations going beyond concurrent infomation dztabase, at least in key sectors which ex-post evaluations undertaken at present; have wide environmental consequences; and (iii developing a social care stratea for the state's (iv) preparing an Environment Po& supporting future needs, in partnership with private partners developmentgoals, and providing a holistic view and civil society,and (iii) expandingsocialsecz/rtyto of the growth-generating potential of natural the unorganizedsector,which is particularlyunder- resources, as well as the lunits and carrying served in terms of health and crop insurance. capacity of key resources. ImprovingInstitutionsto Manage However, beyond organizational structures, there is a greater need for more innovative EnvironmentalAssets reforms in environment management. For example, an area based environment management HP's rich and varied natural heritage provide both approach, provides one way of clustering the opportunities and risks to its development strategy. pollution footprint of industries, and could be Natural resources are a critical, if underutilized, a valuable tool for a fragrle hill economy like engine for acceleratinggrowth and poverty reduction. Hl?Expandingpubkcparticpation-for example, At the same time, resource dependence renders the by encouraging community involvement in the economy highly vulnerable to the consequences of context of specific development projects, and environmental degradation. building the capacity of government agencies for more effective public consultation-is The current approach to environmentalmanagement is another avenue that GoHP must explore, since fragmentedand itis treated as a"clearance" requirement public participation in environmental decision to beobtainedfrom,forexample,theForestDepartment making is typically low in the state. Environment or the State Pollution Control Board. Problems tend to management is particularly important in the context of development of /ydmpower resources. be addressed retrospectively only when they become highly visible. Current development patterns raise concerns about the efficiency, competitiveness, and Tapping Hydropower Resources Efficiently sustainability of resource use--especially given the and Sustainably fraghty of the states resources. Prudent economic management calls for environmental issues to be fully Hydropower has huge untapped potential on account integrated into economic policy and mainstreamed in of the state's supply of five perennial rivers. Judicious x Himachal Pradesh:Accehrating Devekpment and Sustaining Success in a Hill State exploitation of the unrealized potential of over 12,000 implement. This agenda should be communicated MW in an environmentally sustainable manner assumes across government and stakeholders in order to budd particular significance, not just as a source of "green support for its implementation. energy" than can help alleviate the power shortage in the Northern Grid, but also as a critical source of non- It is particularly important to pay close attention to tax revenue as described earlier. Revenues from the sale the sequencing and prioritization of reforms, and to of free power available to the state from ongoing and move more rapidly on policies where there is likely to new hydropower projects alone could reach Rs. 9-11 be quicker and visible returns. Accordingly, the Report billion by 2012-1 3. suggestsa menu of reforms that GoHP could consider over the next few months, based on GoHP's own Given that a number of new hydro projects involving vision, and under consideration by the government. various public and private players are expected to It is proposed that GoHP and the Bank use this for come up, it is important to proceed expeditiously further discussions. with reforms in this sector, since lack of clarity can be detrimental to the investment climate. Key Given the complexity of the task, a flexible approach actions that require attention include: (i) setting up to prioritization and sequencing is suggested-by institutional mechanisms for sustainable hydropower which GoHP identifies those reforms which are the development-including integrated planning based on most pressing, implementable, and likely to yield river basins as against the current piece-meal approach significant returns, in order to develop a cohesive of development of individualprojects,and mechanisms programme that isreflectiveof andconsistent with the to monitor and implement environment management state's vision. As a first step, this assessment suggests activities related to hydropower development to ensure that GoHP address the fiscal constraints on a priority that these activities are completed before projects basis-backed by governance reform measures to are commissioned; (ii) carrying out a strategy study curb the salary bill. At the same time, it would be on the model HP should follow in building up new important for GoHP to take steps towards making hydropower projects as well as for trading power, the transition from a state-led to a private sector and on managing the revenues flowing from the oriented economy, and it is important to signal clear hydropower development to ensure maximum benefit intent in this area. In order to address employment to the state and for those affected by development; and issues, GoHP should begin the process of assessing (iii) implementation of the Electricity Act of 2003, and projecting skills and education requirements. including appropriate institutional restructuring of the The state should take steps to promote sectors with HP State ElectricityBoard (HPSEB), separation of the untapped potential-and could consider measures for trading function from the transmission function, and hydropower and tourism development as priorities. facilitation of open access. Simultaneously, measures to conserve and protect the environmental heritage-both in the context of hydropower development, and in terms beginning A Possible ReformAgenda the process of developing an Environment Policy- should also receive priority attention. Policy suggestions can only be a first step--it is critical to implement the policies that can help the It is also important to keep in mind that deeper state realize its development goals. GoHP needs to institutional reforms identified in this Report will need craft an overarching programme for the state to gude more time and careful preparation, and can form the reform, identifying the policies that it would like to basis for more intensive dialogue.In fact, even the near Executive Summary term reforms proposed by the Report are initial steps It is to be noted that, subsequent to the preparation that bulld towards reforms to be implemented over the of the Economic Report, several reform measures and medium term. Hence, these should not be considered commendable new initiatives have been proposed in "one-off" measures-but as part of a longer term selected priority areas. These reform measures, as well reform vision. as some data updates, are discussed in Annex 1. A Menu of Near Term Reform Options c Thestatemust refineitsmedium term fiscal projections, incorporatingaclearpolicybasis demonstrating expenditurereallocation to capitaloutlay and non-wage O&M in criticalareas, to reflect strongerreform outcomes consistentwith TFC recommendations. These could incorporate analyses of different scenarios and downside stress tests. * In order to enhanceown-taxrevenues, the statecould: (i) from a specific to an ad valorem exciseduty switch structure,as in Maharashtra; (ii) simplifjthe kcenrefeestructurefor alcohol vending (iii) initiatea comprehensive review of the revenue implication of the currentmotorvehick tawregime; (iv) re-introduce the Prof~~sions Tm, (v) begin evaluationof VATimpkmentationwith a view towards improvingthe administration;and (vi) initiate ~JJ anabsisof stampduoevasion and their revenue impact to prepare for more fundamentalreform. r In orderto enhancenon-tax revenues fromusercharges,GoHPcould establisha PublicTariff Commission for various serviceslike transport,education,health, water, and irrigationin order to depoliticize the determination of user charges. In order to curb and improvethe composition of expenditure, the statecould: (i) implementan effectivewad andhitingpolicy consistentwith fiscal sustainabjlity;(ii) cornpletepensionprojedionsfor government and public sector agencies, and begin budgetingon an actuarial basis; (iii)reducepowers~~bsidies,and delink it from the power tariff;(ii) introduce a ~~n~butorypensionschemeat par with government employees for new employees,with pensionable pay, in Public SectorBoards, Corporations,Universities, and Local Bodies; (v) appoint a Cornmiteeto examinecontainment of expenditureunder subsidies and a gradual phase out of non-merit subsidies; (vi) initiate the process of identifyingschemes that have lost relevance, and restructuring and rationalizingthem by constitutingan EqknditureReyiiw Commiteeto critique ongoing programmes; (vii) and rea/bcate expenditure towardsnon wage O&M expenditurein criticalsectors, and capitaloutlay. In the area of management of debt and contingent liabilities, GoHP could: (i) merge oflbudget borrowingswith budgeted borrowings, and eliminate future off-budget borrowings; (ii) risk weightguaranteesand begin reporting them; (iii) revise the tatgetfor kk-weighfedguaranteesunder the FRBM after eliminatingoff-budget borrowings; (iv) establish a set offomaLmksto govern eligibjlityof Public SectorEnterprises (PSEs),cooperatives,and statutory boards for governmentguarantees, takinginto account financial statements,record of profitability, performance on past guarantees,priorities of government, etc.;and (v) make progress towards the implementation of the reform strategy for state-ownedPSEsoutlined by the government in its order dated October 20,2000, includinginitiation of the preparation of a turnaround plan for the HP Road TransportCorporation. r In orderto modernizetax administration, thestateshouldinitiatestepstowards: (i)creatingthenecessary oigani@onal basik for separating and strengtheningthe key tax administration functions;(ii) introducing multiyear strategicphnningpmessesunderlying annual business plans; (iii) improvingthe accountabzligmechanism to move from collection-basedaccountabilityto wider reforms; (iv) strengtheningthe human resourcesin the Excise and Taxation Department; and (v) making the Excise and Taxation Department the basis for a unifiedtax col/ectonsystem. In the area of public financial management and procurement, GoHP could: (i) mohixe the Hida/Pradsh FinancialRules, 1971,which need to be updated and simplified;(ii) replace the existingProcedure & Rules for the xii Himachal Pradesh: AccehatingDevelopmentandSustainingS~ctessin a Hi// State Purchase of Storeswith apnbPcplcrcurenrefftlawthat can apply to all procurementundertaken using public b d s (goods, works and services),and which can be piloted in 2-3 departmentsand PSEs to ascertain the benefits; and (iii) roll out fm..rnry mqbnten@on to cover the entire state. In order to strengthenthe budget formulation process, a fiscalstrategypaper could be presented to the Cabinet I precedmg the budget preparationprocess, communicatingdepartmentalexpenditure ceilingsand fiscal projections as part of the budget call cir-. I kaprwtnBhcW-tClimpfarQSPtctor St~mD4-t I It is patdcularlyimportantto undertakea study to identifythe extent of skiIlsgaps and mismatches, induding a skills-mappingexercise,to identifyparticular sectorswhich would emerge in the near future,so that skill i requirements could be projected. I I In the roads sector, GoHP is undertakmgan assessmentof the costs and benefits of the gang labor system,and recommendations from this should be finalized for implementation. T a p p i n g l e h e ~ ~ i i a l i n ~ W & ~ ' ~ In order to promote sustainabledevelopmentin agriculture, GoHP could: (i) review and rationalizethes~bdy ngrine, especiallyin view of inconsistencybetween encouragement to organicfarming and subsidiesto the consumptionof chemicalfertilizersand pesticides;(ii) prepare a strategywith an implementation time table and progress indicators, aimed at increasingcurrentlylow user charges to reach full cost recoverywithin a designated time period, and an action plan for devolving suitableirrigation schemesto beneficiary farmers. The state should activate and empowerthe Tourism Development Board that has been recently established under the chairmanshipof the Chief Ministeras a forum for better inter-sectoral coordinationand strategicapproach for tourism development in the state. IrPrpmhgtheWtutidEnhmmt ikltxhsbeC r d In order to tadde the problem of overstafling and high wage bill, GoHP could: (i) enforce a sttict ban on recruitment,especiallyfor non-regular employeesas well as Class IV employeesin the regular civil service,and work- charged and part-timeworkersin overstaffed departments,and curb regularization;(ii) idenhz rednndontpostsby conductingfunctional reviews in major departments, assessingwhether current staffingpatterns exceed established norms, revise existingnorms to take into account technological improvements,and identifyposts that could be outsourced to the private sector;(iii) esfabkihan HPPg Commrjsionto decouple salarystructuresfrom those in Punjab, thatwould, over time, chartan independentcourse for determiningthe state's salary structurein view of political sensitivities;and (iv) implement a Vohntmy RetirementScheme(VRS) for governmentemployees who wish to leavegovernmentservice and compulsory retirement provisions in the All-India ServiceRules to remove inefficient staff from service. In order to promote transparency and accountability, (i) the suo-momprovisions of the R7Z should be aggressivelyimplemented,especiallythrough postingof suo-mom information on the web, and providmg departmentalwebsites to those still lackingthe same; (ii) the LokA y ~ should be strengthenedby arnendmg h the LokAyukta Act to allow for sno-mofnpowers to take action in caseswithout a formal complaint,by providing qualifiedlegal and other staff to assist him, and by widentng the definition of corruption to includegrievances arisingout of maladministration;and (iii) the recent weakeningof polite c@&ij, as demonstratedin declining conviction rates, should be reversed by implementingthe recent SupremeCourt directive to create a State Security Commissionto insulate the force from political pressures,and enforcea minimum tenure of three years for the Director Generalof Police and seniorofficers. s Foradministrativerationalization, GoHP could: (i) reviewcurrentjhncfzbnaIcImtenngof administrative . responsibilities, with a view to clusteringlike Departtnents;and (ii)smctly enforce the minimum tbree-yar tenllrep as per HP's transfer policy, by establishmgstatutorycommittees to authorizetransfers and posting for senior Executive Summary xiii A Menu of Near Term Reform Options (Contd...) officers, and creatinga stabilityindex to ensure that the average tenure of the IAS cadre as a whole does not fall below three years. In e-governance,priorities for the IT Department-from amongthe 40-odd projects underway-should be clarified,and implementation should be sequencedbased on departmental capacityand need. H- al3gmdd- In education, it is important to implement measures under consideration topartner with theprivatesectorin the provision of technical and higher education-like usingprivate parties to provide technical and vocational education using the state's existingeducationalinfrastructure. n In health, a studyproposed by GoHP on assessingthe efficacy of mobik us.staticunitscould contributetowards addressingthe problem of health service delivery in remote areas. I r In socialprotection, the statecould:(i) carryout arapidreviewof administrationand record-keepingin key social ~ protection programmes, in order to develop optionsfor improved performance;and (ii) initiate a third party iqbact eualwtionof social pensions-the singlelargest intervention for the poor in the state. r GoHPcouldstrengthen theEnvironment Department and developcapabilitieswhichwould help to systematicallyassess how the state can maximize its natural advantage,and to ensure applicationof environment norms across sectors. I r GoHP could initiatean institutional and "gap" analysis of the environment sector that could feed into the subsequent preparation of an Environment Policy. This would include: (i) assessmentof environmentalpressures in various areas in the state; (ii) identificationof regulatory,institutional,and policy gaps leading to thesepressures; (iii)assessmentof workload and implementationcapacityfor the EnvironmentDepartment, Forest Department, and the State PollutionControl Board; (iv) strengtheningof complianceand efficiencyby assessing alternative ways of implementation of developmentprojects;and (v) assessmentof adequacy of the existing range of policy instrumentsand feasibility of using new ones that target the systemicand root causes of policy failure. r Thestateshouldsetupaninstitutionalmechanism (includingitsstructureand functioning)tomonitorand implement environment managementactivities (catchmentarea treatmentplan, compensatory afforestation, conservation of wildlife, etc.) related to sustainablehydropower developmentin HP, in order to ensure that these activitiesare completed in a time bound manner before the projects are commissioned. Implementation of activities can be outsourced to either the developersthemselves or private contractors,through discrete time bound contractswith periodical monitoring and evaluation of performanceby the regulatorand the developers. r In order to optimize the returns from the hydropower resourceswith due regard to the risks involved,and better , manage hydro revenues, a strategy study should be undertaken to: (i) assess the model that state should follow in building up new hydropower projects-through state/central/private/jointventure routes or a combinationof these; and (ii) recommend best utilization of the hydropower revenues to ensure optimum benefit for the state and affectedpeople. I. a In order to encourageintegrated river basin planning, the statecould facilitatethe proposed study on Satlujriver basin with a view to developinga time-bound action plan based on recommendationsemergingfrom the study It is important to implement recommendations of the Electricity Act 2003, includingfacilitation of open access, separationof power trading function from the transmissionfunction, and appropriaterestructuringof HPSEB. Hima~hglPradesh; ,L A Stafe with a7itrere . - I .;'-, I 1 - ,!'p.- *::, k, .!. '. 1: T his Economic Report is aimed at enhancing the The Report is structured as follows. Chapter 1presents World Bank's understanding of the development a brief review of the state's recent performance, and prioritiesandkeyconstraintsforthehillstateof Hunachal overall development vision in terms of sustainable Pradesh (HP),with a view to identifying strategicpolicy growth and inclusive development.Chapter 2 examines options for the Government of Hirnachal Pradesh the challenges and options in sustaining and assisting (GoHP). This is also the Bank's first cross-sectoral the state's fiscal recovery, in order to create fiscal space assessment for any of India's "special category" states, to help realize the state's development vision. Chapter as well as the first comprehensive study undertaken for 3 analyzes some of the key constraints to private sector any of the country's hill states. participation, which leaves HP dependent on the public sector. Chapter 4 looks at ways in which HP can The Report is based on the Bank's analysis of HP's exploit untapped potential in sectors like hydropower, considerable potential and opportunities, as well as the horticulture, and tourism, where it has natural key challenges facing the state. It is primarily a forward- advantages. Chapter 5 analyzes the key issues facing looking assessment of possible reform priorities and HP in terms of governance and public administration, actions that the state can consider in the short-to- and recommends measures to improve the institutional medium term to help realizeits developmentvision.The environment. Chapter 6 looks at outstanding issues in assessmentdrawslargelyonexistingdataandinformation the human development and social protection sectors, that was availabletill December, 2006, supplemented by where the state boasts of particularly impressive discussions with officials of (GoHP), and members of achievements. Chapter 7 highhghts the importance of academia, civil society,and industry groups.' conserving the environmental heritage, given that the ' Annex 1 providesan update of policy options proposed by GoHP followingpreparationof this Report. 4 Himachal Pradesh:AcceleratingDevekpent and SustainingSuccess in a HiLLState 1 Table 1.1: Local Context, Key Indicators, and Location of HP state's future potential liesinmainlyits naturalresources. is geographically different from most Indian states Chapter 8 lays out a menu of near term reform options located in the plains. HP is largelymountainous, except that can help build on HP's strengths, and address some for a fewpockets borderingPunjab and Haryana-with of the constraints. altitudes spanning from 400 meters to almost 7000 meters above sea level.' Of the aggregate geographical area, almost two-thirds are officially classified as A. State Backgroundand Recent forests-though actual forest cover is lower. The hilly Performance terrain and forest cover contribute to low availability of land for agriculture,and net sown areais only about 15 percent of the total. The population density in the A "Unique" State in the Indian Context state--at around 110per sq. km.-is significantlylower than the national figure of 320 per sq. krn.,largelydue HP has some specificdistinctivecharacteristics that set to relatively low and scattered population in the hill and it apart from other Indian states. First, it is a relatively forest areas. young state in the Indian union. It has existed since 1948 as a Chief Commissioner's Province comprising HP's unique characteristics present several important of 30 princely states, and a state area reorganization development opportunities which the state can exploit. transferred parts of Punjab to HP in 1966. The state, It is rich in natural resources with abundant water which currently comprises of 12 districts, was granted supplies, minerals, forests, biodiversity, and fertile soils. full statehood in 1971.Second, HP is a smallstate both The rich and varied forests are a crucial livelihood in terms of area and population. It has a population of resource that protect the soil and provide fuel, fodder, about 6.6 million which is well under one percent of and a wide variety of non-timber forest products. the Indian total, of which above 90 percent still reside Forests are also important for protecting the many in rural areas. The state accounts for only about 1.6 rivers that flow beyond the state to serve the Indo- percent of the national geographical area. Third, it Gangetic plains. The Himalayan region is one of the Physiographicallythe stateIS divided into four regions: the ShivalikW s have a relatively low average elevationof 1,000meters and are characterizedby a network of streams, the Lesser Himalayas rise to an average of 3,300 meters and support rich forests, much of the Greater Himalayas lie above the tree- line with elevations of 5,500, and the Trans-Himalayanzone is the geographiccontinuum of Tibet, marked by cold alpine desem. Himachal Pradesh: A State with a Difference world's priority biodiversity areas, and HP is one of arising from its high elevation, topography, resource the few Indian states with virgin primary forests. The dependence, and ecological vulnerability--as well as parts under rainforests and alpine forests are home to from a changing and more competitive international some endangered wildlife species. The state is rich in environment. In order to unleash its full potential, flora and fauna, with many glaciers, passes, meadows, there is a need for the state to play to its considerable and trekking routes. The salubrious climate, supply strengths and capitalizeupon its comparativeadvantages of perennial rivers, and natural touristic ambience can which lie in its abundant natural resources that have to contribute to the expansion of important sectors like be sustained. horticulture, tourism, and hydropower. At the same time, these special characteristics also HP's Recent Past: A Socio-Economic pose several constraints to development--on the Success Story basis of which HP has been conferred the status of a "special category" state by the Government of India The state has several significant achievements, in spite (Gal).'HP confronts environmental problems that are of its natural constraints. Even though national norms common across the country-such as pollution, soil are not the most accurate comparator on account of degradation, and declining forest quality-but with HP's uniqueness, it is interesting to note that it is ahead its high level of dependence on natural resources, of Indian averages for most indicators of economic it is especially vulnerable to the consequences of growth and human development. environmental decay. The ability to diversify the economy is limited by rugged topography and poor Significant Economic Growthand Diversification market access,which render large scaleindustrialization costlier and more difficult than elsewhere in India. The state experienced slower growth than the rest of The state's mountainous terrain and remoteness of the country during the 1970s and 1980s (Figure 1.I). much of the population increase the difficulties of HP had a weak socio-economic base when it was infrastructure development, urbanization, traditional formed, partly on account of prior neglect due to its agriculture, and efficient public service delivery. In geographical constraints. Though it began with higher addition, pockets of poverty remain in remote areas, per capita income and better socialindicators compared the small population implies a limited tax base, and to the rest of the country,itwas seriouslydisadvantaged inadequate infrastructure limits the opportunities for in terms of infrastructure, and depended heavily on the private sector development. Go1 has given HP the primary sector which contributed almost 60 percent status of a "special category" state in recognition of of Gross State Domestic Product (GSDP) in 1971. these specific constraints, under whlch the state is the HP had actually fallen marginally behind national recipient of special central grants and incentives that average per capita incomes in the early 1990s-partly have been instrumental to its development. due to initial investments in basic physical and social infrastructure which did not show immediate results in On account of HP's uniqueness, the more developed terms of growth. states in the Indian plains can only provide limited guidance for HP's progress, and the state needs to chart Over the last decade, however, HP has achieved higher itsowncourse.HPfacesspecificdevelopmentchallenges levels and growth rates in income compared to the "Special category" states are those having characteristicslike strategic border locations,hilly terrain, inadequateinfrastructure,large tribal population,and limited resource bases compared to development needs Thereare eleven "specialcategory"statesin India. 6 Himachal Pradesh:Accehrating Development and Sustaining Suctess in a Hill State I - - Fiaure 1.1:Recent Performance in Real Ernnamir Gmfiwth nnri nivarcif;rrr+imm in UP owth Rate = 7.19% 2 - 0 1: 8 - --t. HR PJ p a 4 7 - 8 l n S * r ! No& Dahjvm mansSkzhMAbsrin& HP, P I I &and, Hmyana Coqboundannlralgmwthmfesin hvo t&btjmeIr mtw 1993-94 onrvmd. Dah in ~ average hdian state, and the is showing Positive Achievemnts in Human Development increasing signs of diversification (Figure 1.1). In fact, HP has grown faster than states like Punjab, Haryana, HPhas human developmentandaccessindicatorsthatare Maharashtra, Tamil Nadu, and Andhra Pradesh during mostly better than the national averages on aggregate- this period (Figure 1.1). The secondary and tertiary and better than in richer states, despite the physical sectors have expanded more rapidly than the primary constraint^.^ In fact, if recent linear rates of change are sector-helped by tax exemptionsand specialincentives maintained, the state is on track to attain-or has already since 2003 that have attracted investment in these attained-several important Millennium Development sectors? In contrast, the share of the primary sector Goals (MDG) (Figure 1.2 and Table 1.2). However, has dwindled from 32.1 percent of GSDP in 1993-94 concentrated efforts are needed to provide access to to 21.4 percent in 2005-0komparable to the Indian reproductive health services for all by 2015-where the averageof about 19.6percent (Figure 1.1). MDG target may not be met on current trend. ' Historically, the boost to industrialdevelopment came in the early 1980swhen a host of incentives were announced by the centre and state. The recent major incentives to industriesin HP come in the form of GoI's Special IncentivePackage of 2003 and GoHP's New Industrial Policy of 2004 which provide, among other rhmgs, a five-year tax holiday and ten-year excise relief to existing and new industries (revised to expire in 2010), and capital investmentsubsidies to new industriesin notified locationsand to old units in case of substantialexpansion. These have elicitedan increasein proposed investments. See Box 3.1 for details. ' See Annex 2 for an overview of key socialindicators. HirnachalPradesh: A Statewith a Difference Table 1.2: Summary of Key Millennium Development Goals for HP Likelihoodot AttamingMu4 Possn. Achieve universal primary Enrollment for 6-10 year-olds has r~senfrom Y3Yo Possible. educationby 2015. to 97% between 1993-94 and 1999-00,and for Eliminategendergaps in, , , Already achieved. education bv 2005. rateswere 97% in 1999-00. For 11-14 year-olds, female to male enrollment Possibleby 2008. ratio has gone up from .902in 1992L94to .938in 1999-00. Reduceinfant and child CMR has fallen from 69.1per 1,000in 1992-93 to Possible. mortality rates by two-thirds 42.4 per 1,000in 1998-99. XMR has fallen from 55.8 between 1990and 2015. per 1,000in 1992-93 to 36 per 1,000in 2005-06 1 Access to reproductivehealth Births attended by a health professional have gone Unlikely. Projected to be just services for all by 2015. up from 25.6% in 1992-93 to 50.2% in 200506. under 75% in 2015. Reduce by half the proportion Population without access to safewater has fallen Already achieved. of people without safe drinking from 42.4% in 1992-93 to 22.6% in 1998-99. water between 1990and 2015. Note: Liketihood of attainingMDGs based on tinearpnjectionsfiom atwikzbk time series ahla (RTationa/Sampk Sumy and National Fa* HeaM Sumy), rennt avmvmbbkyean.Pomiy nuinbmfim Deaton and D x p (2002). Himachal Pradesh:Accekrating Develolpment and Sustaining Success in a Hi//State Impressive Expansion of P h y ~ hand Socia/ / and which resulted in lowgrowth rates duringthe initial years of statehood (Figure 1.I). From an initial focus on lnfrast~ucture building transport and infrastructure facilities, HP has The state has already achieved impressive expansion in gradually shifted priority to expenditures in the social infrastructural facilities such as electrification,banking, sectors,which has considerablyexpanded the availability post officefacilities,and teleden~ity.~ of HP7svillages All of basic socialinfrastructure and amenities, and helped are electrified. Power generation in the state has been build an educated and healthy population-which has, growing at 6-7 percent annually in the 2000s, and per in turn, helped to promote a responsibleand responsive capita consumptionof electricityin the stateis 831kWh administration.HP has achieved per capita social sector per annurn, as against the national average of 613 kwh expenditure which is currently more than double the and an average of 565 kWh for the Northern region. all-States average (Figure 1.3). The initial infrastructure Compared to a national average of 8.6 telephones per investmentshave alsostartedyieldingdividendsin terms 100 population, the figure for HP was 12.5 in 2004- of higher growth. second onlyto Kerala. Whilethereareonly0.70 primary and 0.25 secondary schools per 1000 population in This shift in the state's priorities is reflected in Plan India on average, corresponding figures for HP are expenditures. Immediately after the formation of the 1.81and 0.34-implying wider coverage of educational state in 1971, the early Plans allocated less than 20 institutions. Likewise, in health, while a single Sub percent of publicexpenditureto socialsectors-but this Centerand Primary Health Center (PHC)caters to 5085 more than doubledto about 40percentduringtheTenth and 31954 people in India on average, figures for HP Plan (2002-07) period. On the other hand, expenditure are much lower at 2651 and 12488people respectively. on transport and communications, and energy, which These developments are particularly commendable collectivelyaccounted for almost 60percent of the early given the natural constraintsthat the statefacesin terms Plans, has come down to about a third of aggregate of terrain and remoteness. expenditure more recently. Central grants to HP as a "special category" state are Major FactorsContributingto Recent currently above RS. 3550 per capita--compared to an Achievements all-states average of only about 15 percent of that (Figure 1.3). These grants have played a critical role A shift in the state's focus from infrastructure to social in financing public expenditures,and have allowed the investments has contributed to the state's impressive state to overcome its fiscal constraints, and achieve achievements. The state originally started with a very high social sector expenditures. In fact, recent data weak infrastructure base. For example, after India's show that per capita grants-along with per capita independence in 1947, HP had the lowest road length social spending-have been rising over time (Figure per population in the country, and per capita electricity 1.3). Other central incentives-like central tax sops to was less than 1 kwh compared to 17.8 attract industries-have contributed to recent growth kwh nationally, Initially, the government gave priority in the secondary and tertiary sectors? While these to infrastructure development, which required heavy special benefits might have contributed to the absence invesmentsin certainfieldswithoutimmediateresults- of hard reforms by providing a soft budget constraint Bas4 on thesemeasures,anIn& T+ surveyranksHP as secondonly to PunjabamongIndian states. Pleasesee 'The Leaders' LastHurtah", September 11,2006,issue. ' See Chapter 3 for a discussionof tax incentives. HimachalPradesh: A Statewith a Difference I Finllrn 1 3- Hinh Central Grants and Social S~endinain HP 4400- -Per Capita Grants (Rs.) In Ra 100Per As GSDP Share, Capita, 2004-05 -Per Capita SocialSpendmg (Rs.) 2200- All States I Noh: Data in y)twopanehjr2004-05 (BE). Data in nkbtpanel~bwxk'neartime h dfitted SeeW/finmmi&nic.in$r &k&. I to HP, their role in the state's achievements should not helped create an atmosphere where social development be under-valued. has not been constrained. In addition, HP has also been helped by political economy factors and social cohesion. First, the state B. Key Development Priorities in has consistentlysupported nationalpolitical parties, and the MediumTerm: Consolidation has aligned with the party in power at the centre. This has possibly contributed to the centre being favorably and lnclusion disposed towards HP's development needs. At the same time, since the 1980s, major national parties have Looking forward, GoHP appreciates that there is alternated in power in the HP legislature.' This voting an unfi4shed agenda in spite of the recent success. pattern has likely contributed to the responsiveness Accordingly, the Approach Paper to HP's Eleventh of the administration, by preventing the creation of Five Year Plan (2007-12) seeks to achieve the twin a monolithic power base which a single political party objectives of faster growth and inclusive development can take for granted as a vote bank. The different state over the medium term. The articulated Plan objectives admnistrations,irrespectiveof politicalaffiations,have are provision of essential social services--especially all had a common focus on social development in HP. to disadvantaged groups, increasing farm incomes, Second, the state has benefited from relative political developing vital infrastructure, protecting the peaceand social stability.The absenceof insurgencyand environment, and improving governance. A vital strife-which has affected states such as those in the thrust area identified by GoHP is the need to tackle north-east and neighboringJammu and Kashmir-has the unemployment problem, and provide suitable 10 Hirnachal Pradesh:AccehratingDeve/bpment and SusfainingSuccess in a HillState I Fiaure 1.4: Real Sub-Sedoral Growth Rates in HF?1993-94 to 2nns-n~ .- .- s 0\ Notes: Based on datafromDepmtmenf Econorniw and S ~ f i c sGoHP;annuaIpwth rates computed , Bank rt@ b employment opportunities to the educated youth of grown slower than aggregateGSDP despite the state's the state. natural advantages (Figure 1.4). Second, sub-sectors like manufacturing have been growth drivers in the HP's development priorities are a function of its unique recent past, helped by historical tax sops and other socio-economic characteristics. Unlike the states in the benefitswhich have attracted newindustries,especially plains, GoHP recognizesthat growth opportunities lie in in the districts bordering Punjab and Haryana. It will some specificsub-sectorswhere it has natural advantages. be important to sustain this good performance,.and Even though human developmentindicators are among retain the new industries after the benefits are phased the best in the country, the state appreciates that there out in 2010. Third, HP still needs to catch up with room for further progres-d seeks to further improve more developed states like Punjab, Haryana, Gujarat, living standards, especially for disadvantaged sections Tamil Nadu, and Karnataka in terms of per capita and remote areas. income levels. The government aims to achieve an annual growth Sustainingand EnhancingGrowth rate of 8.5 percent during the Eleventh Plan. In Performance order to achieve this, the state seeks to focus more on capitalizing on its comparative advantage, by increasing While HP has been growing marginally faster than the productivity and economic value of its natural national averageson aggregateoverthe lastdecade,this assets, and specializingin sectors where it can compete follows two decadesof slowergrowth-and it may not effectivelyin a globalized economy. be at a "steady state" sustainable growth equilibrium as yet. First, there are high potential sectors that could A related issue for the state is to enhance opportunities contribute to more rapid growth. In particular, there for productive employment. Though aggregate are sub-sectors like forestry and hospitality that have unemployment rates in HP are lower than national Himachal Pradesh: A Statewith a Difference averages, at 2.9 percent compared to 7.3 percent, there extent, the transition already seems to be happening, is evidence that the productivity of employment may with increasing deployment of incremental workers in be low9 First, despite its declining importance, the construction, manufacturing, and sectors associated primary sector still accounts for almost 70 percent of with tourism-while agriculturaljobs are on the decline employment, but generates less than 22 percent of (Figure 1.5). The slow pace of the process is, however, GSDE? Not only are productivity and incomes from troubling. In the rural areas in particular, more jobs are this sector low, they are also likely to be more volatile, being lost in agriculture than are being created elsewhere. increasingvulnerability. The dependence on agriculture Between 1993-94 and 1999-00, while the working age is especiallyextremein the case of rural femaleworkers, population in rural areas increased by about 0.46 d o n , 95 percent of whom were employed in the sector in employment stagnated with hardly any net addition. 1999-00. Second, it appears that the high employment Consequently the unemployment rate in rural HP rose figures conceal significantamountsof underemployment from 1.6 percent to 2.9 percent over the same period. or disguised unemployment. In 1999-00,6.3 percent of However, theworkmgagepopulationisrisingand demand rural and 4.4 percent of urban workers reported being for jobs will continueto rise in the medium term. available for additionalwork. Further 5.2percent workers reported availability for alternative work, suggesting dissatisfaction with their current employment. Promoting Inclusive Developmentand ImprovingLiving Standards There is a need to transition workers out of subsistence agriculture to more productive employment by creating Even though less than 10 percent of the population suitable opportunities in the non-farm sector. To some is classified as poor, HP faces issues in terms of 1 Figure 1.5: Structure of Job Creation and Working Population in HP I Urban Areas 8 - 0 - b 5" I .5 g .?82 e 4 2 + C 4 3 a p" '2 $ s 8 2 g 3 b 11 z5 4 .$8 g s 2 -1 8 -2 $ ,g $ -g $ v E 8 U i 2 Net addition to employment in various sectors, 1993-94 to 199940, shows a move out of low productivityprimaryactivitiesintohigher p r o d u d y secondaryand tettiary sectoractivities. -2 Noks: Leftpanel shows net addition tojobs in uario~/ssectors over the 1993-94 und 1999-00 National Suqle Survq~.Absohte numbers refid highe, popnhfion in wrufHl? " Thisis as per 1999-00 National Sample Survey figures. Himachal Pradesh:Accelerating Deve/opmnt and SustainingSuccessin a Hd State I Figure 1.6: Some Examples of Differential Indicators of Social Outcomes and Access 1 yki Middle l7 R Urban Literate 135.0042 / - - Urban 88.7%~ 1 Low I Medium I w 1Notes: Data onPrimary Heah CentersfMmDepartment of EconomicsandStatistics, GoHl? Data on vuherabiligcomp~ted&Bank sk&Tj-omNational SmrpLSurvey, 1999-00. Otherdata and liiinpin& F.omNationalFmih Heakh Sumy, 1998-99. vulnerabilityof the population. Absolute poverty is not years if the state's good economic performance cannot a major issue by itself. However, vulnerabilityestimates be maintained.'" for the state suggest that the likelihood of households fallinginto poverty in the near future is higher than the Despite impressive achievements in aggregate social proportion of households currently poor-especially development, there are indications of differential in rural areas. It is estimated that about a fifth of the outcomesand access for social,economic,and geographic population could slip into povertywithin the next three categories Figure 1.6).Indicators generally tend to be See Anour 3 for derails. Vulnerability is estimated from National Sample Survey 1999-00 data. The expected funue poverty status of a household is obtained by comparing the predicted future per capita consumption with the current poverty Line, with predictions based on regressions of consumption expenditure on household characteristics Vulnerability incidence (i.e., whether or not a household is vulnerable) is obtained by comparing the mean vulnerability (estimated as the probabilityof being poor at least once in the next years) of the household witha threshold value of 0.50. See Chaudhuri (2000).While this approach has limitations as it is not based on panel data, it does indicate that the state cannot afford to be complacent about its achievementsin poverty reduction.The national vulnerabilityrate (excludingB i i due to data issues)is 54 percent, compared to 22 percent in HF? Hirnachal Pradesh: A Statewith a Difference 13 worse for poorer households, women, households with state in India in many respects. Collaterally, benefits less educated members, households without regular from generous transfers and grants from the central employment, households with high dependency ratios, government that softened the budget constraint may and remote areas. It is very important to note, however, have held back the implementation of bold fiscal that these socio-economicdifferentialstend to be lower reform initiatives by GoHP and contributed to fiscal than in most other Indian states, and are not always indiscipline.This has created other difficulties such as consistentlysystematic in any one direction. high debt, and, more importantly, a political consensus around the role of the state. It has also resulted in a The state seeks to ensure that its growth strategy policy logjam, and excessive reliance on the central does not widen existing inequities. To the extent that government for development-with little policy household incomes are predictors of selected social initiative that can harness the state's many natural outcomes,inclusivegrowth would,in fact,lead to closing advantages for development. the gap in social outcomes. Recent growth in HP has been associated with declininginequities. For example, GoHPrecognizes that state-leddevelopment has certain the Gini Coefficient for consumption expenditure has limits, and generous financial flows from the central declined from 0.27 and 0.47 for rural and urban in government cannot be assumed indefinitely-especially 1993-94 to 0.24 and 0.29 respectively in 1999-00. It is as HP's development achievements influence central important to sustain this performance. devolution to redistribute resources progressively to weaker states. The special tax incentives that have promoted industrial growth are also due to be phased C. Towards a Development out gradually by 2010. At the same time, past state Strategy for the State involvement has raised expectations of economic development which could be difficultto fulfill if central support is phased out-unless GoHP undertakes HP has several impressive achievements to its credit. reforms, and devises alternate strategies to move the Although a "special category" state, it has acquired state from being a provider to a facilitatorand regulator. many of the characteristicsof a middle income Indian Most fast growing states have embraced this need state. For instance, its per capita GSDP exceeds that for reorienting government. HP must undertake the of many developed states such as Kerala and Andhra transition to take advantage of new opportunities to Pradesh. It has grown faster than the nationalaveragein tackle the state's development challenges. recent years, and has achieved levels of social outcomes and infrastructure that are better than in richer states for The assessment finds that, in order to realize its severalindicators. development priorities, the state has to overcome several inter-related challenges and come up with a However,theseachievementsmask severalproblems for coherent strategy to address them. Despite significant the state.Unlikethe developedstates,HP's achievements achievements, HP cannot afford to rest on its laurels, have been largely led by the public sector, influenced by and must work towards sustaining and leveraging the its status as a "special category" state which entitles it gains it has already made. to liberal centralgovernment grants and, more recently, industrial investment incentives. On one hand, the soft The key challenge faced by the state at present is budget constraint from a liberal devolution regime, insufficient fiscal space to finance the development combined with some farsighted planning, has proved vision. While there are recent signs of a fiscal recovery, beneficial in making HP the leading "special category" this has to be maintained. Fiscal resources can finance Himachal Pradesh:Accekrating Devehpment and Sustaining SuccessinaHill State a variety of development priorities-such as critical sectors in which the state has a natural comparative infrastructure that is more costly to construct than advantage-such as tourism and hydropower-need in the plains, investments that can help exploit the to be leveraged. Despite good objective indicators of untapped potential in sectors in which HP has a human development, there is scope to improve some comparative advantage, and social sector expenditures aspects of public admhstration and service delivery. to improve delivery of public services and promote It is particularly important for GoHP to protect its inclusive development. environmental wealth while pursuing its development agenda, since much of HP's future growth prospects At the same time, in order to realize HP's true are critically linked to its natural heritage which is developmentpotential, GoHP must provide an enabling its strength. policy framework that promotes growth and economic opportunities. Better infrastructure and relevant skills The Report analyzes a number of constraints that development for the population can reduce constraints to require dynamic policy changes, institutional capacity private sectorparticipation, and,in turn, help reduce the building, private participation, and infrastructure populations'current dependenceon thepublic sectorfor creation. It offers some short and medium terms services and employment opportunities-which could policy recommendations, based on an evaluation of lead to avirtuous cycle in terms of freeingup additional criticalchallengesand existing opportunities.Taking the fiscal resources. Given that the terrain is unlikely to necessary policy measures will put the state on a path promote agrowthmodelbased on traditionalagriculture towardssustainabledevelopment,and helppreserve and or heavy industry,opportunities and potential in various maintain the state's commendable achievements. L 2 C H A P T E R I I n order to addressthe state's developmentchallenges, (12 percent royalty power) from hydropower projects it isimportant not only to adopt appropriate policies, and equity share power on account of state's 22 but also to generate resources to finance investments. percent equity in the Nathpha Jhakri Hydropower HP is a debt-stressed state, with an unsustainably high project. Second, the introduction of Value Added Tax debt stockof about74percent of GSDP (includingoff- (VAT) resulted in an increase in sales tax revenue budget borrowing)-largely a result of fiscal distress by 34 percent (Rs. 1.86 billion) in 2005-06. Third, evidenced in the high fiscal deficits since the mid- under the Twelfth Finance Commission's (TFC) 1990s. In terms of per capita debt, HP is the second award, the state's non-phn grants increased 84 percent highest in the country. The expenditure composition in 2005-06 (Rs. 14 billion). This was combined with is rigid, with salaries, pensions, and interest accounting expenditure compression efforts, which reduced for 70 percent of total expendture. This provides total expenditure to GSDP rab htll3Qment k ---- -- ------- Tejjl@j$iii fiscal space for financing the state's strategic 2002-03 to 29 percent in 2005-06. This has resulted in investments. Due to the high debt stock, fiscal policy a fall in the fiscal deficit to GSDP ratio to 2.8 percent over the medium term faces the twin challenges of in 2005-06 (Figure 2.1). However, in 2006-07 (RE), achieving debt sustainability and creation of fiscal the fiscal deficit has gone up to 4.3 percent of GSDP. space for priority investments, such as in hydropower Consolidating the turnaround requires a sustainable generation, transport, and social infrastructure to long term fiscal policy. Such a policy must target support growth and employment. reduction in the level of debt stock while creating fiscal space for financing the development vision Some recent positive developments have led to early of the state. In this context, the present episode of signs of a fiscal turnaround. First, in 2004-05, own fiscal correction presents a concrete and promising non-kuc revenue was strengthened by inflows of Rs. 2.85 opportunity to the state government to strengthen its billion--comprising revenue from the sale of power finances robustly. Hirnachal Pradesh:Accehrating Development and St/stainingS~ccessin a HdState L Figure 2.1 :Recent Fiscal Trends in HP t-FiscalDeficitasShareofGSDP 12% - +-Revenue Deficitas Shareof GSDP +Primary Deficitas Shareof GSDP 8% - 4% - Dmoua S+us ------------- -4% 7 ------ 80 ,, sr Orher ] : :::Taxes Interest Payments 60 8 Non-Tax Pensions -4 I Tax A. StrengtheningOwn Revenue Measuresto EnhanceOwnTax Revenues Performance Rationalizingand Adjusting Tax Rates The state's revenue performance has been improving HP's aggregateown tax revenuehas improved gradually, but the process has been slow. HP is highly sensitive and, at about 6.2 percent of GSDP,is comparableto the to central devolution in the form of grants and shared national average of 6.1 percent. However, other states taxes, and these averaged about 70 percent of GoHP's with similar per capita incomes have higher own tax to revenues. However, there has been a recent favorable GSDP ratio--like Punjab with 8.3percent or Karnataka shift in revenue dependency, as described above, and with 12percent in 200!%06. The state could look at the this needs to be consolidated. followingmeasures to improve performance. CreatingFiscal Space to Realize the State's Development Vision 19 Sales tax-largely VAT-is the main sourceof for a more fundamental reform of the stamp own taxes, but gains from this may be drying duty system, and reduce registration fees on par out following two years of implementation. with other states. The yield from ths tax is also lower than the The motor vehicles tax in HP is lower than in national average of 3.7 percent of GDP. Given other states,and could be a sourceof lost revenue." that the VAT has completed nearly two years in GoHP could: (i) conduct a comprehensive study the state, it may be useful for GoHP to consider of the revenue implication of the current motor an external evaluation of VAT implementation vehicle tax regime, and raise the lifetime tax rate with a view to streamlining and strengthening graduallyas in other states; (ii) periodicallyrevise VAT administration, making the department the specific rates of the motor vehcle tax which taxpayer friendly, and preventing tax fraud. have not been revised since 2001; (iii) revamp This evaluation could include value chain fees for permits, registration,licenses,and fitness analysis, VAT assessment, system of refund, certificates, and increasing revenue collection use of nationally harmonized definition of from road tolls. A 'green tax' on older and more goods, fraud risk analysis, VAT threshold polluting vehicles could also be introduced. limit, etc. Taxes on goods and passengers collected Excise duty on liquoris the second major source by the Excise and Taxation Department have of tax revenues, and does better at more than declined from 20 percent of tax revenues in double the national yield. However, the system the late 1990s to about 3 percent currently- is presentlystructured as specificduties classified following the introduction of a specialroads tax in eight categories, with sub-categories-making for transport vehicles. The state could consider the system complex to administer and open to merging the goods and passengers tax with the subjective interpretation of the category of special roads tax. duty to levy. Given the complexity, GoHP could consider steps to switch from a specific to an HP has an electricity duty at the flat rate of ad-valorem excise duty structure following the 6 paise per unit consumed in bulk use and 33 Maharashtra example, and simplify the license paise per unit on consumption by industries, as fee structure for alcohol vending. last revised in the 2005-06 Budget. The tax take from this source has been uneven over the years Stamp and registration duties, at 0.3 percent and constituted below 4 percent of tax revenue of GSDP, are almost half the national yield of in 2005-06. The electricity duty could be folded 0.6 percent of GDP-but downward revision into VAT, given low and uneven intake from it. in stamp duty has resulted in a small increase in revenue." In HP, these charges could In addition, the state levies a number of minor potentially amount to a tenth of property value, taxes such as land revenue, and there are higher than in most other states." GoHP could administrative costs involved. The state needs to undertake an analysis of stamp duty evasion study the administrativecost of minor taxes and schemes and their revenue impact to prepare either devolve them to local bodies or withdraw " As part of the fiscal reform programme,stamp dutieswere reduced to a uniform 8percent of sale deed in April 2005 from 12percent (effectivefrom April 24,1991). This led to a small increase in revenue from this source. l 2 In addition to the 8 percent stamp duty,registrationfee under the IndianRegistrationAct, 1908,as applicableto HP, at the rateof 2 percenton the value of consideration,subject to a maximum of Rs.25,000is also levied.Most states levy only 1 percent registrationfee. 1'3 Non-transportvehicles are subject to one time tax, while transportvehicles are subject to an annual tax. In addition, HP levies a special road tax on transportvehicles.The current level of tbe one time tax is 2 percenton the priceof personal vehicles such as cars and 1.5-3 percenton the price of two wheelers. The one time tax is considerably lower than in other states where it could range between 6 percentand 8 percentof the price of the vehicle. Transportvehiclesare chargedan annual specific tax dependingon the nature of the vehicle. 20 Hirnachal Pradesh: Accehrating Devehpment andSustainingSuccess in a HillState them if the costs of administration do not make Reporting and accountability mechanisms could be them worthwhile. improved. A modernized tax administration should a HP is one of only fivestates in India not to have report on a regular basis to a government Secretary in aprofessionstax,and this denotes potential lost charge of revenue collection. Performance measures revenueI4.The state could reintroduce this tax. should reflect broader reform priorities and not focus While most states levy, collect, and devolve the exclusivelyon collection results. For example,important tax to local bodies, six states have assigned the measures of the performance of the tax administration tax to municipalities to levy and collect. HP may could include the quality of services and information consider an appropriate model to collect the tax. provided to taxpayers, a broadening of the tax net, or reduction of the time required for registration of a Modernizing TaxAdministration business for tax purposes. GoHP should also look into modernizing tax The capacity and organizational structure of administration following international examples. At the Excise and Taxation Department needs to be present, the revenue administrationsystem is somewhat strengthened and streamlined before it can be charged complex, with several revenue-collecting agencies with additional assessmentand collection tasks. Moving in different departments. The various tax collecting from a tenitorid to a ftlndional structure in the Excise agencies currently report to different Secretaries in and Taxation Department is probably the single most the government. There is no comprehensive uniform important initiative the government can take to reform accountability mechanism, and accountability is based tax administration. The reorganization would have to exclusively on collection results. The key Excise and be carried out at the headquarters and territorial levels. Taxation Department has a territorial rather than It would create the necessary organizational basis for functional organization structure, and requires more separatingand strengtheningthe key tax administration qualified and senior staff. functions of registration, audit, collection, and taxpayer services. The hman resotlrce sihation of the Department Overall responsibility for revenue collection could also needs to be addressed-since a professional and be streamlined and consolidated in one dedicated specialized tax administration requires an appropriate collection agency. This agency would have the level of highly qualified staff. This indicates a need for overall responsibility for managing compliance and increasingthepercentageof seniorstaff atofficerlevelin implementing the tax system. The Excise and Taxation the administration. Departmentcouldbethebasisforaunifiedtaxcollection system in HI?. Other revenue-collecting agencies would The planningprocess must be strengthened. Modern then concentrate ontheircore,non-collectionfunctions. revenue administrations in developed and developing Such reform requires careful preparation, however. As countries have introduced regular, multi-year, strategic preparatory and more short-term measures, assessment planning processes, often spanning a five-year period. and collection functions of different departments can These define the mission and vision of the revenue be co-located (e.g., by creatingintegrated check posts), administration, identify the challenges to address in and procedures can be harmonized (e.g., by unifying the planning period, as well as reform priorities. The real property valuation for stamp duty and urban land strategic plan is then translated into annual business tax purposes). plans for the tax administration. Introducing regular l4 The others are Arunachal Pradesh, Punjab,Jammuand Kashmir, andJharkhand. Creating Fiscal Space to Realize the State's DevelopmentVision able 2.1: User Charges in HP compared to Other States 1 s Averape Annual Fees in Edatca26on inRs. adti-- p,taw:gic plutl;.iulh: fsr tslr a&r&&Won equity invested, in addition to the royalty power. The refaim itrHP 4be benefisja. latter course would require the creation of fiscal space for the necessaryinvestment,besides bearing the risk of project completion. Measuresto Enhance Own Non-Tax Revenues The story on user charges is mixed. Imgation charges were revised in June 2005. Although the stated HP's non-tax revenue averaged below 2 percent of policy is to revise irrigation and water charges by 10 GSDP in the 1990s,but there was a shift from 200445 percent annually, this is not regularly implemented. due to receipts from sale of royalty power that the state In a retrograde move in May 2003, GoHP abolished is eligible for from all new projects under the state's user charges levied in hospitals and health institutionsand hydropower policy". The state also gets 22 percent of restored the position of tariffs as on March 24, 1998. power generated at generation cost from the Nathpa The Rogi Kalyan Sarnitis, set up in various hospitals Jhakri project in proportion to its equity share in that to provide a measure of autonomy to hospitals to project.'' In order to enhancerevenues from this source, determine user fees, have also been abolished.A review the state has two options. Under the first option, the of health and higher education charges levied in HP state allows private participation under a transparent and a few peer group states chosen on per capita and investment policy and regulatory environment and similar status basis @dl states) shows that there may enjoys thebenefit of 12percentroyaltypower.Under the be scope for restructuring user charges (Table 2.1). second,the state could investjointly with other partners Of importance is a detailed analysis of the cost of and get a share of the power generated proportional to providing different services, user charge comparisons IS The stategets free royalty power from eight projects:Bairasual,ChameraI and 11, Shaman,RSD,Malana, Baspa I1 and NathpaJhakri. In 200546, proceeds from the sale of power amounted to Rs 2.47billion.The receipt projectedin 2006-07is evenlargerat Rs.5.46 billion. 22 HirnachalPradesh:AccekratingDevelopmentandSustainingSuccessinaHillState across states, and public consultations for regular salaries, pensions, and interest--account for 70 percent revision of tariff. of expenditure, which is higher than in most other states (Figure 2.2). Capital expenditure and non-wage In order to enhance non-tax revenue from user O&M have together declined from over 40 percent of charges, the state could consider establishment of a expenditure in the mid-1990s to only about a fifth at 'Public Tariff Commis\ion' for various services like present. This concern is appropriately reflected in the transport, education, health, water, and irrigation to 2005-06 Budget Speech which c d s for expenditure depoliticize user charge determination. This measure prioritization to improve outcomes. was announced in the 2005-06 Budget Speech. An independent Commission should be established at the earliest to provide an assessment of user costs for Revenue Expenditure various services,carry out public consultationson tariff revision, and advice government on tariff fixation. Wagesand Salaries Salariesare an important component of expenditurein 8.ControllingExpenditureand the state, accounting for about a third of expenditures Improving its Composition according to 200607 (RE). This results largely from the liberal employment policy and a wage regime that historically has followed the salary structure of Punjab. Total expenditure as a share of GSDP has declined Despite the hgh staffing ratio, this has not restrained in recent years from 32 percent in 2002-03 to about GoHP from regularizing temporary workers or 29 percent of GSDP in 200546, but expenditure creating new positions or replicating wage indexation - compositionneedstoimprove.Thedeclineinexpenditure announced by Go1 for its civil servants. Although a has contributed to encouraging improvement in the hiring freeze is in place, examples suggest that it has fiscal balance. However, contractual expenditures- not been seriously and consistently implemented. For Figure 2.2: Expenditure Composition in HP and Selected States r Interest Payments Pension 70% L Salaries I I Pensionsand Retirement Benefits r NonWage O&M 42% - Subsidiesand Transfers 28Yo - Interest Payments CapitalOutlay and Net Lending I Other CreatingFiscal Space to Realize the State's Development Vision 23 instance, the 2006-07 budget announced a liberal introduced a Contributory Pension scheme for new policy of regdari~ingall dailywagers completing 8years employees joining service after May 15, 2003, and it of service against existing positions or by creating follows the Go1 pattern of contribution^.'^ However, new positions on merit. The new policy extended a the impact of the new pension scheme will be felt over policy whose earlier cutoff was March 31, 2000. The the longer term, and, till then, the state will have to expected number of beneficiaries from this is 15,000 contend with pension expenditure under the Defined and the expected expenditure is Rs. 550 million. In Benefit scheme for employees hired prior to May 15, 2005-06, GoHP merged, with effect from April 1,2004, 2003. Since provisions under the Defined Benefit 50 percent of the separate wage indexed component systems are totally unfunded, all recurring costs have of pay (Dearness Allowance) with basic pay scales at a to be paid out of revenue, and this will have fiscal cost of Rs. 1500 million. In the medium term, a fiscal implications. Moreover, there has been ad hoc wage adjustment risk is the implementation of the Sixth indexationhistorically,with pensions for retired workers Central Pay Commission's award when it is announced. adjusted on the basis of revised wages of the last post As it is, HP is unlikely to meet the criteria for salaries held prior to retirement, in line with recommendations recommended by the TFC." from the Pay Commission approximately every ten years. Given that the primary purpose of any post- The government requires an effective wage and hiring retirement indexation is to preserve the real value of policy that is consistent with fiscal sustainabllity.18 pensions, some contractual safeguard is needed to Elements of such a policy should include reviewing confirm that post-retirement indexation will only be staffing norms for various departments, identification provided for price changes, and that GoHP will not of vacant positions and implementing a hiring freeze grant wage indexation any time in the future. against vacant positions except in critical areas, reallocation/closures of vacant posts, budgeting only In this area, the state could: (i) undertake and complete against staffed positions, reviewing the policy for pension projections for government and public sector regularization of work charged, daily work charged and agencies and begin annual budgeting on actuarial basis;2" temporaryemployees,PayCommissionimplementation, (ii) indexpensionsautomaticallyto price increases instead deltnkmg automatic inflation indexation of salaries to of ad hoc wage indexation every ten years through the central announcements, reviewing system of grants in Pay Commission; (iii) consider the scope for expanding aid to educationalinstitutions, etc. the defined Contributory pension fund pool through voluntary or mandatory switching options, and especially Pensionsand Retirement Benefits entice younger workers who joined before May 15, 2003 to switch to the newly introduced scheme; and Pensions are an increasing fiscal burden, having risen (iv) introduce mntn'hkvypensionschemes for new employees from about 8 percent of expenditure in 2002-03 to in public sector corporations, boards, universities, local over 9 percent at present. In August 2006, the state bodies, etc. I' The Twelfth Finance Commissionhas recommended that salaries must not be more than 35 percent of total revenue expenditure net of interest and pensions.HP is projectedat around 58.5 percent in 2008-09. IR See Chapter5 for staffing related issues '"e employeeconmbuted 10percentof BasicPay and Dearness Allowance towards hispensionbenefits and the statematches the conmbution. 20 This has been under consideration from 2004,with World Bank assistance.The exercise has not been completedand will need to be expanded to cover Statutory Boards, Corporations, Universides and aided institutions and Local Bodies from wherein GoHP could experience 'moral hazard' as these agencies aredosely linkedwith the Governmentand followthe Government'spensionrules Knowingfuturepensionliabilitiesis critical to plan forlong- term fiscal sustainability becauseof the current practice of ad hoc incremental budgeting to forecast pensionexpendinue. 24 HimachalPradesh:AccelerafingDevelopmentandSustainingSucce~sin a HillState Subsidiesand Transfers Interest Payments Subsidies and transfers account for about 7 percent of The hlgh debt stockhas resulted in the share of interest total expenditure, up from 6 percent in 2003-04. Two expenditure in total expenditure doubling from 13 large elements determine the level of explicit subsidies: percentin the early 1990sto 26 percentin 200445. HP, powerand transport subsidies.First,GoHP subsidizedthe like other states,has been a beneficiaryof the debt swap, HimachalPmdeshEbdki&Board(HPSEB) Rs. 500 million interest reset, and debt prepayment schemes that Go1 in 2005-06 and is providmg the utility Rs. 2448.7 million operated between 2002-03 and 2004-05.25By enacting in 200607." Although relativelysmallcompared to other the Himachal Pradesh Fiscal Responsibility and Budget states, these are important financial resource in HP's Management Act (FRBM) in 2005, the state got access context and can be put to better use. The economic basis to the Go1 debt relief scheme structured by the TFC. to the state's decision to main& the power tariff that Under the scheme, Rs. 8.24 billion of Go1 loans were existed prior to the 2005 order of the Hirnachal Pradesh restructured, carrying an interest rate of 7.5 percent Electricity Regulatory Commission (HPERC) is unclear." repayable over 20 years. GoHP will, as a consequence, TheHimachalRoadTransportCmporafrfion(HRTC) isanother benefit from a reduction in interest expenditure to the entity that received an annual subsidy of about Rs.480 extent of Rs. 1.35 billion over the period 200546 to million over the last three yearsBBus fares have not been 2009-10 onits outstandingGo1loans.In addition,if the revised since 1999.'4 The 2005-06 Budget suggestsa time stateis able to stay on the fiscal consolidation path and ft-atne of 4-5 years for HRTC to h c i a l l y break even, achieve the level of annual adjustment in the revenue but the turnaround plan is unclear at the moment deficit as recommended by the TFC, Rs. 0.41 billion in annual repayment of Go1 loans would be written- In this area, the state could consider: (i) reducing the off for five years. However, these measures must be power subsidy, and delinkingthe subsidy from the power supplemented by aggressivemeasures to reduce annual tariff; (ii) preparing and implementing a tumaroundphn borrowingand restructure high cost debt +rHRTC, which is an important consumerof subsidies; (i)appointingand activatmga Committeeof Expertsto Non Wage Operationand Maintenance presentaroadrnap forsubsidycontainmentandagradual phase out of non-merit subsidies, as announced in the Expenditure on non-wage O&M as share of total 2005-06 Budget; and (iv) preparing an annual report on expenditure virtually halved between the beginning of explicit and implicitsubsidieswhich would add to fiscal the 1990s and 200445, going from 22 percent to 10 transparency, result in public debate, and help create a percent.Non-maintenanceof assetswillultimatelyresult climate for better targeting, and also support the Public inpoor servicedeliveryand highercostsof replacement. Tariff Commission in determininguser charges. There are encouraging indications of intent in the These figuresneed to be reconfirmedwith GoHP. Subsidieswillaffect the wmmercial disciplinein HPSEB by not making it responsible for its revenue. In addition,the benefit, productivity,and targeting of the subsidyis at best uncertain. Even if the subsidyis to be provided such subsidy should be direct and transparent and not use the power tariff as a subsidyinsrmment. HRTC provides free travel to handicapped, press correspondents, public and former public representatives, freedom fighters, national awardees,war widows, and gallantryaward winners. Students and government employeesget concessionaltravel, as do police officials and jail wardens. 24 Occasionally,HRTC also requires other fiscal support from on and off-budget sources. For instance, in 2005-06 the HRTC was provided an off-budget loanof Rs. 680million through the HknachalPradesh Infrastructure DevelopmentBoard to pay the Provident Fund liabilities of the Corporation.The Corporation with an operating ratio of 1.2 is unable to meet its operatingcosts In comparisonwith Punjab, Karnataka, Rajasthan and Maharashtra state owned uansport utilities, Himachal and Punjab had operatingratios (operatingcosts to operatingrevenue) over 1. Others had operatingratio of 0.8. 25 Unda the arrangement, the staterestructuredi s debt portfoliowith lowercostborrowingto the extentof Rs 35billion, savinginterestexpedtureof about Rs.1.50 billion per annum.The carryingwst of debt thereforedeclined from 11.6percentof on budget debt stockin 2Nl1-02 to 8.3 percent in 2005-06. CreatingFiscal Space to Realize the State's Development Vision 25 2005-06 Budget speech, and earmarked allocations heads; (iii) release resources according to the w o r b from the TFC for maintenanceof roads, buildings, and season in some departments; and (iv) expenditure forestswffl see higher expenditurein this area. allocation accordingto service deliverynorms. This will be critical to the achievement of output under the new A more systematic approach would focus on performance measurement system that GoHP wants to developmentof maintenanceplans for tixed assets such put in place from this year. (Box 2.1). as roads, buildings, and equipment,and f d y budget for these annually. In other sectors, assessment of service deliverygapsin criticalareassuchasin health,education, Capital Expenditure agriculture,police, or the judiciary shoulddriveresource allocation. Since the axe of expenditure typicalb falls HPappearstoincur~k@taLexpendiaasp~ -- --------- on maintenance heads in favor of salary heads, some of GSDP than other states,partly on account oE @ lower measures to prevent this may be necessary.There could GSDP and &her shareof Centrally SponsoredSchemes be efforts to: (i) separate and protect the salary budget (CSS) that are determined on normative principles; and for an agreed staffingplan includingtemporaries (rather (ii) hlgher cost of provision because of the difficult than posts); (ii) discourage reallocation from non-salary terrain and remoteness. However, in recent years, capital Box 2.1: Essential Ingredients of Performance Budgeting I pour requlsltes tor pemrmance buagetlilgsystems are: A frameworkof strategy,priorities,and objectivescoveringpublic e x p ~ ~ ~ ~ e ; Performance criteria for efficiency, effectiveness, impactwhich are regularlymonitored; - -1 Annual reports of inputsand outcomesinformingbudget decisions; - . i 8 I . ,. ''me 4 . - .. Programme budgetingwith allocationsbased on performanceand desiredresults,. . ' . I Additionally,it is importantto use feedback from monitoringand evaluationto use budgeted resources more efficiently. !. , '4 Singaporeand Malaysia have pioneered performance budgeting in Asia. In S i p o r e , performance budgeting was &st introduced in the 1970s. This was complemented in 1989by the delegation of authority to ministries to manage their budgetswithoutreferringexpendituredecisionsto theMinistryof Financeand, in1991,by theintroductionof acomputer- basdrnanage- tieff-sf~stemperrnktinglrccd-~%w- ~OWeaby~eTaUnchOf -- budgeting for results. The features of the system are: Theuse, for all programmes,of performanceindicatorsand targewovering inputs, costs and activitylevels, l b - outputsand outcomes; 1 . . .r6.3-.,&2:~3.~.l&tS?t&3-~~~4!, B Conversionof programme cost centresinto autonomousagencies-subjectto output basedbudgetingGth .-. ', flexibilityin resource deployment; - r-- --m,.: t. + Performance incentivesin the form of the right to retain half of the unbudgeted efficiency ., ,- . r . ...& , 8 Zero based value for money audits of expenditureprogrammesby the Auditor General's office. t -1 Malaysia's modified budgetarysystembuilt on the samebase of programmeand performancebudgetingused in ~ ~ ~ 'p c , ~ andintroducedgreater fiscalcertaintyforplanrugpurposes, devolutionof finanaal responsibility, programme agreements with results orientation, and cycles of programme performancereviews. The Malaysian budget p r e s s is in two parts: first, an examinationof performanceachievable with a 'base' budget with unchanged policies, and then the performance and expenditure effects of new policies. *UP.-, , . ,, * L*-, C, I F , . .,- -&- - 26 Hirnachal Pradesh: Accehrating Development and Sustaining Success in a HiffState Box 2.2: Zero-Based Investment Review in Orha I / -- Several inhstru- projects takenup by the O&sa government were languishq due to lack of monitoring and effective 1 implementation. Consequently,thegovernment,in 200243,launchedan exercisecalled ZeroBased InvestmentReview (ZBlJ led by a hgh-powered committee headed by the Chief Secretary. The ZBI review required each department to place the projectsunderfourcategories:(i) forfast aackcompletion;(iii&ding on slowertrackforthepresent,whichcould fullfun- graduate to fast-trackin the future; @i minimal fundug until redesign or reskuauring,and @) scrapor shelveindefinitely. ' While in the first phase, the review was limited to projects/schemes costing Rs.40 million and above, and, in 2004-05 (secondphase), projects costingRs.10million and abovewere also taken up forcompletion. During thelast fouryears of implementationof thescheme,outof 257identifiedprojects, asmany as 90projects havebeen completedup to December2005. Y w wise allocation of budget and proiect com~letiondetailsis eivenin the tablebelow. For timely completionof the identified projects, concerned departmentshave been allowed to make necessary provision in the budget, and,in case of emergency,have been allowed reallocationof fundswithin the overallbudgetary allocation. The success of this exercise shows that when the totalbudget allocationis held constant, positive incentivesare created for departments to reallocatefunds to priorityprojects rather than hide "whiteelephants" to protect budgetary resources, Review meetings chaired by the FinanceMinister or Finance Secretaryare held to o~erse~~~@~g,e;&y,~ce q$ executingthe work and enforce terms of the contract. -- expendime as a share of GSDP has dedined to about expects to borrow off-budget to financeits hyhropower half its value in 1990-91. The emphasis on the social energy investmentsunder the Eleventh Five Year Plan. sector has expanded current expenditure at the expense Off-budget borrowing in the absence of fiscal space of capital As the fiscal deficit expanded, willresult in fiscal crisis and loss of creditworthiness. capital expenditure either shrank or remained constant They are also subject to lesser scrutiny and lower ( F i i e 2.1). This suggests that most of the incremental accountability. Going forward all capital investments to t t s e - s d a e f i c i t - 4esupported by GoHP must be budgeted for. Increasing capital expenditure to meet the state's The fiscal strategy of the state must focus on the infrastructure demand is constrained by the availability creation of budgetary fiscal space for priority of fiscal space, and GoHP got around this after the investment. To enable this, expenditure prioritization mid-1990s by borrowing off-budget for supporting is necessary along with restructuring. First, GoHP can infrastructure investments and for financing the follow up on its expressed intention in its 2005-06 budgetary deficit. Although the state has now declared Budget to rationakqe andresfnlctrrreschemes that have lost that there will be no off-budget borrowings, GoHP their relevance p o x 2.2). Second, the fiscal gains from GoHP kepta substantialamountof committed expenditureon salaries,pensions,and maintenance under the Planinstead of transferringtheexpenditure to non-planheads at the end of the Plan period. This artificially inflated Plan size. Over 200244 and 200445, the governmenttransferred Rs.10.21 b i o n (suchliabilitiesat the end of 200142) to non-plan headsof expenditure.This reduced the annual Plan size, but most of it is now investment. CreatingFiscal Spaceto Realize the State's Development Vision 1 I Debt Stock to GSDP (LHS) 45% 250 - Per capitadebt &omvarious swrceq HP and other states 39047 200 - - Provident Fund,etc 33Yo 150 Loans/Advances &om Centre $ 1 InternalDebt I00 - 27% 50 - 21% rn 0 -I 15% Noh: Data in (CfrpaneIjbmGoHP bndgefs, in&soJ-buket borromngs. Figutrssfor 2006-07 me Revised Esdirnaks. Dakzforper cqpia debtjbm 2004-05,&UJ bn&is, cxchdingo g w e t bmmngs. such rationalization may be budgeted on infrastructure than the average for Indian states of about a quarter projects that are 'htmi%'in nature,and can be completed of GSDP. Go1guidelinesclassify HP as debt stre~sed.~' with some additional resources. The focus should be Breakdown of debt shows that 77 percent is relatively on completing on going projects. Third, projects that expensive internal debt comprising small savings loans, are going to see lith allocation and are accommodated financial institution borrowings,off-budget borrowings, for considerations other than economic should not be etc. About 6 percent was sourced from the Central included in the budget.A number of such projectswith Government and 17 percent was from Insurance and meager allocations can together appropriate a visible Provident Funds. The state has taken advantage of amount of resources that could be better spent. opportunities to prepay, restructure at lower interest rates, and swap debt, as described earlier. High cost loans (carrying coupon rates 10 percent and above) C. Managing Debt and Contingent constitute almost a fifth of the outstanding debt stock Liabilities of Rs. 188billion as on March 31,2006. Approximately 45 percent of this stock is up for repayment over the next five years, presenting a good opportunity to the The most visible aspect of GoHP7s fiscal problems state for restructuring high cost debt. is the high debt to GSDP ratio of about 74 percent includingoff-budget borrowings, and the high debt per A debt sustainability analysis shows that even under capita (Figure 2.3).The debt is unsustainable and higher steady state conditions of the baseline, debt to GSDP 2' Under GoI's criterion,any state with an interest to revenue receipts ratioIover20 percent is debt stressed. HP had a ratio of 24 percent in 2005-06. 28 Himachal Pradesh:Accekrating Development and Sustaining Success in a Hi//State will decline to 35 percent at best in the next fifteen What are the implications for the medium term year^.'^ Thls will still be higher than national averages. fiscaloutlook? Is this effective in the context of policy priorities and budget allocations? Contingent liabilities in the form of outstanding Is efficiencybeing furthered? guaranteed borrowings by state-owned Public Sector Enterprises (PSEs) after adjusting for off-budget debt The state has already taken an important first step in (Rs. 25 billion) was about Rs. 36 billiondr about 14 making it mandatory to report under the FRBM a percent of GSDP as on March 31, 2006.29GoHP also Budgetary statement that presents 'contingent liabilities carries significant fiscal risks from the losses incurred arisingout of borrowings by PSEs and Special Purpose by PSEs, with accumulated loss of these enterprises Vehicles and other equivalentinstrumentswhereliability being about 4 percent of 2004-05 GSDP. Other forms for repaymentis on the stategovernment,all claims and of financial support in the form of grants/subsidies, commitments made by the state government having equity, loans, and waiver of dues amounted to about potential budgetary implications'. Expanding the form Rs. 1 billion, or 0.5 percent of 200445 GSDP. The of thestatementtopresentareport onthelinessuggested HP FRBM makes it mandatory to progressively above will result in improving fiscal transparency and reduce outstanding guarantees on long term debt, until bring greater legislative and public (market) scrutiny to outstanchg risk weighted guarantees can be capped at the process. 80 percent of total revenue receipts in the preceding year. However, GoHP does not report risk weighted As a rule, GoHP should also minimize the issuance guarantees although the law requires it.u' Risk weighted of implicit guarantees. Automatic guarantees guarantees will be substantiallylower. In that case, the must be avoided. This becomes important as GoHP FRBM target for risk weighted guarantees is too liberal. increasingly considers Public Private Partnerships (PPPs) for developing infrastructure and providing As an institutional mechanism, GoHP must have an services that demand government support. Where independent system-which is currently not on file- obligations are already incurred, disclosing, budgeting, that considers the following questions before incurring and accounting for the potential costs are important any form of contingent risks: for fiscal transparency. Allied to this is the need for a system that will monitor and report contingent Does the Guarantee meet policy objectives? liabilities, and regularly update risk analysis-both Should the government be involved? quantitative and qualitative analysis-and assess the What form of government involvement would expected fiscal pressures. be most efficient?This could take the forms of deregulation, subsidy,contingent support, etc. Is the programme designed to cover only D. Refining MediumTerm Fiscal justifiable risks and minimize moral hazard- Projections like risk sharing with financing institutions for instance? ThestatehasproducedMediumTermFiscalProjections What is the most likely and maximum likely (MTFP) that were tabled along with the Budget for fiscal cost? ' h e e Annex 5 for debt sustainabilityanalysiswith the new revised MTFF! 2v See Annex 6 for details. ill Guarantees amounted to 74 percentof 200445 revenue. Creating Fiscal Space to Realize the State's Development Vision 200647:" The projections have been revised to revenue side, there appears to be a ~ ~ S C O M ~ C ~ between incorporate Eleventh Plan targets, but are based on growth assumptions, tax buoyancy, and projected tax some optimistic assumptions (Figure 2.4). revenue, while user charges are largely neglected as a revenue source. On the expenditure side, the projections The 200607 MTFP requires refinement to be more appear ad-hoc and present a rather stagnant expenditure realistic and reflective of GoHP's vision for the state. composition,and do not meet criticalTFC guidelines on First, the projections do not have a clear poky basis, salaries,interest expenditure, and the fiscal deficit." and are incremental, making it hard to understand the underlying assumptions.Second, they do not fully factor the i@act offufure devehppmentson which the government E. Improvingthe Budget has already taken a stance or has some information- FormulationProcess - such as impact of the Sixth Central Pay Commission, hiringpolicy,hydropowerinvestment,debtwrite-off, etc. - Finally, the projections do not reflect sufficientchangein The state has a process in place for budget formulation. expenditure conposition to project a fiscal reform story, and Given the objectives of the FRBM, the challenge is to reflecta 'businessas usual scenario'. In particular,on the modify the budget formulation process and associated Fiaure 2.4: O~timisticDeficit Proiections under GoHP's 2006-07 MTFP - 6% I %-m 3% - a F~scaJDefiat 8 rr 0% - -+- Revenue DeMt 0 -&- Pnmary Deficit W &: ww --m -3% - EJ L B - 1 w -2.86%, - z- -6% 7 I 3 2 I s 2 - R 5's Q1 3 8 1 8 S hl Notes: Data fromGoHP M P Pfor 200607.Data on hbt includes oJ-budgt bowo~ngs.F t t m j r 200546are Revised E~timatesandfor2006-07 are Latest Esrimates. TheMTFP bar bcen revisedand *dated as&cnssed inAnnex I. ' GoHP has tabled a revised MTFP with its 2007-08 budget. This is described in Annex 1. See also Annex 5 for details on the MTFP, and a debt sustainability analysis. " In2011-12, interestcontinuestobeover20percentof revenuereceiptsclassifyingthestateas"debtstressed";salariesexceed35percentof revenue expenditure net of interest payments and pensions;the fiscal deficit exceeds the target of 3 percent of GSDP by 2008-09. 30 HirnachalPradesh:Accehrating Devehpment and Su~fainingSuccessin a HiUState documentation to better link policy goals and resource Each department must develop budget proposals within allocation, and to embed the medium-term perspective priorindicatedceilings.The key issues in arrivingat the in budgeting. departmentalcedmgsare: (i) sequencingthepreparationof a medium t e r m f i c a I ~ m ewhich defines desired fiscal , Theprocess of annualbudgetpreparation shouldideally targets (the fiscal deficit, revenue deficit, and guarantee follow the followingstages: limits),and establishesbroad multi-yearparameters for the budget; (ii) preparing e.ra'm& of eq%dtueto implement Assessment of overall resource availability ongoing policy, programme, and project commitments; and adoption of aggregate expenditure and revenue targets; (ii) deriving the estzkzate of theficaispae over the medium term to accommodatenew commitments consistentwith _Ilisaggq&n_ o f ggrepate targets into -thefiscalplanp-m; (iv) ensurinrr that decisions on department targets; new poky pqtwsalf are considered within the constraints Preparation and distribution of budget defined by resource availability; and (v) preparing a full guidelines, including department ceilings and annualbudget thatis com&tmt with themedium term fiscal their distribution to spending departments programme. The expectation is that each department ('budget call circular'); would take the resource c e h g as given and prioritize spendingamongits activities to achieveits objectives. Preparation of submissions by spending departments; As a first step,the FinanceDepartmentcanpreparebroad Review of submissions by the Finance expenditure estimates based on current policy, and Department; examine its sensitivity to changes in economic estimates. Preparation of draft estimates; The objective is to gauge affordability over several years, and provide for early warning indicators if some Legislative approvalof draft estimates. programmes are likely to grow beyond affordable limits and explore policy options. The initial estimates would HP7sbudget formulation process requiresstrengthening be a baseline, assumingcontinuationof current spendmg that would enable the Cabinet to review and prioritize levels or laws-assuming no changes in policy. Two sets competing policy, programme, and project proposals, of estimates can be preparehne that assumes current and thereby allocate resources to departments based levels of discretionary spendmg and current laws of on availability. Budgeting in HP, as in other Indian mandatoryspendmg,andanotherthatassumesthatcurrent . . mte~,fUhnvdIea t t e r p a r w - f mxmaheandotherws with implicit commitmentsare with the budget call circular and submissions by line fully funded. This will help identify the 'policy gap' or departments. The earlier stages--determination difference between current levels of public spending and of aggregate resource availability and department requirements to fillpolicy commitments(such as MDGs). expenditure ceilings-are crucial for a credible budget process. Aggregate targets must be agreed upon The revenue and expenditure estimates could form the at the political level before budget elaboration can basis for a fiscal policy paper for presentation to the proceed. In practice, most budgets are incremental, Cabinet, and inform senior officials of basic economic taking the previous year's allocation as base, adding a issues and hkages between government policies and small percentage for inflation and some real growth. outcomes.Theobjectiveis toobtainaCabinetdecisionon Incremental budgeting reflects a mismatch between overall government revenue, expenditure, deficit policy, policies and resources, and excessive focus on funding and framework. At this stage of budget formulation, at the expense of policy in budget deliberations. the Cabinet could commit to a medium term fiscal CreatingFiscal Space to Realize the State's DevelopmentVision 31 programmethatdefinesthehard annualandmediumterm from the past, reallocationdecisions,new objectives, and budget constraints.The medium term fiscal programme output and outcome targets associated with the resource would have to be submitted for Cabinet discussion, and levels and allocations. An important issue here is for approval obtained by September or October in order to the line departments to develop capacity for policy and establish the broad parameters for revenue, deficit, and programme evaluationskills through training. borrowing over the next threeyears. A formal process to critically review ongoing Thebudgetformulationprocesswouldalsoneed toenable programmes as part of the budget process will also the Cabinet to review and prioritize competing policy, help ensure their efficiency. Some state governments programme, and project proposals, based on resource have undertaken a one-time zero-based budget review availability. Some sectoral allocations may have been to rationalize government programs (Box 2.2 above). developed in the course of the fiscal policy discussions Establishing an Expenditure Review Committee (as in where key sectoral trends may have been identified as Australia) to critique ongoing programs and rationalize threatstopolicy or fiscal stability.The remainderof funds would be a useful supplement to the existing annual needs to be allocated reflecting general policy directions budget process. of GoHP. Within sectors, it is important to distinguish between discretionaryand mandatoryspending.The best After receiving the requests, these must be reconciled estimate of mandatory spending for these programmes with resource ceilings and competing demands, and could receive full allocation, while discretionary final policy and funding decisions should be reached. programmes would receive residual amounts. This stage The Finance Department's role is to provide critical will generate a 'development debate', clarifying policy analysis of the line agency's request and conducting issues and resolving programme related tensions. Once fair hearings of their request. Line agencies must be approved by Cabinet, these indicative ceilings for each questioned in detail about their requests, assumptions, sector/department would be transmittedto departments and underlying data. The Finance Department must usually as part of the annual budget call circular that report new programmes separately from ongoing initiates the budget process. programmes in the interest of fiscal transparency. The assessment should include reviews of capital spending, Having received sector or department indicative progress in capital projects, and whether external and ceilings, each line department must develop its budget internal audit findings have been addressed by each proposal. At this stage, departments are expected to line department. This must feed into the Finance think strategicallyabout their programmes, evaluate their Department's recommendationsfor funding. existing programmes, and analyze what inputs or policy willbest help themattain anobjectiveby maximizingthe effectiveness and efficiency of spending. These reviews F. Strengthening Public Financial and plans should be undertaken either as part of the Managementand Procurement annual budget cycle or prior to it, and then fed into the resource allocation decisions in the budget process. The Systems" budgetrequests to the FinanceDepartmentmustseparate existing programs from new requests, and apart from Thestate'spublicfinancialmanagementandprocurement numbers, contain text explainingpolicy, changesin policy systems present both strengths and weaknesses. Going 73 See Annex 7. 32 Himachal Pradesh:Accekrating Developmnt and SustainingSuccess in aHiiiState beyond budget formulation,the process of approvalof for the Cabinet, and propose corrective actions. As the budget by the state legislature is well established, mandated in the FRBM, a report on mid term turnout, and recent budgets have been approved in a very riskstoachievingbudgettmgets,andcorrectivemeasures timely manner. Transaction level controls over the should be tabled in the Legislature, and be publicized budgeted expenditureareexercised.InterimandAnnual through the statewebsite to informpublic opinion and Accounts are reconciled and prepared on a regular and build support. timely basis. External audit is comprehensive, regular, and reports are made available on a timely basis. The Additionally, in the area of public financial process of legislative overslght over matters reported management, there is scope for: (3) improving in the audits is discussed in the fora of the Public budget marhans&/accuracy in cases of certain large Accounts Committee(PAC),and required directionsare departments, where excesses have been consistent and issued for correctiveaction.At the sametime, the state's sqpficant; (ii)including ahquate i3j40matioionrelating to public financial management system is in the need of guarantees,andstatusof theinvestmentinPSEs,othersin modernizationin the areas of budget management and AnnualFinancialStatements;(iiiireinforcingn.ponJibili& execution, accounang and financial reporting, internal and acc~unhbih'& the Head of the Department (HOD) of controls and audits, and legislativeoversight. to ensure more effective utilization of resources and strengthen internal controls; (iv) enhancing @edueness The Budget documentation process could be of offiters responsible for 'inspection' in the spenchg improved. The pre~en~on the document itself is of departments, where formal Internal Audit does not rather detailed, and not easily understood. Though exist;(v)moregehk rc.ponsetoauditby co-coordinating there are attempts to summarizelexplain the Budget timely response fiom line departmentsand addressing details through an ExplanatoryMemorandum, the state systemicissues consistently appearing in audit reports; couldwork on presentation aspectstoenablethe public and (vi) rehn'ng&&s in legislativeoversight. to understand and analyze the complex budget. More importantly,budgetdocumentationshouldber i o d p d Public procurement in HP is governed by ar outlined in the FRBM to achieve the fundamental shift Procedure & Rules for the Purchase of Stores, which in approach to budgeting and the quest for greater is an appendix to GoHP's Financial Rules. These are transparency.The Act proposes to introducepotentially maintained by Controller of Stores under Ministry of valuableand relevantinformationto clarifythe forward- Industries, and relate to procurement of goods. While loolung medium term fiscal program of the state, an the StorePurchase Organizationis the nodal agency for evaluation of past performance, and an assessment of negotiationof ratecontracts,thereisanincreasingeffort the conformity of ongoing and proposed policies with to decentralize department specific purchase to the the medium term programme. For greater transparency, respectivedepartments.Procurement takes placeamidst it would be appropriate for GQHP to also reassess a large number of controllersand overseers. Improving how the remainder of the documentation on the oversightof procurementinvolves rationakdngcontrol budget could be rationalized and made more relevant as well as increasing the ability of the government and for informinglegislators and civil society about public the private sector to monitor performance.The existing policy and resource management. rules provide a preference for domestic suppliers with an aim to promote the local industries. It needs to be Inaddition,thestatecouldbegin aprocessof mid-term reviewedwhether suchpreferences actuallyresult in the reviews and reporting as required under the FRBM. desired effect, Simplification of laws and regulations The Finance Department must strengthen within-year is often best accomplished through the adoption of a monitoring of the budget, prepare occasional reports modern procurement law that applies to all kinds of CreatingFiscal Space to Realize the State's Development Vision 33 procurement undertaken using public funds (goods, and Subordinate Accounts Service functions works and services). could be combined and skills development needs of staff could be assessed; and (iv) an Some additional steps could be considered to improve Internal Audit function might be created by public financialmanagement and procurement. setting up a small, skilled team to review areas of perceived risk. In order to improve financial reporting, GoHP could include information relating to Treasury computerization needs to be rolled guarantees, and status of the investment in out to cover the entire state; this wdl greatly PSEs in the Annual Financial Statement. It improve public financial management in general could also begin presenting information on and internal controls in particular. revenue due but not collected, payables, and In procurement, the state should adopt a outstanding commitments. modern procurement law that applies to all kinds In the areaof internal controls, (i) responsibility of procurement undertaken using public funds and accountability of the HODSneed to be (goods,worksand services).A publicprocurement reinforced in order to ensure more effective disclosure policy can improve the flow of utilization of resources and in general strengthen information on procurement, and allow for public internal controls; (ii) the Himachal Pradesh participationin monitoringand oversight.A review Financial Rules, 1971, which are outdated, of the Financial Management and Procurement difficult to interpret and require reference Policies of the PSEs could be undertaken with a to numerous circulars, need to be revised; view to modernizing practices; the government (iii) responsibility to discharge both theTreasury may start with the two largest PSEs. Improving the Investment CI' nc e 'y@l lor Private Sector. -. < =* 2.. z - :. - :---I.-. .- 7 - . -- - ment Climf .s.<.'!gy*- -- A P olicy makers in HP recognize that a vibrant private billion (includingnew units and expansions of existing sectoriscentralto promotinggrowth andexpanding units) with proposed employment of more than employmentopportunities. Effective partnerships with 280,000 persons (Box 3.1). Actual realized industrial the private sector could enhance the efficiency of the investment has increased by about 50 percent since state's economic performance, reduce the burden 2003. The key sectors are cement, textiles, food on the public sector, and free public resources for processing, pharmaceuticals, engineering, electricals, critical investments. However, HP continues to be and electronics. heavily dependent on the government for its economic development. This chapter looks at the key constraints The recent momentum in investment proposals that affectprivate sector participationin the state. presents three key challenges for the state, which are manifestations of weaknesses in the business climate. First, even though actual investments have gone up A. Challenges in Industrialization more than 50 percent since the announcement of the incentives in 2003, the investment reabxed in the state is HP has achieved significantprogress in industrialization, still only a low percentage of investments approved more so since fiscal incentives were made available (Figure 3.1). Of the 19,279 small, medium, and large to industry. Since the announcement of the Special units approved sinceJanuary 2003, only 1,303had been Incentive Package by Go1 in 2003, the state has actually established till July, 2006.34Second, since the received investment proposals of close to Rs. 200 announcement of the package, most of the proposed 'however, wen with a low rate of realization, there has been significant expansion. At present, the state has industrial investment of about Rs.46billion--of whichRs. 15b i o n has comein after the announced package, of the total approval of about Rs. 192billion. 38 Hirnachal Pradesh: Accelerating DevelopmentandSustaining Success in a Hill State Himachal Pradesh has been the recipient of a grant of a special package of incentives by Go1 (2003), as well as an investor friendlystateIndustdal Policy(2004). Thesehave attracted significantinvestmentproposals in the state, which has contributed to growth in the secondaryand tertiary sectors. I I Ce Wckage I In March 2003, Go1 announced a special incentive package for industries in "special category" states. The industries eligible for such incentiveswere to be 'environment friendlywith a potential for local employmentgeneration and use of local resources.' The main fiscal incentives included the following. (i) New industrialunits and existingindustrialunits on their substantialexpansion,set up in Growth Centres or Industrial InfrastructureDevelopment Centres (IIDCs) areentitled to: * I 100percent outrightexcise duty exemption for a period of 10years from the date of commencementof commercialproduction. a, 100percent income tax exemption for an initial period of five years, and thereafter 30 percent for companies , and 25 percent for other than companies for a further period of fiveyears from the date of commencement of commercialproduction. Capital investment subsidy at the rate of 15percent of investmentin plant and machinery, subject to a ceilingof Rs.3 million. ., (ii) Thrust sector industries identified in the package-such as horticulture, food processing, pharma productsare entitled to similar concessions as mentioned above without any area restrictions. In the originalproposal, the excise and incometax concessionswere valid for industrieswhich commenceproductionup to March2013.On oppositionfrom neighboringstates,however,thevalidityperiod forexciseconcessionswasinitiallyreduced to March 2007, but has now been extended up to March 2010. As per latestreports, the tax incentivesmay now be limited only to fresh investment. Since the notification of special package, several major private companies have come into HP. TheseincludecemehtmajorslikeACCand GujaratArnbuja, pharmaceuticalfirmsDabur,Ranbaxy,aswellaselectronicsand textile companies State Incentives With a view to ensure balanced industrialization in the state and to generate employment opportunities for local persons, GoHP has enacted a new Industrial Policy (2004) where it provides graded incentives to the industrialists so that industries being set up in the interiors of HP get higher incentives. The fiscal incentives being offered include subsidies, concessional rate of electricity duty, and deferment of the Value Added Tax. The state has also introduced a single window clearance and monitoring authority to ensure speedy approval from various departments and agencies. A Special Economic Zone is also being set up in the Kangra, Una, and other districts of the State, with an estimated cost of over Rs. 50 billion. The units located in this economic zone can avail certain specific concessions and facilities like exemption from the payment of central excise duty, levies, specified taxes, relaxation in labor laws. The new units are however eligible for the state incentives only if they employ at least 70 percent of its total manpower, whether on regular/contractual/sub contractual/daily basis or any other mode from amongst the bonafide Himachalis. new imre8ma~are &MZB 3 e &&&& baland pattern QE devtdaparents,kc d d &SO faeilftate $ade&g Punjab gifld H-a, axhich were *dy he i d g m hafworkers framthe hteriot & d c U t~ mwe &m the intetbk disttia (F&e wherehe jobs ebeing c~eated.Thh4it isitzipom 9.1). While the sate shod try w d enswe a ~ Y ; T I ~ to m8me rkat &e nepw inmttsmana&at haw mome inm Improvingthe InvestmentClimate for PrivateSector 39 Only6.7% of invesrment VpfW approved over 200346 has been &tillJuly,2006 UttanulchPl - LegendKey: of MncattnrmtingmGDDP the state twain &er the qen'alincentivesare phased out However, HP's advantages are being offset by key in 2010. bottlenecks that have stifledprivate sectorparticipation. A quick primary survey of the private sector's view HP actuallyenjoys severalgeneral advantages that could on the general investment climate suggests that the attracttheprivatesector.First,the statehasaccessto cheap major constraints are poor road infrastructure and powerbecauseof itshydro-powerpotential.Consequently, skills of laborers available for work (Figure 3.2). The industrialpower tariffs in HP are significantlylower than other issues highlighted by investors include access those in its neighboringstates of Punjab and Haryana." to reliable electricity (frequent power outages), labor Second, HP ranks better than its neighboring states in regulations (especially the requirement of 70 percent the kaw and or& situation.%Third, HP's buremcrag is local employment), and industrial infrastructure, considered far less corrupt and more approachable than including availability of low-income housing for labor its comparator states." Fourth, HP's natural terrain and in the developingindustrial zones. The issue of urban agro-climatic conditions give it a distinct warative developmentassumesimportanceinthisregard,asmost advantage in attracting certain industries like tourism, private industries set up in relatively urbanized areas, horticulture,floriculture,and hydro-power. Finally, GoI's and require basic infrastructural support. Industrial SpecialIncentive Packge provides special concessions for regulations appear less of a problem in the state, as per specificindustries, as discussed above. the survey. 3i Industrialtariffs in HP are around Rs 2.l/kWhv/s Its 3.4-4.t/kWh in Punjab and Haryana. 30 In the recent India Today ranlung of states, HP ranked 6 on the Law and Order index compared with 11 and 13 for Haryana and Punjab respectively. See 'State of the States Survey', India Today,August 2006.The factors considered in the law and order ranking are: 1)policemen per lakh population, '' 2) ratio of pending cases to total court cases, and 3) incidence of murder, kidnapping and rape or molestation in total crime. In Transparency International's rankingof Indian states on corruption, HP is the second least corrupt state in India after Kenla. 40 Himachal Pradesh: Accekrars'ngDeve&ment and Sustaining Succes~in a Hill State Figure 3.2: Major Constraints for the Private Sector I Space and availability of land Percentage Respondents Efficiencyandvis~onof bureaucracy RanlungIssue amongTop 3 Botdenedrs Telephone, fax, email Labour (including regulations) Shelter of workers Labour(duddmg regulations) Industrial infrastructure Notes: Dataformajorbottkncckr based on a q&k S I I of~ 54j m s in HP tomhied in October-Notember2006 to iden?$ tbe mmtmrntr to tbepwtb of HP?jms. The coveredjm~across auto anci~cs,cbemiitalr,gmmmXr, light cnginemng,pbarmaceuticnlr, and te.dIcs. B. Improvingthe Business compared to otherhill stateslikeUttaranchaland S i k h (Figure 3.3).Poor qualityof thestate's main arterialroads Environment is recognized by the state to be a particularly important issue. Only about half the roads are metalled and tarred, It appears from the quick survey that private firms in and suitable for all weather conditions. HP regard poor road connectivity and quality in the hilly terrain and lack of skills of available workers Key Policy Challenges as the two key constraints. Since most industries and services develop in urban areas, productive and The sector suffers from high unit costs but sustainable urban development would be a key to the inadequate findng. Due to the difficult terrain state's development agenda. If the government could and remote locations, the unit cost for road developmentand maintenanceare50-1 00percent address the challenges in these key areas, it would help higherthan equivalentworksin neighboringstates promote private participation in the economy. It would withrollingor plain terrain such as Punjab.At the also have additional desirable effects in terms of better same time, the sectoris inadequatelyfunded. It is living standards, improved connectivity for remote estimated that,given the unit cost for upgradation areas, and better employment opportunities for the of an existing single lane road to double lane educated population. of Rs. 20 rnillion/km., just to upgrade the core network would cost more than Rs. 80 billion. UpgradingRoadQuality and Connectivity The Public Works Department (PWD) has to contend with highfixedcosts,with a salary bill that crowds out critical non-wage O&M. The PWD The state does not do well in terms of connectivity. is saddled with a large gang workforce, and the As compared to the national average of 76.8 kms. of overallproductivityof h s workforceis unclear. roads per 100 sq. km.,the corresponding figure for HP About two-thirds of the budget provided for is only41.6 kms-largely on account of remotenessand maintenance is used up in paying the salary of terrain. More irnpomrly, rural connectivityis low, even these staff, leavingonly a small sum for periodic Improving the Investment Climate for Private Sector 41 Figure 3.3: Poor Rural Connectivity in HP I PercentageUnconneacdHabitations Inote^: D D ~fiomJPradban Mumnm ~ GramS& Yiiana PMGXYI forZOW05. I maintenance.This has resulted in a largebacklog practices;(iv)lowlevelof InformationTechnology of periodic maintenance works and poor (IT) use for planning, monitoringand reporting; condition of the network. (v) continued use of outdated procurement, quality control and financial management Theservicekvehon existingnetworks arelow. Due practices; (vi) absence of departmental vision, to the focus on enhancing rural connectivityand outcome performance measurement system, or inadequate maintenance, the service levels are link between policy and customer expectations; currently poor with respect to volume/capacity, and (vii) lack of an effective human resource surfaceridingquality,lackof crossdrainage/slope development programme. protectionworks, weak pavement structure,poor horizontal and vertical geometry, poor junction layout,periodicclosureof roadsdueto landslides, inadequate snow clearance equipment, limited Strategic Options road signage, and absence of traffic management in built up areas. Although there is no formal Road Sector Policy in the state yet, the 200607 Budget Speech stated that rural The sector is affected by outdated management and connectivityand better roads are of the highest priority i~kmentationpra~h'Ges. Almost allroad worksin the in acceleratingeconomic growth. The state has a two- State are undertaken through the HP PWD. The pronged vision for the sector--extension of the rural organizationalstructure in HPPWD differs from network along with simultaneous improvement to the modern road agencies in severalimportant ways including: (i) a geographc division of functions, core network of 2,160 km.of state highways and 2,240 and absence of specializationwithin the PWD; krn.of major district roads3* (ii) use of force account to undertake a large amountof activity;(jii) virtualabsenceof research In order to realize the vision, the state needs to: or development in technology and management (i) clarify the policy ftarnework, by formulating a 38 A World Bank investmentlending project is under preparation to support improvements and managementof the core network in HP,and is expected to go to the Board in FY 200607. 42 Himachal Pradesh:Accehraiing Devehpment and Sustaining Successin a Hiii State Road Development Policy, and associated monitoring mechanization, new materials and specifications, and and evaluation, including adequate integration of improved work methods and techniques, and setting low cost rural access in all areas including forests, out clear norms and guidelines for non-PWD roads and establishmg a high level standing committee to being constructed by districts and block authorities. promote sustainable policies for road development In addition, the state seeks increased reliance on Go1 and maintenance, and interagency coordination; funds both for national highways,and from the Pradhan (ii) improve maintenance funding, through measures Mantri Gram SadakYojana (PMGSY) to tackle the issue to revise norms for maintenance, provide increasing of rural connectivity, allocations as per norms on a timely basis, encourage local governments to help fund maintenance, assess feasibility and implications of transferring non core Addressing the Skills Mismatch roads to local bodies, create a road maintenance fund through existing and new resources along with an A secondissueis the skillsof availableworkers,which is empowered committee to manage it, and remove the cited as a constraint by private sector representative^.^' backlogin deferredmaintenancein a phased, time-bound At first glance, this is surprising,since the labor forcein manner;'9 (ii) revisit the currentinstitutional structure, HP is quite well educated.Just under half of the labor by reviewing the organization and training needs of force had completed high school and above, among the PWDstaff,and establishingand applyingrevisedstaffing highest in the country (Figure 3.4). While graduates and patterns, job descriptions,and responsibilities alongwith post-graduates are over 12percent of the working labor a suitable trainingprogramme, as required; (iv) upgrade force,technicaldiplomaandprofessionaldegreeholders sectoral planning by establishing and applylng simple constituted over 3 percent in 200445 (Figure 3.4). procedures for data collection on road inventory, surface However, the stateis simultaneouslyfacing the problem condition, and traffic, so as to be able to update and of educated unemployment-even for people with generate management reports on completing routine technical degrees (Figure 3.4). Interestingly, coincident works and prioritizing periodic maintenance works at with the special incentives from the government, the district level and state level; (v) undertake a thorough number of technical degree holders registered at assessment of costs and benefits of the gang labour employment exchanges has risen from 34,064 in 2002 system, which is ongoing, and look at reform options to 40,013 in 2006--an increase of over 17 percent! to enhance productivity of gang laborers through Moreover, the problem of educated unemployment improved management practices, to devolve of part also seems to be rising, with more educated people of gang labor strength to local governments to look registering in employment exchanges even in the face after non-core roads, and to undertake pilot projects of rapidly growing secondary and tertiary sectors, to convert gang labor to small contractors; and indicating either unemployment or the desire to switch (vi) improve construction quality by establishingand to some other job (Figure 3.4). strengtheningquality control system in order to counter low quality at time of original design, introducing This suggeststhat the problem is not somuch of supply, second and third party audit within the Department as one of mismatch between the skills being imparted for all construction and maintenance works, promoting throughthe formaleducation systemand those required '"e statehas alreadyendorsed a Road MaintenanceAction Planand GoHPneeds to focus on steadfast implernentatioion of the Plan. a It should howeverbe kept in mind that this constmintwould arguably be less severe if the industrydid not have to meet the requirementof employing 70 percentof the workforcefrom the local Himachal populace. Improving the Investment Climate for Private Sector 43 . Illiterate .iterate below Primary Primary - diddle Low Shareof High Higher Secondary Less Educated Workers in the b: Graduate Labor Force, Technical/Diploma 200405 Professional Degree , Post Graduate Technical Education Graduate and above Illiterate Below Mauic Secondary Graduatesaud above Mauic Unemplyoment by Graduate Education, 1999-00 NSS Primary Post-Graduate Urban I Below primary Rural I--- -p I Notes: Dulafrom Department of Economics and Statistics, GoHP, and NationalSampk .Purvg. - by the upcoming industries. There is thus a case for technical skills.41Support for the proposition that GoHP to focus on revamping the education system to industry values secondary education highly also comes better equip Himachalis to take up new jobs that are from datawhich shows that the mean wages of workers becoming available. with higher secondary education are 44 percent over those earned by high school graduates. Technical What sort of skills does industry require? At the education adds additional value and raises mean wages workmenlevel,discussionswithindustry representatives further by an additional 8 percent.42Beyond this level, suggest, and international evidence also backs up, that the main source of employment for workers with they are basically looking for workers with the skills tertiary education is in the service sector, especially in taught in general secondary education, along with the public sector. 41 " This is based on field visits, and discussionswith representativesfrom 53industries in HP. Ministry of Fiance, Government of India 2005; Bank Staff Estimates 44 Himachal Pradesh:Accehratlg DeveIopment and Sustaining Successin a HiLLState Accordingly, provision of technical training has the Thefirstis the mismatch betweenindustryrequirements potential of meeting industry demands and raising and workers' expectations. As noted earlier, industry workers7employabilityand incomes. The state currently findsit easier to hire and train secondarypass-outs, and provides vocational and technical education in Grades the demand for more qualified non-technical graduate XI-XI1 in the school system, and through 5 engineering and post-graduates is limited. Discussions indicate that colleges, 6 polytechnics, 51 public and private Indusmal educated youth of HP are unwilling to take up these Training Institutes (ITI), 24 private Industrial Training jobs. This is consistent with the experience elsewhere Centres, and 112Vocational Training Centres. However, in India, that the "organized" sector-which offers this stream has not found favor with students: the share better pay and job security-is the sector of choice of students entering technical education is small in the for better educated workers.J3 Within the organized state, with most students preferring to join the general sector, the public sector is the dominant provider of academic stream. Only 12percent of students entering employment. In 2001, 0.31 million workers, or more higher education chose technical education in 2002- than 10percent of the workforce were employedin the and this share declined to under 8 percent in 2003-04, organized sector, but only about 48,000 of these were lower than the national average of almost 11 percent. in the private sector.* In part, the high dependence It is important to keep in mind, however, that if the on the public sector itself may be a response of a state develops its natural resources and comparative well-educated workforce whose expectation in terms advantages, for example,in tourism and hydropower, it is of employment are increasing, but where the current likely that shortages of specific,related skillswill emerge industrialization pattern in the economy has not been in the future. Without a proactive strategy to develop an able to generate enough suitable private sector jobs appropriatelyskilledlabor force, economicgrowth of the to meet their aspirations. For many, migration out of state can also be compromised. the state is a better option. As per the 2001 census, about 0.4 million people--or about 6 percent of the The state presently lacks hard data to estimatewhere the state's population-reported themselves as having skillmismatchesareor forecastwherethey mayariseinthe moved out of the state, of which more than a quarter fiture. This is an area where further analysis is required. had moved due to employment-related reasons.J5 Thereis,however,anecdotalevidence that,other than the Employers too find that they can also fill positions skills gap, there are other "mismatches" which need to more cheaply through migrant labor from outside be factored in: (i) many of the new jobs created in the the state. developingindustrial belt borderingPunjab and Haryana require relatively low level skills, and the educated youth The second mismatch is between the more populated of HP are unwillingto take up thesejobs while employers districts of the state (Kangra, Mandi, and Shimla), can also fill these positions more cheaply by migrant and those where new industrial units are coming up labor from outside the state; and (ii) poor infrastructure (Una,Bilaspur, Solan, and Sirmaur). Takingadvantage facilities and living conditions in the indusmalbelts may of the employment opportunities being generated be deterring native Himachalis from migrating to these here may require some Himachalis to migrate to these areas in search of employment. districts. However the poor infrastructure facilities 43 Organized sectorrefers to employmentdtherin thegovernment,orin establishmentsemployingmore than 10persons. Nationally, 7 percent of theworkforce is in organized sectoremployment. +5 Over half the migrant male Himachalis had moved out of the state in search of employment For women, however, the most important reason- accoundng for overhalf of female migration over the 1990s-was marriage-related. Improving the Investment Climate for Private Sector 45 and living conditions in the industrial belts may be not spreading thinly scarce public resources but deterring native Himachalis from migrating to these undertaking targeted interventions to correct for areas.46Limited evidence for this comes from census market failureor equity in the labor market. data which shows that for inter-district migration of There could be greater public private Himachalis within the state, against an average in- cooperation in the planning and operations migration rate of 5.4 percent for all HP districts, the of technical/vocational education in the state. combined in-migration rate for the more industrialized The government has implemented the Industry border districts was less than 5.1 per~ent.~'In fact, Management Committee (TMC) concept at industry representatives claim that they are unable to the Industrial Training Institutes with private fill 70 percent of their jobs with localyouth as per state participation, but these Committees are severely policy because they do not find enough applicants for restrained in the extent of delegation of powers on key issues (recruitment, pay scales, and these jobs. curriculum). GoHP is cognizant of this and has engaged in dialogue with the private sector. In order to address the challenges in this area, the However speeder movement on key action followingmeasures could be considered by GoHP. items, such as updated online employment The state proposes to undertake a study on exchange, empowerment of IMCs, mapping skills mismatches and shortagesin HI? This studies for required skills, etc. is needed. Since will be an important step, since the extent of this issue requires coordination amongst various skill gaps and mismatches in the state is unclear government departments, a single champion at present. This constrains evidence-based must be designated and an inter-departmental policy reforms. The studywould include a skills- coordnation mechanism should be instituted mapping exercise, to identify particular sectors with regular monitoring of progress. which would emerge in the near future, so that The single window clearance system in HP skill requirements could be projected. Based has been in effect for more than five years. The on this, the state needs to come up with a skills state proposes to initiate a study to evaluate the development strategy to bridge current and effectiveness of business facilitation measures future skills shortages and skills mismatches- at the state and district level, including lessons worked out in consultation with industry, learnt from single window system in HP and workers, and educators. other states. Finhgs from the study would Going forward, a Labor Market Information inform adoption or refinements in business System(LMIS)needs tobeestablishedtoprovide facilitation measures. both the demand and supply side of the labor The state could promote migrationto districts market with timely information on skills that are where the new jobs are coming up. This in demand or available for hire. An LMIS will would involve improving infrastructure and improvethe efficiency of individuals' decisionto living conditions in the industrial belts in the invest in their human capital by enabling them border areas, where discussions with industry to make education and training choices that representative and field visits suggest an have a more certain and larger pay-off in the unfinished agenda. This would require private labor market. It will also aid the government in participation, as well as fiscal resources. 40 A field visit to the Baddi and B'ispurindustrialareas highlighted the lack of suitablehousingand sanitationand scwagc ficilides as majorproblems faced by workersin the area " TheborderdistrictsconsideredhereareSoh,Sirmaur,Bilaspur,Urn,andKangra,whicharemoreindustriallydevelopedasperFigure3.1. 46 HimachalPradesh:Actehatig DevehpmentandSustainingSuccess in aHi1State ...but urbanpopulation t has been growingat almost 3% annuany -' - 8 - Urban Rural r l i Notes: Based on Censu~data, uariousyears. In rightpanel, figuresfor 2011 and 202I areprojections. 1 ~- > Improving Urban Infrastructure Given the development trends observed, the state is facingthe followingurbanizationchallenges:(i)the lack In order to sustain and accelerate the economicgrowth, of proper industrial infrastructure and housing in the it is vital for the state to develop a competitive and fast growing towns in the lower part of the state and productiveenvironmentforprivate sectorled economic close to the border with Punjab and Haryana, and the development--and urban development is key, since consequent issues for industries that are establishing secondaryand tertiarysectorindustriestypically flourish and expanding there; (ii) the likely expansionof small in an urban environment. Urbanization for the state is townsin thehillyareasdue to thegrowthof population, likely to increase due to continued focus on tertiary tourism, and other services,and the need to equipthem and secondary sectors. In HP, urban development also for establishmentor expansionof smallscaleindustries has implications for the environment and for living and servicesin an environmentallysustainablemanner; standardsof the population. (iii) the somewhat chaotic development of Shimla, which is the only Class I town in the state, and the Even though HP's urbanization rates are considerably consequent problems, such as illegal construction, lower than national averages and in neighboring encroachment of public space, traffic congestion, air states, urban population is growing faster than rural and water pollution; (iv) the need for strengthened population, and urbanization rates are projected capacity for city planning and management; (v) the to rise (Figure 3.5). Starting with 36 towns/urban inequity and potential social'instability due to lack agglomerations in 1971, HP now has 57 towns/ of housing and social services for those cross-state urban agglomerations which are collectively home migrants and immigrants; and (vi) the likely threat to a population of almost 0.6 million. Shirnla is the to the natural and cultural heritages, and the need to only Class I town in the state, and Shimla district protect and enhancethem. consequently has an urbanization rate of almost a quarter. The industrial border districts of Solan and In order to promote infrastructure in urban areas, Sirmaur also have high urbanization rates. GoHP has taken several measures of note. A Baddi Improving the Investment Climate for Private Sector 47 BarotiwalaNalagarh Development Authority (BBNDA) Financing Un5anDevelopmentand Services has been set up in the industrial belt along the border, to oversee infrastructure development. The BBNDA ULBs, which finance urban infrastructure through is under the Department of General Administration, budgetary allocations, grants, and own sources, have and GoHP is seeking to promote interdepartmental incomes less than 40 percent of what is estimated as coordination with the Departments of Industries, and required to adequately finance the urban infrastructure other relevant agencies to avoid duplication in planning needs of HP-indicating the need for better resource and implementation of industrial area development mobilization and financing from non-traditional of BBN area. The state is planning the enactment of source^.^ Revenues from taxes collected by ULBs are Industrial Area Development (IADA) Act to facilitate low due to prevailing rates that are generally lower than planned industrial infrastructure development through in neighboring states like Punjab and Haryana. Non-tax the creation of industrial area authorities in priority revenues from user charges are not adequate even to locations-such as Kala Amb, Paonts, Gagret, and recover the full cost of O&M, with sewerage services Kangra in the near future. The BBNDA and other being provided almost free and income from water IADAs, however, need strengthening through increased charges growing very slowly (Figure 3.6). Salaries and funding. The state could take steps to address urban contingencies account for a high share of income (and issues, by focusing on three key instruments. expenditures). For the Shimla Municipal Corporation, salariesand contingenciesaccount for more than double Planningand Regulation of own income (excludinggrants) and about 85percent of expenditures. While this does not necessarily imply Urban plans that are non-existent, inappropriate, not that ULBs are overstaffed,it does reduce funds available enforced, or unenforceable are one of the main causes for developmentalactivities. leadingtoeconomicinefficiency,anddeterioratingquality of life and environment. It dbe important to improve Given the state's fiscal situation, increasing local the planning process, including: (i) forecast of various resource mobilization should receive a strong policy long-term urban development scenarios (includng attention. The first priority in this regard would be spatial distribution of population and economies), and the inmeme in beneaty cbatges for services, especially identificationand evaluation of theirpotential economic economic services such as water supply. Alternative and environmentalimpacts; (ii) establishmentof a state- organizational and financial arrangements would have wide urban development policy framework that sets to be explored, not only for the services currently out principles and directions for planning, regulating, provided by local governments-but also by state financing, and managing the urban development, and governments such as road transport services, tourist capacity building measures; and (iii) establishment of services, etc. Organizational options should not be regon-specific or city-specific development strategies limited to publiccorporations, but includevariousforms and plans, which will include infrastructure investment of ~ziblicpnvatepartzir)ation.It could contribute to public and institutional development programmes to foster financingsources rather than adding to liabiltties. Other enhanced service delivery and more effective urban innovativefinancing measures could include accessing the governance forgreater urban efficiency andproductivity capital market through municipal bonds, and involving as well as environmental protection. communities in O&M. See PlanningCommission(2005)fordetails. , 48 HirnachalPradesh:Accekrating Devehpment and Sustaining Success in a HiLLSrate - Figurn3.6:FinancialChallenges in UrbanQevelopmen~ I :!::,I Shortfallia Income from Waar SahitdandContigendestakeup crier 90percent of Total.. Supplyand Sewaagein Incomeof ShlmlnMunicipdCorporndan , C' - 450; UrbanA ~ e a s 1 Income 200142 WJ I 9 1999-00 . 2 m 1 1998-99 90 - Own Income -- Salanes& Condngenues 1997-98 I 0 . - W Total Income T I 00 a & ,$! 0 20 40 60 80 100 120 140 a -3 2 a 2 8 8 Rs.Mdhons ~Ndtts: Daiafim GoHP,andShimhMunipal Copraha~ - lnsfitufionalStrengthening rapidlyindustrializingareasin thelower areas,thereisno urban governance system in place. Most existing towns Policy instruments and infrastructure investments will are hard pressed to provide minimal urban services and need to designed and implemented by various state planning guidance, and their rapid growth is making and city level institutions with adequate capacity. Due the situation increasingly tenuous. Strengthening the to the early stage of urbanization, the state's urban capacity of local governments and service providers, management institutions are particularly weak. In many and decentralization mechanisms need to be explored. T he state faces the challenge of exploiting the of "green energy". In contrast to the north-east region full potential in speclfic sectors where it has of the country,which also possessesgreat hydropower natural advantages. Development of these sectors, as potential, HP is relatively close to the major demand identified in the Approach Paper to the Eleventh Plan centers of Northern India, which strengthens its and the HP Economic Survey, will allow the state to competitiveposition as a supplier,especiallyin summer enhance growth performance, open up opportunities when it has a surplus. Second, more importantly, it for productive employment, and generate revenues could also be a major source of non-tax revenue that can help sustain the fiscal recovery. for the government as royalty for the use of state water resources in the form of royalty power from hydropower projects. Revenue from the development A. Exploitingthe Untapped of its hydropowerpotential, assumingefficientproject Hydropower Potential implementation and sound tiscal management, could help restore fiscal health. This revenue, which has already started flowing in as described earlier, could The state's hydropower potential of about 19,000 provide significant resources for the development of MW spread across five river basins is one of its infrastructure and provision of social services. most important strategic development assets, but almost 70 percent of this is untapped (Figure 4.1). HP7spower sector has a number of notable features. Hydropower is particularly important in the state, not About 95-97 percent household have access to electricity, only as infrastructure, but also as a key fiscal resource. compared to the national average of 88 percent for First, judicious exploitation of this resource would urban and 44 percent for rural households, and almost contribute significantly towards alleviating the power all villages are electrified (Figure 4.1). The pace of shortage in the northern grid, and provide a source hydropower development has gone up over the last few 52 Himachal Pradesh:Accehating Devehpment and SustainingSuccess in a Hill State I~ i ~ u4.1e: Untapped Potential in Hydropower, but Good Outcomes in Power Connectivity r HydropowerPotential(m100MWs) Developed Potential(m 100MWs) Saduj &as Chmab Ravi Ymuna NO& Dah onL y & @ m ~ p O & ~ GoHP, b n w k Dah on ehdqhhnfrornM M ~ ~ W . H P w b a r ~ e , k d $ d m years and the momentum is expected to increase further The state has followed a mixed model of development of as new projects are developed. There has been good the state's hydropower resources through: (i) the state experiencein the first few years of economic regulation sector, by HPSEB directly; (ii) central companies like of the sector, including a functioning independent the National HydroelectricPower Corporation (NHPC) an improved consumer grievance redressal and National Thermal Power Corporation (NTPG); mechanism, enhanced public hearing procedures, and (iii)Joint Venture (JV) with Go1(SJVN);and (iv) private the introduction of economically sound tariff-setting sector companies like theJay Pee and Bhilwara groups. principles. The policy framework for the developmentof GoHP is entitled to earn royalty, in the form of 12 the power sector is clear in its general orientation,with percent of power generated by the project free of cost, a si&cant role assigned to public sector developers- for the use of its water resources by the hydropower but alsoincludingpoliciesto attractprivateinvestmentto projects. HP has recently notified a new P o w P0k.y hydro projects of various sizes. The Hirnachal Pradesh with special emphasis on accelerating the development State Electricity Board (HPSEB), a public body created of the untapped hydropower potential through both in 1971under the ElectricSupplyAct (1948), continues public sector developers as well as private invesrrnent. to have monopoly in the electricity transmission, Under the new Power Policy of GoHP, the royalty fee distribution, and supply business. to the state from hydropower projects has been fixed at 12 percent of power generated by the project free of cost for the first 12 years of project operation, 18 Hydropower as a Key Fiscal Resource percent of power generated by the project free of cost for the next 18years,and 30 percent of power generated GoHP has various mechanisms in place to harness by the project free of cost after 30 years of project fiscal resources from the generation of hydropower. operation.Subsequently,after 40years of operation,the 49 Hw~acb~lPrdakb StateEk* Rrguhfo~Conrmisrioon(HPERC) was constitutedin 2000and became operationalin 2001.Itis asinglemembercommission. It has issued five tariff orders till date, the latestone b m g in April, 2007. Exploiting Emerging Opportunities for Revenue Mobilization, Growth, and Employment 53 I- 7 Figure 4.2: Projected Revenuesfrom Royalty Power - 2.00% In Rs.Millions 1.6% 1.2% 0.8% As ShareofProjected GSDP -+- Scenado I - Differently PricedPower in Peak & Off-Peak Seasons Scenario I1 ConstantPrice of Power - Notes: WorM Bank staJ cahlations. Nominal GSDP as~nmedto grow at around 14 percent annnaI4, as per assnqtions under the revised MTFP. project reverts back to the state free of cost. The state GSDP in 2012-13, assumingan annual nominal GSDP has also retained the right to take up equity in the new growth rate of about 14 percent, as per assumptions hydropower projects. In caseof theJV, in addition to the under the revised MTFP, Furthermore, there would be 12percent royalty power, GoHP also has an entitlement additional earnings from power sold from the share of additional power proportionate to their equity stake of GoHPs equity in the Nathpa Jhakri Hydro Project at the regulated tariff that it can either use within the which is under operation, and the Rarnpur Hydro state or sell to other states. Project which is under construction. The returns would vary depending upon the ruling price of bulk power. Therevenueearnedthrough thesaleof royaltyandequity power that has already started flowingin is expected to provide significant resources to the state in the coming Key Challenges and PolicyOptions years. The potential of this sector to generate future revenues for the state government cannot be over- There is considerable untapped potential in the sector, emphasized. Basic back-of-the-envelope calculations and only about 32 percent of the potential has already indlcate that the HP is expected to earn about Rs.9-1 1 been developed,and construction has started on another billion in revenue by 2012-13 through royalty power 21 percent of total potential. GoHP has estimated that, from its planned and existing hydropower projects, by the end of the Eleventh Plan, some 43 percent of the based on two scenarios--one where power generated potential could be in operation. However, hydropower during peak and off-peak hours is priced differently,and developmentin the Himalayas involvesconsiderablerisks, another where there is a single price for power (Figure and states,includingHP, have a modest track record in the 4.2). This is more than 37 percent of the state's current implementation of hydropowerprojects on their own. level of own revenue receipts, and more than double HP7scurrent level of own non-tax revenues. Revenue The sector faces various challenges with regard to the from power would be between 1.4 to 1.8 percent of institutional structure and internal efficiency of the 54 HimachalPradesh: Accehating Devebpment and Sustaini~gSuccess in aHill State - I = = Figure 4.3: Financial Challenges facing HPSEB rnI Employee Cost per Unit of SalesW~tlunState HPSEB ProfitbeforeTax (Rs.Billions) Employee Cost per Unit of Total Sales ( / " S 2 f %B @ 9 !i 1 5 Noh: DaUJinmHPERC TanJ Ordw,200647. Rightpanelshon,~coJb/oryario~(sStaeE M d g Boardr. HPSEB, and the power trading strategy. The number around 23 percent in 2004-05 which, though of new hydro projects involving various public and relatively low, could be reduced further; and private players that are expected to come up in the state (iii)an employee/kWh-soldratio which is among underscores the importanceof proceedingexpeditiously the highest in India (Figure 4.3). with the fundamentalrestructuringof the sector;lackof a The sector is in need of institutional clarity in such matters is detrimental to the investment restructuring. HP must comply with the climate.The statecan takethe followingstepsto support Electricity Act (2003), under which states were expansion of this sector. given one year to restructure their state electricity boards by segregatingthe transmission function e It is important to enhance the internal from the power trading f~nction.~'Although efficiency of the HPSEB. The HPSEB was GoHPhad received an extensionuntll December actuallysufferingfinanciallosses,untilit achieved 2006, it is yet to decide on a blueprint for a surplus in 2005-06 (Figure 4.3). HPSEB's restructuringHPSEB.However, HPSEB is in the financial health needs to improve to ensure process of separating its accounts into the three that the utility is able to continue to provide for segments of the power supplychain (generation, the long-term maintenance of the system, and reliable power to consumers. It is important transmission, and distribution). It is important to control costs, arising from: (i) high interest to design a restructuring plan for the power payments on HPSEB's outstanding debt of Rs. sector and implement it as early as possible, 26.35billionin2005-06, whiledebt servicingwas incorporating the experience from similar states Rs 4.69 billion, or 26 percent of total revenue;" that have restructured-like Uttaranchal. It will (ii) Transmission and Distribution losses of also be imperative to ensure that the boards of Exploiting Emerging Opportunities for Revenue Mobilization,Growth, and Employment 55 the restructured entities are given autonomy,and royalty from free power (for use of the state's include a mix of non-executive and independent water resources), against the policy mandate directors in line with the principles of good of going in for tariff-based competitive corporate governance. bidding. While this is the essence of the benefit of hydropower development to the a The human resource profile needs to be state, this approach needs to be carefully addressed if it is not to have a negative impact evaluated in terms of the risk it could pose to on the sector's future performance. Though the overall trading plans of the state-given HPSEB currently has staff strength of slightly the large capacity addition being planned by more than 26,000 adding to costs, it faces an power-surplus states (north-eastern region, acute shortage of the professional and technical Uttaranchal, Orissa, West Bengal) and the ultra skills needed to meet the demands of the sector mega projects being planned by GoI. These and the changing business environment. It will charges will inevitably put upward pressure on be critical for the sector's efficient performance tariffs for end-consumers and may make the to carry out a human resources need and skill projects less attractive or difficult to finance. assessment, and developlimplement a plan to The current practice of awarding potential meet the emerging new sector structure and hydro projects on the basis of upfront charges evolving business environment. could be revised to tariff-based competitive It is important to adopt a clem power trading bidding, in line with the national policy. strategy, given that revenues expected from the a GoHP has recently set up a new generation sale of hydroelectricity constitute a significant company, the Himachal Power Corporation, portion of the state's.planned revenue for years to undertake implementation of hydropower to come. As most of the electricity will be sold projects in the state to operate in the manner outside the state, it will be important to adopt of the central public sector power corporations. a strategy that will maximize for the state the It has been proposed that a number of new benefits of this trade-based on an analysis of projects that had been either earlier allocated or actual and expected future market conditions, are still unallocated be transferred to this new taking into account expected dynamics of entity. This new approach can have significant supply and demand in different regions in India, implications for the state on account of: especially in the Northern Region. A usefid first (i)possible crowding out of funding for priority step for identifying the optimal strategy for HP sectors with the state's resources getting tied would be to carry out a detailed assessment of up for contribution to equity or raising debt the market, and the implications of different for development of the new hydropower trading strategies (e.g., taking an equity exposure projects; (ii) limited resowces and capan'g of the in projects, settingup a separate tradingcompany state to undertake the new projects, thereby lstinct from HPSEB, going in for short term or slowing the pace of hydro development; and long term contracts for sale of power, meeting (iii) the possible need for GoHP to bear the the state's demand during winter months when off-take and prin'ng risk for the power generated there is a deficit, etc.). from these projects, especially considering the The bidding process for new hydropower very competitive tariffs projected from the projects is not in conformity with national proposed coal-based ultra mega projects which policy. The current practice is of financial are easier to implement. It would be worthwhile loading on hydro projects through up-front for GoHP to strategically evaluate the risks bidding charges, earmarking a percentage of involved under this model, in comparison with the project cost for local area development, the corresponding benefits depending on the and assessing an increasing level of revenue as different approaches that are possible. 56 Himachal Pradesh:Accehrating Deil&lopmenrand Sustaining Success in a Hill State Of particular importance is the need to exploit the with otherhill states,theyield islowerthanin the statesin state's hydropower resources in a sustainable manner. the plains (Figure4.4). Irrigationfacilitiesareparticularly Injudicious exploitation of these resources could have under-developed,with more than 77 percent of the net implications for the future availability of hydropower sown area in the statebeing unirrigated, compared to 61 resources, for the societies and communities affected percent nationally, Other constraints are limited access by hydropower development, and for the wider to technology and markets, and poor management of environment. This critical aspect of hydropower soil and water. development is discussed sub~equently.~~ However, despite constraints imposed by the terrain, there are considerable opportunities to diversify away B. Promoting HighValue-Added from traditional cereals and pulses to horticulture, Cultivation in Agriculture and floriculture, and high value fruits suited. The state's varied climate and topography can support sub-tropical Allied Sectors and temperateclimatefruitslikemangoes,litchis,guavas, andapples,whilecultivationof strawberry,pomegranate, The agricultural sector faces several challenges. The olive, kiwi, and hazelnut has been introduced. There average holding size is about 1.2 hectares, which is is also potential for mushrooms, flowers, medicinal/ about 80 percent of the national average holding size, aromatic plants, and bee-keeping. The state will also with over 92 percent of holdings classified as small or need to focus on improving animal husbandry, since marginal. Crop yields are constrained by per hectare HP is endowed with a large livestock population,which fertilizer consumption that is half of national averages. is a major source of livelihood in the alpine areas. The The average yield of most food crops is lower than livestock population of over 5million contributes milk, national averages, and, although it compares favorably wool, eggs, and meat. Figure 4.4: Low Irrigated Area and Low Yield of Traditional Food Crops in HP I 1Wh - N~~kdgmdAreassShwofNec 3600 - I Y ~ i Q ~ f i ~ Saam~HPMstrktsaud EB,U u a n d J ' Mhtia 75% - Selated state9 2700 - UTQ +AI 50% - 4)HP 4bW 25% - Aim A1 HP t Rice Wheat Pulses N o h Datafot~rn&&dA~jv?n GoHP,.?0&-05. Data&@ldfma m.i-.mm., fot2005-06. 52 See Chapter7. Exploiting Emerging Opportunities for Revenue Mobilization, Growth, and Employment 57 DepartmentalVision for Various Sub-sectors (Development and Regulation) Act 2005". The state has taken several important steps to encourage private The Department of Agriculture has developed a participation in post-harvest a~tivities.~ strategy to achieve the basic objectives of increasing income generation and job opportunities for farming The Department of Animal Husbandry has a policy communities through diversifying agriculture, value to support natural breeding for remote areas, and addition, and providing support for post-harvest has started providing door-step delivery of Artificial activities.Themainactivitiesproposed are: (i) improving Inseminationatsubsidizedprices from 2003.In addition, availabilityof qualityseeds;(ii) increasingfertilizerinputs; the department is providing veterinaryservices through (iii) better use of water resources through conservation a networkof 2,070 veterinaryinstitutions,which include and rainwater harvesting, and more efficient water use; 7 polyclinics, 328 veterinary hospitals and dispensaries, (iv) promoting organic farming, including use of bio- 14 mobile veterinary dispensaries,and 1,721 veterinary fertilizers; (v) supporting an improved system of post- dispensaries. The HP Livestock Development Board harvest handling, storage,and marketing; (vi) diversifying has been set up to improve the animal husbandry from traditional cereal crops into higher value vegetables, services in the state, while HP MILKFED is operating spices, and seed pr0duction;5~and (vii) developing tea dairy development activities in the state by providing cultivation and processing in Kangra. The Department remunerativeoutlet for surplus milk. is also active in promoting small-scale irrigation, and is successful at transferring 1,500 to 2,000 hectares of irrigated land to registered water user groups, without Strategic Options to Achieve the Vision imposing a fiscal burden on the State. Thestateneedstotakestepstoenergizethissector,especially Theoverallstrategyof theDepartment of Horticulture givenitsimportanceasasourceof livelihoodforpoor rural is also to improve income generation and employment communities.Thiswillrequire dose collaborationwith the opportunities for farmers through modernization of private sector in post-harvesting activities, and improving production technologies and greater emphasis on post- the infrastructuralrequirementsfor the sector-specially harvest activities.Some of the important steps taken by in the form of irrigation and rural access. Government thestateinclude:(i)improvingqualityof plantingmaterial may considerthe followingmeasures. through research and development, modernization of While not enormously important in fiscal terms, nursery production, and change from low to medium it is important to rationalize subsidies provided . and high density plantation; (ii) encouraging organic through the departments of Agriculture and farmingthrough useof bio-fertilizers and bio-pesticides; Horticulture according to the principles of: (iii) introducing high-technology cultivation through (i) discontinuing or drastically reducing subsidies micro-irrigation; and (iv) attracting private agencies on traditional practices to free up funds for for post-harvest processing and marketing, through proposed new activities such as diversification, liberal policies and basic support under the restructured value addition, gradmg, packagmg, processing, "HP Agricultural and Horticultural Produce Marketing and marketingss (ii)makingsubsidies sustainable, s3 About 2,100hectaresis proposed to be diverted under these crops during the Tenth Plan. 54 Recognizedlargeestablishmentslike the Adani Groupand othershave establishedControlledAtmosphericStoragesin the state.Storagecapacityof 18,000 tons has alreadybeen establishedby the private agenciesand has startedworkingErom the currentyear.This is over and abovethe effortsof organizations like HimachalPradeshMarketingCooperation(HPMC) and Agro Indusaial PackagingIndia Limited (AIPIL). s5 There are no moresubsidies by the Deparanentof Agnculnue on pesticides, and the fertilizersubsidyis reduced to Rs lO/bagforevery farmer. 58 Himachal Pradesh:Accehrating Devehpment and Swtaalinig Succes~in a Hillstate possibly through one-time support for new extension system, in agriculturein particular, there activities; (iii) enhancing consistency between are vacancies at the grass-roots levels, and this strategy and state policy, by, for example, reducing makes reorganization of the system particularly subsidieson fertilizerand pesticides where organic importantM The Department of Horticulture farmingis encouraged, and freeing funds for the should also upgrade the capacity and skills of use of bio-fertilizers, bio-pesticides,and Integrated its staff under the Horticultural Technological Pest Management; and (iv) improving targeting Mission's scheme, through stronger efforts in this of subsidies to poor and marginal farmers by dire~tion.~'For animal husbandry activities, there identifyingactivitiesgenerallyundertakenby them. is one extension representative on average for In the animal husbandry sector, the subsidies 1-2 GPs. The number should be reduced, while on medicines for curative measures should be alternatives like para-vetenarians are trained, and dispensed with, and funds used more vigorously the capacityand qualityof existing staff improved for protective measures against possible outbreaks through refresher courses, modern technologies, and communityactivities&uch as de-worming. and upgradingcommunication skills.58 a The state should re-examine its land policy to Despitestepstoimprovepost-harvestprocessingand facilitate cultivation of land on a lease basis. marketing,results are still not visible for perishable At present, the owners keep agricultural land products like vegetables and flowers cultivated by fallow instead of giving it on lease due to fear small farmers. There is a clear understandtng in of losing ownership. the Department of Horticulture that only private agencies can effectively take up processing, value In order to modernize extensionservices,the state addition, and marketing of produce-d this is could consider stepstowards: @ making better use also the policy of the state.A detailed critical study of NGOs and farmer associations for training could be conducted to identifj the constraints in (ii) organizingrefresher courses for staff to orient production of hghvaluecrops(especiallymedicinal them to the needs required to implement the and aromaticplants), and inhibitionsof the private state strategy, and u* the services of the two agenciesin &ng up the processingand marketing universities at Nauni and Palampur to effectively should be addressed based on study fin+. The train the trainers; (iii) developingskills in modern Department of Agriculture also has a strategy communication,byeffectivelyusingmassmedia;and to facilitate marketing, but this is not adequately (iv) makmg the best use of available staff through reflected in the 200607 budget.59 a multidisciplinary approach wherein competent and trained staff services are used exclusively for The state can invest in research to improve technological dissemination. Under the present productivity. The universities could particularly 56Under the present extension system, the grass-mot level extensionworkers are Agricultural Extension Officers (AEOs) with eight in each block. Sice there are 50 percentvacanaes there exisa about4 AEOs in eachblock, covering 10to 12Gram Panchayats (30to 40 villages). Added to this, each AEO has to perform severalotheractivitiesrelated to input supply and implementation of other schemes. 57Horticulttltegot an importantboost with the commencementof the HorticulturalTechnologicalMission in 2003-04, with a vision towardsprivatization, diversification,value addition, markeang, organic farming, technologicalinnovations,and improved productivity. 58The department of Animal Husbandry continues to subsidize the cost of MdInsemination(AI).The price was raised from Rs 5 to 15per A1 in complianceof the commitmentunder the Bank-financed watershed project. Looking to the successfuldoor-stepdelivery which cost an additional Rs 35 to40 per AI, itcan be said that the farmers arewillingto pay forgood and timely services.This serviceis presentlyprovided by the Veterinary Pharmicists worlung with the veterinary doctors. If they areprovided with sufficient Paining they can also provide the health services.This makes a strongcase for idenufymgand tniningthe v~llageyouth to work as para-vets (notas governmentemployees) under the supe~sionof the veterinary doctors. A similar approachcan be followed forprovidmgbulls for naturalbreedmgto the communityon nominalprice maintainedby anindividual/community by charging for serviceand under the supe~sionof the veterinarydoctor. 59The departmentexplains that the infrastructuredevelopment for marketingislargelytaken care of by, &st, marketingboardswhich collect the marketing fees forthe produceand, second,to someextent by the Governmentof India schemes.However,thisdoes not meet the basic strategicneed forfacilitating the processingand developingmarketinglinkages to the value-added products. ExploitingEmerging Opportunities for Revenue Mobilization, Growth, and Employment help in getting the quality planting material- with suitablemodificationsinits by-lawswhich are especially exotic patented germplasm-to already under consideration of the GoHI? improve horticultural production. In animal There needs to be better collaboration,especially husbandry, there is shortage of quality pedigree amongtheprimarysectordepartments,toaddress bulls for Jersey and Holstein cows, and also for the strategic issues which can not be resolved by Murrah Buffalo required for cross breeding. any one department. This is particularly true of This should be resolved by acquiring high coordination with the Department of Irrigation quality animals to be maintained and multiplied and Public Health (IPH) for the creation and at the University research farms, and modern management of minor irrigation schemes. In establishmentsin Palampur and Nalagarh should addition, there are several areas of overlap be effectively utilized for this purpose. between the Departments of Horticulture and c Diws&cb ef4m&cuhxmthcstateis Ag*c&ure tkatCaniFrationiZed7 - currently largely confined to apples, even though there ispotentialto expand more aggressivelyinto other fruits and vegetables. Hence, it is important Improving lriigationand Water Supply to look effectively beyond fruits--in particular, apples,whichmaysoonbeovenvhelmedbyChinese Performanceintheirrigationsectorhasdirectrelevance for production. This requires more effort across the primarysectorgrowth,but thereisconsiderableunrealized spectrum,fromproduction(identificationof crop, potentialin this sector. HP is home to hlgh ranges of the availability of quality seed/planting material, and Hunalayas with snow and perennial glaciers which supply packaging practices) to processing and marketing water to much of northern India and beyond. While there (through private agencies). isno overallscarcityof water,only22percent of thestate's The state already has several thousand farmers net sown area is irrigated. Of the irrigation potential of who have been certified as organic producers 0.33million hectares, only 0.21 million hectares is assured by three agencies. In order for more farmers to of supply. At least another 50,000 to 90,000 hectares get an attractive price for organic horticultural can be brought under irrigation by completing ongoing produce, the state should extend promotion projects and introducingnew schemes. . of organic certification, and could offset some of the up-front costs (certification as well as While most of the state's progresswith farmer-managed compensation for low yields) normally associated schemeshasbeenmadebytheDepartmentof Agriculture, with convertingto organicproduction. most irrigation, as well as drinkingwater supply, lies in Sectoralpolicies should be h a r r nsthe ~ ~ ~edomain dxBeparment3Erigauin~bPuTE uf state, and not be based on projects/programmes Health (IPH). A major policy issue in IPH is a huge gap funded by specific agencies. Activities are often between fundscollectedforirrigationand drinkingwater uncoordinated across Go1 and donor-funded schemes, and the cost of operating and maintaining schemes, and attempts could be made to adjust these schemes.This wide gap is due to a near-zero rate to the need of the state and the state policies.'*' of drinkingwatercharges,coupledwith very lowcharges The recently established, ''Natural Resource Management Society"under the chairmanshipthe for both flow irrigationand lift irrigation.The aggregate Chief Ministerasapartof theWorldBank-financed shortfall has significantly increased in recent years 'Mid-HimalayanWatershedDevelopmentProject" (Figure 4.5). In 2005-06, the aggregate shortfall was could provide an excellent forum for this purpose almost Rs. 3150 million. 011Such flexibilityalready exists tosomeextent in theHorticulturalTechnologicalMission programmesbut otherexamplesare rare. 60 Himachal Pradesh:Accelerating Development and Sustaining Success in a Hill Sfate Figure 4.5: Cost Recovery Issues in Irrigation and Public Health - 30W . Annual Gap in 2500 - Rs.Millions Water ChargesCollected - 8 Irrigation 2000 Cost of O&M 2 Dnnking Water g A - 1500 2 loo0 - 500 - -- 0 1 T I Irrigation DrinkingWater Notes: LeJpanefshorndatafor2005-06. AU dabfiom GoHP. The state appreciates the challenges in improving charges; and (ii) gradually increasing costs irrigation facilities to promote primary sector growth through advance announced amounts to reach and ensuring a safe supply of drinking water for full cost recoverylevel. households,andisnowtakingimportantstepsto devolve 0 The Department of IPH is overstaffed, with control (and costs) of both services to beneficiary 30,704 staff (including 3,823 permanent). Most groups. This is seen as a way to improve efficiency of these staff are underutilized; two-thirds of and quality. Guidelines have now been prepared to the non-regular staff are "key men" who are transfer total or partial responsibility of drinkingwater paid to turn drinking water taps on and off. schemes to Gram Panchayats. Similarly for irrigation, The state could gradually reduce staff strength, IPH has drafted guidelines to transfer responsibility of and hand over the responsibility of O&M tertiary canals or small schemes to water user groups, to Gram Panchayats or communities. IPH is in a manner already employed by the Department of considering adding a maintenance function to Agriculture. This change is recognized as one that the responsibilities of the key men, which would requires substantial capacity-building and sensitization increase their cost effectiveness. . . T o f i e ~ e G i a i e ~ n i ~ a ~pddngis- ~~ r m n - ~ d q ~ to begm within the year. strategy involving beneficiaries and GPs to participate in planning and execution of the The Department of IPH could consider and build on irrigation and drinking water schemes. This other reform measures. Some of these reforms are could be practiced for all new projects wherein important from the perspective of fiscal recovery and the government provides technical and one-time better servicedelivery. financial support to the GPs or beneficiaries to develop their own water resources. User charges, which are among the lowest in the country and cover only about 2.3 percent The IPH Department intends to adopt a of required O&M expenditures, have to be multidisciplinary approach, to develop and increased despite expected popular resistance, utilize the water resources with representation through: (i) accepting in principle that O&M from other departments like Agriculture, Health, cost recovery has to be met through service Rural Development, Power, and Forestry. This Exploiting EmergingOpportunities for Revenue Mobilization, Growth, and Employment would help foster coordination, learn from best intensive sector where HP has immense potential on practices, and avoid unnecessary duplication. account of its environmental, climatic, and natural heritage. The sector also has the potential to absorb educated workereplanning Commission estimates C.Developingthe State's Tourism show that an investment of R, 10 la& in tourism Potential creates 47 jobs, making it particularly important in the context of HP's stated objective of creatingproductive work opportunities for educated workers. Tourism is an important labor-intensive sector where the state has potential due to its environmental, In spite of these advantages, the sector's performance climatic, and natural herit~e.Given that it offers leayes$icm&ng ts&&kL ~ * ------ ---------- visitors excellent exposure to temperate forests, HP calculations show that the sector has been growing at can be an ideal area for activities like trekking, safaris, an annual rate of about 6.3 percent since 1993-94- rock climbing, nature walk, angling, camping, etc.- which is slower than the sector's national growth rate thus signifying the possibilities of nature tourism, eco of almost 8 percent. Even though HP is one of the tourism, and adventure tourism. GoHP specifically few Indian states receivingtot/& i@ws per year greater recognizes that tourism is a sector that can prove than its total population of 6 million, this contributes a vital to the state's long term growth and employment small share of tourists to India (Figure 4.6). Moreover, prospects-largely on account of tourism being a labor the state faces challenges in terms of attracting - I . Figure 4.6: HP's Challenges in Tourism - -- - I - - AP .India HP Domeatic . . TN Tourists U P WB Delbi Other -A ForeignTouristsin !-IP in " ' 5 Domestic TaudstsinHP 4.4 Contributiona,GSDPper toucisf in Rs. 1000s,2004 2.2 0.0 -him 2 5 5 2 2 Notes: Shareof tounkIskpie chartr mefw 2004, asapemntaipeof MdiodkrtaL Datafw fon& ineJ;.m Mi* of ToMir, G I . DatafwlraBc, hot4 andTcJtaElmnIsara sbmeof GSDPmeinrea/tmns,jFomtheBank.blivcstate5&base. Con/n'hthto GSDPpcr W tobh'djFom +ts and tokdaawIr,pldfb&msfw Bhutanand Mm'h.~x t n p l h t c d w n a t c to I n d r i a r f g m h Wo& To* e - StalirjCs. Sce b f p : / / ~ . x y o ~ - k , u r i m , . ~ facts/menn.bbnIf.r dskzih. 62 Hirnachal Pradesh:Accekrating Develpment and Sustaining Smess in a Hillstate Figure 4.7: Findings from HP Tourist Survey, 2002 I ROdngs for HP's Publicity 100% IHealth Hospitality Industry Lcss Expensive I Pllgnmage Natural Beauty 75% - ISocialFunctions - 1PeacefulAtmosphere ISports Climate Pleasw Trip lOther IBusiness/Offidal lother 8 Excellent Reason for Visit N o s e of Visit veryGood Poor Note~: Data c w re@me.cjvm botbfm&and d0mest.k tonnjts to tbe slotc. T h ore no mgor Lzmm behvsen Zna'ian andfomjp 'c~pondenh. ScePhmng Codrian (2005)ford e d . high-end tourists and providing them with experiences tourist annually, and foreign tourists are only about 0.5 to rival international destinations. Intakes are confined percent of annual inflows. largely to low-end and domestic tourism, while foreign tourists account for only 3.1 percent of annual intake. Some preliminary analysis of over 8,000 tourists to the This is better than the national average of 2.3 percent state in 2002 suggest that almost two of every three foreign tourists in 2004, but states like Kerala have tourists are attracted to the state because of its natural achieved higher shares of foreign tourists like 5.6 beauty and climate-highlighting the importance of percent. Domestic tourists tend to spend a lot less preserving the state's environmental heritage (Figure than foreign tourists-suggesting that attracting 4.7). However, less than 2 percent of tourists had been foreign travelers may be one way of increasing sectoral drawn by information and publicity, suggesting that revenues. According to a 2003 study, the average per HP is not doing a stellar job of marketing itself as a capita expenditure by a domestic tourist, in HP, for a 3- tourist destination. Most visitors to the state come on day stay is Rs. 4988 while the corresponding figure for pleasure trips-but avenues for health-related tourism a foreign tourist is Rs. 11318. In terms of contn'bution and sports or adventure tourism could be exploited to GSDP, the trade, hotels, and restaurants sub-sector further. The hospitality industry is not rated too hlghly related to tourism contributes about 8.5 percent of by respondents, with an average rating of about 2.5 on GSDPatpresent. Onaper-arrivalbasis,thiscontribution a Cpoint scale along dimensions of behavior, food and works out to be lower in HP than nationally, in more drink, and cleanlinessof accommodation (Figure4.7). developed states like Kerala and Tamil Nadu, and in smallcountries whichhaveworked on developingtheir tourism potential-lending credence to the theory that Constraintsto Development of Tourism tourism in the state is largely low-value (Figure 4.6). However, HP is doing better than other hill states like The sector faces several constraints. First, poor Uttaranchal-where the sub-sector contributes only connectivitj-including underdeveloped road about 6.6 percent of GSDP, and about Rs. 1039 per networks, and small airports unsuited for major Exploiting EmergingOpportunities for Revenue Mobilization, Growth, and Employment 63 Fiaure 4.8: Constraintsto Development of Tourism Potential in HP I C * * + , , 50% - Slow PaceofTomimPH ImplemglrPrloslbm, m 4045 W/o - 20% o?/e W / o - Hotel occupancyrates in Shimlaand Kdu , Manali an below national averages 9W/o 1 t 1999-00 2000-01 2001-02 2002-03 2003-04 Sanctioned inRs.100 Millions(L.HS) I n --C Shimla tKulluManali Percentage Released (RHS) - Notes: Datafmm India To~rismStatirtic5,2004. Hotel ocnrpatyfw K w h Manak' in 200243isnnavmvmhbk. .- commercial airlines-are major constraints to generally poor. However, hotel occupancy rates are the sector's development. The airports at Shimla, still lower than nationally, partly due to connectivity Dharamshala, and Kullu are not well-connected to issues (Figure 4.8). In addition, while there were 223 other Indian cities, and adequate only for 18-seater travel agents, 308 tour operators, 175tourist transport aircraft.There are 56 helipadsin the states,but they do operators, and 13 adventure tour operators registered not provide regular commercial services. An average with the Ministry of Tourism nationally in 2004, tourist from Delhi can reach Singapore or Bangkok in there was not one recognized operator in HP." Third, half thetimerequiredtoreachShimla.Second,facilities HP lags similar hill states in terms of new tourism are inadequate, especially for high-end tourists. The projects under implementation, and even the pace of state has only four five-star and deluxe hotels-in implementation of theseinitiativesisslow(Figure4.8).62 Shlmla,Mashobra, and Kullu Manali-which can cater Fourth, tourism faces challengesin factor markets- to high end tourists, and this is reflected in Shimla and in terms of lack of skilled labor and access to ready Kullu districts together accounting for about half of credit for capital intensive and long gestation projects. tourist inflows annually. Safety standards and facilities GoHP is still to transfer designated available land in a provided in the informal sector motels and lodges are few important places to the Tourism Department, as States Like Andhra Pradesh, Kerala, Karnataka,Mahanshua, and Tamil Nadu do well in this respect, but even hdl states like Uttaranchal, Nagaland,and Jammu and Kashmirhave registeredoperators. See IndiaTourismStatistics,2004, for derails. As per Go1 data, there were four tourismprojectsapproved in HP in 2005-06 with a sanctionedamount of Rs 160 million-f which 56 percentwas released, compared to a national averageof 75.5 percent.See India TourismStatistics, 2004, for details. 64 Himachal Pradesh: Accelerahng ~euelopmentand ~tlsiainin~Succe~sin a Hill State per agreement." Fifth, there is lack of an integrated formulated an Eco-tourism Policy in consultation with approachin the implementation of the state's tourism the Department of Tourism-with aview to developing strategy. Inter-departmental coordination in this sector eco-tourism in an ecologically sustainable way. Eco- is particularly important since the work of various tourism societieshave been establishedon a Community departments-including Urban, Town and Country Based Eco-Tourism (CBET) basis to cover the Greater Planning, Civil Aviation, Roads, Environment, Himalayan National Park (Kullu), Himalayan Nature Power-has direct implications for the i-ealizationof Park (Shimla),~otter'sHill Van Vihar (Shimla), Renuka the tourism potential of the state. Sixth, the role of Wildlife Sanctuary (Sirmour). Further development of the state-run HP Tourism Development Corporation eco-tourism sites-along with private parties-in an (HPTDC) also remains unclear. Unlike in Rajasthan, environmentallysustainablemanner (includingcharging the state continues to run HPTDC, and while the fees for maintenance) are part of GoHP's longer lack of funds prevents the state from upgrading the term plans. GoHP already charges a "green fee" from facilities at the HPTDC properties, it also prevents tourists to Manah. It plans to introduce this in other the private sector from operating some of these prime tourist destinations, and use the funds so collected for properties more profitably. environmental conservation activities in ecologically vulnerable tourist areas. State Vision and Recent Developments A multi-departmental HP Tourism Development Board (HMDB) has been set up under the chairmanship GoHP's stated objectiveis to develop the state's tourism of the Chief Minister, to promote the sector-and it sector as a prime engine of economic growth, and to was operationalizedin 2005 with a view to minimizing positionitself as a major globaldestinationby 2020.The bureaucratic hurdles in tourism development. The statehas a Tot/n'smPolicy in place, issued onJune 6,2006. HPTDB is supposed to formulate policy guidelines for The target is to increase the contribution of tourism to tourism development, and advise GoHP on matters GSDP to 15percent by 2020.This Policyhas somegood relating to regulation and licensing.The Tourism Policy thinkingand the right statementsof intent. It focuseson recognizes that tourism development in HP is under- developingbetter inter-sectoral coordination,upgrading funded relative to other states, but better coordination infrastructure facilities, marketing HP effectively as and integration among departments including Public an attractive tourist destination, investing in training Works, Transport, Irrigation and Public Health, Power, for tourism services, and promoting activity-based Forests, Environment, Urban Development, and Town tourism. In particular, the Policy recognizes the need and Country Planning-which can contribute to better to promote the private sector, and strengthen tourism infrastructure and civic amenities-will help tourism in an environmentally sustainable manner. However, development. The state hopes to achieve this through implementation is behind schedule-and the Policy the HPTDB, which has representation from various needs to clearly define financial targets, achievement line departments. targets, and modes of financing. In the area of regtlbtion and clearances, in order to GoHP has taken steps to improve eco-tourism. minimize bureaucratic delays for the private sector, Ecotourism projects are located on forest land GoHP has introduced single window clearance for under the Department of Forests, which has already tourism projects. However, the system has to be ExploitingEmerging Opportunities for RevenueMobilization, Growth, and Employment 65 made more efficient to attract more investment. The Recent stepshavebeen taken toimproveairconneck'vi~. The HP Registration Tourist Trade Act was passed in airports at Shimla, Dharamshala, Patahankot, and K d u 2002, in order to allow for checking and inspecting are not well-connectedto other Indian cities, and can take hotels and travel agencies against over-charging or ATR42aircraft.Thereare56helipadsin thestates,butthey substandard services. GoHP also plans to promote are not used for regular commercial services. Moreover, tourism through strengthening the capacity of Hotel traveltime fromDelhi to Singaporeor Bangkok is half of Associations to conduct inspections, classifyingtourist that required to reach Shirnlaby surfacetransport.In order units by facilities provided to ensure value for money to overcome this constraint, the government is looking to tourists, and strengthening Tourist Police by training to improve air connectivity. The Airlines Authority of 500 police and hoke guards in tourism-related matters India has opened the expanded runway and new terminal like safety for tourists. The major development in the B L K a n g E L ~ a t ~ ~ & a n d ~ f ) e c c a n ----------- state's tourism sector during 2005-06 is the approval (a major domestic airline) has operated its first Q h t in of the largest Foreign Direct Investment project in the Apd, 2007. The runway of the Kullu Auport is to be tourism sector in India, worth $135million, to develop expanded by buildmga bridge on a rivernear the terminal, the Himalayan S h Vdlage Project near Manali, with a and connectingit to the runway. An airportis planned at total project cost $300million.This project is expected Mandi. Since expansion of airports are a medium term to be implemented during the next three years, and option requbhg financial resources, encouraging regular once operational in 2009, is projected to yield GoHP helicopterand chartered fhghts-especiallyin conjunction about Rs.1.0-1.2 billion in revenues over the next 10 with major private hotel chains-me also part of GoHP's year period. plan to improveaccessibility. 1 - =-=- &ox 4.1: Kernla's Approach to Tourism Development I hema nas been the most successm statein India in positiomg ~tselfcompetitivelyih theinternationaltourist market. In 2003, it recorded India's highest growth in internationaltourist arrivals at almost 27 percent over the previous year, and an averageinternationaltravelerstaysin the stateabout 14daysper visit. It isimportanttolearn from the experienceof India's only "tourism super brand" state,which has been listed by National GeographicTraveler as one of the fifty destinations for a lifetime. The state announced a comprehensive Tourism Policy in 1995, after which tourism took off in a major way in Kerala. -_------- The state focused on the "Six S" framework of India's National Tourism Policy: (i) magat, or hospitality, inclu* - facili- aemwkpcrienm;-(npoothna, or EforGaon, mcluding marketing and promotion, tour operators, and information dissemination; (iiii suvidba, or facilities,including accommodation, amenities, hygiene, and conveniences;(iv) surakba,or security,including tourist safety and environmentmanagement; (v) or cooperation, including qualitycontroland assurance;and (vi) sanrachna, or infrastructure,includingtourism product development,and core and linkage infrastructure. A recent surveyof touristsby CRISILInfrastructureAdvisory Servicesshowsthat all touristsrate Kerala as 'Very Good'" or "Excellent" along the Six Ss of tourism development, and 100percent wanted to revisit Kerala and recommend it ta their relativeand friends as a tourist destination. The keyingredientsin Kerala's successhavebeen to build tourismon coreand naturallyavailableresources,createadistincr brand image,compete internationally rather than locally,provide strongpolitical support and professional administration of tourism developmentprogrammes,and give the private sector space to grow. The state has also invested strategically in core and linkage infrastructure,and has made efforts to build a critical mass of tourism workers through appropriate trainingand capacitybuilding+ 66 Himachal Pradesh:AccekratingDevehpment and Smtaining Successin a H i l State Policy Options to ImproveSectoral manner. Foreign and domestic investors could be encouraged to set up high-end health resorts, Performance spas, ski resorts and entertainment parks- preferably as part of international chains. Door- Going forward in the tourism sector, GoHP might to-door tourist packages that handle all logistics, consider the following options that would help realize and better standardization and certification the potential from the sector. regimes for players in the tourism industrycould The state needs to activate the HP Tourism also help the sector. DevelopmentBoard (HPTDB) thathas recently The state could consider disinvesting select been established under the chairmanship of the properties of HPTDC, especially those where Chief Minister as a forum for a more strategic the private sectoris interested. It is important to approach to tourism development in the state. work out a strategy for the heavy loss-making The HPTDB could go a long way towards properties, including closure/sale/lease to the improving inter-departmentalcoordination.The private sector. Resources from privatization outcome indicators of the HPTDB should be could be utilized to upgrade the facilities at the clearly established, with extensive participation lesser known destinationswhich areeconomically of the non-government entities in this process. viable. A study to assess the profitability and In partnership with the private sector, HP prospects of HPTDC properties could be needs to revamp its marketing and branding undertaken leadingto the development of a time strategy of promoting itself as an up-market bound action plan. tourist destination. The State Tourism Policy, m The airports at Bhuntar (Kullu) and Jubbal 2005, has identified a number of thrust areas (Shimla)must be developed on a priority basis to in eco-tourism, pilgrim tourism, and adventure address the issue of air connectivity. Instead of tourism which hold tremendous promise in HP. spreadingscarceresources thinly on upgradation The state could be projected as an attractive of various airports/airstrips in HP, the state upscale destination for health tourism (spas, must focus on improving the landing and other health resorts, recuperativecentres) and business facilitiesat these two airports, and set up a time- (conferences and retreats). bound implementation plan. This will require a The state must encourage the private sector to creating fiscal resources, but would be a valuable develop upscale resorts across HP. GoHP needs long term investment. A first step towards this to facilitatethedevelopmentof somehigh-profile would be initiation of feasibility studies to cover projects by the private sector in each of the technical and financial aspects, and to identify thrust areas, to be implemented in a time-bound viability and sustainability. H imachal Pradesh has many achievements to its seventhamongsixteenstates (Figure 5.1).Though thisis credit: rapid improvements in human development a perception survey,it indicates that, in the eyes of HP's indicators over time, a tradition of openness in residents, much more could be done to improve the government, and relatively low levels of corruption. quality of public services. Bridging.this perception gap Yet, the state faces major challenges like overstaffing, could also help garner public support for any political politicization of recruitment and transfers, and a party seekingto win state election^.^^ slow pace of decentralization. Developing a coherent strategy to address these challenges is an important element in sustainingthe state's positive past record in A. Enhancingthe Effectivenessof human development. In addition, governance reforms the Civil Services could have particular benefits in terms of assisting the - - -- --------------------- fiscd recovery. Addressing the Problemof Overstaffing Despite objectiveindicatorsthat are better thannational averages,arecentassessmentofuserperceptionssuggests HPhasoneof hghestratiosof civilservantstopopulation that public servicedeliveryin HP could be strengthened in the country,at 4.5 civil servants per 100of population. further. Combining data on access to, reliability of, and It is possible to argue that the large size of HP's civil satisfactionwith public deliveryof drinkingwater, health service reflects the drfficulties of effectively serving a care, the Public Distribution System (PDS), primary small and spread-outpopulation in a region noted for its education, and transport services, the survey ranks HP difficult terrain;yet, itappearsmore likelythat the sizeof M In anycase, surveysbasedon longrunoutcome indicatorstend to reflecta state's pastachievementsfarmore thananycurrentefforts to strengthenpublic services. I Hirnachal Pradesh:Accelerating Devekpzent and Sustaining Success in a Hd State Figure 5.1: Relative Ranking of Public Service Delivery in Indian States, 2003-04 States are ranked based on perceived quality of delivery,with a lower number indicating a better rank. DrinkingWater Health Transport PDS Education - Key Perceived Causes of Dissatisfactionwith Specific Services in HP Only 12%and 18% Almost half About 15%respondents Only 6% were satisfied Only 34% of respondents were respondents reported were happy with the with qualityand quantity respondentswere Fully satisfiedwith problems with access punctuality of bus of grain provided, satisfiedwith adequacy and quality to public health care services,and 12%and 14% 11%were satisfied the qualityof of piped water, facilities, and only respectively were satisfied with reliability, and infrastructurein and 20% reported about 10%reported with the frequencyof the less than half the rural schools,and access access problems and fullsatisfactionwith service and the behavior of respondentswere was reportedlyan frequent breakdowns behavior of doctors conductors and drivers on satisfied with access to issue for a quarter of in supply. and medical staff the buses. PDS supplies. rural respondents. at facilities. Notes: Bared on SamucIPad et. aL (2003). Promoting the Institutional Environment for Inclusive Growth 71 I Table 5.1:Comparative Size of Civil Service in Selected Indian States Per 700 of Population --- SectorEnrphyment inch& con a the civil service is the outgrowth of a strategy designed its rolls. HPSEB currently has some 26,100 employees to offer government employmentin a state where other on its rolls, amounting to 59 percent of staff engaged sources of productive employment have been relatively by PSEs in the state. stagnant?' It should be noted that education accounts for about a third of governmentemployees. Analysis suggests that the growing fiscal burden from overstaffing has largely been the result oE (9 perm& Whilethe total sizeof the civil services (excludingPSEs regu&xadon &WJ, where regulanzed employees had to and local bodies) has grown about 30 percent between be paid as per standard pay scales, while new hang of 1990 and 2003, work-cbatged etqbkiyees have grown 613 non-regular staff to replace those regulanzed added to percent while part-time emplqees have grown some 212 the government's fiscal load and created a new pool of percent (Figure 5.2)!Threeorganizationsareparticularly employees who would inevitably be regulanzed, in due bloated in size. The PWD accounts for 29,240 regular course; (ii) the historic knking 4 I-IPb uviIsemkpg-s& k, staff involved in execution of works and 5,375 regular those of Putyab, which paid its civil servantsmore than Go1 staff constituting the permanent establishment of the and otherstates,suchasHaryana.Fkgmdlessof thereasons department, in addition to 18,098 daily-wagers. The behind HP's burgeoning civil service, the fact remains IPH currently has 3,823 employees in its permanent that the state can no longer afford the resulting wage and establishment and 22,444 work-charged employees on pension b 4 amountingto 50percent of the state'srevenue 65 Another hill state with a similar sad-Nagaland-has serious insurgency problems and lack of non-governmentemployment opportunities, making governmentthe employerof fist resort in the troubledstate.In order to clinchthis issue,onewould need data on the ratioof field staff in urban districts, such as Mandi, Kullu, and Slumla,to more remote disuicts,such as Lahaul & Spiti,but suchdata was not availableat the time of writing this Report 72 Himachal Pradesh: Accebating Devehpment and Sustaining Success in a Hill State Fiaure 5.2: Patterns and Ovemtaffina in HP's Civil Services Aggregatecivil service employment Compositionof non-regular ThreeoqgdmtbllsNrnntly gr pccduntfor375%'~of eivilservices 1 " 1w/o _ -a -II Work- an' 75% grew Eran 8315b 30.0°/0 ova theperim- 990FO4%6~ 50% 2003, andnow count for17.90, 25% . evadlehcpedad . Work-Charged 0% m rn Part-Time 1990 1W3 m8 2003 3 Others IPH HPSEB 8 Others Targeted retrenchmentin India has failed as a tool to reduce the size of the civil service. Some states, such as Orissa and Karnataka, and Go1 have offered civil servants voluntary retirementpackages but there have been few takers. Goa is the only state that has actually succeededin retrenchingthe dvil service. Some 2,000 dvil servants in Goa (fivepercent of the civil service) have taken advantage of an early retirement programme. The majority was over 55 years in age and about 40-45 percent has been replaced by younger employees. Such a schemeis likely to generateonlyverylimited fiscal savings. In effect,statescan only control the sizeof the civil servicethrough attritionand this necessarilyinvolvesenforcinghumg andwage restraintto be effective.AP's corecivil service,for example,is estimatedto have declined by an annualaverageof 2-4 percent between 2002 and 2005 as a result of such restraint. As a percentageof GSDP, salariesin AP are estimated to have fallen fhm 5.5percent in 2000-01 to 5 percentin 2002-03, and are expected to fall further to 4 percent in 200647. If HP can enforce a policy of zero net hiring and limit salaryincreases to the rate of inflation, then the fiscal costs of a large civil servicecan be contained successfully. receipts, thus crow* out much needed capitaland non- part-time workers in IPH, PWD, and HPSEB, wage O&M expenditures Trimming the size of the civil and curb regularization^.^^ serviceis thus a key challengefor the state,and experiences Develop a human resource database to track from other states could be a useful guide. (Box 5.1). all GoHP employees more systematically, audit muster rolls, and weed out ghost-workers. In order to restrain the growth of the civil service, Identify redundant posts by conducting GoHP could consider taking the following multi- functional reviews in major departments: pronged approach. (i) assessing whether current staffing patterns Enforce a strict ban on the hiring of non- exceed established norms; (ii) revise existing regular staff, especially work-charged and norms to take into account technological In 2005-06 alone, some 22,597work-chargedpostswere ngulvized in PWD and 16,127in IPH. Promoting the InstitutionalEnvironment for Inclusive Growth 73 improvements and revise staffing norms RationalizingGovernment accordingly;and (iii) identify posts that could be outsourced to the private sector. The state needs to look at measures for administrative Identify vacant posts across government rationalization to facilitate effective policy-making and and abolish all posts that are both vacant coordinationin a complex bureaucracy, and improving and surplus. the workingof the secretariat. Developan outsourcingpolicyfor government First, there is an issue of irrational clustering of and allow outsourcing in several areas, such as responsibilities.GoHP has 11 Ministers, 25 Principal the provision of security, gardening, cleaning, and driving. Secretaries and Secretaries, and 45 departments. This is relatively a small number of Ministers, but large Examineavenuesforredeploymentby: (i)creating number of departments offers an opportunity to a surpluspool in government; (ii) training surplus cluster departments along functionallines. While some staff for redeployment in other departments portfolios have been rationally assigned-for example, or employment in the private sector; and one Minister handles Revenue, Rural Development, (iii) amending cadre rules to allow greater flexibilityin redeploymentacross cadres. and Panchayati Raj, all linked in one way or another to rural questions--other portfolios do not seem Implement a Voluntary Retirement Scheme to have been assigned with a view to encouraging for government employees who wish to leave functional specialization or linkage." This jumble of government service, especially in PSEs, and responsibilitiesisrepeatedatthelevelof Secretaries:one enforce compulsory retirement provisions in Principal Secretary,for example,handlesboth Revenue the AllIndia ServiceRules to remove inefficient and Public Works; another handles Horticulture, staff from service. Environment, Hydropower, and Biotechnology; Accelerate the process of hiringcontractstaff- another handles Information Technology and in education and health-under the supervision Labor. This confusion of responsibilities also occurs of Panchayati Raj Institutions (PRls) to reduce lower down the bureaucratic hierarchy. Reporting the fiscal burden on the state. relationships also become more complex with some Secretaries reporting to several Ministers at one It will also be important to take measures to decouple time. Accordingly, the state could consider clustering pay-scales in HP from those of Punjab, given the fact related departments at the level of Ministers as well that Punjab has historically paid its civil servants more as Secretaries to provide for greater coordination and than GoI. Pay increases routinely approved in Punjab linkage across related areas, more efficiencyin policy- are automatically translated into pay increases for making, and clearer reporting relationships. GoHP civil servants.The issue of decouplingHP's pay- scales from Punjab is a sensitiveissue, but a start in the Second,secretariatreform in the areaof filemovement right drection could be made by creating an HP Pay is an important priority. While GoHP has introduced a Commissionthatwould,overtime,chartanindependent computerized file monitoring system in 2004, very few course for determiningthe state's salary structure. Secretariesand their officersareactuallyusingthe system I For example,one Mmster handlesboth Animal Husbandry and Housing, two departments which bear little relation to one another.Another handles ExciseandTaxationaswell asTownandCountryPlanning,while the PowerMinisteris alsoresponsibleforPollutionControl,whichclearlyraises conflict- I of-interestissues 1 Hirnachal Pradesh: Accelerating Developmentand SustainingSuccess in a Hill State to reduce delays and cut pendency. Section officers in can lead to skill mismatches, shortages of key staff in particular are not well trained in the use of computers. schools and PHCs, and fuel the growth of corruption The use of the single-file system across government is in the state. While data on 'mass' transferswas hard to hited, with only Rural Development and Panchayati come by, estimates indicate that some 14percent of all Raj making use of that at present. GoHP could focus Health Department staff were transferred in the last on the use of change management tools to better year; Karnataka, in contrast, imposed a quantitative equip staff for the wider use of e-governance in the limit of five percent on transfers across the board. Secretariat. GoHP could consider extending the use of There is no evidence to indicate that the three-year the single-filesystem acrossgovernment. minimum tenures established by HP's transfer policy for most posts are being followed." Nor are tenures for senior Indian Administrative Service (IAS) officers Curbing Irregular Recruitmentand sufficiently stable to promote effective stewardship of ImprovingStability of Tenure for Civil a department's reform programme. The average tenure Servants (in their current posts) of Principal Secretaries and Secretariesin HP is currently a mere 14months; tenures Given the intense pressures on government to recruit, for Deputy Commissioners are marginally better, at 17 it is not surprising that the process of transfers and months, but still well below the three-year minimum recruitment appear to have become politicized, and tenure set by HP's transfer policy."" irregular recruitment in PSEs and other avenues of government employment has become an issue. This GoHP can improve tenurial stability for IAS officers also affects the tenure of civil servants in their current by creating statutory committees to authorize transfers positions. While GoHP has taken steps to improve and postings for senior officers, including exceptions the recruitment process--the Subordinate Selection to the three-year minimum tenure on the basis of Services Board, for example, can no longer destroy clearly defined reasons. Transfersof senior IAS officers records after three months, as was the practice in the should be closely monitored through the creation of a past, and the Board is beginning to use Information stability index to ensure that the average tenure of the Technology (IT) to enhance the transparency of its IAS cadre as a whole in the state does not fall below functioning-it wdl be important to follow procedures three years. These steps will also help prepare GoHP to curb irregular recruitment. In the small state, it for the implementation of new All-India Service Rules is relatively easy for constituents to contact their establishing minimum legal tenures for senior officers. representatives to push their case for transfers. The At the level of general transfers in staff-intensive imposition of a ban on transfers (lifted during the departments, GoHP could consider the adoption of transfer season) has had a paradoxical effect: transfers a system of formal counseling to allocate transfers are routinely routed through the Chief Minister's office, and postings in a rational and objective fashion, while thus undermining the authority of Secretaries and enforcing quantitative limits on the total number HODSformally vested with the authority to transfer of transfers across the state (e.g., limiting aggregate staff. At the mass level, politically-motivated transfers transfers to only fivepercent of civil service size). " Employees often want txansfers for a variety of reasons: some wish to be posted to their home districts; others want to move from a rural district to an urban centre; and still others want postings to 'coveted' positions offering opportunities for rent-seeking,particularlyin departments that deal with taxationor publicworks (eg.,PWD and IPH). A senior LAS officerin HP is likely to enjoyabout the same truncated tenure as one in PunjaborJharkhand. @ Promoting the Institutional Environment for Inclusive Growth 75 1 Figure 5.3:Low Compliance under RTI, 2005 I s Duty toPublish Index forBducodon Dcpmmats &i (National Aveqc = 29%) s * * S S $ S b ,.,mu & b o b $ , , , , , C n Notex DaiafOr and &finition of DufytoPnbhb awnwnkabkbfip://nww.ccs.in/dtp at B. Strengthening Institutionsfor is important to maintain this impressive performance in restraining corruption, and further strengthen Transparency and Accountability institutions of public accountability. It is important to note that, while HP residents do not The Right to Information (Rn) Act needs to be rank in the state's services near the top relative to other aggressively implemented. It has been in force for states, they do not appear to view corruption as a major almost a year, but usage of the Act has been low and problem (Figure 5.4). HP is one of the few states in the StateInformation Commissionhas received only 15 India to have enacted legislation to address corruption appealssincethe Act cameinto effect,whichis farlower in public service delivery providing jail terms and fines than the appeals received in Karnataka, for example. AU for officials and non-officials for a series of offenses government departments are now required to release a such as corruption in the award and execution of large cache of information to the public, in order to contracts, including contract splitting; manipulating reduce the need for explicit requisitions.A recent study muster rolls or measurement books; supplying sub- of Education Department websites in 27 states and 7 standard goods to government; adulteratingmedicines Union Territoriesalong 37 dimensionsranked states on or manipulating their purchase; charging illegal fees; a "Duty to Publish" index, where HP was ranked only lending to fictitious persons; maintainingfalse records; eighteenth (Figure 5.3)." Though several other states and absenting oneself from public duty.'" Howevef, it also perform poorly in their publication requirements 'O See The Himachal Pradesh Prevention of SpecificCorruptPractices Act, 1983formore on this. 7' See 2006 Report Card on RTI Compliance by Sate, conducted by the Centre for Civil Society, Ncw Delhi, which constructsa 37-pointindex based on Section4 of the RTI, for the EducadonDepartments. 76 Himachal Pradesh:AccehatrngDevebpment and Sustaining Success in a Hi1State under the RTI, HP is ranked below national averages Vigilance mechanisms in the state-which are in this regard, and is far behind other hill states like showing some signs of weakening-have to be Uttaranchal. This suggests that there is considerable strengthened.The Vz@hnceDepamenthas ahighrate of room to improve compliance. pendency-approximately 491 complaints are pending, preliminary inquiry and 33 regular inquiry, while Low usage may reflect HP's tradition of openness some 115 cases remain in Court without a resolution. in government, resulting in more information being The state could consider processes to strengthen the available in the public domain in the first place, as well Department by streamlining departmental inquiries as the lack of strong NGOs capable of demanding the with strict deadlines for investigating a case and laying release of sensitive information from the government. down penalties within a finite period of time, say six There are severalways to expand access to information months. More troubling is the fact that the overall in the state. First, GoHP should sha'ctb iqiement the conviction rate for all crimes (including, but not limited suo-motu provisions of the RTI Act releasing pro- to, corruption cases) under the Indian Penal Code active information relating to development works, to (IPC) and Special Local Laws (SLL) has fallen (Figure facilitate social audits by local institutions, for example. 5.4). The trend towards lower conviction rates over Second, departments should be required topost suo-motu time reflects political interference in investigations, information on their websites, departments that still lack vacancies in key positions in the police force, loss of websites should be encouraged to create them as fast organizational morale, and weaknesses in capacity to as possible. Thud, GoHP could consider funding the investigate and prosecute crime--and does not bode fraining of officials and citizens in the use of the Act. well for the security of HP residents over the longer Fourth, the Act itself needs to be pubhked across the term or the state's capacityto combat crime effectively. state to encourage citizens' to use its provisions to Measures to reverse the weakening of police capacity bolster accountability. to provide effective law and order services, reflected in the declining overall conviction rate, could include: (i) Accountability institutions could be made more implementing the recent Supreme Court directive to effective. HP does have an independent Ombuhman createa StateSecurityCommissionto insulate the force (Lok Ayukta) in place, with the power to investigate from political pressures; and (ii)enforcing a minimum allegations of corruption relating to public servants tenure of three years for the Director General of Police (includingpoliticians and ministers)-although there are (DGP) and senior officers. avenuesto strengthen thisinstitution through increasing capacityandpowers."The statecouldconsideramending E-governance is a powerful tool for improving the the Lok Ayukta Act to allow him srlo-motu powers efficiency and transparency of public service delivery.It allowing him to take action in cases without a formal has enormous potential in HP as a tool for simplifying complaint,by providingqualified legaland other staff to transactions and making it easier for citizens to access assisthim, and by widening the definitionof corruption government services. There are several examples of to include grievances arising out of maladministration, successful initiatives in this area which HP could draw as in the case of the KarnatakaLok Ayukta upon (Box 5.2). Promoting the Institutional Environment for Inclusive Growth 77 35% - 25% - 15% - -- -------- DecliningTrend inOverallConviction Rates under Indian Penal Code and *a Speaal Local Lawsin HP. 1 5% 1 8.5 9.5 10.5 11.5 0 r ~ m d a m CA LO^ Per Capita NSDP - - - h @ 5 ~ 8 8 8 8 $ $ 3 1 Notes: Lcftpanely-a& shows corruptionscomJivm tbe TransparencyInternational In& CorruptionStub (2005))jorselected Indian states, with a lower nsmberindicating b e r corqbtion. HPlr comrptionscoreis lower tbanpredicted&incomein tbe Indian context. RiRighaneIshowstrendr in convicton mte~zn HP, asper&a obtainedfrom GoHP, wi?h a hear timetnndjitted. Box 5.2: E-Governance Initiatives in Other States E-Governance, combinedwith business process re-engineering, has played a vital role in improvingthe quality of service / delivery across agencies and reducing opportunities for corruption. The introduction of computerized land records in I Karnataka, for example, has cut the weghted average of bribes paid from Rs.152per person under the manual system to a neghgible Rs. 3 under the new one, according to a survey by the Public Affairs Center, Bangalore. The application of e-governance,alongwith major business process changes, such as banningthe use of stamp paper, placingguideline values on the internet, creating model deeds for public use, and setting up a central valuation committee has vastly improved ~ the functioningof the Registration Department in Maharashua, while curbing corruption, according to a recent study commissioned by the World Bank.One-stop service centers, such as E-Sewa in AP, have helped reduce the difficulties associated with bill payments and opportunities for rent-seeking by allowing the p u b l i c t c r e f f e ~ p l ie n m a c h -- u n d e r a ~ l ~ l ~ t o o ~ o ~ o ~ l e d b ~ ~ ~ r visiting~departmentaloffices.dThefcreation of a centralized i v a o ~ a ~ r ~ s ~ ~ ' complaintsdatabaseaccessed througha complaintcelllocatedin Headquarters,aswell as by emailand telephone, has armed seniorofficers of the HyderabadWater and SewerageBoardwith the necessaryinformationto hold junior officersand front- line staff more accountable to the public. Computerized file monitoringin the Kamataka Secretariathas cut file pendency, made it easier to locate a tile on its journey upwards and downwards, and reduced opportunities for rent-seeking. I Experience from other states shows that e-governance solutions work best when a mix of factors prevail, particularly 1 tenurial stability for adminisators supervising the project, line department ownership, and hlgh-level political support. A 1 public-privatepartnership model usually works better than an in-house efforts by bridging gaps in technical capacityand fun- aswell as injectingnew management skills that rmght not be readily available in government. User fees retained by providers are normally necessary to ensure the long-run sustainabilityof such initiatives. Bridging departmental silos is a key element in agency reforms. E-Sewa, for example, brought together several departments on common platform. In the 1 urban sector, umbrella groups like the BangaloreAgenda Task Force made it easier for stakeholdersand agency reformers 1 to coordinatereform processes in the city with the fullsupport of the Chief Minister 1 78 Himachal Pradesh:Accelerating Deuekpmenfand Sustaining Success in a Hill State HP has made significant progress in this area, though projects, and can only monitor them and offer some challenges remain which GoHP could address. technical solutions as necessary,Projects need to be drivenbyseniorofficialswith the support from First, the IT Department lacks technical the Secretary, and adequate political backing. capacity to drive the vast gamut of projects currentlyunderway. It is short of technical staff, a Fourth, e-governance cannot succeed without and could benefit from the authority to contract process re-engineering where necessary. from the private sector at competitiverates. The Computerizing existing processes without Department has witnessed considerabletenurial simplifymg or restructuring them yields few instability at the Director level, resulting in a benefits for either the government or citizens.73 weakening of capacity. The capacity of the IT The focus should be on process re-engineering, Department needs strengthening, and GoHP rather than just information technology. should ensure that it has the last word on issues Fifth, Public Private Partnerships (PPPs) are relating to the definition of inter-operability lackingin this area,largelybecauseprivate players standards, the use of particular software are reluctant to invest as they see low volumes packages across government, and the right to in IT initiatives given the state's low population monitor the quality and progress of initiatives density, although this logic clearly does not undertaken by departments. hold true for the state's major urban centers at Second, priorities could be clarified further present. Wherever possible, PPPs should be the for the IT Department. There are currently preferred mode of implementing projects, as it 40-odd e-governance projects underway in the is a useful way of mobilizingaddtional financial state, and these could be sequenced based on resources for a project, as well as new technical departmental capacity and need. Projects that and managerial skills. Private parties can also be could constitute the backbone of a powerful held to account more easily than public sector e-governance push for the state could include actors through Service-levelAgreements (SLAs). the development of a state wide area network, the development of Integrated Citizen Services Kiosks, the computerization of land records C. Promoting Decentralization together with property registration, and the to Improve Local Provisionof application of information technology to local government functions and augment its capacity Services to implement projects. a Third, there is a need to build departmental ' GoHP is committed to the process of decentralization. ownership, as the IT Department is not in a The latest Budget speech stresses the importance of position to drive from the outside e-governance projects that belong in particular departments. strengthening local-level accountability mechanisms Whde departmental capacity for IT has been by enhancing PRI control over staff, such as teachers augmented by the appointment of nodal officers and para-medics, as well as strengthening PRI capacity. under the Project E-Mission Team (PEW It is likely that decentralization will help improve the initiative, these officers are too junior to drive quality of service provision in HP, through better " Computerizing land records without vcnfylng their accuracy, suppressing the use of manual records, or effecting Links to property registration is not likely to yield major benefits in the long-run;nor will the computerizationof the Registration Department in the absenceof additional steps, such as the abolitionof the use of stamp paper, the creation of a central valuation committeeto hold disaict valuation committeesaccountablefor their decisions, and possiblylower registrationrates. Promoting the Institutional Environment for Inclusive Growth 79 - Box 5.3: Community Participation in HospitalManagement 7 -=-=- MYSbgi Myan Saniti (RIG)represents a creativeadaptationto the problem of excessive spendingon s s RKS, district hospitals are turned over to the independent societies, which not only manage hospitals,but have the power to levy user fees, solicit private donations, use vacant hospital land to generate more revenue, and outsource cleaning and other functions. RKS societies consist of importantplayers locally including the collector, MLAs, and NGOs. User fees collected by RKS societies are directed towards fundmg maintenance and the cost of purchasing new equipment for the state's often dilapidated hospitals The &st RKS society was introduced in Indore by the collector in 1995 to sustain improvements after the massive clean-up of the city's Maharaj Yeshwant Rao Hospital launched in the wake of the outbreak of plague in nearby Surat in 1994.MP's Chief Minister was so impressed with the results that he decided to roll-out RKS to all health facilitiesin the state ranging from districthospitals to community health centers to primary health centers at one stroke. The RKS model is popular with doctors and staff because it makes available the equipment that might not otherwise be affordablegiven the hlghproportion of the budget spenton salaries. By earmarkmguser fees for maintenance and equipment, RKS societies helped improve the productivity of salary expendituresby topping them off with necessary non-salary spendmg.The poor are exempted from paying user fees on the basis of self-identification, rather than any formal criteria.The centralgovernment's National Health Mission has recently identified the RKS model for replication across the country. RKSswere introducedin HP inJune 2001. Prior to the constitution of RKSs,user chargeswere depositedin the treasury. But with the constitution of RKSs, not only were the RKSs free to set their own charges but the amount so collected was put at their disposal. RKSs had a representation from both government and the civilsociety. However, in 2003, the RKS was reconstitutedas the Aspatal Kalyan Committee,which had only officialsasits members. Followingrecent ruling by the Hgh Court, it is expected that the RKS will be revived. In order to develop successful RKSs, the key ingredients would be: (i) civil society representation in the Sanities; (ii) reasonable user charges if decided by the state government, or by the Samities as per the guidelines of the state government; (iii) autonomy to Samities with respect to use of the amount collected by way of these charges;and (iv)exemption of the poor from these charges, with this power be vested with the RKS. community participation, as it has in other states and PHCs in remote areas. StrengtheningPRIs can also (Box 5.3).Despite the government's stated commitment help improve the capacity to monitor the execution of to decentralization, however, progress in this area has programmes and schemes at the local-level. These are been relatively slow issues-along with improving revenue mobilization at the local level-that deserve serious policy attention as Activating localgovernment control overlocal providers HP seeks to move towards second-generation reforms is likely to result in improved performance and spark that focus less on access to public services and much more pressure on government to fillvacanciesin schools more on their quality. Strengthening Human Develo and Social Protection Strategi C H A P T E R H irnachal Pradesh has made impressive strides in policy options arising from an analysis of challenges in poverty reduction and human development, and the social sectors. has achieved indicators that many other states in India aspire to. Accordingly, HP faces what may be termed "second generation" challengesinthisarea.Thestatedoes A. Education not perceive major problems in terms of basic access to services--which is a common concern in lagging states HP has been strongly committed to education, and of India. The issues in human development are mainly has made impressive progress in the sector. According around qualityimprovements, and buildingpartnershlps to the 2001 Census, the literacy rate in HP was 76.5 with private parties and communities to enhance percent, which was nearly 12 points higher than the efficiencyand ease the fiscalburden. In the area of social national average of 64.8 percent. There is universal protection, the state faces a dual set of challenges as it access to primary schooling in the state. Enrollments seeks to improve the system: (i) continuing to improve are high even in post-primary levels of schooling, administration of existing safety net programmes; and with near gender parity. The state does better than (ii)exploringand experimentingwith new areas of social national averagesat alllevels of enrollment (Figure 6.1). protection which will be increasingly demanded by a Although there are gender differentials, these are lower wealthier population facing the challenges of economic than national gender gaps, and show up more at higher and socialliberalization. levels (Figure 6.1). Public expenditure on education in HP is relatively high, with one of the hlghest per pupil The human developmentsectorsassumedirectrelevance expenditures on education among the major states in view of the stated goal of inclusive development- of Inda. However, HP spends more of its education particularly for remote areas and disadvantaged budget on primary and secondary education than the segments of the population. This chapter looks at average Indian state (Figure 6.1). Himachal Pradesh:Accebrating Developmnt and Sustaining Success in a Hill State I Figure 6.1: EducationalOutcomes and Spending in HP Compared to National Averages Irnh kmBardlmcl RprC E d d o n Lewd, 2Wt-05 - 2ER 200344 Boys W/o GER 2 0 0 3 4 Guls India 400h Pdmary Secondary Higher Tedmical 0% Wp I I OOh 50% 1Wh Notes: Grw Emvthmt Rakfbs2(XI;U)4fram GoZ. Rightp a d sbows Plon a d Non-Ph E+ndih,n on EducuCn ar Sbme of TOMBadgcted Expedtnn (RewneACCOY~~ 2004-05. on Edtrcation, Inthissector,thestatefaceschallengesaroundimproving Grade 1 difficulty, and 36.6 percent of the same age- the quality of education, rather than access. There group cannot read a storytext with somelongsentences are issues around provider absenteeism and training, of Grade 2 diffic~lty.7~In mathematics, 22 percent of and some aspects of school infrastructure could be the age-group cannot solve written numerical sums that improved. In view of the skius mismatch in the state require two digit subtractions with borrowing, and 44.9 describedearlier,itisalsoimportant toreorientthe sector percent cannot divide three digits by one digit. Quality to provide education that can enhance employability. of secondary education in the state is also a cause for Finally, as in other walks of life in HP, innovativePPPs concern. Evidence of this comes from the pass rates of can promote efficiency of education services, and studentssittingfor secondaryand higher secondary final release state resources for other investments. examinations. In 2002, pass rates were only 46 percent and 40 percent among studentswho took the secondary and higher secondaryexaminationsrespectively.Student Quality of Education preparednessinlowergradesisparticularlypoor,and this, in all likelihood, affectsoveralllearning achievements. While learningoutcomesin the stateis much better than the average Indian state, the state s d has some way The quahty of education in basic schoohg needs to to go to achieve good quality education. In the lower be improved. Ths requires paying more attention to age-groups, for example, a 2005-06 survey finds that student learning in the lower grades, in particular. In 19.5 percent of students in the age-group 6-14 years order to improve quality of education, GoHP could cannot read a small paragraph of short sentences of look at two dimensions. " Annual Statusof EducationReport,2006,PRATHAM. StrengtheningHuman Development and SocialProtection Strategies 85 1 Figure 6.2: Teacher Absenteeism in HP and Other States I Iw / o TeacherPresent TeacherPresent & Teaching 80% 60% 40% 20% 0% Noh: Kremer et a&.2005, b a d on schohsuwtyedon a wontiig&dmng wwYng &om. Improving TeacherTraining national averages, and only about half the teachers present were actually found to be involvedin teaching- An aspect that plausibly contributes to low learning which is a disturbing finding (Figure 6.2). levels in lower grades is the quantity and quality of teachertraining. Education experts make the dstinction The state needs to consider measures to curb between pre-serviceand in-servicetraining, considering teacher absenteeism through a mixture of monitoring the latter to be more effective in having an impact on and incentive mechanisms (Box 6.1). Enhancing learningoutcomes. In HP, about98percent of allregular decentralization could be particularly valuable in this government school teachers and 81.1 percent of para- context. GoHP should consider vesting PRIs with the teachers had basic qualificationsin 2005. However, 71.7 power to hire and remove all new teachers, as well as percent teachers in primary schools and 56.9 percent halt salarydisbursements for teachers who fail to teach, of teachers in upper primary schools received any in- as a firststep towards strengthening the qualityof public service training in the previous year." Accordingly, it is services at the local level. important for the state to complete relevant in-service training, especially of teachers in primary grades. Partnershipwith the Private Sector Curbing TeacherAbsenteeism Partnership with the private sector can improve quality Teacher absence is relatively high in the state. A recent as well as free up fiscal resources. The government survey,in fact, finds it to be only marginally lower than is the key provider of education, especially at lower ' 5 ElementaryEducation State Report Cards,2005,NIEPA. 86 Himachal Pradesh: Accehating Development and Su~tainingSuccess in a Hi//State Various interventions,especially experimental, have been put into place to improve attendance of teachers in schools. GoHP couldpilot similarmeasures to improveteacher attendance. - . In some schools in Rajasthan, teacherswere &en a date and time tamper proof camera and modest monetary incentives to provide pictures of themselves and children at opening and closing times of each school day This experiment in impersonalmonitoringreduced absence rates by half and increased the number of teacherswith high attendance records in treatment schoolsvis-i-vis comparison schools (Duflo and Hanaa, 2005). Experimental evaluationsare underwayin a few statesin Indiawhereby teacher attendanceis expected to improve through greater beneficiary control over serviceproviders via an educationinformation campaignin treatmentvillages vis-i-visno campaign in control villages (Pandey, forthcormng).Even though local communities and parents through the PRIs and otherlocal bodies such as V i e EducationCommittees (VEC)and ParentTeacher Associations(PTA) have controlover school functioningin principle, in practice such controlis eitherweak and ineffectual or non-existentdue also to lack of any informationreg* entitlements and controls. Non-experimental initiativesare also being implemented in some Indian states. For example,Orissa is considering a career path forconttactteacherssimilar to the tenure tracksystemin US universities. Thebasis for teachers' promotion willbe their performance evaluationalong a number of dimensions,includmgattendanceand students' learning achievement The state has also authorizedthe VECs to certify teachers' attendancefortheir salaryrelease. I 1 L levels. In 2005, 91.1 percent (compared to the all-India Basic Infrastructure average of 75.1 percent) of children in the age-group 6-14 years in the rural areas of HP went to government The statehas donewellin developingsomedimensions schools,and only 7.1 percent (compared to the all-India of school infrastructure, but lags along other average of 16.4 percent) went to private schools. The dimensions. Except for the thinly populated districts state realizes the importance of the private sector in of Kinnaur, Lahaul & Spiti, all other districts in HP providing higher and technical education in particular, have attained the norm of a primary school located and is taking steps to partner with private parties. For within a kilometer of a habitation. About 86.4 percent example, the Private Universities Act was passed in of all schools have a drinking water facility, and 5.2 2006 to allow establishment and regulation of higher percent of primary schools and 11.7 percent of upper education institutions in the private sector. GoHP is primary schools are single classroom schools. At looking for private sector partners who can use the the same time, in a recent survey, only 3 percent of state's existingeducational facilitiesto conduct technical people surveyed in the state expressed satisfaction and vocational courses that can improve employabihty with the quality of toilets in government primary of the youth-with the private party to guarantee some schools.'~nthe same survey, only 4 percent of the minimum percentage of placements for students who respondents expressed satisfaction with the quality take the offered courses. Such innovative measures can of school buildings. About 35 percent schools in the reduce the burden on the government, and helpimprove state have a common toilet and only 23 percent have marketability and employability of educated youth. a girls' toilet." Only 55 percent of primary school StrengtheningHuman Development and SocialProtection Strategies 87 and 50 percent of upper primary school classrooms Human Resource Planning are in good condition. Accordingly, it is important to upgrade infrastructure quality in schools, and this A key issue for the Health Department is human requires fiscal resources. resource planning. While there are no major issues at the lower skill end of personnel, there is a shortage of specialists and qualified workers. In September 2006, B. Health for example, over 10 percent of doctor's positions were lyingvacant. Retainingand posting qualifiedstaff HP has better health indicators than many other states in rural remote areas is also a challenge confronting of India, as discussed above.'"n HN/AIDS, which is the state. one of the MDGs, the state falls in the low prevalence category, since HIV prevalence rate is less than five There is a need to ensure that adequate number percent in high risk groups and less than one percent of sufficiently motivated and well-trained staff among antenatal women. The life expectancy of 65.9 exists at the facility level. There may actually be a years in HP is higher than the national average of 62.5 case for filling sanctioned specialist posts that are years."l Public health spending in the state is higher than currently vacant in rural and remote areas, based in most other states of India. on analysis of needs and availability. It is also important to provide good training to the existing However,there are some areas where the state needs to staff. While it may be difficult to post specialists at improve performance. Indicators such as IMR-which lower health facilities, general duty doctors can be has actually risen slightly as per the latest National imparted training in special skills. For example, Go1 Family Health Survey figures-and MMR continue to has short training modules for doctors in areas such be matters of concern."' Furthermore, in the border as anesthesia. belts adjoining Punjab and Haryana, the state has experienced adverse sex ratios. The hilly terrain of HP poses special challenges. Diseases specific to the Health 1nft'a~tr~~tllre hilly region-such as Chronic Obstructive Pulmonary Disease (COPD), and other unintentional injuries/ The Health Department perceives infrastructure accidents account for a relatively high share of the shortagesin the state.PHCs are currently not equipped burden of disease. to handle complicated delivery cases, and the state sees an unmet need for labor rooms at PHCs, along There are policy issues in this sector around the with residential accommodation for trained personnel. composition of manpower, infrastructure, and access There are some 800 PHC and sub-center facilities still to services for remote districts. Private participation in to be constructed, currently functioning on rented this sector is low, as in other aspects of service delivery. premises or on space provided by Panchayats/Trusts, Accordingly, GoHP could look at the followingareas in making renovations difficult and impacting the quality the health sector. of care. '"ee Chapter I. '9 '"Life expectancyfigurespe- to thepedod 1998-2002. Although IMR in HP is lower than thenational average,peri-natal mortality, early neo-natalmortalityand still birth rates in HP are almostas lugh as the national average. 88 Himachal Pradesh:Accelerating Development and Susfaing Success in a HillState 1 CasesTreatedin Public Hos~itals m A1 Women availing Public Facilities Post Natal Care Ante Natal Care , Notes: Bared on Nationa/SampleSurvy Organi~utionMorbidig Q Health Care Survq, 60th Round I -- -- -.---- -- . -- HP is one of the focus states under the National Rural centers. Currently, HP does not have any, though Health Mission 0, among other thmgs, which, casualty servicesexist in all zonal and dismct hospitals. provides for upgradation and renovation of public HP plans to set up six dedicated trauma centers along health infrastructure up to Community Health Center the national bhway, and Go1 has already provided (CHC)/First Referral Unit level. Although fundsfor one centreinKullu. Fundingforother centers NRHM is evolving, the Health Department perceives stillneeds to be raised. some gaps which cannot be funded even under NRHM-like residential accommodations for medical officers and paramedical staff, and medical equipment Partnershipwith the PrivateSector at PHCs. For construction of the 800 new buildqs (for facilities that currently exist on rented/donated Health services are stilllargely in the public domain, premises) that have been identified, the Depament and the government is the key provider of health is supposed to tap funds from the Rural Development services-more so than neighboring and similar Phs. However,under this,the supportforconstruction states (Figure 6.3). Since the last year, the Health of new buildmgs is available in a phased mannet and Department has been considering PPPs mainly in therefore the civil works cannot be undertaken quickly, three areas: (i) contracting out about a dozen sub- and funds available are inadequate as Go1 construction centres and half-a-dozen PHCs to private agencies norms for the hill regions are no different from that for for service delivery; (ii) diagnostic services; and the plains. Accordingly, the Health Department needs (iii) ambulance services. The regions in which these toidentifyfundinggaps in the constructionof buildtngs are to be tried have not been finalized yet. The and purchase/maintenance of equipment at primary government is in the process of advertising this level, and develop an action plan to fill them. fairly quickly, and then seeingthis up and running by early next year. Depending on the success of these Moreover, given thehighincidenceof road accidentsin pilot initiatives, these measures could be scaled up a hilly region, it is important to have dedicated trauma and replicated. StrengtheningHuman Developmentand SocialProtection Strategies 89 Special Initiativesto ImproveAccess in for the state in view of its stated goal of promoting RemoteAreas inclusive development. The sector faces common challenges in improving the basic administration of In a hilly region, accessibility is an important issue. several programmes under the current set-up. The First, the potential for tele-medicine seems strong. key medium term strategic issues in social protection At present, two tele-medicine centres in the state are relate to second generation needs of the population functional in Shimla. The Department of IT has in the face of expansion into higher value (but higher promised to support 20 telemedicine centers entailing risk) production, demographic transition, and social a cost of Rs. 45.1 million. This project, which is already problems related to vulnerability and exclusion. underway, was to finish by March 2007, but got delayed due to connectivity problems and is now expected to The spending on anti-poverty programmes from the finish by September 2007. This could be a promising state's own resources has been fairly stableat low levels measure that GoHP could explore further. Second, the in recent years, at just over 0.5 percent of GSDP. The state could experiment with mobile clinics. HP is yet most distinctive feature of social protection spending to seriously explore their viability in delivering primary in the state is the high share of expenditure on social healthcare services in place of static healthcare clinics pensions-for destitute elderly,widows, and disabled- in remote rural areas. These may turn out to be a better that accounts for almost half of total state spendingin option in the interiorswhere, even if it visits a village 2 recent years, with spendingon public works accounting to 3 times a week on pre-determined days, it may prove for another 30 percent. effective. At present only two mobile medical units are functioning in Kinnaur. The feasibility depends on a Programme coverage in HP is generally good, with number of factors such as terrain, road connectivity, a few exceptions. Based on new survey data covering case load, and distance to the nearest health facility. a representative section of households, 92 percent of Senior officials in GoHP feel that mobile units cannot householdsare receivingsomebenefit under atleastone replaceastaticfacility;theycan onlysupplementservices of the main government socialprotection programmes, of static units by organizing disease-specific services compared to the all-India average of about three- during health camps, providing diagnostic services, quarters." The coverage of individual anti-poverty and delivery medicines, etc. GoHP could examine the programmes appears to be close to the national average feasibility and cost-effectiveness of mobile units, in for most programmes, with the notable exception of comparison to static units, and consider pilot initiatives social pensions where coverage is significantly higher that can be studied intensively, and scaled up. (Table 6.1). The coverage of life insurance and the Kissan card in HP is higher than in the rest of India, but health insurance coverage is very low (Figure 6.4). C. Social Protection Targeting of programmes is an area where Giventhelow povertyratein HP,the relativeimportance relatively little is known for the major anti-poverty of traditional social protection programmes is lower schemes. Looking at geographic targeting, the district- than many states.However,they assumedirect relevance level targeting for the public works and rural credit These resultsare fromAjwad (2006)based on the National HumanDevelopmentProfileof India, 2004-05, ahousehold surveyconducted by NCAER in 2004-05 withWorld Bank support.The sample size for HP was 1,373 households (representativeat the stateand rural-urbanlevel), allowingdescriptive analysisof most maioc social protectionprogrammes,with the exceptionof SGRY. 90 Himachal Pradesh:Accehrating Developmntand Sustaining Successina HiLLState Scholarship 5.2 6.3 16.6 1.4 858 1,360 N m 44 3,l 1,7 6.2' a623 Widow Pension 1 6.9 1 1.8 1 1.7 1.3 1 2,269 1 1,976 Notes: Bank staf cah&ns bared on N C A E R snri~ey,20o.COi. R.igbtpanelsbows~~+~entagebousehoklrmlh bji und kaith insumne mid f i s m of cud, inHP compuredhtbAUIndia (Al)and Utfaranchd(UT),which tianotherbillsf& programmes appears to be progressive, and districts the state-level Rajiv Gandhi Awaas Yojna (RGAY) with a higher share of Below Poverty Line (BPL) schemein 2005-06. HousehoU-Leveltargeting analysis for population get a higher share of expenditure under the Public Distribution System (PDS) cards suggest the programmes (Figure 6.5). However, the rural that possession of BPL and Antyodaya Anna Yojana housing programmes under Indira Awas Yojana (AAY) cards are progressive, but there are significant (IAY) are far less well-targeted to districts with larger inclusion errors, with households in the upper asset shares of BPL households, although there has been quintiles also possessing cards meant for poorer a substantial improvement with the introduction of households (Figure 6.5). -- Figure 6.5:Geographic and Household Level Targeting of Programmes ProgressweUlsttibuaonof Cnrds by Asset -tile, but SignificnntInclusionErron . BPL AAY Noks: l@pane/yruai shows comhtion behveen share of BPLpopufion and s h m of programmefnnds, om time. LAWW mrrehtionindicdesweaker geogrqhic meting. R~ghpanel shows cardpossession among houseboh in mous arsetsquintih, h o k d by Q1 being the lowest throughQ5 being f tbe hjyiest. h u h are based on N C A E R suryey, 2004-05, Strengthening Human Developmentand SocialProtection Strategies 91 Overall, HP can be considered one of the better a high level of community participation in performing states in terms of implementation of identi+g beneficiaries both for PDS and social social protection programmes, particularly with respect pensions-the two largest interventions for the poor. However, there is little community to introducing state-specific programmes to bridge involvement in the monitoring of PDS or in perceivedgapsand innovationswithin the limited scope the selection of the beneficiaries under SGSY of such centrally sponsored schemes. However, there The role of PRIs in several CSS anti-poverty remain severalcurrentissuesrelatingtoperformance programmes will become much more important that are programme-specific and cross-cutting, and in the future, especially with the expansion of require attention. National RuralEmploymentGuarantee(NREG), which currently operates only in Chamba and There is evidence of adminish-ativeleakagein some Sirmaur. As a result, attention will need to be schemes. For the PDS, performance is positive paid to the implementationcapacityof PRIs,and in general, with higher ration card coverage and the appropriate level of the PRI system where usage compared to national trends. However, functions wdl lie.x'As the trend in programmes the Planning Commission found that HP had is towards greater roles for PRIs, HP, like other a relatively high level of BPL cards which were states, will need to develop its implementation not with their owners (described as "ghost BPL cards'?, implying administrative leakage^.^' strategywith this in mind. While the sample size of the study was small, There are concerns about the targeting of anti- this is an important criticism which warrants poverty program, especially with respect to the closer evaluation by the HP authorities. In large disparities between the distribution of addition, there is some evidence of irregular BPL households across the state between the supply of food grains through the PDS, and of 1997 and 2002 BPL lists-the latter as yet to be underweighted supply and dissatisfaction with officially approved. Reconciling these estimates the sy~tem.~'TheCAG report on SGSYsuggests in away that is consistentwith both localpolitical poor implementation performance in the state, economy demands and the need to keep the including focus on individual Swarozgaris aggregate number of BPL households roughly rather than Self Help Groups (SHGs), lack of constant (for the purposes of fiscal allocations provision of trainingand facilitationof bank and from the centre) will be challenging. market linkages, poor targeting to SC/ST and Poor record-keeping and the lack of effective BPL households, non-transparent beneficiary monitoring and evaluation make it difficult to assess selection, and non-release of assi~tance.~Vor the overall working and impact of the various most other programmes for which assessments programmes. Despite apparently reasonable are available, notably for social pensions--the outcomes, basic record-keeping remains well single largest intervention-leakage appears to below the level one would expect in a state be low, in contrast to a number of other states. of HP's income level and low beneficiary The picture on comm~nigpartiir$&on is mixed. numbers."In addition, and in common with On the positive side, Go1 assessments indicate many states of India, there is no robust impact ''''PlanningCommission (2005). Paul et a1 (2004). ~, 85 In its early years,only 13percentof central and state fundsreleasedunderthis programme were udlued. 35 The latter concernarisesdue to the small averageGP size, with only about 1700 to 3000 populationand inherentlylow capacity. This is an important weakness hghhghted in both the CAG and PEO reports on SGSY,IAY and PDS, which note the lack of records of houses wnsuucted or repaired under IAYas well as the projects underSGSY 92 Himachal Pradesh: Accehating Devehpment and S~sfainingSuccess in a Hill State Box 6.2: Findings from an Evaluation of Social Pension Schemes in Karnataka I The Governmentof Karnataka (GoK)provides monthly financialassistanceto the destitutethroughthe Old Age Pension (OAP) and Destitute Widow Pension (DWP) schemes. In 200203, GoK paid out over Rs. 1 billion to about a million beneficiaries, each entitled to receive astipendof Rs.100per month. At GoK's request, the Bankconducted an waluation of the scheme in order to: (i) quantify the extent of leakages in public funds, in aggregate, and at various stages of implemenmtion; (ii) examine the extent of over- and under-coverage, and effectiveness of targeting, and (iii) identdy distortions that impede the servicedeliveryprocess. The assessmentfinds that socialpension schemes in Karnatakahave both strengthsand weaknesses. On leakges of publirfirndr, the study finds that state-wide leakage is low. Of every Rs. 100 that is spent on beneficiary payments (notincludingthe costs of administeringthe programme),Rs 13does not reach the beneficiary. However, there arewidevariationsacrosstaluks,with about20percent of public resourcesnot reachmgbeneficiaries in the problem taluks. To reduceleakage,aone time effortto deletefictitiouspensionersisneeded,backed by a fewimprovementsin theTreasury Department's database management system and monitoring systems to ensure that leakages do not creep back into the systemat a laterdate. On targefing,the study shows evidenceof "pro-poop targeting,with coveragerates under social pensions falling sharplyas wealth and assetsincrease. However,the lackof perfect targetingmeans thatcoverageamongthe poorestis much less than possible. To improve targeting,eligibility criteria should be revised and enforced. On the a'eliveryprocess,the study finds that although awarenessof the programs is high,transaction costs of applying for a pension are a deterrentto potential beneficiaries. In contrast,oncepensions have been sanctioned, the deliveryof benefits works smoothlywith minimal costs imposed on the beneficiaries. evaluation of programmes which proceeds make this difficult at times, but leveraging the from a reliable pre-programme baseline or resources of the social protection interventions use of basic control/treaanent approaches to enhance the impact of other livelihoods to evaluation. HP can strengthen record- interventions could have significant dividends. keeping and basic administration of major Facilitating market Idages is particularly social protection programmes, identifying important in HP due to its mountainous terrain. and introducing lessons from other states on simple administrative improvements (Box 6.2). In addition, HP's income and development levels For all major programmes, HP could initiate also suggest that it will increasingly face some new periodic impact evaluations which go beyond the concurrent ex-post evaluations presently and important second generation issues in social undertaken. A first stepin this would be ensuring protection in the coming years. reliable pre-programme baselines whenever new First, coverage of social insurance remains very interventions are launched. limited to date, with the notable exception of a There is a hck of linkqges between specific life insurance?- The most pressing social needs programmes and the broader rural livelihoods appear to be for some form of health/disability agenda of the government. Challenges of inter- insurance, and old age security. In addition, departmental and public/private coordination improved crop and/or weather-based insurance Analysis fromvariouspartsof India-includingdwhich arc much poorer than HP-s-suggcsa that demand for diffuent forms of socialinsurance is sigruficantamongthosein the unorganizedsectorwho presentlyhave no coverage. Strengthening Human Development and SocialProtection Strategies 93 maybeincreasinglyimportantasHP expandsinto Initiatives which are already underway include higher value but higher risk production. In both old-age homes, houses for victims of domestic the government and non-governmental sectors, abuse, and orphans. These are areas where one HP, to date, lags other states in the level of would expect expansion in service provision as support and experimentationin efforts to expand the population grows richer, demographic and social insurance coverage to the unorganized lifestyle patterns change, and expectations from sector. While HP's fiscal situation suggests the population evolve. To date, coverage is small considerable caution on new commitments to scale, but one concern is that responsibilitiesare insurance subsidization,the experiencesof other being added in a somewhat piecemeal manner states with different forms of non-subsidized or without a clear vision of the state's expected low subsidy social insurance products (e.g. Unit future role-in particular the optimal model Trust of India's old age pension plan, which of public/private mix in financing and service operates without subsidy in settings as poor as provision-nor with a more immediate eye Bihar; Maharashtra's Mathadi Worker's Fund on the staffing and resource demands implied. which is contribution-driven; West Bengal's This can continue in the short run, but, in the Provident Fund for Unorganized Workers, medium term, would benefit from a policy-driven which has achieved significant coverage with a approach to expansion of services which draws modest contribution subsidy), and of the non- on the experiences of the non-governmental government sector offer useful models which and private sectors. Accordmgly, GoHP could may be worth piloting in HE" HP can initiate consider development of a social care service pilots on a scale and with models that control strategyforthe state.Strategydevelopmentwould fiscal exposure on subsidies,while exploitingthe be a useful process to develop consensus on the convening power of the government to bring priority servicesfor HP in the medium term, and public and private partners together. a sustainable financing and delivery strategy. A criticalelement on the delivery sidewill continue A second area where HP is already expanding to be played by the private and NGO sectors, services but where a strategic vision is to date and they should be close partners in developing lackmgis socialcaresm'cessfor@n$ic wherabhgro*~. such a strategy. ''Otherstateshave takenp u p insurance policieswith commercialinsurersforspecificgroupsfox specified risks (e.g. Rajasthanwith agrouplifeinsurance policy for d BPL; Assamwith agrouphealthand accidentpolicy for all BPL). , & < Promoting Environmental.; Susta't:ab!e 4 ~evelophent; 1- % ilk-SPr~lrn~gng *--- Environme - i'P% L f e hi-a p0 / . yaeveloprpnnit 6- a 'r(P -1 S ustainability of economic growth in HP is densityof thecoverhasdiminished--as hastheeconomic contingent upon sustainabiity of its environmental productivity, water holding capacity, and the ability to heritage. HP's key growth and revenue drivers in the sustain species richness (Figure 7.1). Recent years have medium term are critically dependent on the state's also witnessed rising pollution levels (Figure 7.1), with natural resource base. While some environmental increase in human and livestock population, pressures degradation inevitably accompanies growth, inaction of urbanization and industrialization, and increased or failure to balance the environmental costs of health hazards. These disturbing trends need to be development with the benefits will have particularly addressed by GoHP. serious consequences for the state-whose opportunities lie in sectors like horticulture, tourism, HP has introduced a number of commendable and hydropower which depend on the environment. new initiatives to address the growing threats to its Given HP's unique geographic situation and small fragde ecology, though there remain issues around resource base, protecting rich natural resources implementation.Theseinitiativesinclude:(i) broadening assume greater importance than in other states. In the State Pollution Control Board's (SPCB) regulatory addition, increased pollution can have implications role to include environmental auditing, rnicro/macro for the entire Indo-Gangetic plains. level environmental planning by which zoning atlases have been completed for five districts, the preparation HP's recent development pattern and trend have had of &strict level industrial sitingguidelines,and industrial some worrying impacts on the environment. While estate planning st~dies;'~ (ii) establishment of a Special forestcoverhas increasedin recentyears, the quahty and AreaDevelopmentAuthoritytoimplementtheapproved " The five disuicnare Shimla,Kdu, Kangra, Kinnaur and Chamba 98 Himachal Pradesh:AccehqtingDeveIpmetttandSustainingSuccessin a HillState I- Figure 7.1: Recent EnvironmentalDegradation in HP - - --- - LU 232 - - 4.5 Y SPMlO Concentration,ug/m3 (LHS) 16 - 5 228 - --A- SO2 Concentration,ug/m3 (RHS) - 4.0 3 # 224 - - 3.5 3 iZ 2 .3 3 220 - - 3.0 4 .c 4 - -tTotalForestCovu 216 - - 2.5 $ -t-DenseForests(CrownDensity >40%) 32 IncreasingPoIluhn - 0 0 In m m a a a g ~ g ~ g g g N s g s s s - - - - . C * C - i%%w Smt h~%#f Fomts. GoHP Po&tion databm cenbafPo&n'on Departmmt coflhfBound notified development plans; (iii) implementation of area degradation,landslide hazards, aquatic life patterns a ban on polythene bags of certain dimensions with and hydrological changes, and poor muck disposal effect from June, 2004; and (iv) segregation of non- affect eco-sensitive areas with high tourist potential. biodegradable ~ a s t e .The major concern remains the ~ " In indusw, there is a neglect of environment planning, weak implementation of regulations. There is an over- such as clustering of like industries for effective reliance on command and control regulationswhich are environment management solutions for industrial cumbersome and costly to enforce. (also hazardous) waste. Further, small scale industries are primary violators as they generally do not have enough resources to invest in environment protection A. Improvingthe Institutional measures. In mining, slope degradation due to weak Approach for Environment implementation of rehabilitation plans, and pressures caused by the influx of workers affect the environment, Management with more violations from small scale mining units. Inforestty, the current ban on green felling has had an Environmental management is an interdisciplinary field adverse impact on forest quality due to constraints requiring cross-sectoral decisions and coordination on maintenance works, in addition to unsustainable for effective management, in the absence of which extraction of forest resources, excessive grazing due to most development activities can induce significant a growing livestock population, conversion of forest and irreversible changes with adverse environment lands to agricultural, and diversion of biodiversity implications. In Lydmpower, land use change, catchment rich forest lands due to hydropower and mining." Draft 'State of the Environment Report", Himachal Pradesh, Coordinated and prepared by Smte Council for Science, Technology & Environment, '' Sponsoredby the MoEF. For example,it is estimated that while 1.9 d o n cubic meten of &elwood is consumedeach year,regrowth is amere0.7 million cubic meters,implying considerable depletionof forest stocks. Promoting Environmentally SustainableDevelopment 99 In agrictllt~reand horficulture, there is danger to the Better IntersectoralCoordinationand environment from shortage of ground water sources, Mainstreaming of EnvironmentalActivities pollution from chemical pesticides, and inadvertent introduction of new weeds which may be harmful to Key Challenges human and animal health. In irrigation andpublichealth, there are environmental threats from degradation of Despite such externalities, the current institutional sub and surface water quality, source protection and approach to environment management is fragmented, contamination due to unhygienicways of handlingwater with environment considerations not consistently and poor sanitation,neglect of tradtional water sources, internalized within sectoral departments, given and conflicts between upstream and downstream water limited priority, and perceived more as a "clearance" users which are exacerbated due to weak community requirement rather than planning criteria. Moreover, the ownership of water resource management and Environment Department is at a very nascent stage of monitoring. In health, weak hospital waste management establishment,currentlyhoused as a small,one-member could lead to other health hazards. There is a trend wing within the Science and Technology Department, towards urbaniyation, with the urban population and not geared to influence development decisions growth at an annual rate of about 3 percent over the from an environmental perspective. Further, the SPCB last decade. However, much of this growth has been is a separate entity, mandated, as per the Environment without a coherent strategy, poor solid waste disposal Protection Act and Rules, to monitor environmental mechanisms, weak enforcement of zoning and building norms fortypicalindustrialactivities(includinghousingj. standards,unreliablewatersupply,and congestionwhich The Forest Department is mandated, per the Forest has contributed to ecological and cultural decay and Conservation Act, to monitor green cover. The state poor quality of life in urban centres. In the transportand relies mainly on clearances from these departments for road sector, opening access to eco-sensitive areas, poor environment preservation. construction practices and debris disposal mechanisms, land use change, slope destabilization, pressure on Weak intersectoral coordination and decision- resources caused by influx of large construction crews, m a h g between departments leads to unsustainable congestion and air pollution due to poorly managed outcomes which then adversely affect the natural and transport systems, improper fuel mix, and inefficient social environment, even though some coordination combustion of vehicles causes overall environment mechanisms are in place. There are examples of degradation.In tourism,weak planningand management, inter-departmental disagreements in HP-such as unplanned expansion, and burdening of existing tourist between the Departments of Power and PWD on areas are contributing to ecological damage and a the construction of roads (timing, alignment, and negative perception of HP as a tourist destination. debris disposal), and the Departments of Power and Forests on the definition of catchment area; and weak Given that the natural environment heritage is critical linkage between the Departments of Mining, Industry, to HP's development plans, it is important to consider Forest, and Revenue in the context of licensing and it as a key planning criterion. Institutional aspects of implementation/monitoring of quarry rehabilitation environment management typically involve interagency plans. The urban scenario also reflects disconnects coordination, and involvement of affected groups, in implementation and enforcement of urban area communitiesandNGOS."~ development plans, given the involvement of multiple 92 World Bank Technical Paper No. 139, EnvironmentAssessment Sourcebook. 100 HimachalPradesh:AcceleratingDevehpmentandS~~ski'ningS~uccessinaHillState agencies W w n and Country Planning, IPH, Art and least the key sectors which have wide ranging Heritage) with minimal participation from the people. environmental consequences, and enhancing There are frequent violations of building standards- the dissemination of this information, should with regularization every three years which encourages be a high policy priority. In this area, HP can further violations. Issues such as safe, commuter- build upon recommendations from the State friendlyroad designs,public transport, air quality due to of the Environment Report. congestion, parking places, wayside amenities, and bus The state is considering the preparation of an shelters are not effectively addressed due to Transport "Environment Plan" and an Environment Poky and PWD (for roads) being two separate Departments, which may help bring convergence of sectoral without enough coordination between the tw0.9~ targets and development goals, and provide a Although tourism is high on the state's growth agenda, holisticviewwith respecttoimplicationson natural there is no systematicmethod to addressoveralltourism resources and environment-carrying capacity. needs in spite of the interdependence of the sector on Specific coordination agencies-like the Tourism line agencies such as Forests for access to eco-sensitive Development Board that has been constituted areas with high tourism potential, PWD for roads and headed by the Chief Minister to ensure connectivity,and Power and IPH for reliable electricity convergenceand avoidintersectoralconflicts- and water supply should be established and strengthened. Strategic Options Furthermore, it is important to better mainstream environment considerations in various sectoral Accordingly, there should be better intersectoral activities, instead of regarding it as a "clearance" coordination to improve the fragmented institutional function to be obtained from various departments and approach to environment management. The state can boards.In order to strengthen this aspect,the following consider a number of mechanisms in this regard. actions could be considered in various sectors. In bdropotver, it would be useful to follow an integrated Itwould be useful to look at measures to strengthen river-basin wide approach towards preparation and theEnvironmentDepaMentanddevelopcapabilities expeditious implementation of activities such as whichwould help to systematicallyassess howthe state can maximize its natural advantage, and to project allocation, Catchment Area Treatment Plans, ensure application of environment norms across Compensatory Afforestation, Net Present Value sectors. The state can consider redeployment (NPV) money for use of forest land and biodiversity of surplus staff from other departments for offsets.94In industry, environment planning, such as administrative functions to minimize fiscal costs, clusteringof similarindustries,would easeenvironment although limited specialist staff may need to management solutions. In tourism, it is important to be hired. develop mechanisms to detect environment conflicts Informed and strategic policy mahng is not resulting from cross purpose implementation of possible without information on critical development policies and projects, through strategic issues, so improving the informahon database in at planning to demarcateareas that have tourism potential Promoting EnvironmentallySustainableDevelopment 101 vis-A-vis those for purely development needs. ImprovingEnvironmentally Responsible Promotion of eco-tourism, in particular, is closely Public Participation linked with environmental resources, and can provide important economic returns as in diverse countries Public participation in environmental decision-making like Australia, New Zealand, South Africa, Kenya, is low in HP and the state needs to improve this. The and Tanzania. Inforestfy, an independent environment recentlyconcludedIndiaCountryEnvironmentAnalysis regulator could ensure that development activities are reveals that effective enforcement requires and is carried out according to the originalMemorandum of strengthened by informed consensus on environmental Understanding (MoU) with various line agencies, and management objectives and policies, based on a good environment assessments are carried out for multi- understanding of the shared roles and responsibilities development works. of all players, includmg the regulator, the regulated community (developers and polluters), and the affected The state could also experiment with an area based community (generalpublic)?" environment management approach, which could be a potentially valuable tool for a fragde hill state. Moreover, environmental management is not only an This provides a way of clustering industrial pollution issue of fixing regulatory institutions-but intricately sources and so: (i) restricts the pollution footprint linked to the behavior and responses of the private to a predefined area and provides a cost effective sector. An incentive-based mechanism to protect the way to mitigate and restrict the damage to the area; environment can be adopted, whereby the private sector (ii) allows for a scientific assessment to prioritize is motivated to behave responsibly through a "carrot- among multiple pollution sources, a consensus-based and-stick approach". National examples also suggest stakeholder process to establish environmental and the importance of community participation, through community goals, and the integration of diverse incentives and rewards for environmentally responsible management options to address the cumulative behavior @ox 7.1). Penalizingpolluterson one hand and impact on the ecosystem. In practice, this approach rewarding those that meet international environmental has had mixed success across the world." "I is standards in their private sector operations on the important to learn from these experiences, emulate other may be necessary, as the state cannot enforce all good practices, and improve the effectiveness of environment-relatedactivities. this tool within the institutional framework for environmental management-likely by linking it with Public participation could be effectively used the decentralization process and local government by improving communication and trust among agenda, strengthening the authority of municipalities stakeholders; maximizing the effectiveness of the and regional development authorities, and enabling Right to Information Act @TI); providing credible them to facilitate integration of multiple sectoral and easily accessible information; developing public strategies and stakeholders. participation strategies in the context of a specific 'j A review of Indian experience hi&hts several lessons, including the need to: (i) a wider range of stakeholders in such involve programmes, and particularly better define the role of affected communities in the monitoring process; (ii) establish adequate performance indicators, linked to environmental quality improvements in the area, and not shply implementation of measures by individual polluters; ( i i strengthenoversight of implementation and incentives for polluters to complete the actions speedily;and (iv) better integratearea-wisesources in the programme, including both non-pointand point sources. Some of the most successful internationalexamples indude those where an appropriate coordinating"area-based"authoritywas establishedwithadequatepowers, suchas river/lake basin orcoastalzone managementagency(e.g.LagunaLake Development Authorityin Philippines),or city-level airquality councils (cg.Mexico). " w o r l d Bank 2006, India Country Environment Analysis. 102 Himachal Pradesh:AcceleratingDevelpent andSustainingSuccessin aHi4State Himachal Pradesh is known for its wealth of natural resources and rich cultural heritage. What this popular perception overlooksis the ecological k@ty of the Himalayas. The economy is largely agrarian, and majority of arable land in the stateis rainfed. After the success of $ 135 million IDA/IBRD funded Integrated Watershed Development Project which dosed on September 30, 2005, the World Bank has worked with GoHP to prepare a repeater project called the Mid-Himalayan Watershed Development Project which became effective in March 2006. The key objective of the project is to reverse the process of degradation of the natural resources base and improve the productive potential of natural resources I and incomes of the rural households in the project area. The secondary objective is to support policy and institutional development to harmonize watershed development projects and policies across the state in accordance with best practices. The project aims to achieve these objectivesby: (i) settingup local insututionalmechanisms that would strengthen capacity and help villagers manage their own resources; Q introducing water harvesting technologies and treatments (such as plantation, protective irrigation, fodder production and soil conservation and catchment treatment measure); (iii) creating employment opportunities to redress of socio-economic and gender inequalities; (iv) restoring ecological balance by harnessing,conserving,and developing natural resources,i.e. land,water, and biomass;and (v) developinginfrastructureto improveconnectivityand accessibilityto markets, and promoting agri-business. The project is implemented through an independent societycalled the "Mid HimalayanWatershed DevelopmentSociety". The parmership between the project and the Forest Department has helped in promoting a major shift towards a more decentralized and community- oriented foresuy approach, rather than a conventiod conservation strategy. Cornrnunity- centered, sustainable,and equitable management systemshave been put in place through local governingbodies called the Gram Panchayats(GPs).Around 600 GPs are likely to be included under this project Another importantguidmg principle used under this project is the multi-stakeholder approach with active partnership from the Departments of Agriculture, Horticulture, Rural Development, and Forest. In order to facilitate different watershed activities, a Natural Resource Management Society (NRMS) was established as part of the project preparation process. The primary objective of the NRMS is to provide policy guidelines for effective coordination among different line departments responsible for the watershed developmentactivities in the state.The projecthas completedits firstyear, duringwhich communitymobilization, micro-plans, capacity building for PRI and user groups, and base line surveys are some of the key interventionundertaken as part of the implementationprocess. To facilitate the afforestation in the Hirnachal Pradesh Mid-Himalayan region, the project has recently introduced an additional componentcalled the Bidarbon Conservationsub-project. Under this component,around 12,000hectares of non-arable land, degraded forest land, and degraded common propeq land will be used for plantation. Farmers will not only receivecash incentives for afforestationwork by sellingcarboncredits,but alsogetdirectbenefit of fuelwood and Non TimberForestProducts.The main objectivesof this componentareto: (i) sequesteror conservegreenhousegasesin forests; (ii) restore degraded land by afforestation; (iii) establish viable biological connectivity among several currently isolated , I forests and protected areas; and (iv)improvethe livelihoods of the farmers. + - -. - -11 . - - - - - - - - -- -. - - . -- - - - - - - . - -- development project and with sensitivity to the local environmental decision-making; sensitizing sectoral situation; building government agency capacity for agencies and developers to the need for meaningful more effective public consultation and participatory public participation; building civil society institutions decision making; broadening the understanding and and capacity tounderstand;andexercisingaparticipatory strengthening the capacity of local governments in action planning process."' Y- World Bank 2006, India Counuy Environment Analysis. Promoting EnvironmentallySustainableDevelopment 103 B. Sustainable Hydropower to development based on river basin management as a whole, that incorporates the environmental and social Development aspectsas integralto the process of development.There are many aspects of management on the level of the Hydropoweris a key resource of the state, and can be a river basin which are crucial for sustainingrevenues and major source of non-tax revenue,as described above. It the long-term operability of projects, but which are not is particularly important that hydropower be developed adequately reflected when development is viewed from in an environmentally sustainable manner. Injudicious the perspective of individual projects. Examples of exploitation of the state's hydropower resources can this include management of the river catchment area; pose a threat to the state's natural resources. As the managementof sedimentin the river bed; management development of the significant hydropower potential of socialandenvironmentalirnpacts;andtheimplications of HP advances to a mature stage, concerns pertaining for the entire river basin of the long-term evolution of to optimal planning for the development of the state's basin hydrologyand river geomorphology, includingthe river water resources and the long-term sustainabilityof possible impact of climate change. this developmentwill come to the fore. A potentially positive development is the recent The project-basedapproach currently in use by the state establishment of a F o m of Hydropower Producers of (and throughout India) d be inadequate to address Sat& Barin in order to achieve common goals and these concerns. With the entry of the private sector objectives for harnessing the hydroelectric potential as well as a number of relatively new public sector of the Satluj basin in an eco-friendly manner, and to agenciesinto hydropower generation,HP is increasingly ensure the development of the area including welfare experiencing the situation where projects in the same of people." R e state could facilitatea river basin study river basin are assigned to a number of different public for the Satluj basin as a starting point, and prepare and private operators. This approach to allocating an implementable Action Man that could promote projects could eventually give rise to controversy or sustainable development of the hydropower resources conflict, as'the differing owners/operators could have along the dimensions outlined below. different priorities for the quantum of exploitationof the water resource available to them, and there may be differing views on the actual use of the water held by InstitutionalArrangementsfor River local communities, environmentalists,and other interest Basin Management groups. Eventually, as the revenues from power sales become significant,itis normal to expect the emergence Inorder topromoteeffectiveinstitutionalarrangements of competingviews on the use of these revenues in the for river basin management, the state could consider context of the public discourseon the budget. creating a specialized agency with a broad mandate for overseeing the development of the major river basins. In order to manage these processes, GoHP, as the Another important benefit of a river basin agency stewardof these significantresources,may find it useful with a mandate for coordination is the positive role to move beyond the present planning paradigm based the agency can play in facilitatingthe work of investors on the individual project to a more holistic approach with other governmental agencies in specific areas of "'The members of the forum are - Bhakra Beas Management Board (BBMB), NTPC Ltd, Himachal Pradesh Electricity Board (HPSEB), SatlujJal VidyutN~gamLtd. (SJVN),Jai Prakash Hydropower Limited OPH), Himachal Sarong Power Ltd., and Nuzivedu Seeds Ltd. 104 Himachal Pradesh:Accehating DevelbpmentandSustaining SS~GSSin aHill State relevance to project development,e.g. land acquisition, to realistically assess the requirements of implementation of environment management plans, driving the change agenda, and to include the resettlement and rehabilitation aspects, etc. In a well- institutional actors accordingly. functioning agency, this would facilitate the overall project implementation process and give assurances A practical startmg point could be the creation of a to investors, contributing to the mitigation of the working-level forum for the coordination of existing significant risks generally perceived to be associated projects on a given river basin and to finance its growth with development of hydro projects. The following over time through earmarking a small portion of the points must be considered with respect to a river basin revenues from projects as they enter commercial management agency. production. Where such forums already exist, they should be institutionalizedand given a formal role. Common institutional modeh follow a two-tiered managementandgovernancestructure,whereby political support and policy decision-making Hydropower Planning are separated from technical and managerial functions. The design of a river basin agency model for HP would need to assess and Oneof thekeyissuesintheplanningforthedevelopment address the specificissues of operations across of the Himalayan rivers for hydropower generation departmental and administrative jurisdictions has been the relative dearth of storage projects, with and include mechanisms of conflict resolution. preferencegiven to smallandmedium-sizedrun-of-river Given the highly technical nature of the projects. Under certain circumstances, storage projects expertise required to operate such an agency, could be the economicallypreferable alternative,aslong it will be particularly important to ensure the as adequate provision can be made for mitigating the insulation of the technically-based decisions generally greater environmental and social impacts of from political pressures. the project. The storageprojects can provide significant Basin institutions can be advisory in nature but benefits in terms of drinkingwater availability, peaking they may also include planning, construction power generation and siit management. or management in their mandate. The mission of the agency must define the fie& of actzir'&, In current practice in India, the decisions regardmg the which may indude flood management,socialand siting and capacity for the hydro project allocations are environmental management, disaster planning, generally not supported by river systems analysis. This etc., in addition to hydro development. can lead to sub-optimal planning whereby benefits are Basin institutions can also help facilitate foregone due to under-realization of hydro potential. putting in place mechanisms for cost-benejt A strong river basin management agency with good sharing between projects within the same basin, analytical capacity could help rectifj this shortcoming for example, in a scenario where an upstream of the planning process. storage project could complement several downstream projects with increased generation Better hydropower planning could be adopted, with during lean season. decisions regarding the siting and capacity for hydro Identification and incorporation of stakeholders project allocations supported by river systems analysis. is crucial for ensuring that all interests are There is an important role for the state in identiEylng represented, that the adequate legal authority and encouraging storage projects for possible future is vested, and that adequate financial resources development, and this function could be assigned are made available. It is also important to a river basin management agency. The state could Promoting EnvironmentallySustainableDevelopment 105 investigate opportunities for economically viable as removal of sedimentation is one of the major storage projects and, where identified, facilitate their operational problems faced by hydropower generation development while ensuring adequate risk mitigation plants on rivers in the Himalayas. In order to improve towards environmentaland social impacts. the framework for environmental management with regard to hydro development, the state could reform of the practice of preparation and implementation Environmental Managementof of CAT plans using a river-basin approach, consider Hydropower Development alternative methods of implementation (e.g. through outsourcing, through project developer, etc.), and One of the most challenging and controversial ensure the activities are completed in synchronization dimensionsof thedevelopmentof theHimalayan rivers, with project completion. including the rivers of HP, is the environmentalimpact of the development projects. Given that this is a major Any delay in the implementation of the sector that GoHP wishes to expand in the medium environmental management activities (such as term, particular attention needs to be paid to ensure CAT plans, compensatory afforestation) falling within that hydro projects are developed in an environmentally state's domain is a threat to the sustainability of the sustainablemanner.Injudiciousexploitationof thestate's environment. It is critical to ensure that these activities hydropower resources can pose a threat to the state's are implemented in synchronization with the project naturalresources. Delay in or improper implementation implementation schedule so that maximum benefits of environmental management activities f h n g w i t h are available to the stakeholders. Given the limited state's domain is a threat to the larger environment. In capacity of local government institutions and agencies HP, this is important not just for assuring stewardship, (e.g. Forest Department) to implement environmental but also because of the negative external impacts on the managementactivities,it may be worthwhileto consider growth prospects of other economic sectors. such innovations as outsourcing this responsibility or making the project implementing agency responsible The track record of GoHP's agencies, notably the for carrylng out the activities under the CAT plan and Forest Department, in implementing Environment other important tasks in the area of environmental Management activities-like the Catchment Area management. In parallel, it would be advisable for the Treatment (CAT) plan, Compensatory Afforestation, state to put in a place a plan for building up capacity development of fisheries, conservation of wildlife, of state regulatory agencies for implementing and etc.-related to hydropower projects in the state is supervising such activities-such as the SPCB and the modest. In order to promote sustainable development Forest Department. of the sector, it is important to take steps to improve these activities, as discussed below. Thecurrent approachof applyingauniform minimum ecological water flowrequirement irrespectiveof the Catchment Area Treatment (CAT) is critical, but project siteand other considerationsis inefficient to the instead of using a river-basin approach, the current extent that the actual requirement (i.e. what is needed approach of preparation and implementation of to achieve the stated objective of the minimum flow) CAT plans is piece-meal. A uniform approach to the at any given location may be higher or lower than the preparation and implementation of the CAT plan, arbitrarily determined uniform norm. If the uniform rather than the current piece-meal approach that norm is hgher than the actual requirement, then there divides responsibility for the CAT plan among the would be a loss in the benefits of electricity generation. individual projects, would have direct technicalbenefits, On the other hand, if the uniform norm is lower than 106 HimachalPradesh:Accelerating DevelopmentandSustainingSuccessinaHz2State the actual requirement, then there would be a failure to It is because of the disproportional impact on local achieve the stated objective of the minimum ecological communities, sometimes including the permanent loss flow. Flexible norms that are determined on the basis of the use of the water for other purposes (at specific of site-specificanalysiswould lead to outcomes that are locations), that benefit-sharing mechanisms have been preferable from both a technical and an environmental developed as a means of ensuring sustainable and perspective. The role of the government, then, should equitable development, and of ameliorating potential be not to determine uniform norms, but to specify opposition to development that could emerge in the the nature and quality of the environmental analysis absence of any benefit-sharing mechanisms. to be carried out at specific sites in order to come to the determination of the minimum ecological flow In its efforts to ensure sustainable, equitable and requirement for the concerned section of the river. socially acceptable development of the state's rivers, Accordingly, the state could introduce flexible, site- one alternative for GoHP to considerwould be to give specific norms for minimum ecological flow-where local communities (which would have to be explicitly GoHP determinesthe nature and quality of the studies defined at the outset) a share in the specific project required to make the site-specificdetermination benefit streams over time (i.e. a part of the power royalty collected by GoHP). The financial cost of this Given the increased global focus on "low carbon" will be very small compared to the revenue streams technologies for generating power and the significant of the project, as overall project returns are generally role hydropower can play towards that end, the statemay high, and the communities concerned generally small alsowish toconsidermeasuresto encourageuseof carbon in terms of population. The positive impacts for local financeas apotential sourceof revenuetowardsmitigating social and economic development should also help the costs of the risks associated with development of build public support for Government's hydropower hydropower.Whilethelikelihoodof futureprojectsbeing development program. There are various models that commissioned and becoming eligible to receive carbon GoHP could consider to help build local communities' revenue before the end of the first commitment period and local administration agencies' limited capacity to under the Kyoto Protocol, in 2012, is low, negotiations manage revenue streams and decide on development are on-going for the second commitment period, which priorities. In one such model, local area development may provideimportantopportunities for HP. activities would be implemented through the project implementing agencies themselves, with the selection of schemes and their monitoring the responsibility Social Inclusionand BenefitSharing of a body with representatives of the project authority, affected villages/panchayats and the local Local communitiesare the most directlyaffected by the district administration. development of hydropower projects. The disruption to community social and economic life during the Contemporary river basin agencies engage their construction phase is often considerableand can take a communitiesthrough active and managed processes of variety of forms;duringtheoperationphase theimpacts involvement to generate a sense of ownership and to aretypicallyless severe.In the caseof the main rivers of ensure that the development processes and outcomes HP, the developmentactivity thatwill impact on specific meet the needs of the communities. Community communities is likely to continue for many years, as participation mechanisms will need to be carefully many projects are slated for future implementation on selected based on the nature and level of community the small number of major rivers in the state. participation that is deemed desirableand feasible. I t is clear from the preceding discussion that, in spite Thebroad elements of a possible development strategy of commendable recent achievements, HP faces for the state are urnmarized in Figure 8.1. The agenda severalchallengesto achievingits developmentpriorities is large, and will need to be executed over a substantial of sustainable and inclusive growth. This Report has term time span. However, it will be to HP's advantage analyzed some of the key challenges in restoring fiscal to begin the process soon-identifymg some of the sustainability, promoting private sector participation, priority areas. Several reforms proposed in the Report exploiting opportunities in the emerging sectors, are administrative in nature, and, where sufficient improving public administration and service delivery, background material and models already exist they can protecting the environmental and ecological heritage, be implemented without delay. Others require a cross- and further improving human development and social cutting approach, and prioritization and sequencing protection strategies. should be guided by the exigencies of the situation and the complexity of the requirements. If proposed The Report has suggested various reform options for policy measures require more preparation and internal GoHP to consider in addressing these challenges. The consultations within the state, involving various menu of reform options is based on the Bank team's stakeholders,GoHP should begin the process. understandingof constraintsand reformprioritiesthat is mostlyalreadyunderconsiderationbyGoHl?Whilethese Given the complexity of the task, a flexible approach are all considered vital policy measures, the assessment is suggested by which GoHP identifies those reforms recognizes that they may not all be implementable which are the most pressing, implementable, and immediately from the view of political feasibility, and likely to yield sigmficant returns, in order to develop a that actions internal to GoHP could be undertaken cohesive programme that is reflective of and consistent more easily than reforms involving changes in national with the state's vision. GoHP could also guide the policies or those requiring wider consultations. proposed sequencingof reform actions.As a first step, 110 HirnacbalPradesh:Accekrating Deuelopmnt and SustainingSuccessinaHdfState Figure 8.1: Proposed Elernentsn in HP's Development Strategy with natunladvan- Increasingproductivity Improving I of employmenqand ' environment for Inclusive providing suitable private participation Development , employment ininfrastructure, opportunitiesfor services,and educatedgroups growth sectors I CreatingFiscalSpace for Gitical PublicInvestment Efficient Provisionof Social/Public Services & g The state? twinprioritiesare snesfarirabkf~ergronth,and more inclnivedeve&ment. It nee& tojcueson secton M'thptbpotcntiu/ hke ton* and hon!icu/bre,prOmotepri~k esectorpankpaiionin vmiousaspectsof dm&rnent, and improvepdum'ue emphymmt @ortunities. Thbcon@& uchiewdthroughesnitabkpo(ices,ciuif senr'ce re/onns, and in@stmctnre dcyehpment (inchdingbydmpofyetjwhich muki a//help Creakficu/qace& nilica/pub&2investments,and be&achievethestute? deue&ment objctiy~~.Theesiutelr environmentalhenen&gebasto bepreservcd &k tbedeve&m& ig-mByT4 Implementingand Sequencing the Reform Agenda 111 this assessment suggests that GoHP addresses the fiscal accordingly identified a number of areas where GoHP constraints on a priority basis-backed by governance could introduce policy reforms. reform measures to curb the salary bill. The stateshould 8 As a first step, the state must retine its medium take steps to promote sectorswith untapped potential- term fiscalprojections, incorporaanga clear policy andcouldconsidermeasuresforhydropowerandtourism basis, demonstrating, for instance, expenditure development as priorities. Simultaneously, measures to reallocation to capital outlay and non-wage O&M conserveand protect the environmentalheritage-both in critical areas, and to reflect stronger reform in the contextof hydropowerdevelopment,andin terms outcomesconsistentwith TFC recommendations. beginning the process of developing an Environment In order to strengthen the budget formulation Policy-should also receive priority attention. At the process to better link policy goals and resource sametime,itwouldbe important for GoHP to take s t q s aoca~~ntoe~&dthe~m~Gt&&~~p'Ctive in -- ------------- towardsmakingthetransitionfromastate-ledto aprivate budgeting,a fiscalstrategypaper couldbepresented sector oriented economy, and it is important to signal to the Cabinet preceding the budget preparation clear intent in this area.In order to address employment process-which will result in the communication issues, GoHP should begin the process of assessingand of departmental expenditure c* and fiscal projecting skills and educationrequirements. projections as part of the budget callcircular. In order to enhance own-tax revenues, the While the Report assesses that certain reforms could state could: (i) switch from a specific to an ad precedeothers, this is not to suggest that othermeasures vahrem excise duty structure, as in Maharashtra; are unimportant. In particular, since social and human (ii) simplify the license fee structure for alcohol developmentoutcomesare superior to most other states, vending; (iii) initiate a review of the motor vebich reforms in this area could follow more pressing policy tax andfeesregime with a view to raising specific needs-but measures to improve quality and access rates of the motor vehicles tax, revamping fees should not be ignored. The critical issue is to develop a for permits, registration, licenses, and fitness credibleoverarchingandcoherentmedium-term strategy certificates, and introducing a 'green tax'; for the stateto guide reforms alongvarious inter-related (iv) re-introduce the Profe~n'onsTax, (v) begin dimensions, so as to meet the stated development evaluation of VAT ihphmentation with a objectives of sustainable growth and inclusive view to streamlining and strengthening VAT development. Reforms should ultimately be adopted by administration; and (vi) initiate an analysis of GoHP with the medium terms agenda in view stat@ dup evasion schemes and their revenue impactto prepare for2morefund-defer= -------------- of the stamp duty system,and reduce registration A. Proposed Reform Options feeson par with other states In order to enhancenon-tax revenues from user The followingreforms areproposed forimplementation charges, GoHP could establish a Public Tariff over the short to medium term. Commission for various services like transport, education,health,water, and irrigationin order to depoliticize the determination of user charges. Sustainingthe Fiscal Recovery for Growth 8 In order to improve provisioning, control, and composition of expenditure, GoHP The Report identifies the fiscal situation as a major could: (i) first complete pension projections for constraint that the state must address, in order to government and public sector agencies, and realize its development priorities. The assessment has begin annual budgeting on an actuarial basis; 112 HirnachalPradesh:AccekrabngDeveiopmentandSustainingSuccessinaHiiiState (ii) implement an effective wage and biting of multiyear strategicphnning processes underlying policy consistent with fiscal sustainability; annual business plans, defining the mission (ii) introduce a contributory pension scheme at par and vision of the revenue administration, with government employees for new employees, identifying the challenges and reform priorities with pensionable pay, in Public Sector Boards, for the planning period; (iii) improvement of the Corporations, Universities and Local Bodes; accountabilig mechanism to move from collection- (iv) appoint a Committe to examine containment based accountability to wider reforms like better of expenditure under subsidies, a gradual phase quality of services and information provided to out of non-merit subsidies as announced, and taxpayers, increased integrity, broader tax net, or present a roadmap for subsidy containment, and reduced timerequired forregistration of abusiness implement recommendations; (v) reduce power for tax purposes; (iv) strengthening of the human - s & ~ q a n + * & e m f f f & ~ d & mmmc& ExciseandTaxationDepartment;and (vi) initiate the process of identifying schemes (v) making the Excise and Taxation Department that have lost relevance, and restructure and the basis foraunifiedtaxcohchonysteem sothat other rationalize them by constituting an Expenditure revenue-collectingagenciescould then concentrate Review Committeeto critiqueongoing schemes;and on their core, non-collectionfunctions. (vii) reallocate expenditure towards non wage O M In the area of public financial management expenditurein criticalsectors,and capital outlay. and procurement, GoHP could: (i) modernize In the area of management of debt and the Hirnachal Pradesh Financial Rules, 1971, contingent liabilities, GoHP could: (i) merge which need to be updated and simplified, of-budget bornwings with budgeted borrowings, (ii) replace the existing Procedure & Rules for and eliminate future off-budget borrowings; the Purchase of Stores with a public promrement (ii) risk-wezghtguarantees and begm reporting, (i) hw that can applyto all procurement undertaken revise the targetjr risk-wnghtedguaranteesunder the using public funds (goods, works and services), FRBM after eliminating off-budget borrowings; and which can be piloted in 2-3 departments (iv) establishasetoffmalmhs to governeligibility and PSEs to ascertain the benefits; and of PSEs, cooperatives, and statutory boards (iii) roll out treasury conp~ten'zationto cover the for government guarantees, taking into account entire state. financial statements, record of profitability, performance on past guarantees, priorities of Improvingthe Investment Climate for the government, etc.; and (v) make progress towards theimplementationof thereform strategyforstai2- Private Sector ---- owneL?!E--iR itsa&~ -------------- dated October20,2000, includinginitiationof the In order to promote private sector participation so that preparation of a turnaround plan for HRTC. investmentsin the state continue beyond the phase out of special incentives in 2010 and the burden on the GoHP could initiate measures to modernize tax state as a provider of employment is reduced, efforts administration by considering, for example: (i) creation of the necessary o~aniptiondbasis need to focus on the key constraints as identified in for separating and strengthening the key tax the short survey undertaken for this Report: improving a h s t r a t i o n functions of registration, audit, road infrastructure, addressing skills mismatches, and collection, and taxpayer services; (ii) introduction strengtheningthe urban infra~tructure.~ Policy changesin the roadssectorarebeingaddressedthrough an investment project supported by theBank.Urban infrastructureis an areawhere Further analysisis proposed. Implementing and Sequencingthe Reform Agenda 113 In the area of skills mismatches, the first step would risks associated with the hydro power projects,if be a study, since the extent of skillgaps and mismatches they are fdly or majority owned by GoHP; and in the state is unclear at present. The study would (iii) best utilization of the revenues flowing to include a skills-mapping exercise, to identify particular GoHP from the hydropower projects to ensure sectors which would emerge in the near future, so the maximum benefit for the state and for those most affected by the development of projects. that skill requirements could be projected. This could subsequently be the basis of a skills development In order to encourage integrated river basin strategy to bridge current and future skills shortages planning, the state could facilitate a river basin and skills mismatches-worked out in consultation with st243 on the Satluj river, and prepare an action industry,workers, and educators. plan for time bound implementation, based on the agreed recommendations. -------------- ---------------- With a view to implementing the Electnci~Act Exploitingthe Potential in EmergingSectors of 2003, GoHP could facilitate implementation of open access, separation of the power trading In the Approach Paper to the Eleventh Plan, the state function, and appropriate restructuring of has itself identified several sectors it wishes to focus the HPSEB. on, where it has natural advantages. These include high value-added agriculture (especially horticulture), In order to improve the performance and sustainability tourism, and hydropower. of agriculture, GoHP could take the following steps over the next few months. With a view to reahation of the full potential from GoHP could review and rationakxe the subsidy the state's hydropower resources, initial reforms could regime. Where the state is proposing to focus focus on the following dimensions. on organic farming, there is an element of In order to promote susfainable Lydropower inconsistency in subsidizing consumption of development, it is critical that the state set up an chemical fertilizers and pesticides, and support institutional mechanism (including its structure should instead be aimed at offsetting costs of and functions) for monitoring and implementing organic practices, particularly for horticulture environment management activities-such as and fruit production. CAT plans, NPV, Compensatory Afforestation, User charges in irrigation cover less than 2.5 lease value of forest land, development of percent of required O&M expenditures, and tisheries, conservation of wildlife, etc.-related n e e h t s h c F a t i e n r d i z e & f r r a c t ~ m a n y ~ c L & - ~ + c & & F & + ~ c , iu m m p irrigation schemes could well be better managed that these activities are completed before the by producers themselves, following successful projects are commissioned (and are then subject to ongoing monitoring), and that HP's precious practices in the state and elsewhere. The state natural resources are managed well. could prepare a sfrategywith an implementation time table and progress indicators, aimed at In order to better manage Lydro revenues, the state increasingcosts to reach fullcost recovery within could initiatea strategystudy for: (i) the model HP a designated time period, as well as an action should followin buildingup hydropowerprojects plan for devolking suitableirrigation schemes to (through state/central/private/joint-venture beneficiary farmers. routes or a combination of these); (ii) analyzing the possible impact on bulk power tariffs from the proposed coal-based ultra mega projects, and The key constraint in tourism appears to be that the capacity of HP to manage the development of connectivity-and addressing this would require 114 HimachalPradesh:Accehan'ngDevelopmentandSustainingSuccessin a Hill Sfate investment resources over the medium term. In the In order to improve administrative efficiency, policy arena, the state should activateand empower the GoHP could: (i) strictly enforce the minimum Tourism Development Board that has been recently threeyear tennre as per HP's transfer policy by establishedunderthechairmanshipof the Chief Minister establishing statutory committees to authorize as a forum for better inter-sectoral coordination and transfers and postings for senior officers and creating a stability index to ensure that the strategicapproach for tourism developmentin the state. average tenure of the IAS cadre as a whole does not fall below three years; (ii) review current functional clusfmng at the level of Ministers as Improvingthe Institutional Environment well as Secretarieswith a view to clustering 'like' for Growth Departments; and (iii) at the level of general t r a ~ e r sin staff-intensive departments, GoHP In order to promote an institutional environment for could consider the adoption of a system of development,GoHP must enhance the effectivenessof formal counseling to allocate transfers and civil services, strengthen institutions for transparency postingsin a rational and objectivefashion,while and accountability, and promote decentralization to enforcingquantitativelimitson the total numbers improve public service delivery. Short term measures of transfers across the state. could focus on some of the foltowingareas. Ine-governance,prioritiesforthelTDepartment- In order to tackle the key problem of from among the 40-odd projects underway- overstaffing and the wage bill,GoHP could: should be clarified, by focusing on a few flagship (i) enforce a shr'ct ban on remitment, especially projects,and implementation shouldbe sequenced. for non-regular employees as well as Class IV The focus should be on process re-engineering, employees in the regular civil service, and work- rather than just informationtechnology. charged and part-time workers in IPH, PWD, To enhance transparency and accountability, and HPSEB, and curb regularization; (ii) identie the following measures are important: (i) the redundant posts by conductingfnnctional reviews suo-motu provisions of the R77 should be in major departments, assessingwhether current aggressively implemented, especially through staffing patterns exceed established norms, posting of suo-motu information on the web, revising existing norms to take into account and providing departmental websites to those technological improvements, and preparing a still lacking the same; (ii) efforts should be made plan to abolish redundant posts inphases,starting to strengthen the Luk Ayukta by amending the with posts that are both surplus and vacant; Lok Ayukta Act to allow for s~o-motupowers to (iii)identify posts that could be outsourced to the take action in cases without a formal complaint, private sector such as the provision of security, by providing qualified legal and other staff to gardening, cleaning, and driving services; assist him, and by widening the definition of (iv) estabhh an HP P q Commixion to decouple corruption to indude grievances arising out of salary structures from those in Punjab, that maladministration;and (iii) theweakeningofpobce would over time chart an independent course for c@act't~to provide effectivelawand order services, determining the state's salary structure in view asreflectedin thedecliningoverallconvictionrate, of political sensitivities; and (v) implement a should be reversed, by implementing the recent VoluntaryRetirementScheme (VRT) forgovernment Supreme Court directive to create a State Security employees who wish to retire, and co~uLF09 Commission to insulate the force from political retirementprovisions in the All-India Service Rules pressures, and enforcing a minimum tenure of to removeinefficientstaff from service,especially three years for the Director Generalof Policeand in organizationslike the HRTC and HPSEB. senior officers Implementingand Sequencing the Reform Agenda 115 Strengthening Human Development and Promoting EnvironmentallySustainable Social ProtectionStrategies Development The Education Department could take the lead It would be useful for GoHP to look at measures to on the skillr mismatch sdtldy mentioned above. Other strengthen the Environment Department and develop measures under consideration to partner with the capabilitieswhich would help to systematicallyassesshow private sector in the provision of technicaleducation- the statecan maximizeitsnaturaladvantage, and to ensure like using private parties to provide technical and application of environmentnorms across sectors. vocational education using the state's existing educational infrasuucture-should be speeded up and GoHP could initiate an institutional and "gap" implemented. The state should also identify specific anallsis of the e n v i r ~ a e c m&hen ~ q --------------- stepstounproveteacherattendanceandaccountability- feed into institutional strengthening of environment through involvement of communities in the moni- management in the state, and help in drawing up the toring process. proposed Environmental Policy."" This could include: Assessment of key environmental pressures,with The Health Department could benefit from the a particular focus on emergingpollution hot.pots, functional reviewof staffingdescribed above-with aview enuiranmenta& fia&k areas (including those with to rationalizingpostings of specialistsin remote areas.A high preservation values, such as endangered studyproposed by GoHP onassessingtheefficacyofmobik biodiversity,and high ecosystemfunctions,suchas us. static units could also contribute towards eventually watersheds), and areas with high tounsmpotentia1. addressing the problem of health service delivery in Identification of regulatory, institutional, and remote areas. policy gaps leading to these pressures. This will include assessment of mandates, gaps and In the area of social protection, the state currently overlaps, and also incentives for compliance and faces issues around record-keeping and technical enforcement of functions. impact evaluation. GoHP could consider the following measures in this area. Assessment of workload and iekmentation capacity ' for the Environment Department, Forest Carry out r@'dm'ew of administrationand record- Department, and SPCB, including staffing/ keeping in key social protection programmes, skdl mix, equipment, and knowledge resource in order to develop options for improved requirements (includingcontract appointments). performance. Going forward, h e d41~ t b i ~ ------------- - review, GoHP could develop and approve an Strengthening of cokpizance and efficieng by Action Plan for improving administration and assessing alternative ways of implementation record-keeping of major social protection (such as separating the regulatory vs. programmes barticularly with respect to management vs. implementation roles of the reporting of outcome indicators). Forest Department), greater use of economic instruments (as recommended by the National Initiate a third party ikpad emhation of social Environmental Policy, 2006), allowing contracts pension-the single largest intervention for the with private parties, or line public agencies, poorin the state.Thiscouldlead tobetterdesignand recasting the management and implementation implementationof the programmein the future. functions, and building upon newer initiatives IM The Bank'sEnvironmentUnitis happyto assistGoHPwith this throughtechnicalsupport under the IndiaCountry EnvironmentalAnalysis. 116 HimachalPradesh:Accekrating Development andSustainingSuccessinaHillState such as the Natural Resource Management and visible results. The Report has proposed a menu Society (with systems for clear physical, financial of measures that can be initiated within the next few targets and monitoring>. months, and GoHPcould,based oninternaldiscussions, Assessmentof the eyeth'uen~~s 9 and sof ittiproving move forward on those that are considered appropriate Compensatory Afforestation Schemes' and use and feasible. However, this should not detract focus of Net Present Value revenues; strengthening from other substantive measures recommended in the of management practices and guidelines Report which should be implemented over the longer using principles of restoration biology and term to deepen reform. the global experience with biodiversity offset schemes; establishment of firm timelines for Additionally, successful reforms have to be context- ipmlementationand monitoring progressin both specific and grounded in local knowledge. The -- ----------- plantingand ecosystem restoration. --- ------- general economic principles EGK-nTTcceleraig a Assessment of the d q a q of the exzisting range of growth and improving service delivery-such as a policy instruments and feasibility of using new healthy investment climate, sustainable fiscal policy, ones that target the systemic and root causes of responsive and transparent institutions, and private policy failure sector participation-apply to HP as they do to most other states. However, economic reform principles Based on this analysis, GoHP could develop an Action need to be creatively packaged by policy-makers in Plan with an implementation timetable, in order to: order to be sensitive to local constraints and take (i) restructure the Environment Sector as indicated by advantage of local opportunities. In this context, it the analysis; (ii) prepare an overarching Environment becomes particularly important to focus on sectors Policy as a guiding principle; and (iii) develop a set of where HP has a comparative advantage, and keep in key performance ind,icators to monitor and evaluate mind the importance of conserving the environmental progress in implementation. resources which can provide further opportunities to the state. PoliticalEconomyConsiderations In closing, it should be emphasized that action now is likely to be less costly than action later. Politico- Policysuggestionscanonlybe afirst step--it iscriticalto administrative and topographical peculiarities of HP implement the policies that can help the state realize its demand a continuing role for the state. However, -Meneeds to craft an overarching if the state does not take specific steps towards self- ------------- programme for the state to guide reform, identifying sufficiency, the recent achievements may not %e the policies-from or beyond those suggested here- sustainable.In particular, any reduction of privileges as that it would like to implement. There is need to build a "special category" state arld announcement of Sixth a consensus for change within the state through an Pay Commission awards could hurt the state's fiscal effective communications strategy, and get the political situation further; the absence of suitable private sector leadership to demonstrate their commitment to the employment opportunities for the educated population proposed programme, motivate agents for reform couldleadto unfulfilledexpectationsand addto the fiscal within the bureaucracy, and garner public support. burden for the state as an employer of last resort; and failureto take action against environmentaldegradation It is particularlyimportant to pay close attention to the wuld threaten future growth prospects. It is critical to sequencingand prioritization of reforms, and to move address these challenges before they start to impact on more rapidly on policies which are likely to yield quicker the state's successfulsocio-economicperformance. - I- ~y ~ok? (UpdatedJune, 2007). T he Economic Report, presented in the earlier A. Creating FiscalSpace and chapters, was prepared by the World Bank over September 2006 to December 2006, and largely uses Improving Public Financial information available at the time of preparation. The Management Report was presented to GoHP on February 19,2007. The government was in broad agreement with several recommendations in the Report. Overall Planfor FiscalReforms Following discussions with the World Bank after GoHP's future reform program is underpinned completion of the Report, GoHP has proposed by the MTFP prepared in 2007-08, for 2007-08 to reforms in some important areas. These address 2011-12. This MTFP has been revised recently, and critical structural, fiscal, and administrative reforms resolve several issues in the earlier MTFP described needed to achieve sustainable and rapid economic in Chapter 2 above. The current MTFP is consistent growth and inclusive development over the medium with the FRBM and TFC recommendations, and term, while protecting the environmental heritage targets eliminating GoHP's current deficit in 200% of the state. The key objectives of the government's 09, and reducing the ratio of gross fiscal deficit to reform programme in the short to medium term GSDP from 4.3 percent in 2006-07 to 2.2 percent by are to fund priority investments through creation 2011-12 (Figure A1.1). It projects improvement in of fiscal space and promote environmentally expenditurecomposition and strengthening of own tax sustainable development-with particular reference revenue-reflecting fiscal reforms. By 2011-12, about to the development of hydropower. GoHP 5 percentage points will be shaved off the 2005-06 also supports reforms to enhance growth and salary to total expenditure ratio of 35 percent. There employment opportunities, and improve governance will be reallocation to non-wage O&M and capital and public administration. outlay, which will increase by 5 percentage points and 7 percentage points respectively over 2006-07 (RE). This Annex describes measures recently announced Own tax revenue is projected to rise by 1.3percentage or adopted by GoHP in order to address the critical points of GSDP over 2006-07 (RE).The state projects challenges facing the state. It should be noted debt to GSDP ratio to decline to about 47 percent by that this is not a description of GoHP's entire 2011-12 from 74 percent in 2005-06. programme or vision-but, rather, of the notable new and innovative initiatives since the completion The targeted debt reduction is achievable if the state of the Report. GoHP has chosen to prioritize these stays on the projected fiscal path under the MTFP. initiatives in areas where the need for reform is felt However,the debt trajectoryis sensitiveto fiscalshocks, to be the greatest. and will require the state to maintain a strong fiscal 120 HimachalPradesh:Accehating DevehpmentandSnstainingSu~cessinaHill State 4 I FigureAl.l: Improving Deficits and Declining Debt under RevisedMTFP I -+- Deficit Fiscal DebtStock to GSDP(LHS) 30% - 5% RevenueDetidt Interestto RevenueRaecipts (RHS) -0- PdmaryDeficit .a 2% - 29% W/v -40/0 m = 15% "I W s - Notes: Finallce DcpIIrtment, GoHP. 2006-07jgrcres are &Yircd &#hates, sttbseqncnt~a~~M'llTpnyeecfions.Negak've&fit dcnotesa1111;6r%.Debt are ~tockfoUwsthe GoHP &finitio* correction path over the medium term to achieve debt own tax revenue from 5.9 percent of GSDP in 2005- sustainability (Figure A1.2). Stress tests demonstrate 06 to 6.5 percent by 2011-12. If successful,the state's that future uncertainty or shocks like decline in dependence on central government grant transfers will central transfers or lower growth rates than those decline from 15.2 percent of GSDP in 200546 to 11.8 assumed under the MTFP could derail the projected percent by 2011-12. The measureswill correspondingly debt reduction trajectory. Ths shows the need for lead to improvement in own revenue effort from 8.6 continued maintenance of fiscally sustainable policies percent of GSDP in 2005-06 to 9.1 percent of GSDP over the medium term, as well as the importance of by 2011-12. robust and sustained fiscal correction to counter For the motor vehicle tax regime, GoHP proposes future uncertainties that can upset the trajectory of to increase Motor Vehicles token tax rates to debt redu~tion.'~'In order to maintain the projected target an additional growth of at least 6 percent fiscal correction path, GoHP has announced various in motor vehicles tax take over 2006-07 (RE). measures which are descnbed below. To avoid congestion and pollution, a higher token tax has been proposed for vehicles over 15 years. These measures should yield Reformsto EnhanceTax Revenues an Additonal Resource Mobilization of about Rs. 6 crores, over and above natural buoyancy. To improve taxrevenues, GoHP has announced several Additionally, the Transport Department shall encouraging measures in its 2007-08 budget to raise its initiate studies to examine how to improve 'O' See Annex 5 for derails. - Annex 1:New Initiativesand Reforms Proposed by GoHP 121 ith Shod; to Growth in 2010 and 21 ~f2.5% an cline in C e n d Transfers by 5% Annually from 20161 ~ t Dedine in CentralTransfers by 5% Annually from 2010-1 1 h 75% - ith Shock to Growth in 2010 and 2011 of 2.5% The debt trajectory k 65% - projected undu the MIFF' is susceptible ' to externalshc 55% - 45% s - , - m 0 f 2 2 5- d l C 8 Ki 8 3 NO I Notes: SeeAnn& 5for details. I motor vehicle taxes, including the use of ad The introduction of VATin 2005 r$sed growth valorem taxes for all new vehicle^."^ GoHP has in sales tax revenue by 34 percent in 2005-06- also liberalized the licensing rules for private but this is projected to grow by a slower rate of bus operators effective financial year 2007-08, 7 percent in 200647 (RE). Although VAT is and that should see an increase in permit and the main own tax source, gains from this may registration fees, the annual token tax, and the dry out following two years of implementation special road tax. if its administration is not strengthened. The yield from this tax has to be raised at least to the a To plug leakages in the collection of luxuty tax national average of 3.7 percent of GDI? As a by hotel owners, the luxury tax will be based first step, GoHP is undertaking computerization on minimum occupancy of beds as opposed to of VAT administration. Furthermore, GoHP is the present regime of a flat 10 percent of hotel considering an evaluation that could include room rent. value chain analysis, VAT assessment, system of GoHP has introduced a new bcensefee *em to refunds, use of nationallyharmonized definition vend liquor based on minimum guaranteed off- of goods,fraudrisk analysis,VAT thresholdlimit, etc. The results of the evaluation will be used to take for different kinds of liquor. The system,as further strengthen VAT administration. presently structured, has specificexcise duties on liquor and licensing to vend liquor classified in a Studies shall also be initiated to explore further eight categories,with sub-categories. areas for increasing tax buoyancies, including Io2Non-transport vehicles are subject to one time tax,while transport vehicles are subject to an annual tax. In addition, HP levies a special road tax on transport vehicles. The current levelof the one time tax is 2 percent on the price of personal vehicles such as cars and 1.53 percent oo the price of two wheelers. The one time tax is considerably lower than in ocher states where ~tcould range between 6 percent and 8 percent of the price of the vehicle. Transport vehicles are charged an annual specific tax depending on the nature of the vehicle. 122 Himachal Pradesh:AcceleratingDevelopmentandSustainingSucces.sinaHillState folding the ehcdn'n'g d@yinto the VAT. GoHP 2012-13. However, efforts need to be broad based currently has an electricity duty at the flat rate beyond hydropowerresources to raise non-tax revenues of 6 paise per unit consumed in bulk use and 33 in order to help make critical services provided by paise per unit on consumption by industries, as GoHP self sustaining.There is scope for raising royalty last revised in the 2005-06 budget. The tax take from user charges periodically, in particular. However, from this source has been uneven over the years rationalizationof user charges is politically challenging and constituted below 4 percent of tax revenue which makes the pace and magnitude of revision in 2005-06. more difficult, and this has to be calibrated. A rational The st* d ~ rate for registration of land sale g institutional mechanism that can periolcally decide on transactions is proposed to be reduced from appropriate user charges is required. ~ p e r c e n u d ~ n t , s a ~ _ t c s c k e & e v a s i o n ------------- and the undervaluing of property transactions. As a first step to improving cost recovery, GoHP has GoHP has already reduced stamp duty from 12 indicated that an administrative review of Hser chatgeeswill percent to 8 percent in April 2005. As a further form the basis forrationalizinguser charges. Eventually, measure to strengthen administration,GoHPwill an institutionalmechanism will be set up-to regularly introduce franking machines to plug leakages in review user charges, reduce implicitsubsidies, and improve stamp duty revenue. In HP, at present rates, stamp sustainable financing of O&M of public investment. and registration duties amount to a potential GoHPalsoplansto reconsrituteRogiw a nSamtis-which tenth of property value, higher than in most were abolished in 2003-and provide them autonomy other states.'"' Stamp duty reform is, therefore, a significantmeasure, and is expected to increase in deciding on user charges. registered property transactions, create a more active land market, and make the state more GoHP is working to address the fiscal burden arising attractive for investment. from thegap between O&M eqensesin Imgation and Pubkc Health and theuserchargescollected As discussed in Chapter 4, user charges fund about 2.5percent of O&M expenses Reformsto Enhance Non-Tax Revenues incurred by thegovernment GoHP has alreadydeveloped guidelines for devolvingschemes to beneficiary groups. Since HP is a small state, its tax base is limited. GoHP has initiated pilots that will be scaled up over Accordingly, non-tax revenue needs to be expanded, time. As of March 31, 2007, operations of 292 Water with the major source identified as the state's natural Supply Schemes and 17 Minor Irrigation Schemes had @di-ToIerpmatnarwithnake--t- &a+ t'"nrFPrrPrltn~r~.srespective~v.on a of electricity. It is estimated that revenues from the sale pilotbasis. In addition,the statehas alreadyannounceda of royaltypower and/or a shareof the power generated participatorystrategyinvolvingWater User Associations proportional to equity invested by GoHP in hydro and Gram Panchayats (GPs) to participate in planning projects with other partners+.g., Go1 in the case of and execution of irrigation and drinking water schemes Satluj Jal Vidyut Nigam Limited (SJVN)-together respectively. This will be practised for all new projects with dividends, could be more than 37 percent of HP's wherein the government provides technical and one- current level of own revenue receipts and more than time financial support to the GPs or beneficiaries to double the current level of own non-tax revenues by develop their own water resources. '03 In addition to the 8 percent stamp duty, registrationfee under the Indian RegmtrationAct, 1908,as applicable to HP, at the rate of 2 percenton the value of consideration,subject to a maximumof Rs. 25,000 is also levied. Most stateslevy only 1 percent registration fee. Annex 1:New Initiatives and Reforms Proposed by GoHP 123 FigureA1.3: Improving Expenditure Composition under GoHP MTFP rn L 35.7% L Pensions and RetirementBenefits 8SubsidiesandTransfers InterestPayments S OtherRevenue Expenditure Capital Outlayand Net Lendmg 7 U).OOh . Source:Finam Dcpariment, GoHl?Allnumbers aspenmkzgcof pnjecfedqben&tures under m. Targeted Improvementsin Expenditure Subsidies and transfers account for about 7 Composition percent of total expenditure, up from 5 percent in 2003-04. GoHP's subsidy to the Himachal Pradesh Electricity Board (HPSEB) was Rs. Simultaneously,the government appreciates the need 2.45 billion in 200607 (RE)-which is relatively to improve expenditure composition towards capital small compared to other state^.")^ GoHP has outlay and critical non-wage O&M. As a first step, reduced the power subsidy to Rs. 1.5 billion in the MTFP has committed that GoHP will: (i) contain the 2007-08 budget, and will strive to contain share of salary expenditure to total expenditure to 30 the level of the subsidy. percent by 2011-12; (ii) reduce interest expenditure to Pensions are an increasing fiscal burden, having revenue receipts to 17 percent by 2011-12; and (iii)and risen from about 8 percent of expenditure in increase non-wage O&M and capital outlay by at least 2002-03 to over 9 percent at present. In August 4 percentage points and 8 percentage points of total 2006, the state introduced a Contributory expenditure by 2011-12 (Figure A1.3). Achievementof Pension scheme for new employees joining these targets will be criticallydependent on the reforms service after May 15, 2003, and it follows the implemented. GoHP has announced several reform Go1 pattern of contributions.'" However, measures to createfiscal space and improve expenditure the impact of the new pension scheme will effectiveness. These actions are projected to result in be felt over the longer term, and, till then, a decline in the expenditure to GSDP ratio from 28.2 the state will have to contend with pension percent in 200607 (RE) to 26.6 percent in 2009-10. expendture under the Defined Benefit scheme The power subsidyessentially finances the revenueloss to the HP State Electricity Board on accountof the differencein the tariff recommendedby the Himachal Pradesh Electricity Regulatory Commissionand the implemented tariff.The scale of the subsidy is small in HP as compared to other states (e.g Andhra Pdesh and Tamil Nadu) and there ace no issues of free power to contend with. IU5The employee contributes 10percent of Basic Pay and DearnessAllowance towards his pension benefitsand the state matches the contribution. 124 Himachal Pradesh:AccekratingDevelopmentandSustaining Success in aHillState for employees hired prior to May 15, 2003. receipts ratio will also decrease from 24 percent in GoHP has announced the creation of a fund 2005-06 to 17percent in 2011-12. for financing Defined Benefit pension scheme with an initial corpus of Rs. 0.5 billion that HP has 23 Pubhc Sector Enterprises (PSEs) that employ will be enhanced over time. GoHP also plans closeto 50,000people.Importantly fromaresourceflow to undertake pension liability and cash flow perspective, however, the annual support to PSEs by projections with respect to civil service with a way of direct subsidiesis not too high. GoHP has kept view to medium term reforms."% annual subsidies to these enterprises at a relatively low In 200607, the state had initiated a system of levelof Rs. 0.4 billion in 2006-07, down from Rs. 0.48 pefomance-based budgeting, which will be actively billion in 2005-06. Much of this is given to Himachal pursued and implemented. Road Transport Corporation (HRTC) on account of the state's social responsibility of providing public GoHPplansto expandperformance budgetingby initiating departmental Me& Tem Expenditure transport services on unviable routes. On the other Frameworks in a few key departments, such as hand, contingent liabilitiesin the form of outstanding Education, Health, Public Works, and Irrigation guaranteed borrowings by state-owned PSEs is b h - and Public Health. at about Rs. 35.5 billion or about 14percent of GSDP as on March 31, 2006. The government also carries GoHP proposes to develop maintenancephns for significant fiscal risks from the accumulated losses k e d assetssuchas roads,buildings,and equipment incurred by PSEs. As of March 2006, the total past for fundingpurposes. accumulated losses of these enterprises was about GoHP is considering a permanent internal Rs. 9 billion or 3.5 percent of GSDP. The HPSEB institutionalmechanism to undertake rolling annual and HRTC and are the largest, accounting for nearly reviews to identify unproductive programmes, 80 percent of the employees and 70 percent of the and rationalize and improve efficiency of accumulatedlosses. existingprogrammes. GoHP has proposed several reforms to lower off- Managementof Debt and Contingent budget borrowings and contingent liabilities. The Liabilities 2007-08 budget has announced that risk-wezghted state guarantees for loans will be capped at exis.ting levels. GoHP has been classified as a debtstressedstate by Go1.'"- GoHP will cap guaranteesat 40 percent of the previous Over the period 2007-08 to 2011-12, GoHP proposes year's revenue receipts by the next financial year. This to replace Rs. 15.5billion of high cost debtwith coupon will help minimize exposure to poorly performing state rates of 10percent and above. Debt that carries coupon owned enterprises and boards, while making the award rates 10percent and aboveconstituted about 18percent of guarantees strategic in furtherance of development of outstanding debt stock at the end of March 31, objectives. Off-budget borrowing is to be contained, 2007. Approximately 40 percent of the debt will be and the state has already consolidated Rs. 27.6 billion repaid between 2007-08 and 2011-12. As GoHP's fiscal of its off-budget borrowings in its books. Moreover, situation improves, its interest expenditure to revenue GoHP presently reports guarantees on an equal 1110Projecaonswill be initiatedfor Statutory Boards, Corporations,UnivetsiaesandAided Institutions, and LocalBodies and the DC scheme is proposedto be extended to covernew pensionablestaff m these agencies. A stateIS classifiedas "debtstressed"by GoLif its interest paymentto revenue receiptratio is equal to or greater than 20 percent. Annex 1:New Initiatives and Reforms Proposed by GoHP 125 weighted basis-but will begin reporting risk-weighted (ULBs);and (vi) reduce backlog of Utilization Certificates guarantees as required under the FRBM. While these and audit of ULBs, and (viii) create a database of PSEs as of today are not imposing a huge annual cash serious audit observations, to monitor and improve subsidy burden on GoHP, the loans extended to some the responsiveness. corporations and guarantees given to others may result in a future fiscal liability. In the medium term, GoHP As regards modernization of public procurement plans to put in place a set of formal rules to govern systems, the challenge is to integrate procurement eligibility of PSEs, cooperatives, and statutory boards into a well defined PFM system. GoHP proposes to for government guarantee. follow such an approach that will focus on integrating procurement with planning, budgeting, accounting, and auditing. The reform will be overseen by the ImprovingPublic Financial Management Finance Department, and will work towards instituting a modern procurement law to guide procurement Despite several achievements described briefly activities in government and conducting an assessment above, some key areas need strengthening for the for e-procurement. state's public financial management system to assist expenditure effectiveness, and support GoHP's medium term fiscal and governance program. The B. Promoting Key Sectors for need for reform is particularly evident in the area of Growth, Employment, and budget execution procedures, including weaknesses in internal controls. It is necessary to complete the Revenue Mobilization ongoing computerization of treasury systems, create an internal audit system, and have more effective legislative oversight and timely follow up on audit Tapping HydropowerResources Efficiently observations. GoHP has outlined an agenda for and Sustainably further strengthening financial management and procurement and prioritized the following actions from GoHP appreciates that the development of hydropower the year 2007-08 onwards: (i) modernixe the Himachal should be in consonance with environmentalsafeguards. Pradesh Financial Rules, 1971, in line with the General Implementation of most of the environment Financial Rules (GFR), 2005, of GoI, to strengthen management activities falls within the domain of the internal controls; (ii) reinforce the responsibii29 and stateand,HP is takingsteps to strengthenits institutional accotmtabik& of Heads of Department (HOD) to ensure structures for the planning, implementation, and more effective utilization of resources and strengthen monitoring of environmental management activities. internal controls; (iii) conduct a Public Financial The state is designing an accountability mechanism for Management andAccountabilify Assessment to review PFM preparation and implementation of CAT Plans. It is arrangements including in the PSEs, starting with also takingsteps to acceleratetheimplementation of the two largest PSEs; (iv) complete treasuiy comp~tenxation CAT plans for the ongoing hydropower projects-in the and roll out coverage to the sub-district level; short term, the focus will be on identifying 3-4 critical (v) constitute a worhng group to work out an internal items from the CAT plans of ongoing large hydropower audtfunctionin terms of scope,coverage,and focus,with projects and demonstrating implementation of the a view to moving towards a 'risk based' audit approach same. In the medium to long term, the focus would be as opposed to a transactions based audit approach, and on scaling up the full implementation of CAT plans streamline the audit function in Urban Local Bodies across ongoing hydropower projects and ensuring their 126 HimachalPradesh:Accehating DevekpmentandS~stm'ningS~ccessinaHil/State implementationat the earliest,and for the new projects, the Electricity Act of 2003, GoHP/HPSEB proposes in parallel with the project implementation schedule. to prepare an implementation plan for enhancing One of the approaches that the state is consideringis the effectivenessof operations of HPSEB under the outsourcingimplementation of some of the activities Electricity Act 2003-and begin implementation of under the CAT plan to either the project implementing the plan. agency or other contractors. In parallel, the state is planning to undertake an assessment of the skill and capacitygaps existingin the different state agencies for Unlockingthe Potential in the HighValue undertaking the environmental management activities, Tourism Sector and will then prepare a plan for building up capacity for implementation and supervision. In addition, HP Despite GoHP's stated commitment to tourism is beginning to focus on incorporatingthe river-basin development, an inter-departmental consensus on approach while preparing such plans. For a start, its importance appears to be absent. The state's GoHP has facilitated the initiation of a study for the current Tourism Policy lacks clear funding SatlujBasin for the optimal and integrated development provisions, and is behind targets in terms of of power. implementation deadlines, as discussed in Chapter 4. Accordingly, GoHP will support the update As described in Chapter4, HPhas been followingamixed of the existing Tourism Policy. This will include: (i) a model of development of the hydropower resources. view of t&efuturewithin the context of Indian tourism, Recently, however, following the establishment of the recognizing that tourism and economic development Himachal Power Corporation, it has been proposed are inseparable and mutually supportive; (ii) a macro- that a number of new projects that had been either level perspective plan for tourism development of earlier allocated or are still unallocated be transferred HP, so as to guide future development in a strategic, to this new entity for development. This new approach scientific, sustainable, and professional manner, while can have significant challenges for the state. GoHP keeping within the defined vision; (G)a micro-level proposes to strategically evaluate the risks and benefits destination development master plan, with a 1-5 involved in following this model, in comparison year perspective, for the focused development of the with the corresponding risks and benefits from the specific areas/sites/sub-regions/themes identified for alternative models. In addition, GoHP also plans to tourism development; (iv) well defined mechanisms for analyze best management of revenues flowing to state financing this vision through public, private and joint from the hydropower projects, to ensure the maximum sectors;and (v) clear responsibilities and accountability benefit for the state and for those most affected by the for implementation. development-including suggestingalternativeways for benefit sharingwith the communities. GoHP seeks to strengthen institutions for tourism development. In order to develop and implement this The htermul ef3i-q of Hl%EB--wW had vision, the institutional mechanism-including inter- b~ ~ @ e * &mdd dmhbhtb departmental coordination-has to be improved. startad XQ dama a h s q k sdrives mainly by:the The HPTDB is an apex body that could take the sigrrifiwtkcme inincvenuefbn in@-state [cab- institutional lead-but it must be activated, with clear r s m h an issue, Under the F;ldcity Act (20Q3)J), mandates and regularized meetings. The HPTDB must mm taiatrue'turetfieir4mtedectlp:dtybodsby lead in facilitating a political consensus amongst all segregatingthe m~niissim funeti~n&om the powex constituencies about the importance of tourism, and b d d ~wid3 &W . t@WX& h ~ b k % l h gclearlycommunicateto all the stakeholdersthat tourism Annex 1:New Initiatives and Reforms Proposed by GoHP 127 is a priority industry. The Executive Body of the C. Promotingthe Institutional HPTDB is supposed to have over 100members, which Frameworkfor Environmentally makes it unwieldy. The organization, composition, and mandate of the HPTDB will be evaluated by GoHP, Sustainable Development and changes introduced as appropriate in subsequent years if required. GoHP also plans to create an GoHP recognizes the need to improve institutions empowered SingleWindow mechanism under the TDB to manage envii.onmenta1 assets, as described for facilitating approvals for tourism projects, requiring in Chapter 7. GoHP has committed to improving inter-departmental coordination. If necessary, GoHP environmental management, particularly by: will hire professionals to work with the government (i) promoting inter-departmental coordination to ensure on a longer term basis. GoHP also plans to involve convergence of environmental objectives and minimize and consult with civil society groups in developing intersectoralconflicts; (ii) strengtheningthe Environment tourism--especially in its plan to certify and classify Department,which currentlyhasinsufficientcapacityand tourist facilities, and organize specialized tourist events powers, in order to capitalize on the state's comparative like annual fairs, etc. advantages and use environmental resources as growth drivers; and (iii) preparing an Environment Master Plan The state proposes direct measures to involve the supporting developmentgoals, and providing a holistic private sector. The state runs the HP Tourism view of the growth-generating potential of natural Development Corporation (HPTDC)-and while lack resources, as well as the limits and carrying capacity of of funds prevent upgradation of HPTDC facilities, key resources. the private sector also cannot operate these state- owned properties in amore profitable and professional Recognizing the importance of environment, GoHP, manner. Properties that belong to HPTDC, if in its Budget announcement, has proposed to form a privatized, could send the right signals to investors. Department of Environment and Pollution Control, It is likely that good tourism properties owned by as per terms of reference issued by the Ministry of the government could earn much more revenues for Environment of Forestry in GoI. A comprehensive GoHP, apart from attracting the high end traveler, if Government Order has already been notified by GoHP run professionally by a good hotel chain. GoHP has on April 13, 2007, providing details for the formation already tendered for Expressions of Interest for the of the department itself, its staff and equipment development of seven properties, broadly suggesting composition, and functions for each of the subset usage-like golf courses, health facilities, hotels, departments: Science and Technology, Biotechnology, etc.-in conformity with GoHP's priorities. Short and Environment and Pollution Control. listingis in process, and bids are likely to be approved this calendar year. An urgent need has been noted for conducting a capacity assessment for the new Department of In order to promote connectivity, GoHP is also Environment and Pollution Control. The assessment planning to involve the private sector in the would review staffing/skill mix, equipment, knowledge construction of three ropeways: Dharamshala-Triund, and resource requirements, as well as identify functions Manali-Rohtag-Solan, and Kullu-Bijli Mahadev. The to be performed by the Department and those to be bid process for this will be initiated shortly. Over the outsourced. It has been further emphasized by GoHP medium term, the state plans to upgrade Kangra and that the state's extremely fragde Himalayan eco- Buntur airports to allow for larger aircraft carriers, as systems warrant a strong research and development well as develop helipads and helicopter connectivity. capacity in priority areas such as adaptation strategies 128 HirnachalPradesh:Accehating DevehpmentandSustainigSmcessin aHillState forglacial melts due to globalwarming; preservationof Inaddition,GoHPis keen on strengtheningcommunity pasture lands and wetlands (Ramsar sites); river basin involvement mechanisms, to enhance environment issues impacting environment flows, aquatic life and performance and accountability, and improve regulatory impacts on livelihoods. GoHP plans to mainstream compliance. Since GoHP has already established Local environment management within sectoral agencies by Area Development Committees in each district, it has preparingsectoralguidelinesto strengthen environment been proposed that pilot "community environment management in sectors with high vulnerabilities. This monitoring mechanisms" would be initiated through willbe initiatedwith aparticular focuson the needs of these Committees. In addition, grievance redressal the hydropower sector. mechanisms will be established by project proponents to increase their environment responsibility and With alongterm perspectiveinmind,GoHPhasindicated public accountability. its intention to prepare an Environment Master Plan for the state to foster interdepartmental coordination In the context of GoHP's specific needs of balancing andincludeenvironmentalconsiderationsaskeyplanntng green coverandmaintaining the "health" of forests,the tools. This includes identifying execution, accountability, need for further research in the area of environmental monitoring, and enforcementprocedures, and roles for restoration and regeneration has been recognized by other depamnentssuch as Transport, Forestry, Tourism, GoHI? GoHP willwork on preparationof guidelines to Hydropower, Indusuy, Urban Development, Town and strengthen the Compensatory Afforestation programs CountryPlammg, and PublicWorks-to be coordinated using scientificcriteria (eg.biodiversity offsets, restoration by the Environment Department. The components of biology) in the short term. the Environment Master Plan would include detailed resourceinventory covenng all environmentparameters; trend analysis of environment degradation;vulnerability D. Improvingthe General Business assessment to establish zones and appropriate Environmentfor PrivateSector development criteria to guide developmentand optimize resource utilization. Once prepared, its implementation Participation would be piloted, beginning with fragrle areas and graduallys c a bup to statelevel. Given that one of the key constraints to private sector development as well as productive employment for In order to build up towards the Environment Master educated youth is the skills mismatch discussed in Plan, GoHP will first initiate a "gap analysis" of Chapter 3, GoHP is seeking to assess and project the the sector. This would include: (i) assessment of skill needs of the secondary and tertiary sectors;better environmental pressures in various areas in the state; match the provision of technical andvocationaltraining (ii) identification of regulatory, institutional, and policy opportunities to market opportunities; and improve the gaps leading to these pressures; (i) assessment general quality of education with a view to increasing of workload and implementation capacity for the employability. The state proposes to undertake a study Environment Department, Forest Department, and on skills mismatches and shortages in HP. This will the State Pollution Control Board; ov) strengthening be an important step, since the extent of skill gaps of compliance and efficiency by assessing alternative and mismatches in the state is unclear at present. This ways of implementation of development projects; and constrains evidence-based policy reforms. The study (v) assessment of adequacy of the existing range of would include a skills-mapping exercise, to identify policy instrumentsand feasibilityof using new ones that particular sectors which would emerge in the near target the systemicand root causes of policy failure. future, so that skill requirements could be projected. Annex 1:New Initiatives and Reforms Proposed by GoHP 129 Based on this, the state plans to come up with a skills to facilitate planned industrial infrastructure development strategy to bridge current and future development through the creation of industrial area skills shortages and skills mismatches-worked out authorities in priority locations is expected to be enacted. in consultation with industry, workers, and educators. Measures would be taken to strengthen the BBNDA It should be noted that it is not proposed that GoHP and other IADAs through additional funding during take the lead on skill development-but that the study the next few years. provides grounding for policy-based reform, including on private sector involvement. GoHP will undertake a study to evaluate the effectiveness of business facilitation measures at the state and GoHP is also working towards improving transport district level. Measures like the single window facility facilities to raise connectivity-which is another have been in operation in the state for several years- major bottleneck faced by the private sector. As part and GoHP would like to assess its effectiveness and of a strategy to make available public transport to rural identify remaining bottlenecks. Recommendations from areas, GoHP has announced an automatic licensing the study will be implemented in future. scheme for all investment applications, where at least 60 percent of the bus route is for rural roads. To make full use of the high investment made in roads E. Strengthening Governance and construction, the licensing regime will be liberalised to Public Administration grant more permits to the private sector for plying of buses.T h s new policy is a "win-win" on many accounts. There shall be more direct and indirect employment Transfers are an important issue, and GoHP supports avenues for the unemployed youth. Through better increasingtenurial stability. As describedin Chapter 5, transport opportunities, the state economy shall benefit the average tenure (in their current posts) of Principal substantially, especially in sectors such as agriculture, Secretaries and Secretaries in HP is currently a mere horticulture, and tourism. The state's tax revenues will 14 months; tenures for Deputy Commissioners are also gain in terms of enhanced consumption of diesel, marginally better, at 17 months, but still well below spare parts usage and higher collection of road tax. the three-year minimum tenure set by HP's transfer The role of HRTC will continue to remain important, policy. Given the high turnover among senior staff, especially for the interior and far flung areas of HI? GoHP is seeking to improve the tenure and stability of civil servants to promote effective implementation GoHP also plans to stepup infrastructure development of programmes by enforcing the average tenure of a in industrial areas. Though the Baddi-Barotiwala- minimum of three years, consistent with HP's transfer Nalagarh Development Authority (BBNDA) has been policy, while discouragingpoliticization of transfers and set us to oversee infrastructure development in the recruitment. GoHP also plans to contain transfers across area, there are issues of funding and coordination. government at 3 percent of the actual working strength The government will promote measures to synergize of cadres per year. A Committee on Minimum Tenures efforts under the BBNDA, the Industries Department, is to be established and GoI's proposal on minimum and other relevant agencies-to avoid duplication tenures for Indian Administrative Service posts is to be in planning and implementation of industrial area accepted. Furthermore, mid-year transfers in Education development of BBN area. A proposal for development are to be banned. of worker housing in the BBN area, based on public private partnerships, wrll also be supported. A proposal Improving administrative efficiency through better to enact the Industrial Area Development (IADA) Act file management is a policy priority. While GoHP 130 Himachal Pradesh:AccehratingDevelopmentandSustainingSuccessinaHillState has introduced a computerized file monitoring system ensure stabletenures for the Director General of Police in 2004, very few Departments are actually using the and other senior officers. system to reduce delays and cut pendency. Section officers in particular are not well trained in the use of E-governance has enormous potential in HP as a tool computers. The use of the single-file system across for sirnplifylng transactions and making it easier for government is limited, with only Rural Development citizens to access government services. GoHP plans to and PanchayatiRaj makinguse of that at present.GoHP implement land records computerization in 88 Tehsils will focus on the use of change management tools to and Integrated Service Center kiosks in all Tehsils in better equip staff for the wider use of e-governancein Shimla District, with at least seven services during the the Secretariat. The single-file system will be extended coming year. This will be scaled up to other districts to selected major departments. GoHP will also issue a duringsubsequentyears,alongwith businessprocess re- Government Order requiring use of REFNIC-which engineeringinitiativesas necessary. is a file tracking software-by departments for all file management and tracking functions in Secretariat. Among other measures to improve public administration, the Right to InformationAct will be more GoHP needs to strengthen police capacity. Despite a aggressively implemented. All state Departments are good law and order situation,the overallconvictionrate being encouraged to post all the required information for all crimes (including, but not limited to, corruption under the RTI Act on their respective websites, cases) under the Indian Penal Code (IPC) and Special so that the common citizen can access all relevant LocalLaws (SLL) has fallen in the last decade.Measures information pertaining to departmental schemes. to reverse the weakening of police capacity to provide GoHP plans to experiment with an outsourcing policy effectivelawand order services,reflectedin thedeclining in some key departments-including functions like overall conviction rate, will include implementing sanitation work of hospitals and urban local bodies. the recent Supreme Court directive to create a State Furthermore, GoHP proposes to undertakefunctional Security Commissionto insulate the force from political reviews of departments with a view to improve pressures. HP has also notified Go1 rules designed to government efficiency. nex2, Some Human Developm Indicators, HP(I 120 - Human Development Outcomes... - 100 IN GJ 7 IN IN )MH dL HP 40 - - 20 ?kKR ?tKR 0 j f -$ $ 3, g 3 a *g $ 3 Q- x i - 4 52 n 5 2 i- k !j.A 8; 0 s 2 $ 9 & E 5e $ 8 U 120% - ...andAccessto Services 1Wh - RKR NKR Wh - HP bHR 60% - GJ IN 40% - IN np 20% - KR )k 1 0?/0 r I 24 .g i 8 8 8 3 g a fid I (P P, 2 5I 8 1 4 P 8 Nok: A#&&@m National S@k Sumg (79994)or National Fmm'3Heakb S u y (199&98). Stah rtpnsenkd m MH=Mabarosbhq Mi=&rah, GJ=Gu~arat;HR=Hatyanq' PJ=Punjab;HP=HimnchafPradcsb, andll\r= IndiaAm&. Defining Vulnerability model is estimated using cross-sectional data and the predictions from this model are used to generate the P overty and vulnerability are closely related but distribution of expected consumption and the predicted distinct concepts. Poverty is the actual observed probabilityof beingpoor in the future. Householdswith state of the household falling below a specified probability of future poverty below an arbitrarilychosen threshold with respect to a specified welfare measure. vulnerabilitythreshold, analogous to the poverty line, are Vulnerability, on the other hand, is the prior probability classified as vulnerable to expected poverty. While it is of the household being poor. In other words, poverty acknowledged that vulnerabilityis essentially a forward- is the exposf realization of a state while the latter is the lookingconcept so that cross-sectional data can provide ex ante probability of a household being in that state. some insightonly at the cost of stringentassumptions,it Households vary in their exposure to shocks and in is equallyimportantto make an attempt,in the absence of their ability to cope with these shocks. Consequently, panel data, to highlightthe need to focuson the volatility some households may be more vulnerable than others. of consumption and the movement of households into Thus, itisimportant to examinevulnerabilityarisingdue and out of poverty. to household characteristics and/or shocks that make households more likely to remain in poverty or to fall Key Stepsin Estimationof Vulnerability into poverty in the future. Empirically, the first step is to estimate a reduced form In this Note, we adopt the approach that vulnerability consumption model as follows: is "the likelihood that at a gven time in the future, an individual will have a level of welfare below some norm or benchmark". This approach develops a model to predict realized welfare, measured as consumption where C, is the per capita household consumption in this specific case, at a point in the future using expenditure, x, is a ( k l ) vector of household cross-sectional data, and the probability of an individual characteristics (including household demographics, household fallingbelow the predicted welfare level (see main economic activity, endowments of labor and Chaudhuri 2000). Two attractions of this approach are: land, etc.), fl is a ( k l ) vector of unknown parameters (i) the measuresof aggregatevulnerabilityareanalogous that describe the state of the economy and e, is the to poverty incidence and are thus easy to interpret and normally distributed error term N(O,of,).This error apply to policy; and (ii)data availability. term captures the idiosyncratic shocks that result in different levels of per capita consumption for The basicintuitionbehind thls methodology is essentially otherwise observationally identical households. The to understand the household's random consumption model allows for the cross-sectional variance of the generating process and hence, the probability of error (and hence of log consumption) to vary with household consumption falling below a specified household characteristics as follows: threshold. In the absence of panel data with observed consumption distributions over time, a consumption Annex 3:Technical Note on Estimation of Vulnerability 133 where 0 is a (kxl) vector of unknown parameters to incidence, v, =0.5, defined over a three-year time be estimated and u, is the normally distributed error horizon, i.e., the probabilityof fallinginto consumption term N(O,a,2). poverty at least once in the next tbreeyars..Io8 The parameters fl and 0 are estimated using a three- The advantage of this approach is that it does not step Feasible Generalized Least Squares (FGLS). This require panel datasets that are rare in developing procedure generatesconsistent estimatesof 6,allowing countries and can be used to assess vulnerability based equation (1) to be transformed so that the error term on cross-sectional data. Additionally, the methodology is homoscedastic. The consumption regression model yields an overallincidence of vulnerability measure that can then be estimated using Ordinary Least Squares is analogous to the commonly used poverty headcount (OLS) to obtain consistent estimates of b. Using these ratio and is familiar to policy-makers. Note that the estimated parameters, we can obtain household-level measure of vulnerability already incorporates the use expected log consumption: of coping mechanisms (as it is defined in terms of observed consumption expenditure) and thus, reflects both income risk and the use of smoothing (Pritchett, Suryahadi, and Sumarto 2000). On the flipside, the and household-level variance of expected log shortcomings of this approach relate to the strong consumption: assumptions that are required to assess vulnerability from a single cross-section (see Chaudhuri 2000 for details)-ne, inter-temporal variance can be proxied by cross-sectional variance across households at a Assuming a normal distribution for log consumption, sufficient level of disaggregation;two, the structure of vulnerability can be estimated as follows: the economy is stable so onlyidiosyncraticshocks enter the model through the error term. Data and Variables Used in Esfimafion We estimate separate consumption regression models where z is the specified poverty line and @() is the for rural and urban areas of Himachal Pradesh using standard cumulative normal density function. the 1999-2000 large-scale National Sample Survey consumption schedules, as per the methodology Overallvulnerabilityincidenceis then defined as the total outlined above. The variables used to explain log number of vulnerablehouseholds,i.e., those households consumption include household head characteristics where the estimated vulnerability falls below a specified (including age, gender, marital status, educational threshold in a given time horizon. Clearly, the measure attainment), household demographics (such as of vulnerabilityincidenceis sensitive to the choiceof the household size, number of children and elderly vulnerability threshold (%) and the time horizon (n). in the household), main economic activity of the household (i.e., whether the household is primarily Following standard practice in the literature, we focus self-employed in agricultural or non-agricultural on the most commonly used threshold for vulnerability activities, primarily engaged in regular wage or casual IU8Note that,by delinition, providedthe sampleis largeand normallydistributed,the esdmated mean vulnerability should rend m d s the observedpovertyrate 134 Himachal Pradesh:AcceleratingDevelopmentandSustaining Successin aHillState wage-agricultural and non-agricultural in rural background) as well as controls for seasonality. The areas-employment or other activities), land owned impacts on household log per capita consumption of and facilities (whether the house is electrified), other the majority of these variables are broadly plausible. household characteristics (including caste and religion Results are reported below. I DependentVariable = Lon Monthly Per Capita Consumption I Annex 3:TechnicalNote on Estimation of Vulnerability135 Dependent Variable = Log Monthly Per Capita Consumption Demilsof Loss-MakingPSEs HP Minorities Finance andDevelopmentCorporation -28.02 -112.73 197.42 HP Mahila Vikas Nigam -2.02 -4.06 196.92 *L a k ! s ffw A b accounts ~ werejd~?d Sbaded row5 indicatePSEs witb mdedpil up cgiid --- ections and Debt ., lity Analysisl. Fiscal Projections given that the state has announced severalencouraging measures in its 2007-08 budget to raise its own tax T he Government of Himachal Pradesh had revenue. These include raising the motor vehicle tax produced medium term fiscal projections that on personal vehicles from 2 percent to 5 percent, and were tabled along with the Budget for 2007-08. to prevailing national levels by 2011-12, levying a The projections were subsequently revised to reflect green tax on vehicles over 15 years old, and a hotel strongerimprovement in expenditurecomposition and tax based on notional minimum occupancy. The state fiscal correction. The revised framework is outlined exciseregimehas been revised to avendor-wise auction below. The MTFP is broadly consistent with the regime, with annual license fee linked to minimum HimachalPradesh FRBM, 2005and aligned with TFC's guaranteed quota that is based on past trend in sales. recommendations. The MTFP targets elimination of As a percent of GSDP, the state's own tax effort is GoHP's current deficit in 2008-09 and reducing the forecast to increase from 5.2 percent in 2006-07 (RE) ratio of gross fiscal deficit to GSDP from 4.3 percent to 6.5 percent by 2011-12. Non-tax revenues show in 200607 to 2.2 percent by 2011-12. Going forward, a growth of a little over 10 percent annually. These GoHP plans to execute its budget to meet the 2007- are fairly conservative, given that non-tax revenue has 08 MTFP targets, and prepare the 2008-09 budget in grown rapidly from 2002-03 onwards at an average alignment with the MTFP targets for that year. GSDP of 45 percent year on year, largely on account of is expected to grow at a nominal rate of 14 percent, revenue from sale of hydropower. Central taxes and which is broadly consistent with a real rate of growth grants are projected to decline from 15.7 percent of of 8 percent. GSDP in 2006-07 (RE) to 14.9 percent by 2011-12. The revenue effort is projected at an almost even 24 Revenue. The projections indicate an annual growth percent of GSDP through the MTFP period, in part rate of roughly 16 percent in own tax revenues (and because of a conservative forecast of share of non- a buoyancy of around 1.1). This seems achievable, tax revenue. Table A5.1: Revenues under the MTFP (Percentageof GSDP) I h d T m a a d G m @ 121 17.2 15.7 14.7 14.3 - 147 14.9 149 SharedTaxes 2.3 1.9 2.0 2.4 2.5 2.7 2.9 3.1 Grants 9.8 15.2 13.6 12.3 12.1 12.0 12.0 11.8 138 Himachal Pradesh:Accelerating DevelopmentandSustaining S~uccessin a HillState Table A5.2: Expenditure Composition as a percent of Total Expenditure - - - - - 200445 2005-06 200607 2007-08 200849 2009-10 2010-11 2011-12 Actual Actual RE Proj Proj Proj Proi 1 Salaries 1 36% 1 35Y0 1 33% 1 34% 1 34Y0 1 33% 1 31% 1 30% 1 I Pensions andRetirement Benefits 1 9% 1 1P/o I 1P/o 1 10% 1 10% 1 10% 1 10% 1 9% 1 Non Wage O&M 10% 11% 13Oh 13% 14Yo 15% 17% 18% SubsidiesandTransfers 7% 7% 8Yo 9% 8% 7% 6% 5% InterestPayments 25% 21% 20% 20% 18% 17% 16% 15% CapitalOutlay& Net Lending ZOO! 11% 13% 12% 14% 16% ' 18% 20% Expenditure. The projections indicate that GoHP wages, likely impact of the next Pay Commission, and recognizestheneed toimproveexpenditurecomposition wage creep in the salary projections. Subsidies and towards capitaloutlay and criticalnon-wage O&M.The transfers remain fairly constantin absolute terms. MTFP attemptsto: (i) reduceshareof salaryexpenditure to total expenditureto 30 percent by 2011-12, from 35 While the projections may not meet Twelfth Finance percent in 200546; (ii) decrease interest expenditure Commission's guidelines on salaries (35 percent of to revenue receipts to 17 percent by 2011-12 (i.e. by revenue expenditure net of interest payments and 5 percentage points of revenue expenditure from 21 pension) and interest expenditure(15 percent by 2009- percent in 200546); and (iii) increase non-wage O&M lo), they do meet the Twelfth Finance Commission and capitaloutlay to 18percent and 20 percent of total targets of elimination of revenue deficit and a fiscal expenditurerespectively by 2011-12 (Table A4.2). The deficit ratio of 3 percent of GSDP. Moreover, what is underlying basis of the forecast has been strengthened important is that the projections do show a story of to reflect huing plans, amition, inflation indexation of consistent fiscal improvement. The proposed fiscal trajectory is shownin Figure A5.1. Figure A5.1: Projected Fiscal Trajectory IDebt SustainabilityAnalysis The state,in itsmedium term fiscalprojections, predicts that debt will reach around 47 percent of GSDP by 2011-1 2.Whilethestate& thepast,hasnotbeenreporting off-budget liabilities, and thereby underestimating the actual level of debt, it is now making an effort to consolidate the outstandingoff and on budget debt for fiscal management purposes. Figure A5.2 below gives the debtprojections asper the government's projections, after including off-budget liabilities from 200546 onwards.The debt stockis expected to decrease by over 20 percent over the next six years. tPrimaryDeficit +RevenueDeficit tFiscalDeficit Stress tests were carried out to check the robustness of the projected debt trajectory to economic and fiscal Annex 5: Fiscal Projections and Debt SustainabilityAnalysis 139 I 2008-09. GSDPgrowth startsat 8.5percent, and moves DebtProjectionsunderGoHPRevised M l T P gradually towards a long term growth rate of around 7 n 1 percent by 2016. Under steady state conditions of the MTFP, if projected forward to 2020, debt to GSDP ratio should decrease to about 35 percent in 15years time. However, a shock to GSDP growth of 2.5 percent in 2011-12 could slow the reduction of debt to GSDP to 38 percent by 2020. In a second test, a decline in central transfers of an order of 5 percent annually from 2010-1 1 onwards, will raise the end period debt to GSDP ratio to 46 percent. Finally, declinein central transfers of the order of 5 percent annually from 2010-11 onwards, combined with an interest rate Table A5.3: Debt Projections under Varying Scenarios (percent GSDP) cenarios 2005 2010 -2015 2020 Baselineplus shock to growth ratesin 2010-11and 2011-12 74 57.5 46.9 37.9 Baseline plus a possible declinein centraltransfers starting2010 74 58.0 55.8 46.1 Baseline plus declinein central transfers plus interestrate shock in 2010-201 1 74 59.7 58.8 48.8 shocks. These tests are mainly indicative. The purpose shock of 3 percentage points in 2010-11 and 2011-12, of the exercise is only to demonstrate the need for will raise the projected debt to GSDP ratio over the continued maintenance of fiscally sustainable policies baseline by nearly 13percent of GSDP in 2020 to 49 over the medium term and the importance of robust percent. To maintain the original debt trajectory in and sustained fiscal correction to counter future the face of shocks the state would have to generate uncertainties that can upset the trajectory of debt higher primary surpluses. Clearly, the state needs to reduction.TableA4.3 below shows Himachal Pradesh's stay on a strong fiscal correction path over the hkely debt trajectory under different scenarios. For the medium term. . Fie -------- GSDP 2815.2 14112.5 15661.2 17148.2 18904.7 20721.O 23024.0 25435.0 28995.9 * Gwaranteespwkining to tbe HimacbaI Howsing Board HP Fored Coprubon, HPRIDC and HPIDB have been retired & tnqiig their off bw& bommng mlb on-bdgefakk ' - - Annex 6:Fiscal Data for HP141 Himachal Pradesh: Fiscal Summary 142 HimachalPradesh:Accehating DevelopmentandSustaining Success inaHillState Himachal Pradesh: Fiscal Proiections under RevisedMTFP Annex 6:Fiscal Data for HP 143 Himachal Pradesh: Fiscal Projections under Revised MTFP I --- - I I &imary Surplus (+)/Deficit (-) 1.8 a 1.5 1.6 1.7 - I mevenue Surplus(+)/Deficit(-) -0.1 1.3 2.2 3.0 . " '@seal Surplus (+)/Deficit(-) 3.4 4d -3.8 -2.6 -2.2 'r? -- -- Bebt Stock 63.7 !m$ 54.8 50.7 46.7 !JIB A. Introduction the receipt side. On the expenditure side these include revenue expenditure,expenditure on creation of assets and repayment of loans. T he purpose of thisAnnexisto provideapreliminary assessment of the Public Financial Management Part 11-Contingency Fund This fund is established to Systemin Government of Himachal Pradesh (GoHP). meet transactions of an unforeseen or urgent nature; currentlybalance in the fund is Rs. 5 crores. This note has been prepared based on findings of a World Bank team which visited Himachal Pradesh Part 111-Pubbc AcmunkThisincludes transactions relating (I-IP) during October 16-19 and then during October to deposits, advances,remittancesand suspense;in cases 2GNovember 3, 2006. The Bank team met with where the government acts as a banker or trustee. This Officials of GoHF',Public Accounts Committee,Audltor may include Provident/Pension Funds, various reserve General(AG),Controllerof Storesin Shimlaand reviewed and development funds, deposits relating to various relevant documents (Finance Accounts, Appropriation departments, and suspense/temporary accounts which Accounts, C&AG Audit Reports, Procedures & Rules areexpectedto beclosedthrough offsettingtransactions. for the Purchase of Stores, Industrial Policy Rules, The Public Account also holds the cash reserves of the and various Acts and Rules etc.) during the course of stategovernment. its work. Chart of Accounts: A budget document provides detailsof budget-estimates for the comingfinancialyear. B. Budget Formulationand The budget estimates are prepared for different heads Execution of accountswhich are based on a uniform classification system as adopted by most states. As stated above, at the broadest level all transactions are classified into BudgetaryFrameworkThe frameworkfor Budgeting one of the funds. Consolidated Fund is divided into and Accounting in GoHP is divided in the following Revenue and Capital sections, which are further broken three parts; this is sirmlar to the structure for any other down into sectors and sub-sectors. The sub-sectors Indian state. are further divided into a six-tier hierarchical structure, classified as follows: Part I-Consolidated Fund Most of the transactions of Major Head-4 major function of the the state flow through the Consolidated Fund."" These Government include taxation and other receipts, capital receipts and proceeds from loans raised by the State Government on Sub-MajorHead-a sub-function 1119 Funds whch are received directly by the implementing agencies (e.g. State Societies in case of Health or Primary Education or DRDAs in case of Rural Development Schemes) under CentrallySponsored Schemes would normally not be reflected in the State Budget or Annual Financial Statements. Annex 7: Preliminary Assessment of Public Financial Management and Procurement 145 Minor Head-a programme a conscious effort in terms of scheme prioritization, still steps should be taken to bring more of an outcome Sub-Head-4 scheme focus in the Budget. An outcome budget would clearly Detailed Head-a sub-scheme articulate objectives, financial outlays, deliverables/ Object Head-standard object of expenditure physical outputs and desired outcomes of a program/ scheme; it is intended to bring in a higher level of This classificationimplies that the budget is very detailed accountability for results. Go1 has recently moved in and consequently the implementing departments have this direction by presenting its first outcome budget limited flexibility during the year to be able to shift for FY 2005-06; other Indian states are also moving in resources from one scheme to another. This shiftmay be this direction.'" Towardsgarnering maximum resources warranted in case there is slow progress on one scheme for development, the state also needs to ensure that it and fast progress on another; both being implemented gets the best possible allocations out of the Centrally by the sameDepartment. In suchinstances, the shift may Sponsored scheme^"^ with high rates of utilization of be made only with approval of the FinanceDepartment; these allocations. which tends to delay optimum utilization of resources"". The Budget Document: The Annual Budget has the Budget Preparation: Framework forpreparation of the following features: budget is as per the Budget Manual, 1972.Though there The Budget is a very detailed document with has been no major review of this document till date, information on receipts and payments; it is circulars/directions are issued by the GoHP Dom time supported by a detaded book for each of the to time to meet any new developments/requirements. 31 grants. The budget document is not easily The budget is prepared on a cash basis and is divided understood by readers, in terms of level of into two parts i.e. Plan part which is the responsibility detail as well as description of the heads and of the Planning Departmentlll, while the non-Plan part sub-heads. Though an attempt has been made which mainly consists of salaries, establishment and to summarize/explain the same through an other recurrent expenditure which is prepared by the Explanatory Memorandum; much more needs to Finance Department based on detailed information"? be done in terms of presentation to enable the provided by other departments. public to understand and analyzeit. The Budget becomes a public document after it The Planning/Budgeting Process: In HP, the is tabled in the state legislature.It is also available Plan size is much smaller than the Non Plan outlay, on the GoHP website; however as explained salaries, pension and interest account for 70 percent above,it is not easy to comprehend. of expenditure; moreover focus of departments during the course of budgeting for Plan Funds tends Legislative Approval: The State Legislatureis required to be on schemes, rather than needs. Though there is toapprovethebudgetaspartof anannualAppropriations "" '" See Paragraph 10of this Annex, on Budgetary Control. Planningdepartment prepares an overall Plan outlay for the year;this depends upon a numberof facton including the Annual Plan Approach Paper and the Five Year Plan. For determinationof department-wise outlay, it normally considers past outlays, any guidelines for growth the Approach Paper has identified, and specific schunes launched by Gol. I i ZDeparments prepare salary and other recurring part of the budget with full details, includmg list of employees, etc The information is collected and ' compiled at the Directoratelevel in each depamnent. E.8 Karnataka has moved towards Outcome based ProgrammeBudgeting. In case of the Sarva Shiksha Abhiyaan, the state spent 69% and 83% of its Annual Work Plan and Budget for FY 2004-05,2005-06 respectively. 146 HirnachalPradesh:Accelerating DevelopmentandSustainingStlccessinaHil'State Act; this is mandated as per the Constitution of India. a At theDepartmentallevelanyrequest for additional In case supplementary or additionalgrants are required budgethastobemadeto theFinanceDepartment, during the year, the same also need a similar approval. which if convinced of the requirement, would If the Budget is not passed before commencement normally sanction an 'additionality' (specific of a year, a Vote On Account is required to enable approval/additional allocation)to the department with copies to Treasury and AG (A&E). The expenditure in the initial months of the financial 'additionalities' are away of reducingthe number year. Timings of approval of the budget in GoHP are of supplementary budget provisions whch reasonable; the last two budgets i.e. for 2005-06 and is done only once"' towards the end of the 200607 have been approved before March 31, 2005 financial year. Around September/October, the and 2006 re~pectively."~ Finance Department instructs all departments to submit budget proposals for the next year It is mandatory for all state governments to obtain along with revised budget estimates for the legislative approval for any excess over a grant/ current year. Thus providing opportunity to appropriation by the state legislature. In HP a total the departments to not only identify additional of Rs 13,871.86 crores of excess spendmg since FY budget requirement but also surrender any likely 2001-02 requires approval of the legislature. In the past, excess budget provisions. this process of regularization is understood to be taking a period of 4-5 years; this process needs to be reviewed Budget Marksmanship/Accuracy: CAG has pointed both in context of minimizing the excess as well as in outa number of excess/savings in thegrantsprovided in reducing the time taken for regularization. the budget. However a significant part of the variations GoHP: Excess over provision requiring regularization Year 200142 200203 2003-04 2004-05 Rs.Crores 2,965.36 3,295.74 4,515.58 3,095.12 Budgetary Control: GoHP exercises control over related to repayment of overdrafts/ways and means budgeted expenditure, through a number of processes. advances'I8in FY 200344,2004-05. a A t the transactionhue4 the Finance Officer at the However, an analysis of excesses in case of select spending department scrutinizes the payment request for vatious checks, including availability departments/grants indicates significant variations of the budget. Further, the Treasuryensures that Over the Years; for the same need be onlythose payments are processed, for which analyzed and furthermore there is a need to improve budget is a~ailable"~. the process of monitoring. ' Howeverearlier budgets were passed as per the following timelines;2004-05 byJune30,2004 and 2003-04 byJuly 16,2003. ' l6In practice, since the sub-treasuriesare not computetized and therefore not able to get real time informationon budgetavailability (fora particularDDO under aspecific head),there are possibilitieswhere the acrual expenditure may exceed the budget allocated. "'While the total number of additionalities during the year may be as large as 200, in the past only one supplementary budget provision was made "'For encompassingall the additionalities. this purpose,the CAG considerseach repayment of overdraftas an expenditure. Annex 7: PreliminaryAssessment of Public Financial Managementand Procurement 147 I GoHP: Excess utilization of Grants (%I Grant 2004-05 FinancialYear2003-04 Public Works 56.2% 76.9% IRoad &Water Trans~ort IWSS, Housing:& Urban I 79.1% I 173.9% 1 C. Rulesfor Accounting, Procurement in the HP is governed by Procedure & Rules for the Purchase of Stores, which is an appendix Procurementand Financial to GoHP Financial Rules. These are maintained by Reporting Controller of Stores under Ministry of Industries, and relate to procurement of goods. While the Store Purchase Organization is the nodal agency for Financial Rules: Accounting and Financial Control negotiation of rate contracts, there is an increasing including Procurement in HP is guided by 'The effort to decentralize department specific purchase to Himachal Pradesh Financial Rules, 1971'. These the respective departments. The existing rules provide rules cover areas such as General Principles, Budget, a preference for domestic suppliers with an aim to RevenueReceipts, Pay, Allowances & Pensions, Stores, promote the local industries. It needs to be reviewed Works etc. Prima Facie, the Rules seem difficult to whether such preferences actually result in the desired interpret and require reference to circulars released effect. Moreover, when procurement is decentralized, since issue of the Rules; these need to be updated and multiple rules & departmental regulations/instructions significantlysimplified. developover timewith littleif any effortmade to ensure consistencyin the regulatory basis or clarityin regard to The General Financial Rules (GFR) of Government which rule applieswhen. of India (Goo have been revised in 2005. This was done through a task force setup with the objective of Simplification of laws and regulations is often best reviewingand revisingthe rules.The Report of the Task accomplished through the adoption of a modern Force states 'The GFRs, 1963were issued as a cotzpendium procurementlawthat appliesto allkindsof procurement of instmctionsj%rguidance of government offcm dealing with undertaken using public funds (goods, works and matters qf a financial nahre, have been inforce for overfour services). States like Tamil Nadu and Karnataka have decades. A Alarge nmber of the original whs havefalien into adopted modern procurement laws. disuse due to changes in the environment in which government deparfments opera&. %id growth of alternative service Annual Accounts: Annual Accounts of GoHP are dehety syteems, develcrpments in information technology and the prepared on a regular and a timely basis and provide expectationsof thepublic that Governmentshodd render time4 considerableinformation. These consist of the Finance efficientandquality sm'ce hasnecessitateda conprebensivereview Accounts and the Appropriation Accounts. of thegovernmentfinancial managementsystems) so as to ensure The Finance Accounts provide information (ii transparency, accotmtability and efectiveness..." These facts form of 19Statementsand various appendices)on are equally relevant for any Indian state. A revision of receipt and expenditure, borrowing and liabilities, the Rules (possiblyusingthe Go1GFRs as a base) would loansandinvestmentsmade,andcashbalances.The ensurethat the frameworkguidingfinancialmanagement formats are fairly consistent fiom year-to-year; in is precise, easy to understand and contemporary. certaincases Balances till date' are alsoprovided. 148 HimachalPradesh:Accehating Developmnt and Sustaining Success in a Hill State The Appropriation Accounts contain details seen by stategovernments merely as a compliance of expenditure vis-8-vis the voted/charged function and the state government may not view appropriations for the year. it as a tool for management control. Timeliness: The Annual Accounts are usually ready Completenessof FinancialInformation:Thefollowing within six months of close of the financial year; e.g. issues are of note. accountsforFY200445wereapprovedbytheC&AGon GoHP issues guarantees to assist state/public September 19,2005.Thisis considered quietreasonable sector undertakings in borrowing funds and/or in comparison with many other Indian states. In terms reducing the cost of their borrowings. As on of monthly"y accounts, GoHP fares much better than March 31, 2005 the total amount of guarantees most Indian states e.g. GoHP accounts for the month issued by the state government stood at Rs of July 2006 were available on the C&AG website in 6409 crores. Guarantees are capped under the October 2006. This is an indicator of timeliness of HPFRBM at 80 percent of total revenue receipt accounting as well as a culture of openness in terms of in the preceding financial year for which actuals readiness to share/disclose information. are available as per Finance Accounts. Also there is no system of assessing risk involved with ResponsibilityforPreparationof AnnualAccounts: each Guarantee and making provision to fund payments in case these are likely to be invoked. The followingpoints are of note. Since a cash basis of accounting is followed, GoHP's Annual Accounts are prepared by the the accounts do not present any information C&AG (Accounts and Entitlement Wing). on revenue due but not collected, payables and The various spending departments send one outstandmg commitments. set of original paid documents to the AG for compilation/consolidation of information for Only the state share of the Centrally Sponsored the entire state;this is done through the Voucher Schemes (CSS) is reflected in the Financial Level Consolidation (VLC) software. Statements since usually Go1 directly transfers fundsla' to the implementing entities for these The accounts are certifiedby the C&AG of India; the certificate states that "Points of interest programs. Since allocation to CSS is significant, the overall expenditure on the Schemes could arising out of the study of these accounts as well as test audit conducted during the year or earlier be reflected as additional information in the years are contained in my Reports being presented Financial Statements. separately for the year to the Government of As explained in a subsequent section, though Himachal Pradesh". Thus the C&AG clarifies investments in Public Sector Enterprises (PSE) that a report on audit of the accounts would be are disclosed at face value, the fact that the issued separately. accumulated losses in the PSEs are greater than Due to the process explained above, GoHP has the investments,is not disclosed. only part ownership of the Annual Accounts. While on the one hand this ensures uniformity Public Access to Procurement & Financial acrossthe country,italsoimpliesthataccountingis Information: With passing of the Right to ''The I CAG publishes monthlyaccountsof Indian stateson its website.Thisis publishedwith the following qualification"ComptrollerandAuditor General of India is entrusted with maintainingthe accountsof the stategovernments,in all the states except Goa.The position of summarisedmonthlyaccounts in case of stateswho have agreed to display on the web site is availablehere...". 110Few exceptions do exist where funds are initially received in the Consolidated Funds of the State, e.g.some schemes in the Rural Water Supply Sector. Annex 7: PreliminaryAssessment of Public Financial Management and Procurement 149 Information Act, 2005 every public authority has D. Internal Control and Internal the responsibility to provide specific information on its functions and activities. The act (Section 4 Auditing (2)) further states that ('itshall be the constant endeavor of every public authon.5 to take steps to provide as much ReinforcingResponsibilityandAccountabilityof information suo moto to the public at regular intervals the Head of the Department (HOD):Though HOD through variousmeans of communications,includinginternet is responsible for effective financial management for so that the public have minimum resort to use this Act to the department this needs to be more clearly stated in obtain information". the relevant Rules/Codes. Sometimesitis aperception that these matters are responsibility of the Finance A disclosure policy could be help establish Department. This results in sub-optimal utilization information that needs to be disclosed suo moto. of resources, weaknesses in internal controls, delay in Firstly, the formats for provision of information response to audit reports etc. The GoI, in its revised need to be simplified to ensure that information is GFRs, has included Rule 64 to more clearly articulate easily understood by the general reader. Secondly, responsibility of the HOD.The Rule reads as follows; though the Annual Financial Statements are tabled in '%le 64. Duties and Responsibilio of the Chief Accounting the state legslature, these are not widely debated so AuthoriwThe Secretary of a Ministry/Department as to increase awareness amongst the general public. d o is the Chief Accounting Authon3 of the Ministry/ Thirdly, in context of non-financial information, Department shall-... and clearly lists down 9 areas " Annual Performance Reports of departments could of responsibility including responsibility for financial also be more widely disseminated including availability management, ensuring that funds are used for the on the GoHP website. purposes intended, responsible for full and proper maintenance of accounting records etc. The state can Drawing and Disbursal Officers (DDO): There draw lessons from this to ensure that Accountability are approximately 3600 DDOs in the state; more of the HODis clearly established. than 2000 of these are School Headmasters whose role as a DDO is primarily for payment of salaries Treasury Computerization: HP has a Treasury and miscellaneous expenses at schools. Each DDO System which js computerized at the state and position implies the entire cycle of accounting district levels; the On-line Treasury Information & book-keeping, reporting for consolidation, System (OLTIS) in use has been developed by the reconciliation and audit. The number of DDOs needs National Informatics Centre (NIC). The state is in to be rationalized by introducing higher levels of the process of installing a state-wide Wide Area automation/use of banking facilities or both. In the Network (WAN) and the Treasury system is expected state of Uttar Pradesh for example, DDO positions to be rolled out to a further 30 sub-treas~ries'~'in the were rationalized by following the principle of 'one short term using the WAN. An additional but related DDO per department per &strict'. Also to note that aspect is a plan to develop a Personnel Management Tamil Nadu has moved to ECS salary payments for Information System (PMIS); this will have an impact approx. 14lakh employees (including school teachers) on the Treasury since it is expected to automate and proposes to extend the functionality for all payroll preparation and therefore improve controls payments including suppliers. related to this task. 121The state has a total of 85 sub-treasuries. 150 HimachalPradesh:Accehating DevelopmentandSustaining Successin a Hillstate Staff Capacities:The GoHP has two types of staff 'inspectionf2*'.Inspections are not very regular and discharging the responsibilities in context of the do not exist in certain departments like Health & financialmanagement function. Family Welfare'", moreover information on results of inspections is available neither at the department nor at a Accounting: Finance Department in the GoHP the state level. HP needs to establish an IA function by has a dedicated cadre of (SubordinateAccounts a strategic allocation of resources. A small, centralized, Service) staff which are selected through the HP Public Services Commission. Staff with at least skilled internal audit team should be setup to conduct five years of experienceare eligible for selection, systemic reviews in areas of perceived risks. andundergo around sixmonths of trainingbefore they begin work. They areposted atvarious levels Examiner Local Fund Audit (ELFA): Mandate of in all major departments and provide a level of the ELFA is mainly to undertake audit of local funds independence in context of the financialmatters generated out of local incomes/fees or donations. of the department. It has approximately 125 staff including 73 auditors Treasury: Similar to the above, the Treasury who are required to cover over 600 School Boards, has a cadre of staff selected through the HP Himachal Urban Development Authority, Universities, Administrative Service/others. This staff is Colleges, Market Committees, Temple Trusts etc. responsible for checkmg docurnents/recordmg GoHP is reviewing the possibility of transferring the transactionsin the treasurysoftware;thisprocessing responsibility of audit of ULBs to the ELFA. includes ensuring availability of budget, checking signatures,adequacy of documentation etc. Utilization Certificates: In instances where funds are released in form of Grants to an Institution or The followingpoints areof note. Firstly, thisstaff brings Organization, the relevant agency is required to submit in an element of independence and thus strengthens a Utilization Certificate(UC) confirming that the Grant internal control. Secondly, the skill development needs has been spent for the intended purposes; this needs to of staff need to be assessed; while training at entry is be submitted w i h 12 months of the closure of the provided, there isno systemof ongoingtraining.Thirdly, Financial Year. As on March 31, 2005 a total of 2859 sinceboth types of staff areunder the samedepartment UCs aggregating to Rs. 355.27 crores were due; this is and essentiallyworking to strengthen internal control, it anindicator of weakness in internal controls. is most logical that staff have opportunities to discharge both the functions12"; this would provide them with a Oversight of Procurement: Procurement presently wider range of experience and better opportunities for takes place amidst a large number of controllers career progression; thus rendering them more effective and overseers. Improving oversight of procurement and improving morale. involves rationalizing control as well as increasing the ability of the government and the private sector to Internal Audit (IA): In context of the spending monitor performance. Actions may include:introducing departments IA does not exist, however officers performance monitoring of procurement; developing in various departments like Rural Development or effective mechanisms to conduct internal and external Irrigation and Public Health are responsible for auditing of procurement; creating trusted mechanisms '" In stateslikeTamilNadu, a single cadre of staff work in Treasuries/are deputed to various departments Inspection covered a number of issues including budget monitoring, status of Works, stores registers, status on double entry book-keeping,review of expendituretransactions, service records etc Para 3.1.59 :CAG Civil report - 31-3-2004. Annex 7: Preliminary Assessment of Public Financial Management and Procurement 151 for receiving and responding to complaints;developing Audit Process and coverage: Audit is conducted on forums for receiving input from business groups a "test basis". This implies that frequency and coverage and beneficiaries; and enhancing the disclosure of of audit are determined in context of the perceived risk information on procurement. and the amount of money involved. The initial process after completion of the audit is issue of an Inspection Improving Commercial Practices: These can be Report which is provided to the office audited and with accomplished through improved contracting, better an opportunity to respond to or 'settle' the observation. inventoryand assetmanagement (e.g. IPH departmentis Only those audit paras/observations which are significant already undertaking inventory management initiatives), in nature and have not received a satisfactoryreply from improved contract management and enforcement, the office/department audited are included in the final effectivedispute resolution procedures, and attention to Audit Report. This report is issued under the signatures interactionwith the suppliercommunity.E-procurement of the (State) AG as well as the CAG. can help reduce transactional cost of procurement as well as result in cost savings for the government. Timeliness: Receipt of audit report has usually been within 11-12 months".i of close of the financial year. This compares very well with other Indian states. E. ExternalAudit Audit Management: Response to inspection Independence and Scope of External Audit: The reports and preliminary audit paras is provided by External auditor for the State Government is the the concerned departments; the Finance Department Comptroller and Auditor General of India (CAG, plays a coordinating role when the final audit report is India's Supreme Audit Institution) through its field received from the CAG. Overall the audit process will office in HP (the Auditor General or AG); this is be strengthened if a centralized 'Audit Committee' is similar to the arrangements in all Indian states. made responsible for a gamut of issuesrelatingto audit. Independence of the CAG is well established; drawing These would include monitoring timeliness/quality of its functions and powers from the Constitution of responses of departments, assessmentof systemicissues India. The audit covers all expenditure departments, and timely action for the future and communication of revenue receipts and select state public sector the States' priorities to the AG to ensure best value out undertakings. Audit is broadly of the following types: of the audit. (a) regularity or compliance au&t covering aspects such as overpayments, failure to collect revenue, infructuous expenditure, inventory control, internal Legislative Oversight control etc, and (b)performance reviews which try to provide a picture of the performance of a particular Public Accounts Committee (PAC)/Cornmittee on department in the year. In the last two years the AG Public Undertakings (COPU): As per convention, has conducted performance review each year covering the PAC in HP is headed by a member of the party keylmajor spending departments like Irrigation and in opposition; it has 11 members. Regular hearings of Public Health, Revenue (2004-05), Health & Family the PAC areheld; an officer of the Finance Department Welfare and Public Works (2003-04). is invited to participate. Once the Audit report issued 125For FY 200445, the Revenue Audit Reportwas finalized in November 05 and the Civil and Commercial Audit Report in February 06. For EY 2003-04 the Civil Audit Report was finalizedin February05 and the CommercialAudit Report by March 05. 152 HimachalPradesh:AccekratrngDeveloptent andSustaining Success ina HillState by the CAG is received by the PAC, departments are public funds currently flow; funds also flow through asked to respond to different paragraphs; this is first Urban Local Bodies (ULBs), Public Sector Enterprises done through an interview process and subsequently (PSEs), and Rural Local Bodies (PRIs). Some of the the department may be requested to submit an Action aspects relating to these are discussed below. Taken Report (ATR). The response is examined by the committee and if not satisfied it may again ask for UrbanLocalBodies.HPhas a total of 49 Urban Local further examination. Bodies (ULl3) consisting of 1 Municipal Corporation (Shimla), 20 Municipal Councils and 28 Town While the PAC reviews areasof mainstreamgovernment Panchayats. Total revenues of ULBs for EY 2004-05 as reported in the Civil/Revenue Audit Reports, the amounted to Rs 69 crores, consisting of own income COPU examines aspects relating to the State Public of Rs 33 crores (48%) and Grants from GoHP of Rs. Sector Undertakings as reported in the Commercial 35.6 crores (51%). Accounting Records in ULBs are Audit Report. The COPU holds around 4 meetings in maintained using single entry accounting system.Audit a month, and usually it review observations higher than of the ULBs is undertaken by staff (deputed from Rs 10lakh in value. Local Audit Department) working under The Director, Urban Development. While the frameworkof PAC & COPU is an important instrument of enforcing public accountability,however The followingissues are of note: in practice the processlZ6is such that there is significant a The Directorate of Urban Development is delay between the event and its resolution at these planning to undertake reforms in ULBs by committees;e.g. the PAC submitted its report on Health shifting to double-entry system of accounting. and Fynily Welfare Department relating to Audit These reforms are likely to be in a phased for EY 2000-01 in March 06. At present the PAC is manner starting with the Shimla Municipal examining audit report for FV 2002-03; traditionally Corporation. GoHP may draw on experience the PAC has examined reports in a chronologicalorder of the ULBs in Karnataka which have made though there is nothing to prevent it from examining significant strides in the areas of double entry the latest available audit report i.e. for EY 200445 and accounting and better disclosure of financial then graduallygoing back in time to cover the backlog. information including a higher level of involvement of its citizens. a The Audit process has not been very regular G.Other Areas and frequently audits undertaken have covered a period of 7-8 years at one stretch impacting While the main focus of the team's work was on State effectiveness of audit. Status of the audits Government Departments through which bulk of pending is summarized as follows: The accountability cycle is completed when the audit is conducted, reportissued, PAC hearingsheld, responses received from the Government, and the PAC tables its reports in the StateLegislature. Annex 7: Preliminary Assessment of Public Financial Management and Procurement 153 Above may be attributed to inadequacy of Road Transport Corporation reveals that the reports audit staff. Moreover utility/response to audit provide useful information on operation of the entities is limited; a large number of audit paras i.e. for the given period and the audit reports provide an 16,853"' for different ULBs are required to overall opinion on true & fair status of the financial be settled. statements; however quality of presentation could GoHP is reviewing transfer of the Audit be improved including a clearer statement of the function of ULBs under the ELFA, thiswill have Accounting Policies. a positive impact on the quality and timeliness of audit. Monitoring of financial management policies/practices of the PSEs at the state level is negligible. This needs to Public Sector Enterprises. On date there are 21 be strengthened. This could be started with review of Government PSEs in the state with a total investment the two largest PSEs, looking at their existing Financial of Rs 4920.30 crores including Equity 730.32 cr and Management and Procurement Policies to identify Loans etc. Rs.4189.98 CP8.GoHP received a dividend performance improvement areas. of Rs 70.30 lakhs on this investment; the policy of a minimum dividend1*'of 3%was compliedwith, by only Rural local Bodies. HP has 3243 Gram PanchayatsI3" one company. (GP) (Village level), 'l5 Panchayat Sarnitis (PS) (Block level) and 12 Zilla Parishads (ZP) (District level). Many of these PSEs have been incurring financiallosses The Panchayati Raj Department assumes overall over the years and the cumulative position of losses responsibility for the Rural Local Bodies (RLBs) and is Rs. 894.88 crores. Thus total investment of GoHP ensuring implementation of the HP Panchayati Raj in these PSEs has been completely eroded. While the Act, 1994. GoHP annually allocatesabout Rs. 5 million total investment of GoHP in the PSEs is presented in to RLBs. RLBs also receive a significant amount of the Finance Accounts (Statement 14) the position of funds under Centrally Sponsored Schemes for poverty accumulated losses is not provided, thus providing an deviation and other developmental works. Whtle inaccuratepicture of the status of investment. GPs have power to levy and collect taxes on various accounts, PSs and ZPs do not have such powers and Audit of HPSEB and HRTC are undertaken by the AG, are allocated funds by State Finance Commission. while auditof most of the other GovernmentCompanies is undertaken by a firm of chartered accountants The followingare of note. appointed by CAG under the CompaniesAct, 1956.Of Audit-This is conducted through an audit wing the 17working companies, audit of six companieswere working under the Director, Panchayati Raj. The delayed by one-two year while the delay was five years HP PanchayatiRaj Act, 1994requires that annual for the HP ElectricityRegulatoryCommission. audits be conducted of all PRIs; during2005-06, 50°/o ZPs, 39% PSs & 55% GPs were audited. A preliminary reading of the Audited Annual Financial The shortfall is reported to be due to elections Statements of HP StateElectricity Board and Himachal of the PRIsI3'. I*' Source:Audit Wing of UrbanDevelopment Department. CAG Civil & Commercial Report 2005. Para 6.1.8of CAG Civil & CommercialReport 2005. I3O Source:Annual Plan 200607. Annual Administrative Report,PRD. 154 HimachalPradesh:AccekratingDevehpment andSustainingSuccess in aHillState Inspection provides internal audit function of that relevant and critical information is consistently PRIs. Each PRI should be inspected at least once available for public scrutiny. during a year. During FY 2005-06 around 42% (e) The benefits of the effectively functioning of the GPs were subjected to inspections. treasury at the district level need to be rolled-out Likemost otherIndian States,HP too facesissues to cover the entire state; this will be an important relating to shortage of Panchayat Secretaries as step to strengthen internal controls as well as to well as low levels of education/training among maintain efficiency of operation in context of the the existing Panchayat Secretaries. geographical/climatic factors. Given the geographical nature of. the state, (9 Accountabitttyof theHODneeds tobe more clearly building procurement & financial management established to ensure more effective and efficient capacityat this level can help enhance outcomes. utilization of resources provided to departments. (g) The Local Fund Audit function needs to H. Conclusion: Areas Requiring be consolidated; staff under the ELFA and audit wings of the Urban/Rural Development PriorityAttention Departments need to be viewed as a single resource and utilized across the state using a risk based approach. (a) Rules relating to financial management i.e. 'The Himachal Pradesh Financial Rules, 1971' need to Q InternalAudit-a small, centralized, skilled internal be revised to ensure that the framework guiding audit team may be setup to conduct systemic reviews in areas of perceived risks. The process of procurement & financial management are precise, inspection needs to be systematized. easy to understand and contemporary. (b) Thestatecaninitiateefforts toensurethat thepublic (i) Response to audit needs to be streamlined; this should be supported by a system to track all audit procurement system promotes competitiveness paras, PAC/COPU observations. This would through steps that might include application of ensure that the state gets the best value out of e-government procurement, and improving the the audit process rather than seeing it merely as a commercialpractices of the government. compliance function. (c) Formats/presentation of Budgets and Annual Towards the objective of safeguarding its Financial Statements need to be rationalized.These investments/annual grants and ensuring good need to be shorter and more easily understandable. governance a one time review of the Financial (d) Regarding disclosure in context of the Rights Managementand ProcurementPoliciesof the PSEs to Information Act, 2005 GoHP may articulate may be undertaken; the government may start with a 'Policy on disclosure of Information' to ensure the two largest PSEs. YP &a- A#--- Ajwad, M. I. 2006. Statistics on theSdefy Net Programs in India, Manuscript, World Bank. CAG. 2003. Petfrmance Audit Ministry of Rural Development: Rural Housing, Chapter 3, Comptroller and Auditor-General of India. CAG. 2003. Petformance Audit: Ministty of Rural Development: Swamajganti Gram Swaroqar Y@ana,Cbqbter 2, Comptroller and Auditor-General of India. Chaudhuri, S. 2000. Empirical methodrfor assessing houfehoMvulnerabiL& topove*. School of International and ' Public Affairs, Columbia University, New York. Manuscript. Dev, S. Mahendra, C. Ravi, B. Viswanathan, A. Gulati and S. Ramachander. 2004. Economic liberalisation, Taqeted Progammes and HousehoM Food Security:A CaseSt#& of India, MTID Discussion Paper No. 68, IFPRI. Rajan, S. I. 2001. Social Assistance for Poor Elderly: How Effective?, Economic and Political Weekb, February 24,2001. PEO. 2005. Petformance Evaluation of Targeted Pubkc Distn'buttbn $$tern, Programme Evaluation Organisation, Planning Commission. PlanningCommission.2005.HimachalPradeshDevelpment wort. Government of India.Academic Foundation, New Delhi. World Bank Technical Paper No. 139,Environment Assessment Sourcebook. World Bank. 2004. Resuming Punjab5 Prosperio: The Opportunities and ChallengesAhead. Poverty Reduction and Economic Management Sector Unit, South Asia Region. World Bank. 2006. India Country Environment Analysis. - - THEWORLD BANK 1818 H Street N.W. Washington D.C. 20433 USA 70 Lodi Estate New Delhi 110003 INDIA www.worldbank.org : I I KarinKemper L a , SectorManager (SASDN) :.. - MSN: MC 10-1013 ,. &-