Progress Report on Tranche Release · khadi and village industries (KVI) to create sustainable employment and higher incomes to khadi artisans, increase artisan welfare, and develop

Progress Report on Tranche Release

Project Number: 42151-013 Loan 2452 December 2017

India: Khadi Reform and Development Program

(Third Tranche) This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 1 November 2017)

Currency unit – Indian rupee/s (₹)

₹1.00 = $0.0155 $1.00 = ₹64.6838

ABBREVIATIONS

ADB – Asian Development Bank CAGR – compound annual growth rate DRA – direct reform assistance IFMS – integrated financial management system KVI – khadi and village industries KVIC – Khadi and Village Industries Commission MIS – management information system MMSME – Ministry of Micro, Small and Medium Enterprises MOU – memorandum of understanding RID – reform implementation division RMU – reform management unit TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government of India and its agencies ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2017 ends on 31 March 2017.

(ii) In this report, “$” refers to United States dollars.

Vice-President Wencai Zhang, Operations 1 Director General Hun Kim, South Asia Department (SARD) Director Kenichi Yokoyama, India Resident Mission, SARD Team leader Ashok Srivastava, Senior Project Officer (Urban), SARD Team members Bhawna Kulshreshtha, Executive Assistant, SARD Yoshinobu Tatewaki, Principal Portfolio Management Specialist, SARD Rekha Vankina Sri, Principal Counsel, Office of the General Counsel In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

I. INTRODUCTION 1

II. COMPLIANCE ASSESSMENT OF THIRD TRANCHE POLICY CONDITIONS 2

1. Establishing a Policy Reform and Implementation Framework 2

2. Promoting and Marketing Khadi 3

3. Realizing Procurement and Production Efficiencies 4

4. Implementing Institutional Reforms 5

III. TECHNICAL ASSISTANCE GRANT 8

IV. PROGRAM MONITORING 8

V. ASSESSMENT 8

VI. ASSURANCES 9

VII. CONCLUSION 9

VIII. THE PRESIDENT'S DECISION 10

APPENDIXES

1. Revised Policy Matrix 11 2. Summary of First and Second Tranche Release Conditions 18 3. Status of Compliance with Third Tranche Release Conditions 20 4. Chronology of Loan Review Missions 22 5. Status of Program Covenants 23

I. INTRODUCTION

1. The Khadi Reform and Development Program is a policy-based loan aimed at revitalizing khadi and village industries (KVI) to create sustainable employment and higher incomes to khadi artisans, increase artisan welfare, and develop select traditional industries.1 This is aligned with the Government of India’s goal of increasing income and employment growth for the rural nonfarm sector. 2. The program has the following outputs:

(i) establishing a policy reform and implementation framework, including a comprehensive reform package, for the development of khadi;2

(ii) promoting and marketing khadi by establishing a “Khadi Mark”;3 (iii) realizing procurement and production efficiencies by facilitating raw material

production and procurement, introducing market-linked pricing, rationalizing financial assistance for khadi, encouraging khadi entrepreneurs, and empowering artisans; and

(iv) implementing institutional reforms, including restructuring the Khadi and Village Industries Commission (KVIC) to enhance its development role, revitalizing khadi institutions, building capacity, and developing synergies with village industries.

3. The $150 million policy-based loan was approved on 2 October 2008, signed on 22 December 2009 and became effective on 2 February 2010. The loan was to be released in four tranches within 3 years based on compliance with 16 conditions for tranche 1 ($20 million), 31 conditions for tranche 2 ($40 million), 26 conditions for tranche 3 ($40 million) and 17 conditions for tranche 4 ($50 million). 4. Implementation arrangements. The Ministry of Micro, Small and Medium Enterprises (MMSME) is the executing agency and KVIC is the implementing agency for the program. A dedicated division, reform implementation division (RID), was set up at KVIC and reform management units (RMUs) were established at state and division level to implement the program.

5. Technical assistance. A technical assistance (TA) grant of $2 million from the Japan Special Fund, funded by the Government of Japan, was attached to the program to support the implementation of the khadi reform package. 6. Loan restructuring. The 3-year program, originally scheduled for completion by 30 September 2011, was extended several times to 30 September 2015. The government requested on 17 December 2015 for restructuring of policy matrix based on extant conditions. ADB, as a special case, approved restructuring of policy loan on 14 December 20164 with the following changes (revised policy matrix is in Appendix 1):

(i) The loan of $150,000,000 to India for the program was reduced to $105,000,000;5

1 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loans and Technical

Assistance Grant to India for Khadi Reform and Development Program. Manila. 2 Khadi is a handspun and handwoven cloth. The raw materials (cotton, silk, or wool) are hand-spun and hand-woven

on hand spinning wheels called charkha and woven on handlooms. 3 As per the Khadi Mark Regulations, 2013, the Khadi Mark authenticates genuineness of khadi and khadi products. 4 ADB. 2016. Major Change in Program, Loan 2452: Khadi Reform and Development Program (India). Manila. 5 The costing for the program elements was estimated based on major changes in scope and prevailing cost.

2

(ii) The number of tranches for the program was reduced from four to three, and the balance of $85 million was to be released in two tranches, $40 million for the second tranche and $45 million for the third tranche;

(iii) The number of policy conditions for tranche release was rationalized from 90 to 66, maintaining the substance of the reforms actions and intended results; 6

(iv) Conditions related to setting up a marketing organization with mostly private sector ownership and participation in KVIC central sliver plants were dropped; and

(v) The closing date of the policy loan and the attached TA was extended to 31 December 2017.

7. Tranches 1 and 2. ADB released the first tranche of $20 million on 17 February 2010 and the second tranche of $40 million on 17 March 2017, upon compliance with respective policy conditions (Appendix 2).

II. COMPLIANCE ASSESSMENT OF THIRD TRANCHE POLICY CONDITIONS

8. The 18 tranche release conditions of the third and last tranche under the loan have been fully complied with. An overview of the third tranche compliance status is provided in Appendix 3.

1. Establishing a Policy Reform and Implementation Framework

9. Condition 1: KVIC shall have ensured the completion of the audit of remaining 220 eligible khadi institutions by independent auditors (complied with). A total of 646 khadi institutions were audited under the program, of which 400 were selected under tranches 2 and 3, based on audits conducted by the Comptroller and Auditor General of India empaneled auditors, across 30 state offices and six zones.7 Support was extended to 220 khadi institutions under tranche 3.

10. Condition 2: KVIC shall have (i) undertaken an independent assessment of the Khadi Reform Package, (ii) held a stakeholder consultation on the outcome of the assessment, and (iii) prepared appropriate measures to address the feedback (complied with). A consulting firm selected on a competitive basis carried out an independent impact assessment of the Khadi Reform Package on khadi institutions, including challenges and gaps in implementation along with the identification of measures to increase program effectiveness. The impact of the program was assessed at various levels of KVIC, khadi institutions, village industries, sales outlets, artisans, and consumers.8

11. Based on the findings and feedback from the national stakeholder consultation, the following key recommendations were agreed to augment ongoing efforts with additional professional contributions in areas that could support production and sales:

(i) Strengthen monitoring measures to ensure implementation of the Khadi Mark; (ii) Conduct regular awareness raising and capacity building workshops to

disseminate the benefits and modalities of market-linked pricing, and enroll artisans in various welfare programs rolled out by the government;

6 16 first tranche conditions, 32 second tranche conditions (from 31), 18 third tranche conditions (from 26), and no

fourth tranche conditions (from 17). 7 Ratings: 1–3: average, 4–5: good, 6–8: very good, and 9–10: excellent. 8 Data were collected from 47 khadi institutions supported by the program, and 47 khadi institutions not supported by

the program.

3

(iii) Continue hands-on support in the implementation of the management information system (MIS) to ensure data consolidation, leading to higher efficiency and informed decision making;

(iv) Conduct refresher capacity building and training for skill upgrading of artisans and khadi institutions to enhance their technical and managerial capacities, on a continuous basis; and

(v) Adopt modern marketing channels such as e-commerce, digital marketing, and social media.

2. Promoting and Marketing Khadi

12. Condition 3: KVIC shall have created the basic testing infrastructure for the Khadi Mark (complied with). Testing report formats and a protocol for verification of the Khadi Mark were prepared to test and review the requirements of 100% natural fiber and the direction of twist of the yarn. KVIC has set up Bureau of Indian Standards compliant testing infrastructure in Raebareli, Uttar Pradesh (for north, northeast, and east zones) and Chitradurga, Karnataka (for central, west, and south zones). 13. Condition 4: KVIC shall have continued to conduct random spot audits of khadi institutions regarding adherence to the licensing requirements for the use of Khadi Mark (complied with). Spot audits were undertaken in 240 randomly selected khadi institutions, as per Khadi Mark Regulation, 2013 and the Khadi Mark Procedural Protocol, 2013. The spot audits also covered an assessment of initiatives undertaken by khadi institutions for the promotion of the Khadi Mark, challenges in implementation, and suggestions for strengthening implementation. KVIC is institutionalizing corrective actions based on the findings, and has also increased its frequency of monitoring and verification to ensure continued compliance. 14. Condition 5: Based on the outcome of the survey, KVIC shall have identified products for both domestic and international markets and develop marketing strategies for all khadi-related institutions and products (complied with). Two independent agencies were recruited on a competitive basis to undertake a pan-India market survey and an international market survey to help KVIC develop marketing strategies. The domestic market survey was carried out in 28 cities and towns with about 18,000 respondents, of which 60% were female. The findings of the international market survey were based on desk review and inputs from exporters.

15. Based on the findings, key marketing strategies to be applied across product categories for the domestic market include:

(i) expand retail outreach of khadi and village industry products through traditional retail outlets, large store chains, and online retail channels;

(ii) targeted retail outreach in tier 1 and 2 cities, backed by 360-degree campaigns;9 (iii) promotion of the Khadi Mark among producers, buyers, and customers; (iv) celebrity endorsements, discounts, offers, and distribution of samples; (v) professional designer inputs to develop quality khadi products; and (vi) promotion in visual, social, and digital media to engage a wider audience.

16. The recommendations for the international market are:

(i) conducting capacity building of khadi institutions on export norms, quality control, and regulations;

9 In advertising, a 360-degree campaign means creating synergies of messaging through print, in-store, digital and

social media so that the customer will experience communication no matter where they are.

4

(ii) establishing a one-point contact for exporters to ease sourcing of products; (iii) enhancing exports through upstream value chain activities for quality consistency; (iv) facilitating e-commerce sales; (v) building awareness of khadi and its use among exporters; and (vi) undertaking contemporary and effective promotion, and brand-building activities.

17. Condition 6: The KVIC shall have prepared a product catalogue and set up the market information system (complied with). KVIs operate in a decentralized ecosystem, with 2,375 khadi institutions across the country, around 5,000 sales outlets operated by khadi institutions, and a wide variety of product categories. KVIC has assisted khadi institutions in uploading individual product catalogs to the KVIC website, enabling even small khadi institutions to access online consumers. An MIS has been developed and linked with the khadi institutions’ MIS, to take stock of the products and inventory availability with khadi institutions. The MIS is operational in about 1,800 khadi institutions, and has been linked with all sales outlets to consolidate information on products, sales, assets, and inventory.

3. Realizing Procurement and Production Efficiencies 18. Condition 7: KVIC shall have monitored and assessed the effectiveness of the implementation of the benefit chart (complied with). KVIC issued a circular on 24 May 2011 to guide the implementation of a benefit chart covering costing, guidelines for the calculation and use of the surplus generated from market-based pricing, and reporting formats for khadi institutions, state offices, divisional offices, and zonal offices. According to the guidelines, 50% of surplus revenue is to be used for the benefit of artisans, 20% for office bearers of khadi institutions, and 30% for product development. In all, 10 orientation-cum-consultation workshops were organized in each zone from December 2016 to May 2017. The guidelines were revised on 4 July 2017 based on feedback. The initial assessment report of the benefit chart recommends:

(i) concerted efforts to increase awareness of the benefits to dispel the concerns of khadi institutions;

(ii) providing hand-holding support, by conducting targeted capacity building workshops for khadi institutions that have not implemented the benefit chart;

(iii) strengthening compliance norms; and (iv) leveraging technology to monitor the progress of market-linked pricing, and

recognizing institutions that are implementing it and reaping its benefits. 19. Condition 8: KVIC shall have continued the phasing out of production incentives on other product categories and assess the impact on sales as a result of this (complied with). Phasing out of production incentives initiated in 2011 under the second tranche was further strengthened with the introduction of market promotion and development assistance in 2016. Khadi and poly-vastara (fabric made from blend of natural and synthetic fiber) products for bulk government supply was made ineligible for benefits. KVIC issued a circular on 26 March 2017 for the implementation of the benefit chart and phasing out of production incentives, directing five premium products to be identified in each khadi institution that could be sold at market price. An assessment of sales from April 2017 to September 2017 indicates that (i) sales have increased by 58% in comparison to the same period in 2016; and (ii) KVIC executed orders worth $4 million with pre-determined government price, creating 5%–6% subsidy savings. Given the significant increase in sales, the withdrawal of market development assistance has not had an adverse impact on certain bulk selling products.

5

4. Implementing Institutional Reforms

20. Condition 9: : KVIC shall have implemented the MIS in 400 khadi institutions (complied with). An MIS was designed for the automation of key functions of khadi institutions. In the first phase, a stand-alone MIS software was installed and is operational in 100 khadi institutions. This was later converted to a web-based system, developed in-house at KVIC. The master data required for carrying out transactions has been uploaded to the MIS for 1,837 khadi institutions (as of 3 November 2017), and khadi institutions have begun transactional data entry to the system. KVIC supplied computer hardware and accessories to 400 khadi institutions covered under the direct reform assistance (DRA) on a needs basis, and training was provided to all khadi institutions for operationalizing the system. KVIC also set up a help desk to support and monitor MIS implementation by the khadi institutions. 21. Condition 10: KVIC shall have implemented the integrated application system (complied with). KVIC has 6 zonal offices, 7 divisional offices, and 30 state offices, working with 2,375 khadi institutions. An information and communication technology roadmap was developed to improve operational efficiencies as part of the second tranche policy action. KVIC recruited an agency in February 2017 for the design, installation, and operationalization of an integrated financial management system (IFMS). The MMSME launched the IFMS on 3 November 2017 at KVIC’s head office and “Go-live” for the application system was achieved. 10 22. Condition 11: KVIC shall have adopted the comprehensive reforms plan to empower and revitalize the 400 eligible khadi institutions (complied with). Key elements of the comprehensive reforms were:

(i) Production reforms, aimed at improving the production efficiency of khadi institutions through interventions covering the production value chain. These interventions included the procurement of implements for khadi institutions, establishing a common facility center, constructing work sheds, renovating sales outlets, IT support, capacity building of office bearers of khadi institutions and artisans; and providing working capital to the khadi institutions.

(ii) Marketing reforms, aimed at improving market perception and the final product value of khadi products through support for the renovation of khadi institution sales outlets, inventory management, staff rationalization, and financial assistance to develop advertising material.

(iii) System reforms, through the supply of basic IT infrastructure (including accounting systems) and electronic networking of khadi institutions with KVIC.

(iv) Governance reforms, to ensure the representation of artisans in khadi institution management committees and the reorganization of artisans into self-help groups.

23. In all, 80 khadi institutions adopted the comprehensive reforms plan during the second tranche and 320 khadi institutions during the third tranche. 24. Condition 12: KVIC shall have re-categorized the remaining khadi institutions using the modified norms (complied with). KVIC re-categorized 2,011 khadi institutions based on their performance in six parameters of artisan welfare, financial management, operational systems, quality of governance, artisan and women empowerment, and compliant with DRA norms. Further, 19 indicators related to production and sale of khadi; and 12 indicators related to

10 Go-live is the time when the application system is duly designed, configured and user acceptance tested, and is

ready for transactions.

6

marketing of khadi products, were also considered during the categorization process.11 The short-listed 400 khadi institutions were re-categorized in the second tranche, and the remaining 1,611 were re-categorized in the third tranche. The list of re-categorized khadi institutions and the evaluation norms were disseminated via the KVIC website. 25. Condition 13: KVIC shall have signed with 220 eligible khadi institutions memorandum of understanding (MOU) for comprehensive khadi institutions reforms (complied with). KVIC signed MOU with 400 khadi institutions that agreed to implement the action plans for comprehensive institutional reforms approved by the standing finance committee. A total of 180 MOUs were signed during 2013–2015, and 220 MOUs during June 2016– September 2017. Sample MOU and 220 institutions selected to receive DRA was disseminated in the KVIC website. 26. Condition 14: KVIC shall have ensured that 320 eligible khadi institutions shall have implemented the comprehensive reforms plan (complied with). Khadi institutions were supported in the implementation of the comprehensive reforms plan based on the approved action plans (condition 11). Eighty (80) eligible khadi institutions implemented the program in the second tranche, and the remaining 320 eligible khadi institutions commenced implementation from June 2016 to October 2017 under the third tranche. KVIC has undertaken preparatory activities, including the rollout of the MIS, supply and installation of hardware, training and capacity building of staff.

27. Condition 15: KVIC shall have evaluated the performance of 400 eligible khadi institutions (complied with). The key objective of DRA, as part of the comprehensive reforms plan (condition 14), was to support selected 400 khadi institutions to become self-reliant and able to organize khadi programs on their own without government assistance. As required in the revised policy matrix, an evaluation study was carried out to assess the performance of the 400 khadi institutions as a result of the DRA.12 All 400 khadi institutions covered under DRA have adopted broad level reform measures—such as direct benefit transfers to artisans through bank accounts, adoption of the Khadi Mark, operationalization of the Khadi MIS, and representation of artisans in the management committee. The findings indicated that all 400 khadi institutions that received DRA from 2013 to 2017 have implemented the reforms program with visible improvement in performance The evaluation report with recommendations was shared with MMSME and ADB. Specific evaluation findings include:

(i) Khadi institutions and artisans have benefited from the new model charkhas in terms of improved production of yarn, which increased by an average of 39% in 87 khadi institutions (11 khadi institutions in the normal category experienced an increase of over 100%), quality of the thread spun, and an overall increase of about 400% in the wages of the spinners.13

(ii) Of the 400 common facility centers endorsed for development, 271 have been established with an appropriate working environment, separate washroom facilities for women, new machinery procured, new products (such as stitched garments), printed khadi fabrics developed.

11 Scoring system for 75% and above: A+ (excellent); 60%–75%: A (very good), 40%–60%: B (good); 30%–40%:

C (average); and less than 30%: D (require improvement). 12 Some 87 khadi institutions that received DRA funding from 2013 to 2016 were assessed in detail, while the remaining

313 khadi institutions that received DRA in 2017 (or are implementing DRA) were assessed on broader parameters of the key reforms plan. The assessment was based on primary and secondary data collected under each component.

13 Two categories were charted out: special khadi institutions (belonging to hilly areas, border areas, and left-wing extremism affected regions) and normal khadi institutions (in the non-special areas).

7

(iii) IT support has been made accessible, and the MIS is operational in about 2,000 khadi institutions. About 28% use all the MIS functions, while the rest are increasing their use of the functions.

(iv) Access to digital technology, such as emails and social media, is improving the internal management of khadi institutions and boosting the buyer’s outreach to khadi institutions for direct procurement of khadi products.

(v) While the overall participation of artisan representatives (including women in the management committees of khadi institutions) is about 25% (national average), the southern and eastern zones have more than 50% representation of artisans in management committees.

(vi) Of the 739 sales outlets approved for renovation, 105 outlets have been renovated. The MMSME minister inaugurated 60 renovated outlets online on 2 October 2017. There has been a 42% overall increase in sales in these renovated outlets.14

(vii) Employment of spinners has increased by 12%. Spinners’ wages increased by about 400%, while weavers’ wages grew by about 60%. Most spinners in khadi institutions are women, and an increase in their daily wages has a positive impact on their overall well-being.

(viii) Support for khadi institutions benefitted artisans through increased access to insurance and KVIC’s Artisan Welfare Fund. Internet and electricity connectivity issues are being resolved for optimal use of IT systems.

28. Condition 16: KVIC shall have ensured the establishment of one cluster for each of the identified village industry (complied with). KVIC established seven clusters of five traditional village industries identified in the second tranche. Thirty-seven (37) clusters were identified across 13 states based on their potential to develop, market demand for products, scope for marketing, and availability of artisans engaged in the industry. Detailed progress report indicates:

(i) Honey and beekeeping. Three clusters were established in (a) Sundarbans, West Bengal (April 2015), supporting 508 artisans; (b) Balasore, Odisha (June 2017), supporting 591 artisans; and (c) Thrissur, Kerala (March 2016), supporting 497 artisans. All three clusters have commenced commercial production.

(ii) Herbal health and cosmetic products. One cluster was established at Gadchiroli, Maharashtra (March 2017), catering to 180 artisans, to be expanded later to 280 artisans. Soft interventions, such as awareness programs among the artisans, have been initiated. Production is expected to begin by mid-2018;

(iii) Leather and leather products. The Jalandhar leather cluster in Punjab was established in March 2017 and funds disbursed in June 2017. Implementation commenced in July 2017 and production is expected to begin by mid-2018.

(iv) Agro-based and food processing industry. The amla (Indian gooseberry) food processing cluster was established in Pratapgarh, Uttar Pradesh (March 2016). Interventions include training for 540 artisans, and construction of a common facility center. Production will commence by end of 2017.

(v) Handmade paper. This cluster, catering to 200 artisans in Kalpi, Uttar Pradesh, was established in September 2017. Production is set to begin by mid-2018.

29. Condition 17: KVIC shall have ensured the implementation of the comprehensive capacity building plan in the identified clusters (complied with). The training and capacity building requirements for artisans and KVIs of the five clusters were identified , and implemented by the reform implementation agency in partnership with KVIC. Activities included (i) a needs-based training program for stakeholders in the clusters on skill development, credit-related issues,

14 For the 87 khadi institutions that received funding in the first phase and have implemented DRA.

8

the formation of self-help-groups, application of technologies; (ii) providing advanced tools and equipment to the institutions; (iii) exposure visits and study tours to better performing khadi institutions; and (iv) awareness programs, trust-building activities, production, quality control, sales and marketing. A total of 10,600 artisans were trained in 301 training sessions in the identified clusters. The progress report on training and capacity building activities undertaken in the clusters was shared with ADB. 30. Condition 18: KVIC shall have monitored the performance of the clusters (complied with). KVIC regularly monitored and reported the cluster development activities of the seven established village industry clusters through its state offices, individual directorates, regular review meetings by the reform implementation agency, technical agencies, and implementation committees set up in each cluster. Random field visits to the cluster are carried out and based on the findings, remedial measures are regularly advised for continued performance improvement. The cluster progress reports have been disseminated via the KVIC website.

III. TECHNICAL ASSISTANCE GRANT

31. A technical assistance (TA) grant of $2 million from the Japan Special Fund, funded by the Government of Japan, was attached to the program to support the implementation of the khadi reform package. The TA supports the executing and implementing agencies in program management. TA inputs were realigned based on the restructured program mandate. The consultants recruited under the TA supported implementation of (i) DRA activities, (ii) Khadi Mark implementation, (iii) marketing reforms, (iv) financial management, (v) implementation of the MIS and design of the IFMS, and (vi) program management for the development of village industry clusters. The delay in implementation and extension of the program from 3 years led to the extension of TA support to 30 April 2018, to provide a reasonable time for consultants to close their account. To date, $1.9 million has been committed and $1.6 million disbursed.

IV. PROGRAM MONITORING

32. All program conditions have been complied with. The executing agency has been responsible for overall program administration, including (i) overseeing timely implementation of policy actions and coordinating with the implementing agency (KVIC), (ii) maintaining program records, (iii) complying with reporting requirements, and (iv) disbursement. KVIC, state and divisional offices, TA consultants, and ADB monitored program activities under tranche 3 at different levels through (i) three loan review missions on 6–7 February 2017, 16–17 May 2017, and 8–9 August 2017, and two special program administration missions on 2 September 2017 and 27–28 September 2017; (ii) two tripartite portfolio review meetings on 6–7 April 2017 and 26–27 October 2017; and (iii) the aide-mémoire of these missions. The chronology of loan review missions is in Appendix 4. Many of the reforms undertaken in the program cover the entire khadi and village industries, and are not limited to the khadi institutions under the program.

V. ASSESSMENT

33. Governance. The government has demonstrated its continued commitment to program reforms, as reflected by compliance with the policy conditions. The reforms have contributed to improvements in the operational and financial performance of the sector by bringing efficiency to its operations. The direct benefit transfers have furthered financial inclusion and improved the efficiency and timeliness of benefits being passed on to artisans and weavers. The government’s initiative to bring in accounting reforms, along with implementation of the IFMS, will increase financial control and efficiency of resource utilization. The increased representation of artisans in

9

governing bodies of khadi institutions has led to greater participation of beneficiaries in decision-making processes. ADB’s active engagement has helped the government in rationalizing the financial support to khadi and bringing sustainability to the sector without budgetary support. 34. Poverty and social. The program has brought far-reaching changes to the sector, and has positively impacted the lives of about one million artisans and their families employed in khadi, including (i) increased earnings (72% increase from FY2010 to FY2017) resulting from market-linked pricing; (ii) financial inclusion (more than 90% artisans receiving wages through bank account and insurance cover) because of mandatory direct benefit transfers through bank accounts;15 and (iii) increased production and sales through support of DRA. 35. Environment. Due diligence during field and supervision missions by implementing agencies and their consultants have not reported any adverse or potential environment impacts on account of program interventions.

36. Gender. Women comprise 80% of the workforce in this sector. The program provides significant socio-economic and gender-responsive impacts for the female workforce involved in the sector. The policy-based loan was originally categorized gender equity. Upon restructuring the policy-based loan was recategorized some gender elements, in line with the revised Guidelines for Gender Mainstreaming Categories of ADB Projects.16 The reforms executed in the program enhanced the employment opportunities, skills, and income of women working in the sector. The program also increased the insurance coverage of women artisans by 90%. Women artisans were empowered through the representation of at least one woman artisan in the decision-making body of khadi institutions, contributing to gender mainstreaming in khadi institutions.

VI. ASSURANCES

37. The borrower and the executing agency are in full compliance with the loan covenants (Appendix 5) and third tranche conditions (Appendix 3). Assurances provided by the government in the amended and restated loan agreement of 19 December 2016, have been adhered to by the executing and the implementing agencies. The first and second tranche conditions continue to be complied with. The government, the executing agency, and the implementing agency have fully complied with the conditions of all the three tranches. 38. In accordance with the provisions in the loan agreement, the borrower has on 3 November 2017 requested for release of the third and last tranche of $45 million, having successfully fulfilled the conditions for the release of the third tranche.

VII. CONCLUSION 39. The program has achieved significant institutional reforms in KVIC. Although the DRA under the program was targeted at 400 khadi institutions, it had a ripple effect on other khadi institutions not covered by the program by improving their performance to meet the evaluation ratings to become eligible for DRA. Significant impacts of the program include (i) institutionalizing women artisans’ participation in the decision-making committees of khadi institutions; (ii) linking khadi product pricing to market demands, increasing the earnings of khadi institutions;

15 The program pioneered the transfer of benefits to artisans and weavers through bank accounts, which was subsumed

within the larger financial inclusion agenda of the government. 16 ADB. 2012. Guidelines for Gender Mainstreaming Categories of ADB Projects. Manila.

10

(iii) regulating the use of the Khadi Mark by providing a unique identity and enabling premiums for all khadi products in the market; (iv) establishing transparency, ease of operations, and market access by linking all khadi institutions (beyond the 400 program khadi institutions) to the MIS; (v) updating the legacy database of registered primary artisans and related ancillary artisans, supporting the finishing works of the primary artisans, and allowing all artisans in the updated list to receive benefits directly in their bank accounts;17 (vi) a 12% increase in the employment of spinners, who received about 400% increase in wage, while weavers’ earnings increased by about 60%; (vii) establishing the IFMS to bring greater financial control and accounting reforms to the sector; and (viii) reduction in the dependency on government budgetary support. 40. The program interventions have increased the annual production and sale of khadi products. Sales increased in the KVI sector by a compound annual growth rate (CAGR) of 10.2% (from $2.3 billion in FY2006 to $6.4 billion in FY2016), while sales for khadi grew by a CAGR of 9.2% during the same period. 41. The executing and implementing agencies are committed to carry forward the successful interventions in the program to other khadi institutions. During the launch of the IFMS, ADB was requested to continue its support in pursuing the identified reforms, to strengthen policy, planning and institutional framework, and implementation of the recommended actions from various assessments, to improve the sector further.

42. Program implementation was consulted through regular dialogues with development partners that are overall governed by Department of Economic Affairs (DEA) of Ministry of Finance.18

VIII. THE PRESIDENT'S DECISION

43. In view of the significant progress made in implementing the overall program, and the full compliance with all 18 policy actions for the release of the third and last tranche, the President is satisfied with the overall implementation of the Khadi Reform and Development Program and that the necessary actions for the release of the third tranche have been fulfilled. In accordance with the established procedure, the President will authorize the release of the third tranche in the amount of $45 million. The authorization shall be effective not less than 10 working days after the circulation of this progress report to ADB’s Board of Directors.

17 This list has not been updated since 1956. 18 Ministry of Finance is the government’s nodal agency for coordination with India’s development partners, to ensure

that effective and prioritized assistance is provided. ADB consulted with development partners for formulating the Country Partnership Strategy (2018- 2022), approved in September 2017. ADB has regular consultations with International Monetary Fund (IMF), on Article IV and other macroeconomic issues including the most recent annual Article IV report published on 22 February 2017.

Appendix 1 11

REVISED POLICY MATRIX

Policy Actions First Tranche

$20 million

Second Tranche $40 million

(December 2016)

Third Tranche $45 million

(December 2017)

I. Establishing a Policy Reform and Implementation Framework

A comprehensive reform package for the development of khadi

Government of India (the Government) conducts a review of the performance of khadi sub-sector comprising KVIC and other subsidiary institutions and develops a Khadi Reform Package to strengthen the khadi sub-sector. (Khadi Reform Package) KVIC agrees on the khadi reform package comprising – policy, legal, marketing, and institutional reforms for achieving sustainability of khadi and enhancing artisan welfare. (KVIC letter indicating concurrence) KVIC, in consultation with MMSME, develops (i) criteria for selecting KIs eligible for assistance under the Khadi Reform Package, which will primarily be performance-based with due regard to regional balance and the inclusion of backward areas, and (ii) draft MOU between KVIC and KIs on comprehensive reforms for KIs, which will include performance benchmarks and sanctions for KIs that fail to meet the performance benchmarks. (Eligibility criteria and MOU) KVIC selects 400 KIs eligible for support under the khadi reform package. (List of eligible KIs)

KVIC shall have ensured the completion of the audit for hundred and eighty (180) eligible KIs by independent auditors (Summary of audit findings) KVIC shall have disseminated the Khadi Reform Package nationwide through workshops (List of state-wide workshops and training report) KVIC shall have (a) undertaken the first independent assessment of the Khadi Reform Package, (b) held a stakeholder consultation on the outcome of the assessment, and (c) prepared appropriate measures to address the feedback (Assessment Report and identify feedback and mitigation measures)

KVIC shall have ensured the completion of the audit of remaining two hundred and twenty (220) eligible KIs by independent auditors. (Summary of audit findings) KVIC shall have (i) undertaken the independent assessment of the Khadi Reform Package, (ii) held a stakeholder consultation on the outcome of the assessment, and (iii) prepared appropriate measures to address the feedback. (Assessment Report and identify feedback and mitigation measures)

II. Promoting and Marketing Khadi

Establishing identity of khadi through Khadi Mark

KVIC agrees to undertake steps to develop Khadi Mark and link the artisan’s base earnings to the use of Khadi Mark. (Khadi reform package)

KVIC shall have developed the Khadi Mark, including designing its logo, and registers the Khadi Mark under the KVIC Act, 1956 [(a) Notified Khadi Mark

KVIC shall have created the basic testing infrastructure for the Khadi Mark. (Testing Infrastructure Report) KVIC shall have continued

Appendix 1 12


$20 million


(December 2016)


(December 2017)

Regulation (b) Khadi Mark Logo and (c) Summary findings of random spot audit reports] KVIC shall have (a) undertaken pan India arrangements for independent testing of Khadi; (b) obtained undertaking from users to abide by regulations for use of Khadi Mark: (c) developed the detailed plan for the creation of basic testing infrastructure for Khadi Mark at KVIC; and (d) undertaken the arrangement for managing Khadi Mark by KVIC state/divisional offices. [(a) MOU with the accredited agency b) Undertaking from users for usage of Khadi Mark c) Plan of testing infrastructure d) Khadi Mark Procedural Protocol as notified] KVIC shall have adopted the procedures and assigned the Khadi Directorate to grant usage of Khadi Mark to KIs and other entities (Gazette notification for Khadi Mark Regulations) KVIC through its Khadi Directorate shall have ensured that the KIs registered at either KVIC or KVIB adopt the Khadi Mark (List of KIs registered for Khadi Mark) KVIC through its Khadi Directorate shall have prepared and maintained a list of KIs and other entities authorized to use Khadi Mark and publish this in its website (List of KIs) KVIC shall have conducted random spot audits of KIs and other entities authorized to use Khadi Mark regarding

to conduct random spot audits of KIs regarding their adherence to the licensing requirements for the use of Khadi Mark. (Summary of spot audit reports)

Appendix 1 13


$20 million


(December 2016)


(December 2017)

their adherence to the licensing requirements for the use of Khadi Mark (Summary of the spot audit reports)

Effective marketing through private sector participation

KVIC agrees to establish a new marketing organization with majority private sector ownership (Khadi reform package)

KVIC shall have commissioned a product specific market survey of Khadi and Village Industries products through a specialist firm [(a) Work order and (b) the market survey report]

Based on the outcome of the survey, KVIC shall have identified products for both domestic and international markets and develop marketing strategies for all Khadi related institutions and products. [(a) Market Survey Report (b) Strategy report based on survey)] The KVIC shall have prepared a product catalogue and set up the market information system. (Product Catalogue and operational market information system)

III. Realizing Procurement and Production Efficiencies

Facilitating raw material procurement and cotton sliver production

KVIC develops quality norms for raw material procurement by KIs. (Quality norms issued by KVIC) KVIC initiates the creation of a fund to kick-start private sector participation in sliver/roving production. (KVIC letter, which will incorporate the guidelines for utilization of the fund)

KVIC shall have conducted training for the 300 eligible KIs on quality testing of raw materials. (Training Report)

Market-linked pricing to replace cost-based pricing

KVIC agrees to undertake steps to allow KIs to set their khadi prices. (Khadi reform package)

KVIC shall have issued a notification to allow KIs to set market-linked prices. (Notification for Market Linked Pricing) KVIC formulated the benefit chart. (Notification for Benefit Chart) KVIC notified benefit chart to KIs (Circular / Order for Benefit Chart)

KVIC shall have monitored and assessed the effectiveness of the implementation of the benefit chart. (Assessment report)

Appendix 1 14


$20 million


(December 2016)


(December 2017)

Rationalization of financial assistance for khadi

KVIC agrees to undertake steps for the KIs to shift to the production incentive plan. (Khadi reform package)

KVIC shall have formulated the production incentive plan and provided production incentive to all Khadi products. (Guidelines as issued to all KIs for Market Promotion Development Assistance) KVIC shall have reassessed working capital requirement for Khadi production. (Report of Working Capital Assessment) KVIC shall have appointed a focal person to engage with the bankers to enhance access of the KIs to working capital. (Office order for appointment of Focal Person)

KVIC shall have continued the phasing out of production incentives on other categories of products and assess the impact on sales as a result of this. (Progress report)

Creation of new khadi ventures with greater entrepreneurial activity and enhanced artisan empowerment

KVIC agrees to pursue the producer company model and enterprise model for new ventures in khadi. (Khadi reform package)

KVIC shall have developed the framework for producer company model and enterprise for new ventures in Khadi. (Notification for implementation of Producer Company)

IV. Implementing Institutional Reforms

Organizational restructuring of KVIC for better focus on facilitative and developmental role

KVIC adopts the restructuring devolution plan for (i) restructuring khadi, village industries, science and technology, and economic research directorates; (ii) strengthening of human resource and administration directorate; (iii) realignment of reporting relationships; and (iv) devolution of powers and responsibilities to zonal offices. (Restructuring devolution plan) KVIC creates the steering committee and users’ committee for the IT/IS planning and implementation. (KVIC notification)

KVIC shall have (a) restructured its Khadi directorates, village industry directorates, science and technology directorates, and economic research directorates; (b) strengthened the human resource and administration directorates; (c) realigned reporting relationships for efficiency; and (d) devolved power to zonal offices. [(a) Circular on restructuring b) Circular on strengthening the HR and administration directorates c) Circular on realignment of reporting relationships d) Circular on devolution of powers to zonal offices)]

KVIC shall have implemented the management information system in 400 KIs. (Progress Report on fully operational MIS in 400 KIs) KVIC shall have implemented the integrated application system. (Achieved "Go-Live" for the application system)

Appendix 1 15


$20 million


(December 2016)


(December 2017)

KVIC shall have (a) reviewed the existing structures and processes for the certification of the KIs; and (b) issued appropriate guidelines to empower a committee within the directorates of KVIC with the authority for the certification of KIs, under the guidance and advice of the central certification committee. [(a) Review report of certification of KIs (b) Notification on empowering CCC to manage certification process)] KVIC shall have examined and reviewed the role and relevance of the central certification committee in the certification process of the KIs. (Review report) KVIC shall have developed an integrated management information system and roll out in one hundred (100) KIs. [(a) Work order issued to vendor for developing MIS and (b) Progress Report on roll out for 100 KIs] KVIC shall have developed IT/e-governance roadmap, infrastructure requirements, and linkage of IT/IS strategy to the Khadi Reform Package. (IT Roadmap and Tender Notification) The Borrower through the Program Executing Agency shall have reviewed the functions of the marketing directorate of KVIC. (Action Taken Report with minutes)

Revitalize KIs KVIC agrees to formulate the comprehensive reforms plan for the 300 eligible KIs. (Khadi Reform Package)

KVIC shall have modified categorization norms for KIs and recategorized 400 KIs using the modified norms. (List of re-categorized KIs

KVIC shall have adopted the comprehensive reforms plan to empower and revitalize the four hundred (400) eligible KIs.

Appendix 1 16


$20 million


(December 2016)


(December 2017)

and modified re-categorization norms) KVIC shall have signed MOUs with one hundred and eighty (180) eligible KIs for comprehensive Khadi institution reforms. [(a) List of Institutions along with date of signing of MOUs (b) Sample MOU)] KVIC shall have ensured that the eighty (80) eligible KIs implement the comprehensive reforms plan and implementation plan developed and approved for hundred (100) additional KIs. [(a) Progress Report on implementation of 80 KIs and (b) Implementation plan for 100 KIs approved by KVIC]

(Comprehensive Reforms Plan) KVIC shall have recategorized the remaining KIs using the modified norms. (List of re-categorized KIs and modified re-categorization norms) KVIC shall have signed with two hundred twenty (220) eligible KIs the MOUs for comprehensive Khadi institution reforms. (List of MOUs with dates of signing and sample MOU) KVIC shall have ensured that three hundred and twenty (320) eligible KIs shall have implemented the comprehensive reforms plan. (Progress Report) KVIC shall have evaluated the performance of the four hundred (400) eligible KIs. (Evaluation Report)

Strengthen the capability of all institutions

KVIC agrees to develop a comprehensive capacity building plan covering KVIC, KVIBs, KIs, and artisans. (Khadi reform package)

KVIC shall have completed (a) the assessment of existing training arrangements (infrastructure, capacity of trainers, curriculum, and demand for training); and (b) based on the assessment, the comprehensive plan for (i) demand driven training delivery, (ii) the creation of linkages with external training program, (iii) the upgrading of physical infrastructure, and (iv) the enhancement of the skills of training staff. (Comprehensive capacity building plan) KVIC shall have implemented the comprehensive capacity building plan. (Progress Report)

Appendix 1 17


$20 million


(December 2016)


(December 2017)

KVIC shall have periodically published in its website the training calendar. (Training calendar)

Develop synergies through traditional village industries

KVIC agrees to identify around 5 village industries that are in line with the ethos of khadi – handmade, use of organic inputs processes, and socially aware. (Khadi reform package)

KVIC shall have identified five (5) thrust traditional village industry clusters based on market assessment study. (Market Assessment Report and list of clusters identified for implementation) KVIC shall have formulated the cluster development strategy for the identified village industries. (Cluster development strategy report)

KVIC shall have ensured the establishment of one (1) cluster for each of the identified village industry. (Progress Report) KVIC shall have ensured the implementation of the comprehensive capacity building plan in the identified clusters. (Progress Report) KVIC shall have monitored the performance of the clusters. (Progress report)

CCC = central certification committee, IT = information technology, IS = information system, KI = khadi institution, KVIB = Khadi and Village Industries Board, KVIC = Khadi and Village Industries Commission, MIS = management information system, MOU = memorandum of understanding, MMSME = Ministry of Micro, Small and Medium Enterprises. Source: ADB. 2016. Major Change in Program, Loan 2452: Khadi Reform and Development Program (India). Manila.

Appendix 2 18

SUMMARY OF FIRST AND SECOND TRANCHE RELEASE CONDITIONS

First Tranche – 16 Conditions

S. No.

First Tranche Conditions Evidence as per

policy matrix Remarks

1. Government of India (the Government) conducts a review of the performance of khadi sub-sector comprising KVIC and other subsidiary institutions and develops a khadi reform package to strengthen the khadi sub-sector.

Khadi reform package Completed

2. KVIC agrees on the khadi reform package comprising – policy, legal, marketing, and institutional reforms for achieving sustainability of khadi and enhancing artisan welfare.

KVIC letter indicating concurrence

Completed

3. KVIC, in consultation with MMSME, develops (i) criteria for selecting KIs eligible for assistance under the khadi reform package, which will primarily be performance-based with due regard to regional balance and the inclusion of backward areas, and (ii) draft MOU between KVIC and KIs on comprehensive reforms for KIs, which will include performance benchmarks and sanctions for KIs that fail to meet the performance benchmarks.

Eligibility criteria and MOU

Completed

4. KVIC selects 300 KIs eligible for support under the khadi reform package.

List of eligible KIs Completed

5. KVIC agrees to undertake steps to develop khadi mark and link the artisan’s base earnings to the use of khadi mark.


6. KVIC agrees to establish a new marketing organization with majority private sector ownership.


7. KVIC develops quality norms for raw material procurement by KIs. Quality norms issued by KVIC

Completed

8. KVIC initiates the creation of a fund to kick-start private sector participation in sliver/roving production.

KVIC letter, which will incorporate the guidelines for utilization of the fund

Completed

9. KVIC agrees to undertake steps to allow KIs to set their khadi prices.


10. KVIC agrees to undertake steps for the KIs to shift to the production incentive plan.


11. KVIC agrees to pursue the producer company model and enterprise model for new ventures in khadi.


12. KVIC adopts the restructuring devolution plan for (i) restructuring khadi, village industries, science and technology, and economic research directorates; (ii) strengthening of human resource and administration directorate; (iii) realignment of reporting relationships; and (iv) devolution of powers and responsibilities to zonal offices.

Restructuring devolution plan

Completed

Appendix 2 19

S. No.

First Tranche Conditions Evidence as per

policy matrix Remarks

13. KVIC creates the steering committee and users committee for the IT/IS planning and implementation.

KVIC notification Completed

14. KVIC agrees to formulate the comprehensive reforms plan for the 300 eligible KIs.


15. KVIC agrees to develop a comprehensive capacity building plan covering KVIC, KVIBs, KIs, and artisans.


16. KVIC agrees to identify around 5 village industries that are in line with the ethos of khadi – handmade, use of organic inputs processes, and socially aware.


.

Appendix 3 20

STATUS OF COMPLIANCE WITH THIRD TRANCHE RELEASE CONDITIONS

No. Third Tranche Conditions Evidence following

Revised Policy Matrix Compliance

Status A. Establishing a Policy Reform and Implementation Framework

1. KVIC shall have ensured the completion of the audit of remaining two hundred and twenty (220) eligible KIs by independent auditors.

Summary of audit findings

Complied with

2. KVIC shall have (i) undertaken the independent assessment of the Khadi Reform Package; (ii) held a stakeholder consultation on the outcome of the assessment; and (iii) prepared appropriate measures to address the feedback.

Assessment report and feedback and mitigation measures

Complied with

B. Promoting and Marketing Khadi

3. KVIC shall have created the basic testing infrastructure for the Khadi Mark.

Testing infrastructure report

Complied with

4. KVIC shall have continued to conduct random spot audits of KIs regarding the adherence to licensing requirements for the use of Khadi Mark.

Summary of spot audit reports

Complied with

5. Based on the outcome of the survey, KVIC shall have identified products for both domestic and international markets and develop marketing strategies for all Khadi related institutions and products.

Market survey report, strategy report based on survey

Complied with

6. The KVIC shall have prepared a product catalogue and set up the market information system.

Product catalog and operational market information system

Complied with

C. Realizing Procurement and Production Efficiencies

7. KVIC shall have monitored and assessed the effectiveness of the implementation of the benefit chart.

Assessment report Complied with

8. KVIC shall have continued the phasing out of production incentives on other categories of products and assess the impact on sales as a result of this.

Progress report Complied with

D. Implementing Institutional Reforms

9. KVIC shall have implemented the management information system in four hundred (400) KIs.

Progress report on fully operational management information system in 400 khadi institutions

Complied with

10. KVIC shall have implemented the integrated application system.

Achieved “go live” for the application system

Complied with

11. KVIC shall have adopted the comprehensive reforms plan to empower and revitalize the four hundred (400) eligible KIs.

Comprehensive reforms plan

Complied with

12. KVIC shall have recategorized the remaining KIs using the modified norms.

List of re-categorized khadi institutions and modified re-categorization norms

Complied with

Appendix 3 21

No. Third Tranche Conditions Evidence following

Revised Policy Matrix Compliance

Status 13. KVIC shall have signed with two hundred twenty (220)

eligible KIs the MOUs for comprehensive Khadi institution reforms.

List of MOUs with dates of signing and sample MOU

Complied with

14. KVIC shall have ensured that three hundred and twenty (320) eligible KIs shall have implemented the comprehensive reforms plan.


15. KVIC shall have evaluated the performance of the four hundred (400) eligible KIs.

Evaluation report Complied with

16. KVIC shall have ensured the establishment of one (1) cluster for each of the identified village industry.


17. KVIC shall have ensured the implementation of the comprehensive capacity building plan in the identified clusters.


18. KVIC shall have monitored the performance of the clusters.


KI= khadi institution, KVIC = Khadi and Village Industries Commission, MOU = memorandum of understanding. Source: Asian Development Bank.

Appendix 4 22

CHRONOLOGY OF LOAN REVIEW MISSIONS

Milestones Dates Locations Inception of the PPTA 4 January 2008 Consultation mission for PPTA 17–21 March 2008 Review mission for PPTA 10–17 April 2008 Concept paper 6 June 2008 Fact-finding mission 17–24 June 2008 Consultation mission 24–25 July 2008 1st MRM 30 July 2008 Appraisal mission 7–11 August 2008 2nd MRM 20 August 2008 Loan negotiations 27–28 August 2008 Loan approval 2 October 2008 Signing of loan and program agreement 22 December 2009 Loan effectiveness 2 February 2010 First tranche disbursement 17 February 2010 Special program administration mission 21–24 November 2010 First loan extension loan closing date (made effective on 26 September 2011)

30 September 2013

Special program administration mission 27 April 2012 Loan review mission 6–7 March 2013 Mumbai Loan review mission 22–23 May 2013 Loan review mission 16–17 September 2013 Second loan extension loan closing date (made effective on 4 December 2013)

30 September 2015

Loan review mission 16 September 2014 Third loan extension loan closing date (made effective on 1 February 2016)

30 June 2016

First consultation mission for exploring loan revival

24 February–3 March 2016

Second consultation mission for exploring loan revival

27–29 April 2016

Third consultation mission for exploring loan revival

11–13 May 2016

First review mission for restructuring of program 29 June–7 July 2016 Fourth loan extension loan closing date (made effective on 1 July 2016)

31 December 2016

Second review mission for restructuring of program 17–24 August 2016 New Delhi Loan negotiations for amended and restated loan agreement (due to proposed major change in program)

3 November 2016 New Delhi

Fifth loan extension loan closing date (made effective on 14 December 2016 on Board approval of major change in program)

31 December 2017

Signing of amended and restated loan agreement of restructured program

19 December 2016

Effectiveness of amended and restated loan agreement of restructured program

20 December 2016

Loan review mission 6–7 February 2017 Mumbai and Delhi Second tranche disbursement 17 March 2017 Tripartite portfolio review meeting 6–7 April 2017 New Delhi Loan review mission 16–17 May 2017 Mumbai Loan review mission 8–9 August 2017 Mumbai Special program administration mission 2 September 2017 Coimbatore Special program administration mission 27–28 September 2017 Mumbai Review meeting (status of compliances) 24 October 2017 Mumbai Tripartite portfolio review meeting 26–27 October 2017 Bengaluru

MRM = management review meeting, PPTA = program preparatory technical assistance

Source: Asian Development Bank.

Appendix 5 23

STATUS OF PROGRAM COVENANTS

Schedule No.

Covenant Comments and/or

Compliance Program Management

5(1) MMSME shall continue to be the Program Executing Agency and be responsible for the overall implementation of the Program. MMSME shall set up a RIMC to be chaired by the Secretary of MMSME. The members of the RIMC shall consist of representatives from the DEA, the Ministry of Textiles, and KVIC as well as a marketing expert from the Confederation of Indian Industry and a financial expert from the banking sector. The RIMC shall assume the function of the Program steering committee and undertake the following tasks: (a) provide policy and technical guidance to the RID; (b) review the progress of Program implementation; (c) monitor the performance of the RID, and RMUs; and (d) ensure effective Program coordination. The RIMC shall meet at least on quarterly basis.

Complied with

5 (2) KVIC shall be the Implementing Agency and be responsible for the implementation of many of the policy actions set out under the Program. KVIC shall establish the RID to be headed by a director of KVIC with sufficient knowledge and experience in the KVl-related program initiated by KVIC. The RID director shall report to the chief executive officer of KVIC. The RID shall have four subdivisions: (a) promotion and marketing; (b) the raw material procurement and production; (c) institutional reform; and (d) Program coordination and administration. KVIC shall assign thirteen (13) officers and seven (7) administrative staff members to RID.

Complied with

5 (3) KVIC shall establish RMUs at the state/divisional office of KVIC to manage and monitor the Program implementation at the Kl level. KVIC shall ensure that each RMU shall be headed by someone at an assistant director level within KVIC and at least one (1) KVIC officer shall be assigned to support the RMU heads. KVIC shall ensure that the RMUs coordinate with the Kls and facilitate monitoring and implementation of the reforms.

Complied with

Program Implementation

5 (4) The Borrower through the Program Executing Agency shall, and shall cause KVIC to: (a) promptly adopt and implement the policies and the actions included in the Program as specified in the Policy Letter and the Policy Matrix; and (b) ensure that such policies and actions continue in effect during and subsequent to the period of the Program.

(a) Complied with (b) Continue to be

complied with

5 (5) The Borrower through the Program Executing Agency shall, and shall cause KVIC to fulfill the agreed policies and actions under the Program in accordance with the agreed implementation schedule, to ensure that the loan tranches are released in a timely manner.

The first tranche was released on schedule, but the release of the second tranche was delayed by some infeasible policy conditions that led to the restructuring of the program in 2016 on the government’s request. The second tranche was subsequently released following the amended schedule.

Appendix 5 24

Schedule No.


Compliance

The release of the third tranche is on schedule, as the executing agency has complied with the policy conditions under third tranche.

5 (6) The Borrower through the Program Executing Agency shall, and shall cause KVIC to ensure that all activities, documents, and enactments required under the Program shall be prepared in consultation with the relevant stakeholders and their feedback shall be incorporated, as appropriate.

Complied with

5 (7) In case of natural calamities and unforeseen circumstances that affect the equity and liquidity of KVIC, the Borrower through the Program Executing Agency shall immediately consult ADB and prepare a remedial action plan for the Program to be mutually agreed between ADB and the Borrower.

Not applicable

Khadi Policy Reforms

5 (8) The Borrower through the Program Executing Agency shall, and shall cause KVIC to ensure that the reforms under the Program, including institutional, legal and financial reforms under the Khadi Reform Package are formulated, finalized, and implemented to the satisfaction of ADB.

Complied with

5 (9) Prior to the completion of the Program, the Borrower through the Program Executing Agency shall cause KVIC to reorganize all artisans into self-help groups and KVIC shall proactively provide required training support to the group to enable the groups to constructively serve the purpose of the artisans.

Complied with through third tranche condition 17

5 (10) Prior to the completion of the Program, the Borrower through the Program Executing Agency shall cause KVIC to ensure that (a) at least fifty (50) percent of the governing board of the Kl shall be representatives of the artisans; and (b) the criteria for the selection of the other members of the governing board shall be based on good governance practices.

Complied with

Counterpart Funds

5 (11) (a) The Borrower through the Program Executing Agency shall continue to establish, in a manner satisfactory to ADB, a Special Account at a commercial bank acceptable to ADB for the specific purpose of depositing and utilizing the Counterpart Funds.

(b) Whenever the Borrower through the Program Executing Agency withdraws proceeds of the Loan from the Loan Account, the Borrower shall continue to promptly deposit into the Special Account the Rupees amounts equivalent to the amount of the proceeds so withdrawn.

(c) Separate accounts and records in respect of the Special Account shall continue to be maintained in accordance with consistently maintained sound accounting principles and shall be audited annually by independent auditors acceptable to ADB in accordance with sound auditing standards. Certified copies of such audited accounts and records shall be furnished to ADB promptly after their preparation but in any event not later than six (6) months after the close of the fiscal year to which they relate, or not later than six (6) months after the date of the closing of the

Loan Account, as the case may be.

(a) Complied with (b) Complied with (c) Complied with.

Comptroller and CAG audit for FY2016-17 under way

Appendix 5 25

Schedule No.


Compliance

5 (12) The Borrower through the Program Executing Agency shall ensure that the Counterpart Funds shall be used for the adjustment costs associated with the reforms introduced under the Program for KVIC and Kls and shall be allocated for the purpose of the (a) adjustment costs related to policy and institutional reforms, including Khadi Mark and synergy with village industries in the amount of thirty two million and hundred thousand Dollars ($32,100,000); (b) adjustment costs related to marketing reforms in the amount of eight hundred thirty thousand Dollars ($830,000); and (c) adjustment costs related to the strengthening of Kls in the amount of seventy two million and seventy thousand Dollars ($72,070,000).

Complied with

Information Sharing

5 (13) The Borrower through the Program Executing Agency shall, and shall cause KVIC to regularly exchange views and information with ADB on any problems and constraints encountered during Program implementation and seek proper resolution to address these problems and constraints.

Complied with

Technical Assistance

5 (14) The Borrower through the Program Executing Agency shall, and shall cause KVIC to ensure that in the carrying out of the policy measures and the activities included under the Program, the recommendations made under the Technical Assistance are duly considered for appropriate adoption in a timely manner and in consultation with ADB.

Complied with

Environment and Social Safeguards

5 (15) The Borrower shall, and shall cause KVIC to ensure that all activities under the Program shall be carried out in accordance with all applicable environmental laws and regulations of the Borrower and ADB's Environmental Policy (2002).

No adverse impacts

5 (16) The Borrower shall, and shall cause KVIC to ensure that under the Program no persons shall be (a) adversely affected in terms of ADB's Involuntary Resettlement Policy (1995), and applicable laws and regulations of the Borrower related to resettlement and rehabilitation; and (b) affected in terms of ADB's Policy on Indigenous Peoples (1998) and related laws and regulations of the Borrower.

No resettlement activities

Accounting, Auditing and Reporting

5 (17) KVIC through RID shall prepare quarterly progress reports and submit them to ADB within twenty (20) days of the end of the applicable period. The reports shall be prepared in a format acceptable to ADB and include (a) the status of institutional development activities; (b) delays and problems encountered and actions taken to resolve them; (c) compliance with loan covenants; and (d) expected progress during the next three (3) months. Within three (3) months of the completion of the Program, KVIC shall prepare and submit to ADB through the Program Executing Agency, a Program completion report.

Complied with

Program Performance Monitoring and Evaluation

5 (18) KVIC through the RID shall establish and maintain the Program performance management system to include a database on the progress status of the policy measures and other Program indicators.

Complied with

Appendix 5 26

Schedule No.


Compliance

Program Review

5 (19) ADB and the Borrower shall conduct semiannual reviews throughout the implementation of the program to identify further actions required for the continued development of the Khadi sector. By no later than 4 months from the date of this Amended and Restated Loan Agreement, ADB and the Borrower shall undertake the midterm review for the Program to (a) review compliance status of the third tranche conditions; (b) status and implementation of policies; (c) status and implementation of reforms; (d) initial lessons learned; and (e) note the progress in achieving the indicators in the design and monitoring framework.

Complied with

Gender

5 (20) The Borrower and Program Executing Agency shall ensure that the principles of gender equity aimed at increasing Program benefits and impacts on women are followed during the implementation of the Program, including (a) equal pay to men and women for work of equal value; (b) enabling working conditions for women workers; and (c) taking actions to maximize women's benefits from increased production, value addition to products and enhanced sale from the renovated retail sales outlets.

Complied with

Program Agreement

5 (21) The Program Agreement forming part and parcel of the Initial Loan Agreement shall continue to be part of this Loan Agreement, however with following revised Recital A to indicate the reduced Loan amount:

(A) by a Loan Agreement of even date herewith between India (hereinafter called the Borrower) and ADB, ADB has agreed to make to the Borrower a loan of one hundred and five million dollars ($105,000,000) on the terms and conditions set forth in the Loan Agreement, but only on the condition that the Counterpart Funds be made available to KVIC and that KVIC agrees to undertake certain obligations towards ADB as hereinafter set forth; and

Agreed and complied with

ADB = Asian Development Bank, CAG = Comptroller and Auditor General of India, DEA = Department of Economic Affairs, KI = khadi institution, KVI = Khadi and Village Industry, KVIC = Khadi and Village Industries Commission, MMSME = Ministry of Micro, Small and Medium Enterprises, RID = reform implementation division, RIMC = reform and implementation monitoring committee, RMU = reform management unit Source: Asian Development Bank.

Documents

Progress Report on Tranche Release · khadi and village industries (KVI) to create sustainable employment and higher incomes to khadi artisans, increase artisan welfare, and develop