Public Disclosure Authorizeddocuments.worldbank.org/curated/en/... · A successful past, but an uncertain future. P. unjab is India's most prosperous and developed state with the

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Administrator

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Poverty Reduction and Economic Management Sector Unit

South Asia Region

2004

The World Bank

The Opportunities and Challenges Ahead

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The Report has been prepared by Vikram K.Chand and Deepak Mishra, with significant

contributions from the following Bank staff andconsultants in the form of Technical Notes :Deepak Ahluwalia (Agriculture), Paolo Belli(Health), Bhavna Bhatia (Power), ParminderBrar and Papia Bhattacharya (FinancialManagement), Prema Clarke (Education), LuisConstantino (Decentralization), BishwanathGoldar (Productivity), Sumir Lal (PoliticalEconomy), Syed Mahmood (Investment Climate),Rinku Murgai and Radhika Nayak (Poverty),Mona Prasad (Fiscal), M. Govind Rao (TaxPolicy), Ismail Radwan and Jet Riparip (Health),Deepa Sankar (Education), N. C. Saxena(Governance), S. K. Sudhakar (Health), NarayanValluri (Tax administration), C. Veeramani(Productivity) and Varalakshmi Vemuru (Gender).The team was assisted by Vidya Kamath andShahnaz Rana. The work was carried out underthe direction and management of Sadiq Ahmed,Michael Carter, and Ijaz Nabi. SaumitraChaudhri, Indermit Gill, and Homi Kharasprovided insightful comments on the manuscript.

The team undertook a wide range of consultationsat various stages of preparation of the Report with theGovernment of Punjab and other stake-holders. Theteam would like to especially thank the Chief MinisterCaptain Amarinder Singh, Finance Minister SurinderSingla and Chief Secretary J. S. Gill for their cooperationand guidance during the preparation of this Report. Inaddition, the team would like to thank the followingcurrent and former GoP officials: S.C. Agrawal, B. R.Bajaj, Rupan Deol Bajaj, Anjali Bhawra, A. K. Dubey, B.C. Gupta, D.S. Guru, Mukul Joshi, Nirmaljeet SinghKalsi, Ravneet Kaur, Sarvesh Kaushal, J. S. Kesar, K.R.Lakhanpal, Vini Mahajan, R.C. Nayyar, Y.S Ratra, D. P.Reddy, Kusumjit Sidhu, Himmat Singh, Jaspal Singh,Tejveer Singh, A. R. Talwar, Jaspreet Talwar, G.Vajralingam, and P. K. Verma among others. Thegenerosity of the Government of Punjab in sharinginformation and images that have been used in thisReport is gratefully acknowledged. We also acknowledgethe use of photographs taken by Pallava Bagla.

The design of the cover page, layout of the insidepages, editing and print production was carried byMacro Graphics Private Limited, New Delhi.

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�� A successful past, but an uncertain future

Punjab is India's most prosperous and developedstate with the lowest poverty rate. At the end of

the 1990s, more than 94 percent of Punjab's citizenswere above the poverty line, 70 percent were literate,94 percent of the six year olds were enrolled inprimary schools, 72 percent of children under twelvemonths were immunized, 99 percent of householdshad access to safe drinking water, and the average lifeexpectancy of its citizen was 68 years. The remarkabledevelopment record of Punjab can also be inferredfrom the fact that it has already achieved, or is well ontrack to achieve, most of the MillenniumDevelopment Goals (MDGs). According to India'sNational Human Development Report (2001),Punjab was ranked second only to Kerala in terms ofthe overall level of human development among themajor Indian states. Most citizens of Punjab have thusalready achieved a level of socio-economic status thatthe majority of Indian citizens are unlikely toexperience in their lifetime.

Yet in many ways, Punjab's developmentexperience is paradoxical: Its private sector is one ofthe most prosperous in the country, but itsgovernment is highly impoverished; it has virtuallyeliminated the gender gap in primary education, yetsuffers from the problem of widespread sex-selectiveabortions and female infanticide (the gender ratio is

only 874); and although it has a growing and largemiddle class, the quality of public services remainsstubbornly poor. Punjab's fortune also seems to be atvariance with the rest of the country: The state grewrapidly (6 to 7 percent per annum) when much ofIndia was wedded to a low rate of growth of 3percent per annum and it's economy slowed downafter the mid-eighties when the rest of India took-offon a higher growth path.

Not surprisingly, given the mixed results, thereis a sense of uneasiness regarding what the futureholds for Punjab. Concerned citizens of the statewonder whether the younger generation will grow upin the most affluent and developed state in thecountry like their parents and grandparents once did.Will the heady days of the 'green revolution' everreturn to Punjab? Will the state be able to hold on tothe impressive gains made on the socio-economicfronts? Such anxieties are not without reason: thestate's public finances are under severe stress, theeconomy has stagnated, employment opportunitiesare shrinking, the quality of public service delivery isdeteriorating, interest groups are growing ininfluence and human development indicators arebeginning to languish or even deteriorate.

Three areas of concerns: growth slowdown,fiscal crisis and deteriorating public services

After a spectacular growth rate during the sixtiesand the seventies, the Punjab economy began to slow

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down in the late 1980s and decelerated further duringthe 1990s. Its per capita income grew at an annualaverage rate of 2.1 percent during the 1990s -significantly below the national average and the thirdlowest growth rate among major Indian states. Muchof the growth slowdown originated from theagriculture sector - its output grew at a trend rate of2.6 percent per annum in the 1990s compared to theall-Indian average of 3.2 percent, and almost half thegrowth rate of 5 percent per annum in the 1980s.Worse, current agricultural practices seem to beenvironmentally unsustainable: Punjab now has thehighest percentage of groundwater exploitation in thecountry and also the largest percentage of over-exploited and dark blocks. Extensive use ofnitrogenous fertilizers and pesticides has led toincreasing nitrate concentration and accumulation ofpesticide residues in soil, water, food, feed and otheragricultural produce, often above tolerance limits.Industrial growth has remained largely between 5 to6.5 percent during the last decade and half,considerably below the performance of some of themore industrialized states in India. Punjab's share inIndia's total foreign investment is a meager 0.7 percentand the state has clearly lagged behind other high-income states in creating a healthy investment climate.

Punjab has the dubious distinction of being themost prosperous as well as one of the most indebtedstates in the country. Its government-debt to GrossState Domestic Product (GSDP) ratio, at 42 percentin 2002/03, is 163 percent of the level in Haryanaand 235 percent of Maharashtra, two states withsimilar per capita income as Punjab. Its hiddenliabilities - arrears, delayed payments, unfundedliabilities and contingent liabilities that are likely tobe realized in the medium-term - are estimated to bearound 20 percent of GSDP. According to theGovernment of Punjab (GoP)'s White Paper on StateFinances (2002), the Government has beenborrowing primarily to finance its currentconsumption, i.e., to pay for the growing salaries,pensions, interest payments (which together haveaccounted for all revenue receipts since 1996/97) and

subsidy. As a result, state finances are now borderingon bankruptcy.

Punjab's tax performance compares unfavorablywith other Indian states, both in terms of the level ofrevenue raised and in its growth. Its tax revenue toGSDP ratio (around 7 percent) is lower than theaverage for both the high- and middle-income statesand only marginally higher than the average of the low-income states. The buoyancy of its tax revenue is thelowest among the major states except West Bengal. Theannual compound growth of its tax revenue is lowerthan the average of the low, middle or high-incomestates. There also appears to be substantial under-registration of dealers in Punjab and the reportedturnover by dealers appears to be systematicallysuppressed. If the average turnover of dealers inKarnataka is assumed to be a fair value of the actualturnover of dealers in Punjab, the extent of under-taxation in Punjab could be as high as 50 percent, i.e.,a whopping Rs. 1,500 crores each year. An alternativemeasure of under-taxation shows that, in comparisonto Haryana, the annual sales tax revenue shortfall inPunjab could be nearly Rs. 700 crores.

Despite its high per-capita income and veryhigh per capita expenditure levels, Punjab does notscore well in terms of service delivery outcomes. Arecent perception survey by the Public Affairs Center(PAC) places Punjab in eleventh place in the qualityof service delivery across 16 major Indian states. Inmost services, Punjab has been ranked lower than allthe middle and high-income states and even worsethan some of the low-income states like MadhyaPradesh and Uttar Pradesh. In education, where itwas ranked at the bottom of the group, the poorquality of the government system is evident from theweak performance of public school students in theBoard Examinations. Only 53 percent of studentswere successful in the Class 10 exams in 2002. Publicschool students perform worse than theircounterparts in private schools at all levels of thesystem. Similarly, households surveyed in the 1998-99 National Family and Health Survey (NFHS)

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consistently rate the quality of public health serviceslower than the care provided by the private sector.Absenteeism among educational and health workersis a serious problem in Punjab. On an average, onany day, 36 percent of Punjab's primary schoolteachers and 39 percent of doctors are absent fromtheir workplace. Poor supervision, inadequateincentives, and lack of penalty mechanisms for errantservice providers are to be blamed for such high levelsof absenteeism.

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Some of the developmental challenges facingPunjab are common across many Indian states. Theperceived decline in public services, theadministrative and governance challenges, theproblems associated with the power sector and thegrowing culture of appeasement (through across theboard subsidies) by the political class are some of thechallenges that Punjab shares with other Indianstates, though even here the extent and nature of theproblems vary greatly in Punjab.

But at the same time there are certain elementsof uniqueness to its problems. Punjab has had aturbulent history: Its borders have been redrawntwice in the modern era; it has been underPresident's rule longer than any other Indian state;and it has been a witness to three wars, one of thebloodiest ethnic conflicts in India's history anddecade and a half of terrorist activities in its fiftyyears of life. It is also disadvantaged by its location asa frontline state on an often hostile border and forbeing land-locked. Key developmental challengesfacing Punjab today are :

Debilitating impact of civil strife Punjab is yet to heal from the deep scars left

during the militancy period on its growth and statefinances. The impact of militant activities on growthwas swift, widespread and, in some cases, permanent:The industrial growth rate halved, from 8 to 4percent; and the growth rate of services sector

decelerated as well, and fell by half, between 1987/88and 1992/93. Even the agricultural growth rateplummeted from around 6 percent per year to 2percent during this period due to decline in long-term investment associated with the uncertaintysurrounding militancy activities. Our calculationshows that the output loss suffered by Punjab onaccount of militancy activities could be as large as Rs.13,000 crores in today's prices (equivalent to 29percent of today's GSDP).

The impact of insurgent activities on the fiscalsituation was felt through three channels:expanding state apparatus and rapid growth of stateadministration, mounting revenue expenditure tomaintain law and order, and the inability on part ofthe government to enforce effective taxadministration, given the deteriorating law andorder situation, especially in rural areas. Thegovernment's desire to expand job opportunitiesduring a period of social turmoil led to a majorspurt in the size of the civil service: it expanded bymore than 3 percent each year between 1987/88and 1992/93. The growing bureaucracy and higherexpenditure had its toll on revenue expenditure,which shot up by 2-3 percentage points of GSDPduring this period. The rising expenditure wasfinanced by additional borrowing from the Centreand by the time Punjab returned to normalcy, itsinterest payments as a ratio of GSDP had doubled.Even to this day, an amount close to Rs. 8,000crores is still on the accounts of GoP, which wereborrowed to fight militancy in the state.

Punjab's civil services: The problem of lowproductivity

Punjab has one of the most over-staffed andover-paid civil services in the country. The ratio ofcivil servants per 100 population is approximately2.2 in Punjab, compared to 1.36 in Karnataka, 1.75in Andhra Pradesh, 1.7 in Gujarat and 1.9 in Orissa.Two decades ago, Punjab had only one Inspector-General (IG) of Police. Today there are 16 IGs, 13Additional Director Generals of Police, who

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supervise the work of the IG's, and one Director-General of Police at the top. While such expansionwas justified to curb insurgency, this considerationwas no longer relevant after the state returned tonormalcy.

Overstaffing is not limited to core governmentemployees but is equally pervasive in public sectorenterprises, especially in the Punjab State ElectricityBoard (PSEB). It has 16 employees to serve 1000consumers as compared to national average of 8. Asper official sources, the irrigation department andPSEB together have as much 50,000 excess staff. Atthe same time, the pay scales of GoP employees,especially the Group C and D employees who makeup 85 percent of the state's civil service population,are significantly higher than many other Indianstates. Despite the generous staffing and pay scales,the quality of public services leaves much to bedesired, underlining the low productivity of the civilservices in the state. Service delivery is alsoundermined by the frequent transfer of officers: Theaverage term for Principal Secretaries is 13 months intheir current post and 16 months in their previouspost; the average tenure of deputy commissioners isonly 16 months in the current post and 22 and 14months respectively in the previous two postings;and in police, the tenure of Station House officers(SHO's) is about 7 months. Moreover, GoP has yetto systematically apply information technology on alarge scale in its day-to-day operations.

Subsidy crowding out public investmentPunjab's subsidy bill has grown five fold while

its capital expenditure to GSDP ratio has fallen byhalf during the last ten years. The input subsides (i.e.,power and canal irrigation) that are paid from GoP'sbudget have increased from Rs. 409 crores in1990/91 to nearly Rs. 2000 crores in 2001/02.Farmers in Punjab also benefit to the tune ofRs.2,000 crores each year on account of subsidy fromGoI as price support for paddy and wheat crops andRs. 1,000 crores as part of subsidy for fertilizers. Thelarge subsidy bill is not only a threat to state's fiscal

situation but is also environmentally unsustainable.At the time when subsidies were growing, the capitalexpenditure to GSDP ratio fell from 3.8 percent in1990/91 to 1.7 percent in 2000/01. In prioritysectors like education and health, the ratio of capitalto total expenditure has been less than one percent in2002/03. Such low levels of public investment inirrigation, agriculture, power, road transport,education and health sectors have done incalculabledamage to the future growth prospects of the state.

Corruption, state capture, and the weakening ofrule-based governance

While the state's Vigilance Department hasbecome more active under the current government,Punjab's office of the Ombudsman (the Lok Pal),responsible for combating wrongdoing by Ministers, ismoribund. Nor has Punjab moved as fast as Karnatakaor Tamil Nadu to pass a Transparency in Tenders andProcurement law, although it has prepared a draft lawon the subject; Right to Information (RTI) legislationhas been delayed after Punjab decided not to enact itsown excellent draft law and wait instead for theGovernment of India to make the national Freedom ofInformation (FOI) law effective.

The state has also become a soft target ofspecial interest groups and lobbies who havemanaged to stall or rollback reforms that adverselyaffect their interests, even though the policies are inthe greater interest of the state. Unwillingness toraise the sales tax rate on diesel and farm inputs tothe levels recommended by the EmpoweredCommittee on State Finance Ministers, rollback ofpolicies aimed at enforcing better tax compliance(i.e., export-import forms), complete lack ofprogress in addressing overstaffing issues,reintroduction of non-practicing allowance fordoctors, growing cartelization of liquor sales in thestate and collusion by truck operators to fix pricesare manifestations of a deeper problem: the fact thatstate policies are being systematically captured byspecial interest groups. This growing culture ofpopulism has further narrowed the fiscal space of

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the government, squeezing capital expenditure todangerously low levels.

The failure on part of the Government tocomply with the various measures of its own FiscalResponsibility and Budget Management Actduring 2003/04 and the earlier systemic diversionof funds meant for procurement of foodgrains tomeet its revenue needs, clearly indicate lack ofcompliance with rules and regulation on part ofthe government.

�� A promising start, followed by roll-backs

The new government that came to power in the2002 state elections started the reform process inearnest. It abandoned the populist, but fiscally andenvironmentally unsustainable, policy of free powerand water for farmers. Punjab became the secondstate after Karnataka to have a 'Fiscal Responsibilityand Budget Management (FRBM) Act.' It camedown hard on corruption and introduced politicallydifficult measures to restrain revenue expenditureincluding a number of tax policy and administrativereforms to raise state's tax to GSDP ratio. Therevenue deficit came down sharply in 2003/03 as apercentage of revenue receipts. The Governmentconstituted an Expert Committee to suggest reform for the power sector. It passed the 'Punjab Infrastructure Regulation Act 2002' toencourage greater private-public participation indeveloping new infrastructure. It accepted the recommendations of the DisinvestmentCommission, which was set up by the previousgovernment, came out with a well-articulateddisinvestment strategy, and had some initialsuccesses. The Government undertook an ambitiouscontract-farming project to diversify the state'sagricultural base away from the paddy-wheat cycle.The government also announced its intention toundertake significant decentralization of primaryhealth and education services with the aim toimprove the quality of public services.

The urgency to reform and the hectic pace ofpolicy making, unfortunately, appears to be fadingaway. The fiscal targets laid out in the FRBM Act for2003/04 are unlikely to be met. Punjab is also likelyto fail to qualify for grants in the GoI's Fiscal ReformFacility. There have also been a number of policyrollbacks, especially in the tax area. The budget speechdelivered on June 21, 2004 conveys the government'spositive intentions on the reform front: It reiteratesGoP's commitment to implement the FiscalResponsibility Act, improve tax compliance,introduce Value Added Tax (VAT), reduce theft in thepower sector to 20% by the end of the Tenth Plan,continue debt swap arrangements, and promote thewidespread use of information technology ingovernment, particularly at the district-level. On theother hand, the budget is silent on a number of keyreform issues, including (a) actions to reduce the sizeof government (it does not reimpose the earlier banon recruitment but instead makes new hiringcontingent on the submission of a restructuring planby departments); (b) the unbundling of the powersector; and (c) the re-introduction of the statutoryexport-import (EXIM) form for tax purposes, amongothers. The Medium Term Fiscal Reform Programmetabled with the budget does not appear to beconsistent with the state's Fiscal Responsibility Act.The merger of dearness allowance into basic pay tothe tune of 50%, also announced in the budgetspeech, will in particular place a greater burden onPunjab's fiscal position.

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Some of the standard policy recommendationsfor restoring fiscal health, righting the power sector,and improving the quality of administration andservice delivery apply to Punjab as well. Yet, the realproblem in Punjab is not articulating the reformprogram but implementing it. This section firstelaborates some of the report's majorrecommendations and concludes with an analysis ofthe critical implementation issues surroundingPunjab's reform program.

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� !"#$�%# &&%'()*" '+Three critical steps to restore fiscal balance

To restore fiscal balance, the Government needsto move on three things immediately. First, it needsto comply with its own Fiscal Responsibility andBudget Management Act. To be in compliance, itneeds to budget more realistically to achieve fiscaltargets, create implementation committees tomonitor fiscal indicators much more closely andtake corrective actions promptly when necessary.Second, it has to create 'fiscal space' by addressingoverstaffing in government departments as well as inthe PSEB. Alternative mechanisms are needed todeliver subsidies to farmers more effectively; theresultant savings can be used to increase publicinvestment in critical sectors like agriculture,irrigation, power, road transport, education andhealth. Third, GoP has to aggressively pursue taxpolicy and administration reforms, e.g.,introduction of VAT, restructuring of the taxadministration department along functional lines,and computerization of the tax information systemto generate additional resources to meet the state'sgrowing public investment needs.

Measures to create an enabling climate for growth

Punjab can take a number of steps to createan enabling climate for its private sector to growand prosper. It could streamline administrativeprocedures involved in establishing new businessesby creating a more transparent and time-boundsystem. It could streamline its inspection systemand simplify record keeping and submission ofreturns procedures for industries. GoP may wishto introduce competition in agriculturalmarketing by allowing private sector and growercooperatives to set-up market yards as has beenoutlined in GoI's model Act. It would need to takesteps to reduce corruption, and strictly enforcecontracts and laws of the land. The Governmentshould continue its effort to unbundle the PSEBand introduce an open-access regime as indicatedin the Electricity Act.

Improving governance and service delivery The civil service is plagued by numerous

problems including overstaffing, fragmentation,frequent and politicized transfers, and weak policy-making capacity. There is no single solution to theseserious and deep problems, but they can besignificantly ameliorated by (a) re-imposing a ban onrecruitment except in priority sectors, (b) establishinga surplus pool to facilitate staff redeployment, VRS,or retrenchment within a finite period of time, i.e., sixmonths, (c) curbing premature transfers byestablishing an independent civil services board toprocess transfer requests, creating quantitative ceilingson transfers, and introducing computerizedcounseling in large departments, such as educationand health, (d) grouping departments on sectorallines in response to the need to reduce cabinet size to15 percent of the legislature, and (e) improvingpolicy-making capacity through a mix ofadministrative decentralization and greater relianceon specialists through lateral entry and/or outsideagencies. In order to improve transparency, GoPshould move forward to put in place both Right toInformation (RTI) and Transparency in Tenders andProcurement laws on the lines of model laws in otherstates (Maharashtra and Karnataka in the case of RTIand Tamil Nadu and Karnataka in the case ofprocurement). It is also essential to strengthen anti-corruption enforcement by appointing a new Lok Pal(Ombudsman) to the currently vacant post. Servicedelivery can be improved by (a) promoting e-governance through greater political ownership andcultivating agency reform champions, and (b)refining the current decentralization program toensure that teachers and primary health staff are morefully accountable to Gram Panchayats (GPs) to reducethe alarmingly high rate of absenteeism; this will alsonecessarily involve an effort to strengthen the workingof PRIs as a whole by improving their fiscal andadministrative soundness, for example.

�&,!%&%'*)*" '�-)!!%'.%+There is no shortage of good policy

recommendations for GoP when it comes to

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undertaking reforms in the state. A number of usefulreports already exist, including the White Paper onState Finances, two studies undertaken by NationalInstitute of Public Finance and Policy (NIPFP, 1994and 1998), Report of the Punjab Public ExpenditureReforms Commission (2002), the World Bank'sNote on 'Some Key Reform Challenges in Punjab'(2003), Expert Group's Report on Power SectorReform (2003), the Bank Report 'RevitalizingPunjab's Agriculture' (2003) and GoP's Report onDisinvestments (2002) to name a few. The problemin Punjab, more than in other states, is one ofimplementation. The report outlines siximplementation related issues that will help the stateto move the reform agenda forward.

An overarching vision for the state The government needs to craft an overarching

vision for the state to guide reform, build publicsupport for change, get political leaders to publiclydemonstrate their support for reform and motivatechange agents in the bureaucracy by giving themclear signals and supporting them in times of crisis.

Punjab missed out on the liberalization trendsthat have influenced other parts of the country sincethe early 1990s. It is now playing catch up. There isan awareness among the politicians, the bureaucracy,media, as well as among economic interest groupslike farmers and industrialists that business cannotcontinue as usual. What Punjab lacks, and what thereforming states of India have found, was a politicalleadership that painted a future vision around whichpeople could rally, and then drew up a master planfor the state's revitalization.

Developing a consensus for reformThere is a need to build greater consensus in

favor of reform among and within existing politicalparties in Punjab. GoP also needs to develop a largerpublic constituency for reform, among the press,NGOs, professional associations, trade unions, andfarmer organizations through a more effectivecommunication strategy, for example.

The role of GoIThe key to successful reform in Punjab lies not

only with its own leadership, but also with theGovernment of India (GoI). In several ways, Punjab'ssituation is unique within India's federation. It hasunique disadvantages (the Rs. 8,000 crores of debtincurred during the fight against insurgency duringthe 1980s) and unique advantages (the Rs. 2,000crores of subsidy that Punjab's farmers receiveannually as minimum support price for paddy andwheat production). Whatever the precise meansthrough which these problems are solved, they canonly be addressed by GoI. Without a resolution tothese issues it will be very hard for Punjab both toreturn to fiscal sustainability and discipline, and todiversify away from the environmentally unsustainablecropping practices.

Grounding reforms in the local context andusing local knowledge is essential

Successful reforms tend to be context-specificand grounded in local knowledge. Generaleconomic principles to accelerate growth andimprove service delivery - e.g., market-basedcompetition, a healthy investment climate,appropriate incentives, sustainable fiscal policy,good institutions, protection of property rights,contract enforcement - do not necessarily map intostandard policy packages. There is no necessarycorrespondence between the functions that goodinstitutions perform and the particular form thatsuch institutions take. The importance of localknowledge and context is critical in a state likePunjab, which is known for its conflicted andunique history. Punjab's policymakers thereforeneed to creatively package economic reformprinciples into institutional designs that aresensitive to local constraints and take advantage oflocal opportunities.

Weak policy-making and managerial capacityMost high-level officials in Punjab are

overloaded with routine administrative tasks, rangingfrom dealing with transfer requests, particularly in

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staff-intensive departments, such as health andeducation to even appearing in court cases. The resultis a short attention span, made worse by the problemof frequent transfers that makes both policy-makingand management more difficult. If the Punjab civilservice is overstaffed, it is probably under-managed:More needs to be done to improve capacity in criticalareas, such as treasury. Neither the health nor theeducation departments possess a policy planningunit, for example. Nor does Punjab have a strongnetwork of training institutes, similar to AP's Centerfor Good Governance or Karnataka's AdministrativeTraining Institute (ATI) that might bolster capacity.It is no accident that the reform program has movedfaster in areas like tax administration and the powersector partly because of the willingness to activelyinvolve skilled consultants.

Sequencing and prioritization of the reformprogram

The Government needs to pay close attentionto the sequencing of the reform program. Forexample in critical sectors like power, irrigation andtransport, efforts should be made to improve thequality of service delivery along with the hike in usercharges. In priority sectors like health and education,where salary and pension payments to employeestake up 94-98 percent of resources, the Governmentneeds to restructure the composition of publicexpenditure before allocating additional funds to

ensure that these additional resources reach actualusers. Unless the Government ensures that theadditional revenue collected is used for publicinvestment to improve services, there is a risk that thereform program would become unpopular, andultimately derail. Among the many reforms discussedin the report, the ones that perhaps need immediateattention are: compliance with the FiscalResponsibility Act, addressing the overstaffingproblem, reorganization of the tax departments onfunctional lines, liberalization of the agriculturalmarkets, implementation of the power sector reformprogram, and decentralization of health andeducation services.

Action now will be less costly than action laterUntil reform is put on the top of the agenda by

all parties - with the support of key elements of civilsociety - the situation in Punjab is likely to continueits downward spiral regardless of which partygoverns the state. In the absence of reforms, Punjab'sdebt could climb to as much as 70 percent of GSDPby 2009/10 and its interest payments wouldconsume almost half of its total revenue. And if thecurrent growth slowdown persists for anotherdecade, by the end of it, Punjab would no longer bethe most prosperous state in the country. At leastfour Indian states - Gujarat, Karnataka,Maharashtra, and Tamil Nadu - would have a higherper capita income than Punjab.

12

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Amodest-sized state tucked away on the north-western border of the country with a population

of 25 million (figure 1.1), Punjab has an uncommonprominence in India. For more than four decadesnow, it has remained the most prosperous anddeveloped state in the country with the lowest ratesof poverty. Its turbulent history, including redrawingof its borders at the time of independence, huge grainsurpluses produced by its farmers since the GreenRevolution, which helped the country gain self-sufficiency in food, its location as a frontline state onan often hostile border, its ability to bounce back tonormalcy and preserve its social gains following theviolent separatist insurgency in the 1980s, itscontribution to Indian military, pop culture and

sports and the visibility of its diaspora both across thecountry and the world have lent Punjab a profilehigher than many of India's much bigger states.

Yet in many ways, Punjab's developmentexperience is paradoxical: Its private sector is one ofthe most prosperous in the country, but itsgovernment is highly impoverished; it has virtuallyeliminated the gender gap in primary education, yetsuffers from the problem of widespread sex-selectiveabortions and female infanticide (the gender ratio isonly 874); and although it has a growing and largemiddle class, the quality of public services remainsstubbornly poor. Punjab's fortune seems to be atvariance with the rest of the country: The state grew

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rapidly (6 to 7 percent per annum) when much ofIndia was wedded to a low rate of growth of 3percent per annum and it's economy slowed downafter the mid-eighties when the rest of India took-offon a higher growth path.

Not surprisingly, given the mixed results, thereis a growing perception that Punjab's dominance andinfluence are waning in recent years and the state islagging behind other states, especially the southernand western Indian states, in terms of growth anddevelopment. Concerned citizens of Punjab wonderwhether the younger generation of Punjab wouldgrow up in the most prosperous and developed statein the country like their parents and grandparentsonce did. The fault lines are clear and visible: thestate's public finances are under severe stress, theeconomy has stagnated, employment opportunitiesare shrinking, the quality of public service delivery isnot as good as in many other states and the humandevelopment indicators are beginning to languish oreven deteriorate.

This chapter takes a closer look at Punjab's pastdevelopment record and its future prospects. Theturbulent history of the state, its success in achievinga high level of socio-economic progress and itscurrent difficulties in preserving the impressiveachievements of the past are discussed. The chapteralso discusses the consequences of not addressing thecurrent problems of the state, particularly the impacton growth and service delivery.

��% ��/%��0��Punjab has had a turbulent past. It has been

divided twice in the modern era. First, in 1947, whenthe bulk of its original area along with its Muslimpopulation became the Pakistani province of Punjabduring the violence of partition. Then, in 1966,

following an agitation for an exclusive Punjabi-speaking state in India, the Hindi-speaking state ofHaryana was carved out of Indian Punjab, whileseveral of its hill districts were merged with HimachalPradesh. Today, Sikhs constitute 63 percent ofPunjab's population and Hindus about 35 percent.However, there is a rural-urban divide with Sikhspreponderant in the countryside (about 72 percent)and Hindus dominating the towns. Scheduled Castesof both communities comprised 35 percent of thepopulation in 2001 - the highest proportion in India.

By the end of the 1970s, the Green Revolutionhad taken firm roots in Punjab. But the agriculturalsurpluses and rising incomes did not get convertedinto investment for industry, and unemploymentrose as did disparities in income. Socially andeconomically, the conditions were ripe forretrogressive ideologies with unemployed, non-richJat youth particularly vulnerable to their lure. Politicsalso deteriorated. Extreme elements were able to turna moderate political movement seeking greater stateautonomy and share of water resources into a violentstruggle against the central government1. The statecame under a prolonged spell of President's Rule(direct rule by the Centre through the bureaucracy)during 1983-92, except for a short-lived Akali Dalgovernment during 1985-87.

Competitive politics returned to Punjab in1992; by 1997, the political situation seemed stablewith a new Akali-led government coming to powerin alliance with the BJP and with voter turnouthovering at the 80 percent mark. Congress did wellin the 1999 Parliament elections and returned topower in the state in 2002. A stable two-partysystem thus appeared to be in place by the end of the1990s, signaling the return of full political normalcyin the state.

1 The problem of inter-state sharing of water resources has recently resurfaced in Punjab after a Supreme Court ruling to expeditecompletion of the canal linking two rivers (Sutlej-Yamuna Link canal) and to release water to neighboring states as per TheReorganization Act, 1966, and the subsequent agreement in 1981. Following the court ruling, the Punjab legislature unanimouslypassed the Punjab Termination of Agreements Bill, 2004, annulling the water-sharing arrangement with neighboring states, therebybringing the water dispute to the fore again.

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Change in the Millennium Development Indicators during the 1990s (in %) - India vs. Punjab

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�%�� %�� 2�� Punjab is on track to achieving its MillenniumDevelopment Goals……

Punjab has a remarkable development record. Ithas already achieved, or is well on its way toachieving, most of the Millennium DevelopmentGoals (MDGs). At the end of the 1990s, more than94 percent of Punjab's citizens were above the povertyline, 70 percent were literate, 94 percent of all six yearolds were enrolled in primary schools, 63 percent ofbirths were attended by skilled health staff, 72 percentof children under twelve months were immunized, 52percent of households had access to improved

sanitation, 99 percent of households had access to safedrinking water, and the average life expectancy was 68(top panel, figure-1.2). According to India's NationalHuman Development report, Punjab is rankedsecond only to Kerala in terms of the overall level ofhuman development among the major Indian states.

…… though the rates of improvement havebegun to slow down

But Punjab is finding it harder to maintain theimpressive level of human development it has achievedso far. As shown in the bottom panel of figure-1.2, infive of the twelve indicators, the rates of improvementin Punjab have fallen short of the national average2.

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2 Since Punjab started with a higher base (in terms of the value of the development indicators), it is natural that its pace of change willbe relatively slow compared to states starting with a lower base.

Selected Millennium Development Indicators in late 1990s / early 2000s - India vs. Punjab

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One of the worrisome trends is in the health sector,where the levels of infant mortality rate and the under-five mortality rate have increased between 1993/94and 1999/00, unlike the rest of India where they havefallen. Key education sector indicators, like the literacyrate and primary enrollment ratio, have also sloweddown during this period. The sex ratio in Punjab,which was already at one of the lowest levels in thecountry in 1991, has worsened further during the1990s. The decline in the economic might of Punjabcan also be seen from the fact that its economy grew at4.3 percent during the 1990s compared to 6.1 percentfor the rest of the country.

��4�&�#��)��$�'Punjab has the lowest poverty rate in the country

Poverty has fallen in Punjab during the 1990sand the regional disparities have narrowed. Themost recent large-sample National Sample SurveyOrganization (NSSO) data from 1999-00 indicatethat only 1.5 million of the 25 million people wholive in Punjab are below the official poverty line,compared to 260 million poor people in all of India.This poverty headcount ratio (6 percent) makesPunjab the state with the lowest poverty rate amongthe major Indian states and places it well above theall-India average of 26 percent. Some other estimates

find the poverty headcount ratio to be as low as 3percent [Deaton and Dreze 2002]. There is alsoevidence of narrowing of regional disparities withinthe state during the 1990s. Rural poverty levels arecomparable to those in urban Punjab, and thedifferent estimates of poverty levels in 1998-99 allpoint to a narrowing of the gap between thenorthern (traditionally richer) and southern regionsof the state.

Not only has Punjab historically had the lowestpoverty rate, it has also experienced one of thesharpest rate of declines in poverty as compared toother states. Punjab performed particularly wellduring the 1970s following the green revolution. Therural headcount ratio declined by 12 percentagepoints, from 28 percent in 1973-74 to 16 percent in1977-78, at a rate that was much more rapid thanpoverty reduction in other states during the sameperiod (see Box-1).

Conflicting evidence about the rates of povertyreduction over the 1990s

There is no clear agreement among researchers onwhether Punjab has been able to maintain itsimpressive rates of poverty reduction in recent years.Part of the difficulty in assessing progress arises because

Punjab not only has the lowest poverty rate but has also experienced one of the sharpest reductions in poverty rateamong major Indian states during 1973/74 and 1993/94. Its impressive track record at poverty reduction has been asubject matter of much research. Evidence shows that this is attributable to new technological breakthroughs inagriculture, the diligence and entrepreneurship of its farmers, judicious public spending and favorable initial conditionsin terms of more egalitarian distribution of income and assets and a considerably higher level of human development.

Following the green revolution, between 1957-58 and 1990-91, Punjab had the most rapid and sustained growth inboth agricultural and non-agricultural productivity among the major Indian states. Real agricultural output per hectareincreased by 3.3 percent per annum while real non-agricultural output per capita increased by 4.5 percent per year. Inaddition, growth in the state was 'unusually pro-poor' during this period. Cross-state empirical work indicates that thiswas primarily due to the higher growth in farm yields and non-farm output and the high trend growth rate ofdevelopmental expenditure in Punjab. Second, the growth-poverty elasticity in Punjab was particularly high, reflectingits superior initial conditions in terms of the relatively equitable land distribution, low rural-urban disparity, and highlevel of human development in the early 60s.

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of the controversy around the poverty estimatesreleased by Government of India (GoI) on the mostrecent 55th (1999-00) round NSSO ConsumerExpenditure Survey. While both official and otherestimates by Deaton and Dreze (2002) show that therehas been a decline in rural as well as urban poverty overthe 1990s, estimates by Kijima and Lajouw point tomore stagnant poverty levels over the 1990s in Punjab.

It is difficult to be conclusive on this issue, sincechanges in other determinants of poverty during the1990s also present conflicting evidence. Realagricultural wages have grown very little over theperiod in Punjab - and at the lowest rate amongst allIndian states. In addition, the main drivers of povertyreduction - growth in the economy and stategovernment development expenditures - have sloweddown during the nineties. Growth in real agriculturaloutput per hectare has decreased from 3.3 percent peryear during the three decades leading up to 1990-91 to2.5 percent between 1991-92 and 1999-00. Annualgrowth in per capita state development expenditureshas also declined, in half, from 7.6 percent to 3.2percent per year. Growth in non-agriculturalproductivity (as measured by real non-agriculturalstate domestic product per capita) has been steady at4.4 percent per year but has not increased tocompensate for the slowdown in agricultural growth.

Irrespective of the extent of poverty reductionduring the nineties, it is clear that Punjab has had animpressive track record of achieving low povertylevels rarely seen in developing countries. Given thelow levels of poverty, the task of eliminating povertyin Punjab is now one of coping with localizedimpoverishment - in specific occupation and socialgroups - and of recapturing high rates of economicgrowth to further raise living standards in the state.

!)��)��$�'�Punjab has made considerable improvements ineducational outcomes … …

Punjab has made substantial progress in gettingchildren into school over the last two decades, with

the most impressive gains being in rural areas.Among rural boys, 89 percent of 7 to 12 year oldswere in school in 1995-96 compared with 70percent a decade earlier. The most dramaticimprovement was amongst rural girls whoseenrollment increased by 27 percentage points, to 87percent. According to the 2001 census, theproportion of children entering school (amongst 7year olds) increased from 84 to 94 percent duringthe 1990s, and attainments showed a markedimprovement: the percentage of 15-19 year oldswho completed upper primary school rose from 57to 67 percent. Despite its unacceptably low sex ratio,Punjab has virtually eliminated the gender gap in theenrollment ratio between boys and girls in ruralareas and in the completion of upper primaryschool.

… …. though there continues to be largedisparity across economic, social and regionalgroups

Punjab's educational achievements, thoughbetter than the all India average are considerablybelow the levels achieved by other high-incomestates. In 2001, Punjab's literacy rate was 70 percentplacing it as the tenth-highest literate state in thecountry. The two states with the highest literacy rate - Kerala and Mizoram - exceed Punjab by 30percentage points. Although the gender gap at lowerlevels of education has been eliminated, state averagesin outcomes mask other inequalities within the state- economic, social and regional - as well as gendergaps in higher education.

There are large gaps in enrollment betweenchildren from poor and rich households. As figure-1.3 (left panel) shows, 99 percent of the 6 year oldsfrom the top quintile households are enrolled inschool compared to only 66 percent form the bottomtwo quintiles. These gaps are exacerbated when welook at attainment rates: while 75 percent of childrenfrom the top quintile households completed the 9thgrade in 1998/99, only 9 percent from the bottomtwo quintile households reached the same level. It is

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quite worrisome to note that the educationalattainment of poor households in fact fell between1992/93 and 1998/99 across all grades (right panel,figure-1.3).

Some disparities with regard to rural-urban andinter-district differences are still evident. Literacy inurban Punjab at 79 percent exceeds the rural literacyrate by 14 percentage points. At the district level,while 81 percent of the population in Hoshiarpurdistrict is literate, Mansa district has a literacy rate of53 percent, well below the all-India average of 65percent. There is a geographic dimension, with northand northeast districts performing much better thandistricts in the south and southwest. There are alsosocial gaps in enrolment and completion, particularlyat higher levels of education. In 1999-00, 73 percentof household heads among SCs in rural Punjab hadbelow primary education compared to 58 percent fornon-SCs. The contrast between SCs and non-SCs iseven starker in urban areas. While 74 percent of non-SC household heads had completed primary schoolor higher, only 40 percent of SC heads had achievedsimilar levels of education. The sharp increase indropouts after completion of primary school isanother additional area of concern. Among the poor,since only 40 percent are able to complete the first

grade, the proportion making it to secondary schoolis abysmally low.

/��3��)��$�'�Punjab's health outcomes are not commensuratewith its level of income

Punjab has reasonably good health outcomescompared to the all-India average, although these arenot commensurate with its level of per capita incomeand public expenditure, which are highest among themajor Indian states. Other states with lower publichealth spending and overall income (e.g. Kerala,Maharashtra and Tamil Nadu) have better outcomesin some key indicators such as infant and child mortality rates, reproductive care, andimmunizations (figure-1.4).

The health indicators for the girls are a matter ofgreat concern

Punjab ranks second in the HumanDevelopment Index among Indian states, but rankssixteen with respect to the Gender EmpowermentIndex (GoI 2001). According to the 2001 census, thesex ratio in Punjab at 874 females per 1,000 males islower than it was in 1991 (882), and is well below thesex ratio (933) for the country as a whole. The sexratio of the 0-6 years population has declined more

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drastically from 875 in 1991 to 793 in 2001 (figure1.5). The post-neonatal (1 month to 1 year) mortalityrate is almost twice as high for girls than for boys, andthe child mortality rate is four times as high. Thefemale to male ratio of no treatment for AcuteRespiratory Illness or fever is 1.67 in Punjab, whichranks only above Rajasthan among the Indian states.

In addition, girls who survive are more likely to beunderweight and severely stunted than boys. Nearly13 percent of girls compared with only 5 percent ofboys do not receive any of the required vaccinations.

There are not only social costs to genderdiscrimination but also economic ones. The gap in

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Pradesh, OR-Orissa, PJ- Punjab, RJ - Rajasthan, TN- Tamil Nadu, UP - Uttar Pradesh and WB-West Bengal.

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the work force participation rate among the men andwomen, at 35 percent in Punjab is one of the highestin the country (figure 1.5). The reasons put forwardto explain the consistently low and declining sex ratioin Punjab include: (a) strong preference for a son forcultural and economic reasons; (b) sex selectivefemale abortions, (c) female infanticide, (d) neglectof the girls resulting in higher mortality at youngerages; and (e) lack of proper implementation of thePre-Natal Sex Determination Test (PNDT) Act.

As in other states, poorer households andscheduled caste households in Punjab tend to haveworse health outcomes. Children from both thesegroups have higher infant and child mortality rates,and are more likely to be under-nourished. Almostone in two children from scheduled castes are lesslikely to be fully vaccinated (on an average, 72percent of children age 12-23 months are fullyvaccinated). Women from these groups are less likelyto be covered by the recommended package ofantenatal care. Nutritional deficiency is particularlyserious among disadvantaged socio-economic groups.

��0� ��%�� Punjab has the second lowest percentage of work-force dependent on agriculture after Kerala

Punjab's employment structure has shifted awayfrom agriculture into the non-farm sector, with only39 percent of its work force employed in agriculture in2001, a drastic fall from 53 percent in 1991. Punjabhas now become the state with the second lowestpercentage of work-force dependent on agricultureafter Kerala. The occupational structure in rural areashas also changed considerably, with a large decline inagricultural laborers as a proportion of the total laborforce - Punjab is one of the four states that havewitnessed such a decline [Kijima and Lanjouw 2002]3.By contrast, employment in the rural non-farm sectorin Punjab has expanded rapidly over the 1990s, from28 percent in 1993-94 to 39 percent in 1998-99,consistent with the slowdown in agricultural growthrates over the last decade (figure-1.6).

Aggregate changes, which mask considerabledisparities between different groups, do not necessarily

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indicate an improvement in the occupational status of Punjab's work force. The movement out ofagricultural labor has been more significant among therichest 40 percent of the population, while agriculturallabor remains the main source of employment forpoorer households. The wage differential between thecasual non-farm sector and agriculture has been quitesmall in Punjab, making it difficult to ascertainwhether the agricultural labor is being pulled intomore productive non-farm employment opportunitiesor is being pushed out of agriculture in the context ofstagnant output and increased pressure on farm land,or a combination and interaction of the two.

Punjab has the largest proportion of SCs in itspopulation amongst Indian states

Punjab has the largest percentage of scheduledcastes (Dalits) in its population amongst Indianstates and this percentage is growing rapidly. Theproportion of scheduled castes (SCs) in the totalpopulation has increased from 28 percent in 1991, to35 percent in 1999-00.4 Dalits in Punjab arecertainly not as poor as their counterparts in otherparts of the country. However, as in other states, theyhave an average standard of living that is considerablybelow the rest of the population. The overall povertyincidence among SCs (at 11.9 percent) is roughlyfive times that of non-SCs (2.4 percent).

Lower standards of living among SCs are in partexplained by factors such as poor physical and humancapital endowment, types of employment and low returnon assets. Nearly 98 percent of SCs in Punjab own lessthan 1 hectare of land, compared to 52 percent amongstthe non-SC population. SCs are highly represented inagricultural wage labor activities and are particularlyunder-represented among cultivators. In the non-farmsector, SCs are more likely to be engaged as casual non-

farm labor or own enterprises that rely only on familylabor or specialize in the lower return occupations (e.g.,non-mechanized transport services such as transportinggoods by animal carts, rickshaw pullers, etc). The returnsto education for SCs in Punjab are also found to beconsiderably lower than the non-SCs5.

�%2��%��:�5:�0��Migration is an intrinsic part of life for most

families in Punjab. The state ranks, perhaps, behindonly Kerala and Gujarat in terms of migration asmeasured by the number of People of Indian Origin(PIO) living outside India. Among the 20 millionstrong Indian diaspora, it is believed that 10-15 percentare People of Punjabi Origin (PPO)6. It is generallybelieved that Punjabi migrants have a higher per capitaincome level than the average Indian migrant (the latterin turn possessing a higher level of income than thenational average of their host countries), harbor astrong commitment to maintain their own cultural andlinguistic heritage, and seek to preserve their links withthe families in India. From humble origins, Punjabimigrants have risen to become one of the highestearning and best educated groups in their hostcountries and have achieved eminence in a variety offields. Many wealthy PPOs have individual trusts andcharities for projects pertaining to health, education orinfrastructure in their villages in Punjab.

While there are no official estimates of themagnitude of remittances received by Indian states,the abnormally high deposit to credit ratio and thegrowing interest of foreign banks in opening branchesin Punjab indicate that remittance flows to Punjab arelikely to be considerable. Some experts informallyestimate the annual PPO remittance flow to be ashigh as US$2 to 3 billion per year, i.e., 12 to 18percent of Punjab's GSDP. While it is difficult to

4 1991 and 1999-00 figures are from the Census and the 55th NSS Round data, respectively.

5 In recent years, we were told, increasing number of SCs from Punjab are migrating to foreign countries. The remittances sent by these migrantshave given rise to a new class of affluent and empowered SCs that has become more assertive of its rights, e.g., in terms of participation in theelections of Gurudwara (Sikh temple) committees, which at times has resulted in growing frictions between SCs and non-SCs in the state.

6 Based on the Report of the High Level Committee on the Indian Diaspora and discussion with officials from different Embassies in New Delhi.

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estimate the economic impact of remittances onPunjab's economy, it is generally believed that thestate's current economic problems would have startedmuch earlier and become more severe in the absenceof the large flow of remittances from these migrants.

Migration of a different nature has also becomea norm in Punjab, i.e., migration of manual labor andblue-collar worker from poorer Indian states intoPunjab. The unwillingness of native Punjabis to workin farms has created a shortage of agricultural labor inthe state, which is being increasingly met by migrantlabor from poor Indian states, mostly Bihar and UttarPradesh. While Punjab's prosperity has thuscontributed to reducing poverty in these poorer states,it has also become a sore element in the relationshipbetween native Punjabis and the migrant laborers.

��%��2��:�/6�%�� %�� %�%�0Punjab was one of the slowest growing Indianstates during the 1990s

After a spectacular growth rate during thesixties and the seventies, the Punjab economy began

to slow down in the late 1980s and almost stagnatedduring the 1990s. With the onset of the 'greenrevolution,' Punjab surged ahead to become therichest state in the country. Its economy grew atalmost 7 percent during the 1960s and 5.4 percentduring the 1970s, almost one-and-half to two timesfaster than the rate of growth in the rest of India (leftpanel, figure-1.7). The onset of militancy in the1980s, the sputtering of productivity growth inagriculture in the 1990s and the low level of publicinvestment due to misplaced fiscal policies in the lastdecade seem to have played a role in the economicdecline of Punjab. Punjab grew at an annual averagerate of 4.3 percent during the 1990s - significantlybelow the national average and the third lowestgrowth rate among major Indian states (right panel,figure-1.7 and Box-2).

�,&��)��)&��2&�7�3��7!�7��! �4�&��$��)'��+��#Agriculture brought prosperity to Punjab; it isnow responsible for some of its miseries

The pioneering role played by Punjab inIndian agriculture is well known. With the ushering

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in of 'green revolution technology' in the mid-1960s, aided by public investments ininfrastructure and price incentives that encouragedwheat and rice production, Punjab soon emerged asthe dominant 'food grain surplus' state in thecountry, contributing significantly to meetingnational food security goals. With about 3 percentof India's net sown area and 1.5 percent of its

farming population, Punjab today produces about10 percent of the country's rice, 20 percent of itswheat, and about 45 percent of all rice and wheatprocured by the government.

Despite, or perhaps because of, theseachievements serious concerns are now emergingabout the future prospects of Punjab's agricultural

The answer to the question, unfortunately, is a Yes. Punjab's economy has been on a secular decline, with other statesfast catching up with its high per capita income. Even prior to the Green Revolution, Punjab was one of the most well-off states in the country. With the onset of the Green Revolution, Punjab surged ahead to become the richest state inthe country. A comparison with Maharashtra, the second richest state in India, shows that in 1972/73, Punjab's percapita income was 51 percent higher than Maharashtra (see figure below). Today Maharashtra and Punjab are, however,in the same per capita income league again. While Punjab continues to remain an agrarian economy, Maharashtra hasdiversified into industry and services and since the latter sectors tend to grow more rapidly than agriculture in the longrun, it is certain that Maharashtra will grow more rapidly than Punjab in the coming years.

If the current growth trend persists for another decade, by the end of it, at least four Indian states - Gujarat, Karnataka,

Maharashtra, and Tamil Nadu - are likely to have a per capita income higher than that of Punjab7 (see figure above, right panel).

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7 The forecasts for 2010/11 are only indicative in nature. They are reported here to underscore the serious economic implications thatcould arise if the growth slowdown is not reversed immediately. The actual outcome could vary significantly from the forecast value.

Source: Central Statistical Organization (CSO), Census of India, Reserve Bank of India (RBI).

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sector. Agricultural growth slowed substantially inthe 1990s - agricultural output grew at a trend rate of2.6 percent per annum in the 1990s compared to theall-Indian average of 3.2 percent, and relative to agrowth rate of 5 percent per annum in Punjab in the1980s. Productivity of rice appears to be plateauing.As figure 1.8 (left-panel) shows, the total factorproductivity (TFP) growth of its crop sector fell from1.55 percent per annum in the 1980s to 0.05 percentduring the first six years of the 1990s [Kumar 2002].The TFP growth in the southwest region wasnegative (-2.04 percent per year) because of problemsin cotton. The main rice-wheat tract of centralPunjab also experienced a decrease in growth, withTFP growth slowing down to 0.067 percent perannum mainly due to negative TFP growth in rice[Singh and Hossain, 2002].

Growing concerns about the environmentalimpact of the current agricultural practices

Among the main agricultural states, Punjabpractices the most input-intensive agriculture. It hasthe largest proportion of irrigated area, highest

cropping intensity, and the most intensive use offertilizers, tractors, and pesticides. The impact of theseinput-intensive agricultural practices on the qualityand quantity of the state's land and water resources hasbecome a real concern. Of greatest concern is the over-exploitation of groundwater resources of the state:Punjab now has the highest percentage of groundwaterexploitation in the country, and also the largestpercentage of over-exploited and dark blocks8 (rightpanel, figure-1.8). Extensive use of nitrogenousfertilizers and pesticides has also led to increasingnitrate concentration and accumulation of pesticideresidues in soil, water, food, feed and other agriculturalproduce often above tolerance limits. The 16 milliontonnes of rice straw that is burnt every year result in airpollution, creating suffocating smog-like conditions inmany parts of the state at harvest.

%�!)'�&#��2&�7��,6��)��'�� ),3�Punjab's industry has done well, given the adversegeographical and historical problems of the state

Because of the adverse geographical location (landlocked, border state, no significant natural resources)

8 Over-exploited blocks are those where groundwater extraction is more than 100% of recharge and dark-blocks are where extractionis between 85 - 100% of annual recharge.

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Source: Revitalizing Punjab's Agriculture, The World Bank, 2003.

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and turbulent history (partition, civil strife), Punjab'sindustrial landscape is significantly different from thatof the leading industrial states in India. Industries inPunjab are invariably small and specialize in low-endconsumer goods that use less capital and are low onR&D. As of March 31 2000, there were 611 large andmedium enterprises in Punjab compared to 199,071small firms. Small firms accounted for 99 percent of allunits, 80 percent of employment, 41 percent of outputand 20 percent of investment in Punjab'smanufacturing sector. The average number ofemployees per firm in Punjab was 48 in 2000-01compared to the Indian average of 61. Punjab is lessindustrialized than the average Indian state with theshare of manufacturing in state GSDP lower than theall-India average (15.9 compared to 17.1 percent). Theimportant sectors in terms of production, investmentand employment are bicycle and bicycle parts,automobiles and components, agro/food processing,textiles and hosiery, basic metal, metal products,machinery other than electric and electronics.

Following an impressive performance between theseventies and the mid eighties, manufacturing growthslowed down in Punjab after the onset of militancy.The annual growth rate, in constant prices, remained

largely between 5 to 6.5 percent during the last decadeand half, considerably below the performance of someof the industrialized states in India, but commendablegiven the difficult conditions through which the firmsoperated during the eighties and early nineties.Punjab's share in total approved FDI to India is ameager 0.7 percent or Rs. 1970 crores during August1991 to May 2002, though investment appears to havepicked up in more recent months.

Productivity of Punjab's manufacturing firmsfall short of more industrialized states

The average firm in Punjab is significantly lessproductive than in India. In terms of output value, theaverage net value-addition per worker in a firm in Punjab was nearly 25 percent lower than the all-Indiaaverage in 2000-01. A careful analysis of the registeredmanufacturing sector across major Indian states findsthat the average productivity level in Punjab'smanufacturing sector during the last decade is 102compared to 103.5 in neighboring Haryana and 108.8in Delhi (value normalized after indexing Maharashtra'sTFP in 1982/83 at 100, see figure-1.9). This implies thatfor the same level of factor inputs (labor, physical andhuman capital), a typical firm located in Delhi obtains6.8 percentage points higher output per year than the

Source: ICRIER (2004).

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firm located in Punjab. Examination of TFP at more adisaggregated level shows that in certain sub-sectors,Punjab has considerably higher productivity, e.g., in foodproducts, cotton textiles, textile products, rubber, plasticand petroleum, basic metal and alloy industries9.

Studies show that the low level of productivityof firms in Punjab can be attributed to a number offactors: smaller size, lower export-orientation, lowerdegree of technical ability and adaptation, limitedproduct innovation, poor quality awareness, littlepro-activeness in finding markets, inadequate sharingof good practices compared to firms in some of themore progressive states in India and lack of a healthyinvestment climate in the state10.

Punjab's investment climate is perceived to be ofmoderate quality

Punjab has clearly lagged behind other high-income states in creating a healthy investment climatefor its entrepreneurs, which includes policy, regulatoryand institutional factors that affect the expectedreturns and risks from investment. Based on the CII

and WB survey in 2000 and 2003, Punjab appears tobe in the middle of the league with some perceptionsthat the overall climate has improved in recent years(see figure- 1.10). In 2000, Punjab was in the bottomhalf of the league with six states scoring above it andthree below. The number of responses identifyingPunjab as the best state in terms of the investmentclimate was slightly less than the number identifying itas the worst state. By 2003, perceptions about Punjabhad improved. The improvements in perceptionsabout Punjab's investment climate responded to signsof a more investor-friendly policy stance by the newgovernment. The recent improvement in perception,however, appears to be at odds with the actualsituation on the ground, which does not show anymarked improvement between 2000 and 2003.

�� %�� /%�2��%��%�%�0A prosperous private sector and an impoverishedgovernment

The fiscal performance of Punjab is notcommensurate with its relative economic prosperity.

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Source: FACS, 2000 and 2003.

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Despite its high per capita income, Punjab is facedwith a severe fiscal imbalance. The state's revenueand fiscal deficits are much higher than the all-stateaverage and its capital expenditure to GSDP ratio isbelow the average. It has the highest per capita stategovernment debt among the major Indian states,almost 181 percent of the level in Haryana, itsneighboring state, 247 percent of Maharashtra, thestate with almost the same per capita income asPunjab, and 289 percent of the level in UttarPradesh, the state with the lowest level of per capitastate government debt in the country (left panel,figure-1.11)11. According to the GoP's White Paperon State Finances (2002), the state government hasbeen forced to frequently resort to ways and meansadvances and overdraft facilities from the RBI and itsfinances are bordering on bankruptcy. The problemis attributable both to a poor record of mobilizingrevenues and profligacy in spending.

While Punjab has a history of running a highlevel of fiscal deficit, the quality of its fiscal deficittoday is perhaps worse than in the past. In the late1980s and early 1990s, the fiscal deficit to GSDPratio was even higher than it is today. But the bulk ofthis deficit was due to an extraordinarily high level (bythe standard of Indian states) of capital expenditure(right panel, figure-1.11), which presumablycontributed to augmenting the productive capacity ofthe state. Unfortunately, today the level of fiscaldeficit is still very high, but it is not due to the highlevel of capital and developmental outlays, non-wageO&M or social sector spending. The state has beenborrowing primarily to finance its currentconsumption, i.e., to pay for the growing salaries,pensions, interest payments (which accounted for allrevenue receipts since 1996/97) and subsidy, much ofwhich are regressive and do not contribute to raisingthe productive capacity of the state.

Source: RBI, CSO, States Database, The World Bank.Note: AP - Andhra Pradesh, BH - Bihar, GJ - Gujarat, HY - Haryana, KN - Karnataka, KR - Kerala, MH - Maharashtra,

MP - Madhya Pradesh, OR - Orissa, PJ - Punjab, RJ - Rajasthan, TN - Tamil Nadu, UP - Uttar Pradesh, and WB - West Bengal.

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11The state government debt numbers reported here do not include off-budget liabilities whose interest payments are made from thebudget. Punjab has no off-budget borrowings of this type.

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Hidden liabilities: The reported liabilities ofGoP far exceed the actuals

Punjab's fiscal problem is far more severe thanwhat the budget numbers reveal. There are a largeamount of hidden liabilities in the form of arrears,delayed payments, unpaid and unfunded liabilitiesand contingent liabilities that are not fully accountedfor in the state's Budget (figure-1.12). Based on theinformation from GoP, we estimate the hiddenliabilities to be around 20 percent of GSDP (nearlyRs. 15,467 crores or Rs. 6,141 for every citizen ofPunjab), which is a subset of all the hidden liabilitiesthat may have been accumulated by GoP12. Thepower sector is the source of a number of theseliabilities, including Rs.3,242 crores that GoP owe to

PSEB on account of free power during 1997/98-2001/02 period and unfunded liabilities of Rs.5,500crores to PSEB employees as per the draft FinancialRestructuring Plan (FRP) of the power sector.

Issues of financial management GoP has reasonable general financial rules,

treasury codes, rules of procedure and relatedregulations governing public financialaccountability and management. However, the"public accountability and financial managementsystem" has not been sufficiently modernized inany substantive manner in Punjab for severaldecades as elsewhere in India. It no longerfunctions with the effectiveness as intended in the

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Source: GoP, State Database, The World Bank.

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12These hidden liabilities are different from hidden deficits. The latter is not included in the reported fiscal deficit number but isrecorded in the government debt. The former is neither part of the deficit nor debt. It is in the form of arrears, delayed paymentsand contingent liabilities.

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Constitution of India. Almost all aspects frombudgeting, revenue collection to expenditurecontrol and audit are operating below par. Forexample, the extent of overestimation of revenuereceipts in Punjab is twice the average of the majorstates. The revenue expenditure estimates have alsofluctuated widely, with large shortfalls or largesavings. The fiduciary risk for Punjab issignificant. Annual accounts are not tabled ontime, the executive frequently ignores auditreports and the legislature is unable to holdhearings on a timely basis on serious irregularitiesin departments such as Public Works. Excessexpenditure is not regularized on a timely basis.Instances of unauthorized diversion of funds wereobserved including Rs 4,500 crores on the foodaccount. The risk is even higher in autonomousbodies and local government where accountingrecords are not maintained properly. Wherefinancial statements are prepared as in the case ofpublic sector undertakings such as the PunjabState Electricity Board they are heavily qualifiedby the auditors and in any case issued too late toattract attention.

The fiscal situation appears to have worsened in2003/04 after showing improvement in 2002/03

The fiscal situation had improved in 2002/03on account of better tax collections and doubling ofgrants from the Centre. As per actuals, the fiscaldeficit fell from Rs.4,960 crores in 2001/02 toRs.4,410 crores in 2002/03 - a decline of 11 percent- while the revenue deficit was constant in nominalterms. The ratio of revenue deficit to receipts fellfrom 42 percent in 2001/02 to 34 percent in2002/03. Unfortunately, the improvement may havebeen short-lived. Revised estimates for 2003/04 showa further decline in the revenue deficit (to 26 percentof revenue receipts) but a worsening of the fiscaldeficit (up to 7.2 percent of GSDP from 6 percent in2002/03). The projections in the Medium-termFiscal Restructuring Programme show the revenuedeficit/revenue receipt (RD/RR) ratio furtherdeclining to 22 percent in 2004/05, but then stayingat around this level for the subsequent two years. Thefiscal deficit shows a marginal decline to reach 5percent of GSDP by 2006/07. This would imply thatGoP would fail to come close to meeting the deficittargets set out in its own Fiscal Responsibility and

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Total Rev Receipts 15,678 13,677 11,071 8,929 14.6% 23.5% 24.0%

State's Own Tax Revenue 7,114 6,559 5,715 4,820 8.5% 14.8% 18.6%

Sales Tax 4,025 3,575 3,072 2,684 12.6% 16.4% 14.5%

Stamps & Registration 800 750 559 444 6.7% 34.2% 25.8%

Central Taxes 865 752 645 607 15.0% 16.6% 6.2%

Grants 1,617 1,596 676 537 1.3% 136.3% 25.7%

Total Rev Expenditure 19,121 17,216 14,825 12,710 11.1% 16.1% 16.6%

Capital Outlay 2,555 1,507 423 984 69.6% 256.6% -57.1%

Revenue Deficit 3,442 3,539 3,754 3,781 -2.7% -5.7% -0.7%

Fiscal Deficit 6,117 5,868 4,410 4,959 4.2% 33.1% -11.1%

Revenue Deficit/Revenue Receipt 21.96% 25.88% 33.91% 42.35% - - -

Source: Budget Documents

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Budget Management Act, 2003 (which requiresannual 5 percentage point reductions in the RD/RRratio until the revenue deficit is eliminated, andnominal reductions of 2 percent in the fiscal deficituntil it reaches 3 percent of GSDP).

��F��%�0��%�%��%��Punjab's tax performance compares unfavorably

with other Indian states, both in terms of the level ofrevenue raised and its growth. Punjab's tax to GSDP

ratio in 2001/02 was 7.0 percent, which was lowerthan the average for both the high and middle-income states and only marginally higher than theaverage of the low-income states (top-left panel,figure-1.13)13 . The buoyancy of tax revenue in theState during the 1990s at 0.9 was the lowest amongthe major states except West Bengal and 0.08 less thanthe average of high-income states (top-right panel,figure-1.13). During the same period, the annualcompound growth of tax revenue in Punjab at less

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Source: Analysis of Tax Revenue in Punjab (Technical Note).

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13In Punjab, proceeds of some of the taxes, like market (mandi) fee, rural development cess and the infrastructure cess, are kept outsidethe consolidated fund. Including those revenues are however unlikely to change the basic message of figure-1.12.

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than 12 percent was lower than average of either low,middle or high-income states (bottom-left panel,figure-1.13). Consequently, the tax - GSDP ratio thatpeaked in 1986-87 at 7.9 percent declined steadily to6.9 per cent in 1991-92 and further to 5.9 per cent in1998-99 before reviving marginally to 7 per cent in2001-02 (bottom-right panel, figure-1.13).

Not surprisingly, Punjab's actual tax collection isfound to be considerably lower than its estimatedtaxable capacity14 and thus its tax effort index is alsorelatively low. For example, Kerala, Haryana, TamilNadu, Maharashtra and Gujarat had higher per capitasales tax revenue collection in 2001/02 than Punjab,despite having lower per capita income (figure 1.14).Haryana, a neighboring state and with a similareconomic structure as Punjab (i.e., agriculturecontributing to nearly 38-40 percent of GSDP), hada per capita sales tax revenue of Rs.1,428 compared toRs.1,125 in Punjab. More importantly, the tax effortby Haryana (defined as the ratio between actual tax

collection and estimated taxable capacity) is 111.8compared to 91.5 for Punjab. In other words, ifPunjab had put in the same level of tax effort asHaryana, its sales tax would have been higher by asmuch Rs. 700 crores - which implies that the level ofunder-taxation is nearly 25 percent.

%�� : �� Punjab's power sector has achieved much success … …

All the villages in Punjab are electrified and 92percent households have access to electricity - thehighest among all the states in India. The per capitaconsumption of electricity in Punjab is 800 kWh perannum compared to the national average of 355 kWh(FY2000). All the consumers except agriculture aremetered and 54 percent of the total energy availablefor sale is sold on metered basis - higher compared toseveral other states15. The electricity sector has been amajor contributor to the growth of the agriculture

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Source: Analysis of Tax Revenue in Punjab (Technical Note).

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14Taxable capacity is estimated by regressing per capita tax collection on per capita income, share of non-agricultural output in totaloutput and per capita bank deposit for 14 major Indian states for 2000/01 and 2001/02.

15Karnataka - 37%, Andhra Pradesh - 47 %, Tamil Nadu - 61%, Rajasthan - 44%; and Orissa - 52%.

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sector in the state, with about 8.6 lakh farmers out ofthe total 11 lakh landholdings dependent onelectricity for groundwater irrigation. The PunjabState Electricity Board (PSEB) is generally consideredamong the financially better performing utilities inthe country. It has maintained good collectionefficiency, ranging between 96 to 98 percent. ThePSEB has never defaulted on its payment obligationsto the other financial institutions/banks16.

… … though like in the rest of the country, itsperformance has deteriorated in recent years

The growth of the power sector in Punjabslowed down considerably during the 1990s.Compared to 8 percent average per annum growth ininstalled capacity and 12 percent in energy availableduring the 1980s, the corresponding growth ratesduring the 1990s have been 3.7 and 4.3 percentrespectively. During FY2000-03, the installedcapacity increased by only 3.3 percent and energyavailable by 2.6 percent (left panel, figure-1.15). Thestate currently faces a 14 percent energy deficit and 30

percent peak deficit. While the hours of power supplyto urban areas has been more or less maintainedaround 24 hours, daily power supply in rural areas hasdeclined from about 21 hours in FY2000 to 16 hoursin FY200317. There are no announced power cuts onlarge industrial consumers, but peak load restrictionsare imposed. The financial performance of PSEB hasundergone a sharp deterioration in recent years, froma net loss (excluding subsidy) of Rs 296 crores inFY1997 to Rs 2,251 crores in FY2002. The PSEB wasnot even able to cover its operating costs - its earningbefore interest and depreciation declined from Rs 303crores in 1996/97 and became negative by 1998/99(right panel, figure-1.15).

Partial financial recovery during 2002/03 and 2003/04

Unlike in many other Indian states, the powersector finances of Punjab have turned around in the lasttwo years. As per the provisional numbers, the financiallosses (before subsidy) in 2002/03 were Rs 1,385 crores.The GoP has provided subsidy support of Rs 950

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Source: Punjab Economic Reform Study: Note on Power Sector (Technical Note).

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16Though the debt servicing on GoP loans were allowed to be retained by PSEB in lieu of subsidy receivable from the government.

17The farmers with whom the Bank staff met however insist that the actual duration of power supply is much lower than the officialversion and has fallen in recent years.

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(as committed under the ARR/tariff review for2002/03). For 2003/04, the latest estimates indicate aloss of Rs 103 crores after accounting for Rs 857 croressubsidy receivable from GoP. The two tariff orders of thePERC have put the utility back on track towardsimproving its cost recovery and financial viability. In2002/03, the tariff was increased by 8 percent forsubsidizing consumer categories and 11 percent for non-subsidized categories, with the objective to narrow thecross-subsidy. Tariff for agriculture consumers wasrestated at Rs 0.57/kWh or Rs 60/HP/month. The costrecovery, thereby, has improved to 76 percent. InFY2004, the average tariff has been increased by 6-13percent for different consumer categories, except for theagriculture consumers. Partial restoration of financialperformance is a positive development, however thereare significant risks to the sustained viability of Punjab'spower sector. Without a commensurate improvement inthe quality of power supply and improved operationalefficiency, for which new investments are urgentlyrequired, it will be difficult for Punjab to sustain thecurrent power sector reform.

Road sector has not kept pace with the demandsPunjab has one of the highest road densities in the

country, but is disadvantaged by its long distance fromports. The state has a large and relatively well-developed

road network that provides good geographical coveragethroughout the state. The rural road network is uniquein India, connecting essentially 100 percent of villageswith paved roads whose maintenance is funded fromthe mandi tax at a rate of 4 percent of the value on cropsales. Punjab has also an extensive National HighwayNetwork (1720 km), in relation to its size, whosemaintenance is funded by GoI. However, the Statemain road network of about 7,000 km, which connectsrural roads to National Highways and also providesintra and inter-state links, is under considerable strainfrom increasing traffic and the cumulative impact ofmany years of maintenance under-funding. Fiscalconstraints have prevented the government frommaintaining and upgrading the road infrastructure inthe state, in line with increases in vehicular traffic andtherefore the road sector has not kept up with thedemands on it. Public enterprises operating in the roadsector have been plagued by inefficiencies.

��%� �� %� �0��2�� Despite its high per-capita income and public

expenditure, Punjab does not score in terms ofservice delivery outcomes. A recent perception surveyby the Public Affairs Center (PAC) places Punjab ineleventh place in the quality of service delivery across16 major Indian states (figure-1.16). Except in health

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Source: EPW, 2004.

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services, Punjab has been ranked lower than all thesix middle and high-income states shown below andeven worse that some of the low-income states likeMadhya Pradesh and Uttar Pradesh (not shown). Ineducation, the poor quality of the governmentsystem is evident from the weak performance ofpublic school students in the Board Examinations.Only 53 percent of students were successful in theClass 10 exams in 2002. Public school studentsperform worse than their counterparts in privateschools at all levels of the system. The poor quality ofgovernment schools is particularly problematic forthe poor and disadvantaged castes who are much lesslikely to attend private schools (Punjab HDR, 2003):Poorer districts tend to have fewer private schools;and the share of scheduled castes in governmentprimary schools is 44 percent, well above their sharein the population, as children from other groups havebeen moving out to private schools.

In several states, e-governance has proven to beone way of reducing corruption and improvingservices. There are several challenges confronting thedevelopment of e-governance in Punjab. TheDepartment of Information Technology has beenseriously hamstrung by the erratic release of funds forsome of its projects. It is also clear that many

departments lack the champions to aggressivelyimplement e-governance solutions in their domains.While some progress has been made in e-governance,much more needs to be done for it to take hold inPunjab. In the social sectors, absenteeism remains amajor issue, seriously undermining the quality of theschool and primary health system in rural areas. Thegovernment intends to reinforce local accountabilityin the health and education systems through anambitious decentralization initiative.

The civil services face major challenges inPunjab including chronic overstaffing, politicalinterference, weak policy-making capacity, andinefficient processes that stymie its working. Theratio of civil servants (core, PSUs, and local bodiestogether) per 100 of population is approximately2.2 in Punjab, compared to 1.36 in Karnataka, 1.75in Andhra Pradesh, 1.7 in Gujarat and 1.9 inOrissa, and the all-India ratio of 1.4. Relativeto several major states and the country as awhole, therefore Punjab is overstaffed. Whiledownsizing may be difficult in the current politicalenvironment, the government has also loosened thefreeze on recruitment, which might have helpedcontain the long-term fiscal damage of its bloatedcivil service.

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Source: Data derived from Chhibber 'Democracy without Associations' 1999.

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There is also considerable scope forrationalizing the structure of government andreducing administrative fragmentation to improveperformance. Punjab's 43 departments could benefitfrom greater coordination amongst them.Administrative fragmentation has been fueled inpart by the large number of Cabinet membersrelative to the size of the legislature: Between 1967and 1994, 35% of the legislature foundrepresentation in the state Cabinet, the secondhighest of any state in India (figure 1.17). By 2004,the percentage of legislators finding a berth in theCabinet had fallen significantly to 26%, but theproblem of fragmentation remained largelyunaddressed. The new constitutional amendmentlimiting cabinet size to 15% of the strength of thelegislature provides a further opportunity tostreamline departments in Punjab to promotesynergies and eliminate overlapping functions: All states will have to comply with this law by June, 2004.

The frequent transfer of civil servants spawnscorruption and undermines service delivery. Theaverage term for Principal Secretaries in their currentpost as of October, 2003 was a mere 13 monthscompared to 16 months in their previous post (thisexcludes officers on deputation to GoI where termstend to be longer). For Secretaries in their current post,the average tenure was 17 months compared to 15months in their previous assignment. Nor is the pictureany better at the district-level: The average tenure fordeputy commissioners in Punjab's districts was only 13months for the current occupant in October, 2003compared to average of 22 and 14 months respectivelyfor the previous two deputy commissioners. Frequenttransfers imply a weaker capacity to frame policy indepartments; Secretaries often have only a few monthsto learn about a department before they are whisked offto another position. Ironically, many Secretaries spenda great deal of their time dealing with personnel issues,such as transfers and appointments, rather thanthinking about policy formulation and strategy.

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An average citizen of Punjab has alreadyachieved a level of socio-economic

development that an average Indian citizen isunlikely to experience in her lifetime. This makesthe nature and extent of Punjab's developmentchallenge that much more unique and complex. Toparaphrase, using language from the sports world,Punjab is a champion defending its title and not anunderdog trying to win one. As the previouschapter demonstrated, Punjab's problems are likelyto be different than those faced by other Indianstates. Punjab grew rapidly when much of Indiawas growing at an anemic rate of 3 percent perannum, but its economy slowed down when therest of India took-off. The growth slowdown inPunjab is primarily attributed to stagnantagriculture, while the growth slowdown in some ofthe high and middle-income Indian states is largelydue to the deceleration of the growth rate inindustry. While the genesis of the current fiscalwoes in many states is traced to the Fifth PayCommission and declining revenue during the1990s, the roots of the problem in Punjab go muchfurther back in time to the period of militancy thaterupted in the early 1980s. At the same time, thereare similarities as well. The decline in publicservices, the administrative and governancechallenges, the problems associated with the powersector and the growing culture of appeasing specialinterests are some of the challenges that Punjabshares with other Indian states, though even here

the extent and nature of the problems vary greatlyin Punjab.

In this chapter, we take a close look at some ofthe major challenges that are a key threat toPunjab's long-run prosperity. The emphasis is onPunjab-specific factors and not on factors that arecommon to all states and are thus well known in theliterature. Seven such factors have been identifiedbelow for in-depth scrutiny.

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The long bout of insurgency during the 1980sand early 1990s has left an indelible mark on thestate, which it is still learning to deal with. Theimpact was felt on all fronts: investment and growthslowed down as investors stayed away, state financesdeteriorated due to increasing expenditure on lawand order and the rapidly growing bureaucracy,collecting taxes became an increasingly difficultbusiness, service delivery, particularly in rural areas,suffered, and civil servants under President's rulebecame less accountable and potentially more proneto corruption.

Extensive decline in the growth rates across all sectors

The impact of militancy on growth was swift,widespread and, in some sectors, permanent.Although there was no flight of existing capital,

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surplus capital with Punjab's larger industrial housesmoved out to neighboring states18. Punjab's base ofsmall-scale industries began to stagnate. Theindustrial growth rate halved, from above 8 percentper annum in the mid-1980s to 4 percent per annumby 1991/92 (figure 2.1). The growth rate of theservices sector decelerated as well, and fell by half.Even the agriculture sector was not spared. Its growthrate fell from around 6 to 2 percent per year,although it is unclear how much of this decline is dueto insurgency activities and how much is due todiminishing returns on the green revolutiontechnology. The overall growth rate declined from anannual average of 6 percent per annum to 3.6 percentduring this period. While the industry and servicesectors have gradually bounced back to trend growthrates as normalcy returned to Punjab, the agriculturesector remains mired in a low growth trap even today.

Our calculation shows that the output loss sufferedby Punjab on account of militancy activities could beas large as Rs. 13,000 crores in today's prices19.

Fiscal impact: The chickens came home to roostafter a lag of several years

While state finances were affected duringmilitancy, much of the real damage was felt after thestate returned to normalcy. The fiscal situationwas affected by the expanding state apparatus,mounting revenue expenditure to maintain law andorder, and the inability on part of the governmentto enforce effective tax administration, given thedeteriorating law and order situation, especially inthe rural areas20.

A major spurt in the growth of the civil servicesin Punjab occurred during the second spell of

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18Some of the prominent and successful Punjabi business houses that began investing outside of Punjab, mainly in Haryana and Delhi,during this period include the Munjals, Oswals and Mittals.

19This assumes that the economy would have grown at the pre-militancy trend growth rate during the militancy period.

20Bank staff was told by one official that, during the height of militancy, the government was effective only within a the 10 kilometerradius of the Grand Trunk road, the main road connecting all important cities of Punjab. The countryside, especially in the borderdistricts, were off-limit to state government officials.

�� !��"#�$%&'("�%�(#�)#**�+&�,-.#%� */�.�%-�$�("#�0#%-&.�&)�

1-*-(��+/��.��%#,-.#�(�,�%�*#�-$�%#�234�

Source: Economic and Political Weekly; The State Live Database, The World Bank.

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President's rule, from 1987 to 1993, with the core civilservice growing by some 3 percent per annum (figure-2.2). Most of the growth came from contingency andwork-charged employees (22 percent per year) andGroup A civil servants (16 percent per year). The rapidgrowth of contingency employment between 1987and 1997 partly reflected the government's desire toexpand job opportunities in Punjab during a period ofsocial turmoil fed by militancy.

The fiscal cost of maintaining a large andgrowing bureaucracy had its toll on revenueexpenditure, which shot up by 2-3 percentage pointsof GSDP during this period (figure 2.3). The risingrevenue expenditure was financed by additionalborrowing from the Centre, resulting in a seculardecline in the state's capital expenditure and anunprecedented increase in GoP's debt. As figure-2.3shows, Punjab's debt to GSDP rose from 26.1percent of GSDP to 36.3 percent in a span of sixyears (between 1986/87 and 1992/93), at a timewhen the average debt to GSDP ratio for other

Indian states remain unchanged at 23.7 percent. Theinterest payments on these additional borrowingsstarted to mount rapidly and Punjab's interestpayments more than doubled in 1993/94, from 1.6to 3.4 percent of GSDP and steadily increased thereafter (figure-2.3)21. The rising interest bill todayaccounts for nearly 30 percent of the state's totalrevenue receipts and is one of the main causes of thelow level of capital expenditure and the risingrevenue deficit of the state.

An amount close to Rs.8,000 crores related to themilitancy period, generally referred to as the 'terror-debt' in Punjab, is still in the accounts of GoP thoughthe interest payments have been waived off till 2004/05.GoP has made a request to Government of India (GoI)to write-off the entire terror-debt and the TwelfthFinance Commission (TFC) will give its view on thismatter when it submits its report later in the year.

Revenue mobilization also suffered during thisperiod and worsened as policy-makers, faced with the

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Source: GoP, State Database.

21There was also a waiver on some of the interest payments during President's rule, which stopped following the latter's revocation.

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specter of insurgency, adopted populist policies. Thestate, over time, became a soft target of specialinterest groups. The state's own tax revenue to GSDPfell from 7.9 to 6.9 percent of GSDP between1986/87 and 1992/93, though not all of it can beattributed to the militancy problem, as the tax toGSDP ratio declined in other states as well duringthis period, albeit less rapidly than in Punjab.

�� 7��8� ��The Problem of Low Productivity

There is no simple and objective way tomeasure the productivity of a state's bureaucracy.

But in a state like Punjab, where the salary per civilservant is one of the highest in the country (figure-2.4) and the quality of public services one of thepoorest (figure-1.16), it can be said with somedegree of confidence that the productivity ofPunjab's civil service, however measured, is likely tobe quite low. The average salary per civil servanthowever masks inter-Grade disparity, e.g., comparedto the pay scale of Tamil Nadu, Group C and Demployees in Punjab are paid higher than theircounterparts, while Group A and B actually receiveless (right panel, figure-2.4). The fact that Group Cand D make up 85 percent of the state's civil servicein Punjab and are paid disproportionately more than

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"-$"#%�-�(#%#,(�0�/1#�(,��.��*&'#%�%#6#��#� �,#��.�0%&.�+(-6-(/

9�**�6�%-� *#,��%#�#50%#,,#.��,��0#%+#�(�&)��:

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Source: GoP; The State Live Database, The World Bank.

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their counterparts in other Indian states clearlyreflect that the mismatch between wage andproductivity is likely to be far greater in the lowerthan in the upper grades.

The low productivity of civil services in Punjabcan be directly linked to chronic overstaffing, politicalinterference, lack of accountability and absenteeism,and inefficient processes that stymie its working.

�6#%,(�))-�$Punjab has one of the most over-staffed civilservices in the country

According to GoP, the total size of the core civilservice in 2002 stood at about 376,222 employees ofwhich the most numerous were Group C employees(67 percent) followed by Group D employees (18percent). If we add employees of PSEB and otherPSUs (about 104,178), teachers in Grant-in-aid-schools (16,804) and local bodies (about 38,636),this number swells to 535,840.

The ratio of civil servants (core, PSU's, andlocal bodies together) per 100 of population isapproximately 2.2 in Punjab, compared to 1.36 in

Karnataka, 1.75 in Andhra Pradesh, 1.7 in Gujaratand 1.9 in Orissa, and the all-India ratio of 1.4.Relative to several major states and the country as awhole, therefore Punjab is overstaffed (figure-2.5).

The Punjab Expenditure Review Commission(2002) report notes that senior positions in thebureaucracy have proliferated in recent years,triggering a concomitant expansion of subordinatestaff as well: the number of Indian AdministrativeService (IAS) officers increased from 165 to 206between 1984 and 1998, while that of Superintendentof Police (SPs) and above increased from 112 to 237.Group A civil servants in absolute numbers grew from612 in 1967 to 5,192 in 1992 and 12,156 in 2002. Itis worth noting that the growth of the Punjab civilservices has an important historical dimension (figure-2.6). The first major spurt in growth in the civilservices occurred from the late 1960s to the late 1970spushed forward by the Indian state's rapidlyexpanding role in the economy. Particularly notableduring this period was the rapid growth of Group Acivil servants, expanding by 58 percent between 1967and 1972 and another 39 percent between 1972 and1977. The next major spurt of growth occurred during

�6#%�$#�1&�("*/�,�*�%/�&)�+-6-*�,#%6��(,��+%&,,�,(�(#,��.��+%&,,�

$%�.#,� #('##��,(�(#,�-$�%#�23�

Source: GoP, GoTN, The State Database.

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the second spell of President's rule in Punjab from1987/88 to 1992/93. The growth of Group Acontinued unabated between 1992/93 and 1997/98registering an increase of 86 percent, while Group Bshrank by 35 percent with more Group B cadres beingreclassified as Group A by the leadership. Contingencyemployment also increased between 1992 and 1997by 47 percent, but the overall size of the core civilservice expanded by only 7 percent.

The problem of a ballooning wage bill has beenexacerbated by three factors in addition to the salary

increases decreed by the Fifth Pay Commission andextended by Punjab's Fourth Pay Commission to allstate employees. First, GoP, for essentially politicalreasons, allowed the number of Group A cadres toswell from just 161 in 1998 to 211 in 2001, resultingin a major increase in the number of highly paid civilservants in the state. Group B cadres registered amoderate increase from 93 to 99, and Group Ccadres fell from 314 to 258 in the same period. Atypical example: agricultural inspectors, a Group Ccadre, were redefined as Group A officers in the late1990s. Second, government servants under the

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Source: Finance Department, GoP.

�� ,�+-6-*�,#%6-+#�-,�&6#%>,(�))#.�+&10�%#.�(&�1��&%��.-��,(�(#,�-$�%#�23?

Note: (i) Data pertains to 1999/00, except Gujarat, for which data is available for 1998/99. Total Public Sector Employment includescore civil service, work-charged and daily-wage employees, grant-in-aid institutions, state- owned enterprises, and local bodies.

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assured career progression program were guaranteedhefty salary increments, even if not promoted, after8, 16, and 24 years of service respectively; this wascompressed in 1996 to shorter time horizons of 4, 9,and 14 years, while the number of cadres fallingunder the program's ambit was widened significantly.Third, the pay scales of GoP employees aresignificantly higher than those in neighboringHaryana and, crucially, the GoI, particularly forpeons, teachers, doctors, and constables, whoaccount for a large percentage of the state's total civil service.

Police and Irrigation seem to be particularlyoverstaffed. The police budget, only 3.53 per centof the total budget in 1980-81, has shot up to morethan 8 per cent (Rs 1000 crores) today. Twodecades ago, Punjab possessed only one Inspector-General (IG) of Police in Punjab, controlling thepolice force. Now there are 16 IGs, 13 AdditionalDirector-Generals of Police, who supervise thework of the IGs, and one Director-General ofPolice at the top. The force spends roughly 87% ofits budget on salaries and the rest on other activitiesincluding maintenance and modernization; thiscontrasts sharply with the norm of only 70% of the

budget for salaries set by the National PoliceCommission. Estimates place the number ofsurplus employees, in the Irrigation Department atover 20,000.

Overstaffing is not limited to the core civil serviceThe Punjab State Electricity Board (PSEB) is

one of the most bloated electricity utilities in India,making it even harder to commercialize (figure 2.7).Employee costs in PSEB are substantially highercompared to other power utilities, and accounted for19% (FY2002) of the total cost of power supply.During the period FY1997-2002, PSEB's employeecosts increased by 100% between 1997 and 2002,while the number of employees grew by merely 3%.While the utility has imposed a ban on recruitmentand a freeze on new posts, there is no evidentimprovement in the rationalization and efficientdeployment of the employees in PSEB. Theemployee strength is large (about 85,000), there areissues of skill mismatch, and the salary/benefitsstructure is among the highest compared to otherpower utilities in the country. PSEB has 16employees to serve 1000 consumers as compared tothe national average of 7.8 employees per 1000consumers. Key reasons for such gross overstaffing

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Source: Annual report on Working of SEBs, Planning Commission, May 2002.

No. of months Less than 3 3 to 6 6 to 12 12 to 18 18 to 24 more than 24

No. of officers 18 20 5 3 6 5

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include outdated work norms, minimal outsourcingof the utility's functions, and the rapid creation ofposts. An internal review concluded that PSEB couldprofitably shed 10,000 posts in transmission anddistribution (i.e. 15% of the total employees inT&D), while PSEB's Chairman stated that he had tocontend with "flab" in excess of 30,000 employees.

The Punjab Expenditure RegulatoryCommission (PERC) in its FY 03/04 tariff orderstressed the need to reduce employee costs andallowed the utility to recover Rs 1250 crores in wagesthrough tariffs. However, employee costs in FY04/05 is estimated to be about Rs 200 crores higher.Subsequent to the directive of the PERC to reduceemployee costs, some measures22 have been initiatedbut with only marginal effects so far.

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Punjab suffers from the problem of frequenttransfers of officers, spawning corruption andundermining service delivery. Frequent transfersseem to be a particularly serious issue in largedepartments, such as health, education, and police,as well as revenue-generating departments, such astransport and registration23. Leadership for reformshas to be provided by Secretaries of the keyDepartments, for which they need a stable tenure.Unfortunately, at present the average time that thePrincipal Secretaries and Secretaries have spent on

their jobs in the Punjab secretariat does not seem tobe more than a few months. The total period thatPrincipal Secretaries and Secretaries had spent intheir posts as of October, 2003 is shown in Table 2.1.

Of the five officers who had spent more thantwo years on their posts, four were holding posts forwhich there is little competition, such as PrincipalSecretary, Freedom Fighters; Principal Secretary,Programme Implementation; Secretary, Departmentof Relief and Settlement; and Commissioner,Departmental Enquiries. The more importantSecretaries were transferred before they could play aleadership role in promoting reform. The averageterm for Principal Secretaries in their current post asof October 2003, was a mere 13 months comparedto 16 months in their previous post (this excludesofficers on deputation to GoI where terms tend to belonger). For Secretaries in their current post, theaverage tenure was 17 months compared to 15months in their previous assignment. Nor is thepicture any better at the district-level: The averagetenure for Deputy Commissioners in Punjab'sdistricts was only 13 months for the currentoccupant in October, 2003 compared to average of22 and 14 months respectively for the previous twoDeputy Commissioners. In the police, the tenure ofStation House Officers (SHO's) was about sevenmonths, and just eight to nine months for DeputySuperintendents of Police (DSPs).

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22These measures include abolishing 1400 vacant posts at hydro-electric projects, and curtailing benefits such as telephones, staffcars, and house/conveyance advances (annual savings of Rs 35 crores). The utility is allowing long leave of five-years to work in

the private sector and premature retirement.

23For example, the problem of deteriorating pupil-teacher ratios in remote or rural areas has been compounded, to a large extent,by the politicization of the process of assigning and transferring teachers across posts. The incentives to use political influence tosecure a desirable urban posting can sometimes be overwhelming, resulting in higher-than-normal vacancies in less developeddistricts. Mid-year transfers, recently banned, have seriously disrupted the learning process for school children across Punjab.

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On the whole, the Punjab Government has yet tosystematically apply information technology on a largescale. While the Secretariat does possess a computerizedfile monitoring system in the office of the ChiefMinister, its use could be far more widespread than it isat present. The Government has computerized theservice records of all Secretariat officials but has yet toimplement a computerized human resource databasefor which the software is already available. TheSecretariat's Manual of Office Procedure is in dire needof revision to accommodate the greater use ofinformation technology, administrative simplification,and public demand for access to information.

More importantly, there is considerable scope forrationalizing the structure of government andreducing administrative fragmentation to improveperformance. Punjab's 43 departments could benefitfrom greater coordination among them: For instance,the Punjab Finance Department focuses only onexpenditure while revenue is a separate subject under aFinancial Commissioner, Excise and Tax. Punjab has117 Principal Secretary and Secretary-level officersfrom a total of 163 IAS officers; the ratio of IASofficers to the population is highest in Punjab out offourteen major states; and for every single IAS officerin Punjab, there are 412 Group D staff (e.g., drivers,peons) compared to 352 in Tamil Nadu and 205 inKarnataka. The problem is not necessarily the largesize of the IAS cadre but the cascading effect that thishas on the proliferation of the civil service at lowerlevels. Currently, the state is organized into fourdivisions, 17 districts, 72 subdivisions, and 140development blocks; yet, in 1966, Punjab had twodivisions, 11 districts, 37 subdivisions/tahsils and 117development blocks. It is not clear whether a smallstate, such as Punjab, needs four divisions or 72 sub-divisions when the average number of developmentblocks in a district is just eight. This multiplicity ofadministrative tiers generates both confusion anddelay, besides adding to the state's enormous wage bill.

Lack of a computerized tax system andadministrative fragmentation have affectedstate's tax collection

Lack of a systematic method to gather economicintelligence and the fragmented administrativestructure of the tax department have affected revenuecollection in the state. Punjab has no institutionalmechanism for sharing of information among sales /commercial tax departments, except verification on acase-by-case basis from time to time. This is a matterof concern as Punjab levies sales tax at the last point,unlike most Indian states that collect taxes at the firstpoint. Given that the information on the dealers isweak and there has been widespread evasion of tax inthe last point system, over the years, the state hasshifted the tax to the first point in respect of anumber of commodities. This however, has nothelped to improve revenue productivity, as thetraders seem to have managed to keep the entirechain of transactions out of the tax net. Theorganization of the tax departments along thegeographical lines instead of functionalresponsibilities has also led to inadequate sharing oftax information across the geographical boundaries.

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Recent evidence from a survey of governmentprimary schools across Indian states shows thatteacher absence in primary schools in Punjab isextremely high: on an average, on any one day, 36percent of Punjab's primary school teachers areabsent from the school (top panel, figure 2.8). Thisrate is well above the 25 percent rate for All-India,and third highest across Indian states, followingBihar and Jharkhand. Compounding the problem isthe finding that even when teachers are present, onlyhalf (49.8 percent) are teaching. This is below the all-India average of 59.5 percent.

The same problem plagues the health facilitiesas well. Nearly 39 percent of doctors and 44percent of other medical personnel are absent from

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their place of work (bottom panel, figure 2.8). Notall the absences can be explained by shirking.Among doctors, of the 39 percent absence rate, 11percent were absent without reason, 12 percentwere on authorized leave, and the remaining 16percent were away on official duty. Among non-doctors, the corresponding breakdown is 9, 14, and20 percent. More work is needed to better

understand the high rates of absence, as the policyresponse depends on why absences occur. Ifservice-providers are absent for personal reasons,incentives for staff need to be changed. Ifinstitutional reasons are the culprit, the state needsto re-evaluate the value of other requirements that keep providers away from their jobs24.Interestingly, Madhya Pradesh, which has been a

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Notes: The absence rate is the percentage of providers who are supposed to be present but are not on the day of an unannounced visit.Source: Provider Absence Project Research Team, World Bank 2004.

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24Home visits could be a reason, but are likely not to be an overwhelming factor. Only 2% of women surveyed in the 1998-99 NFHSreport having received at least one home visit from a health or family planning worker in the 12 months preceding the survey.

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pioneer of decentralizing education and healthservices to panchayat raj institutions (PRIs), has amuch lower absenteeism rate than most states.

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The problem of absenteeism is partly to beblamed for the gross under-utilization of healthinfrastructure across the state. Punjab has a largenetwork of centers (community health centers,primary health centers, and sub-centers) inaddition to hospitals, but within the public sector,the vast majority of services are provided throughhospitals, whether in-patient or out-patient.Lower level public facilities perform a negligiblerole at the level of in-patient care, perhapsreflecting the lack of adequate facilities to take careof patients who are seriously ill. While PHCsaccount for a larger share (20 percent) of out-patient treatments at public facilities, their sharein overall out-patient care is negligible comparedto the private sector. Paradoxically, the success ofPunjab's Health System Corporation has drawn

patients from the primary health systems fortreatment in the more advanced public hospitalsystems leading to underutilization of PHCs (see Box-4).

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Disturbingly, 94 percent of the Medical andPublic Health Department's budget in 2001/02 wasspent on salaries and pensions to employees, withonly a pittance left for maintenance, supplies andmaterials, including drugs (figure 2.9). Thesituation is even worse in General Education, wherethe 98.5 percent of the budget amount is spent onemployees. In effect, the public educational systemseems to have been captured by teacher unions forthe exclusive purpose of salary payments, despitethe appalling high absenteeism rate. While Punjabspends less money as a percentage of GSDP oneducation than Kerala or Rajasthan, there is littlepoint in expanding outlays unless it is to improvethe composition of the budget to reduce the relativesalary burden.

&10&,-(-&��&)��50#�.-(�%#�&)�("#��#.-+�*��.�� *-+�#�*("�

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Source: Government of Punjab

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�>�&6#%��+#@-(-D#�,��"�%(#%,A number of challenges remain to be

surmounted before e-governance takes off in Punjab.The Department of Information Technology has beenseriously hamstrung by the erratic release of funds forsome of its projects. It is also clear that manydepartments lack the champions to aggressivelyimplement e-governance solutions in their domains.It is also important that e-governance be combinedwith real business process re-engineering acrossagencies. The state has a great many initiativesplanned but it will be necessary to prioritize givenboth resource and capacity constraints.

Although GoP has citizen's charters in manydepartments, these are vague, and service norms arepoorly defined. Grievance redressal mechanisms arelargely left unstated and no penalties ensue for breachingcharter norms. It is not clear whether people are aware ofthese charters, or whether any improvement in servicedelivery has resulted from them. Charters appear to havebeen hastily prepared in most cases without publicconsultation and little attempt to sensitize staff.

�� The long spell of President's rule in the 1980s

appears to have weakened accountability mechanisms,fuelling opportunities for corruption and graft. Whileno serious study has been conducted on the profile ofcorruption in Punjab, potential areas where theopportunity for corruption clearly exists includerecruitment and transfers (discussed in the previoussection), tendering and procurement and servicedelivery (e.g., the need to pay a bribe at the localregional transport office to secure a drivers' license).While the state's Vigilance Department has becomemore active under the current government, Punjab'soffice of the Ombudsman (the Lok Pal), responsiblefor combating wrongdoing by Ministers, is moribund.Nor has Punjab moved as fast as Karnataka or TamilNadu to pass a Transparency in Tenders and

Procurement law, although it has prepared a draft lawon the subject; Right to Information (RTI) legislationhas been delayed after Punjab decided not to enact itsown excellent draft law and wait instead for theGovernment of India to make the national Freedom ofInformation (FOI) law effective.

There is widespread evasion of tax and no strongpolitical support for tax reform

There is considerable evidence of widespreadevasion of tax in the state. Given the economiccharacteristics of Punjab's economy (i.e., high per capitaincome, last point sales tax, low rural-urban disparity,large and growing remittances from the diasporaabroad), one would expect Punjab to have a largenumber of tax-paying dealers and high average turnoverper dealer. But Punjab had only 143,000 registereddealers compared to 384,000 in Andhra Pradesh,370,000 in Tamil Nadu, 350,000 in Uttar Pradesh and188,000 in Karnataka25. The problem of under-taxation is also evident if one examines the averagedealer turnover across selected Indian states. Forexample, if the average turnover of dealers in Karnatakais assumed to be a fair value of the actual turnover ofdealers in Punjab, the extent of under-taxation in thelatter is a staggering Rs. 3,316 crores each year, i.e.,Punjab's estimated sales tax collection should have beentwice the actual collection (figure 2.10)! If one discountsthe fact that Punjab has higher threshold for dealerregistration, lower average tax rate, and does not haveadditional tax in the form of turnover tax as comparedto Karnataka, even then the extent of tax evasion couldbe as high as Rs. 1,500 crores.

Several attempts to raise additional revenue andreduce tax evasion have failed due to lack of adequatepolitical support for such reforms. Raising the sales taxrate of diesel from 8 percent (lowest rate among allstates) to 16 percent has been attempted several timesbut has yet to clear the Cabinet. Certain revenuemeasures like discontinuation of the non-practicing

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25Part of this could be explained by different turnover threshold for registration, which is Rs. 5 lakhs in Punjab. The correspondingthresholds are Rs. 3 lakh in Tamil Nadu, Rs. 2 lakh in Karnataka, Rs. 1 lakh in UP and zero for AP.

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allowance for doctors and introducing sales tax indefense canteen stores have been announced and rolledback after several weeks. The mandatory filing ofstatutory export-import (EXIM) form at InformationCollection Centers for inter-state transactions wasintroduced in September 2003, but was withdrawn inJanuary 2004, for political considerations. In the shortperiod when it was in existence, the measure didincrease revenue collections. These episodes show thestrong disinclination on part of the government tosolve its fiscal problem by generating more revenuethrough better tax policy and effective administration.

��7� ��!��7��>�� Punjab has been a major beneficiary of the foodsubsidy from GoI

Farmers in Punjab receive a range of subsidiesfrom the state and central governments. Oneimportant source of subsidy is through the policy of

minimum support prices (MSP), under which GoIthrough the Food Corporation of India (FCI), followsan open-ended procurement policy and buys whateverrice and wheat is offered for sale at the MSP (providedit meets defined quality specifications). While inprinciple, the MSP is a national price, in practice,because of the availability of a good procurementinfrastructure, Punjab has been a major beneficiaryfrom GoI price support operations. Over 90 percent ofmarket arrivals of rice and wheat in Punjab arecurrently procured by GoI at the MSP (World Bank,2003a). Since the mid-nineties, the MSP subsidy forfarmers has increased rapidly as support prices for bothcrops have increasingly diverged from productioncosts. It is estimated that rice and wheat farmers inPunjab received a subsidy of nearly Rs 2000 crores in2001/02 through this mechanism, over twice the totalsubsidy received by rice and wheat farmers in anyother state (World Bank, 2004)26. The other subsidyprovided by GoI is on fertilizer, which amounted tonearly Rs.1000 crores in 2001/02 for Punjab.

��1#�,�%#�&)�0&(#�(-�*��.#%>(�5�(-&��-�� 9-��,3�%&%#,:;�2��2@��-$�%#�234�

Source: GoAP, GoK, GoO, GoP, GoTN and GoUP.

26The subsidy is calculated as the difference between the MSP and the C2 cost of production. The C2 cost includes all actual expensesin cash and kind including imputed costs for owned land, family labor, and capital. If benefits were computed on the basis of A2+FLcosts (which do not include imputed capital and land costs), the benefits for rice and wheat farmers would be much higher.

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Input subsidies are nearly 10 percent ofagricultural output

Apart from output price support, inputs,particularly irrigation and electricity supply, are alsosubsidized and are provided by the stategovernment27. These are large subsidies: since 1997-98, input subsidies received by Punjab's farmers havebeen around Rs. 2,000 crores annually in recentyears, which is over 10 percent of the agriculturaldomestic product in the state (figure 2.11).

The key challenge, thus, is to work out anappropriate package of tariff/subsidy reforms andimprovement in the power supply conditions to buildsupport among stakeholders (politicians, farmers andthe utility). Determining a fiscally affordable level ofpower subsidy to agriculture (at present farmers areprovided 8 hours/day power supply), targeting of thesubsidy, and delivering it to the consumers withoutaffecting the commercial performance of the utilitiesare important public policy issues that need urgent

attention. For regulating power supply to agriculture(official policy is 8 hours/day supply), while ensuring24 hours power supply to rural areas for household,commercial and industrial purposes, PSEB has beenimplementing a program to segregate agricultureloads in the rural areas28.

At the same time, public investments havefallen precipitously

GoP's capital expenditure in agriculture wasaround 1.9 percent of agriculture GSDP in 2000/01,less than the 2.2 percent average across all states inthe country. Private capital formation, which is thedominant source of investment in the sector (four tosix times public capital formation), decreased in realterms in the first half of the 1990s and stabilized at alower level in the second half of the 1990s. So in realterms, Punjab's total investment in agriculture todayis same it was in the late 1980s. This relatively lowlevel of investment is worrying since capitalinvestments are a precursor to future growth.

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Notes: Subsidies in current prices. Source: Technical Note.

27The fertilizer subsidy is shown in the GoI budget. Canal irrigation subsidy is estimated as the difference between O&Mexpenditures and revenue collected from water charges. The power subsidy to agriculture is calculated as the difference between the

cost of supply (agricultural consumption times average per unit cost of supply) and revenue collected from farmers.

28In about 50% rural feeders agriculture load has been segregated to a separate feeder, and the investment cost for segregation in thebalance 5000 villages feeders is estimated to be Rs 250 crores.

Direct benefits of output price support and input subsidies naturally accrue to those agricultural households who cultivatesome land29. Comparing the socio-economic profile of agricultural households to non-agricultural households shows thatsuch subsidies are likely to be regressive as cultivators by and large are amongst the richer sections of the rural population.

The finding that agricultural subsidies are likely to be regressive is not unique to Punjab (World Bank, 2003b).However, Punjab does stand out in comparison to other states because very few of Punjab's farmers come fromdisadvantaged socio-economic groups (see Table below).

How are price support and input subsidies distributed within the farming population? The figure shows the estimated transfersthrough the MSP, electricity, and canal irrigation subsidies. In each case, the distribution of benefits is regressive, with marginalfarmers receiving a little over a tenth ofthe subsidies received by large farmers.The average input subsidies received byPunjab's farmers are comparable, and inthe case of the price support, muchhigher, than those received by farmers inother states. For instance, on an average,a rice farmer in Andhra Pradesh receivedRs 164 in 1998, about one-twentieth theamount received by a rice producer inPunjab. Similarly, a wheat farmer inPunjab received nearly one and a halftimes the transfer received by a wheatproducer in Haryana, and forty-five times the transfer received by a producer in Uttar Pradesh (Sur and Umali-Deininger,2003)30. The coping costs are too high for poor and small farmers. A Bank study on Power supply to agriculture shows thatmotor burnout costs for marginal farmers accounted for 10 percent of gross farm income in Haryana and 7.7 percent inAndhra Pradesh. The corresponding rate for large farmer was 1.6 and 2.3 percent respectively in the two states.

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Agricultural households as a % of: Punjab Maharashtra Gujarat Tamil Nadu Haryana

Population 41.5 58.3 59.3 32.5 50.7

Poor 8.4 51.4 53.6 25.4 12.3

Scheduled Castes and Scheduled Tribes 6.5 44.7 53.5 17.6 8.3

Characteristics of Agricultural Households across States

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During the period FY1999-03 investments inthe power system have been insufficient with respectto the 7 percent average load growth. The

investments in the transmission system have beenparticularly low resulting in overloading of thesystem and operational constraints. Introduction of

29This ignores indirect effects on rural land, labor, and output markets. A priori, without further empirical work, it is difficult topredict whether accounting for indirect impacts would makes the subsidies more or less regressive.

30While it is clear that subsidies are regressive - the magnitudes reported in the figure are likely to be over-stated. Not the entiresubsidy actually reaches farmers. For example, the supply of electricity to farmers reported by PSEB could be exaggerated to hidetheft and technical losses. The PSEB estimate for average consumption by agricultural pump sets was 3021 kWh/kW/year inFY2000, and was restated at approximately 1800 kWh/kW/year in FY2002. The PERC in its first tariff order assessed consumptionto be even lower, at approximately 1700 kWh/kw/year (PSERC Tariff Order, FY 2002-03). Using the regulator's norm of 1700 kWh for FY00, would lead to a drastic reduction in the agricultural power subsidy, from Rs 19.39 billion to Rs 10.9 billion.

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open access can result in additional power for thestate. While there is an urgent need for investmentsin the power system to reduce overloading, T&Dlosses and improving quality of power supply, it isimportant that these costs are adequately recoveredthrough tariffs and do not result in additionalfinancial losses for the utilities. A comprehensiveassessment and prioritization of investments basedon the costs-benefits analysis should be undertaken.

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The regulatory burden faced by entrepreneursin establishing a new business or running an existingone is an important determinant of the investmentclimate of the state. Regulations by themselves arenot undesirable; indeed, regulations are needed toclarify the rules of the game for business as well asensure that societal expectations about howbusinesses should operate are fulfilled. Periodicinspections by government officials may be needed toensure compliance. The problems arise whenregulations are onerous and stifling and wheninspections are too frequent, and involve harassmentand corruption. While the regulatory burden inPunjab is not excessive and the inspection regime isnot too stifling, both leave much to be desiredcompared to other states. There are also certaininfrastructure constraints, especially in the quality ofpower supply and the cost of transport for its exports,given that it is a land-locked state.

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Administrative procedures involved in establishinga new business in Punjab requires several steps andclearances, but is not necessarily more cumbersomethan elsewhere in India. There are two stages in the

registration of a company with the Department ofIndustries: (i) An entrepreneur has to get a provisionalregistration from the District Industry Centre withproof of location (and large enterprises have to getregistered with the GoI, Ministry of Industry, as well);(ii) The sponsor has to prepare a project report andapply for a no objection certificate (NOC) from thePollution Control Board (PCB), following which thesponsors apply for a power connection from the PSEB.

For certain types of enterprises, there areadditional requirements. For example, if the land isprovided by the Punjab Urban DevelopmentAuthority (PUDA), the sponsor needs to get abuilding permit from it. For hazardous industries,(the Factory Act of GoI identifies 19 hazardousindustries), the sponsor has to apply for a siteappraisal to the Competent State Authority (CSA)-cum-site appraisal committee. There are some localrestrictions regarding sites31. When construction iscompleted and machineries are installed, sponsorsapply to the PCB for consent to operate.

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According to the responses to the investmentclimate survey, firms in Punjab face a relativelymoderate inspection regime. An average firm inPunjab is visited by government inspectors around 8times a year, compared to an all-India average of 11.However, in one sector, garments, the incidence ofinspections in Punjab is the highest in the country,i.e., 14 per year compared to an all-India average of 9.

Generally, small firms experience less inspectionthan large firms (the all-India average number ofinspections is 9 for small firms vs. 20 for large firms).The firms exporting goods tend to be inspectedmuch more (21 times a year) than the non-exporters

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31For example, in a city with a population of more than 10 lakhs, no industrial unit can be set up within 25 kms. of the city limitswithout obtaining an industrial license from the GoI. This applies to all industries. Additionally, no industrial unit can be set upwithin 16 km. of Chandigarh. This is a state-imposed restriction. If the unit is located within the municipal limits of any town,then an NOC is needed from the municipal authority; this does not apply to industrial areas.

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(6 times). Managers of firms in Punjab reportspending about 12.5 percent of their time dealingwith government regulatory matters; this ismarginally below the all-India average of 13.8 percentfor small firms and 14.5 percent for all firms.

A recent review of inspections, maintenance ofrecords and filing of returns in Punjab and Haryana bythe CII reveals a number of problems32. Firms arerequired to maintain a large number of forms andregisters, especially under different labor laws. Many ofthese forms ask for the same information and differentforms often appear similar, thus adding to the confusion.

�� &%�Labor market flexibility. A relatively inflexible

labor market has been one of the major weaknesses ofIndia's investment climate. The GlobalCompetitiveness Report 2001 identifies restrictions onthe hiring and firing of workers as one of the greatestchallenges of doing business in India. India ranked73rd out of 75 countries on this front in the surveycarried out for the report, with China ranking 23rd.

Firms in Punjab identify labor relations as one oftheir less serious problems. One manifestation of a rigidlabor market is the incidence of excess employment.Firms operating in rigid markets have limited scope foradjusting the size of the workforce in the face ofchanges in business conditions and this is sometimesreflected in excess employment. By this criterion,Punjab's firms appear to be operating with greaterflexibility than their counterparts in most states. Theaverage degree of excess employment reported by thefirms in Punjab (which are all small in the sample) is

7.5 percent compared an all-India average for smallfirms of 10.5 percent. Only firms in four statesreported a lower incidence of excess employment33.

Skills and training. Firms in Punjab suffer fromskill shortages. Of the total educated job seekers inPunjab during 2000, only 24 per cent weretechnically qualified34. A recent study of the qualityof workers in Indian manufacturing found the qualityof Punjab's work force to be low and declining overtime, relative to other states. Data for 1999/2000placed Punjab as 15th out of 18 states in the qualityof its regular salaried urban manufacturingemployees. Ten years earlier, i.e., according to data for1987/88, Punjab had ranked 12th35.

The state has several industrial traininginstitutes (ITIs). These institutes suffer from many ofthe deficiencies common to public sector traininginstitutes - outdated and irrelevant curriculum,inadequate facilities, obsolete equipment andshortage of trained instructors - all of which lead toskills that have little market demand. Notsurprisingly, as reflected in employment exchangedata, a large proportion of the technically trainedmanpower from ITIs remain unemployed oremployed in trades unrelated to their training36.

�#6#*��.�B��*-(/�&)��)%�,(%�+(�%#Power. The adequacy, reliability and cost of

power supply are an important dimension of theinvestment climate. Enterprise surveys have identifiedit as one of the most critical problem areas in manyIndian states and Punjab is no exception. Firms inPunjab report an average of 25 power outages per

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32Confederation of Indian Industry, Northern Region, Consolidation of Registers and Forms in Punjab and Haryana: A Potent Way toSimplify Procedures and Minimise Inspector Raj: A Note, December 2003.

33Interestingly the states that appear to perform better by this criterion are those that have an overall poor investment climate (e.g.,Madhya Pradesh, West Bengal and Uttar Pradesh).

34Punjab Development Report 2002, Chapter 12.

35Suresh Chand Aggarwal, Labor Quality in Indian Manufacturing: A State-level Analysis, ICRIER Working Paper No. 126, April 2004.


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month, nearly double the nation-wide average of 14and significantly higher than in states with betterinvestment climates. Firms report losing almost 9percent of their output due to power shortages,compared to a nation-wide average of 6.5 percent. InPunjab, which has the second highest incidence ofgenerators among Indian states, firms obtain about 27percent of their power from own-generators.

Transport: Like their counterparts in othernorthern states, firms in Punjab are disadvantaged bytheir long distance from ports. This is a particularlyserious problem with regard to heavy weight orvolume products, or where the delivery times arestringent. A recent study indicates that:

� Pavement conditions are not perfect but,perhaps, reasonable by Indian standards: about70 percent of the network has a riding qualitywhich is at least 'fair.'

� Over 500 km of the network has traffic in excessof 15,000 PCU (passenger car units), but thereare only 42 km of four-lane roads; the networkis almost entirely two-lane and intermediate lane(5.5 m). Traffic has been increasing at 11 percentannually and, even if this rate of growth is

reduced substantially, about 40 percent of thenetwork will be approaching saturation by 2008.

� Vehicles average 34 kmph with only 10 percentof the network having speeds greater than 45kmph, reflecting the imbalance between trafficflow and road capacity.

Total vehicle operating costs are high, servicestandards low and they will deteriorate further unlesssubstantial additional road capacity is provided. Presentstandards may be adequate for grain-based agriculturebut it is difficult to envisage vehicle speeds of less than35 kmph facilitating the attraction/development of amore diversified, higher value and more time sensitivepattern of production in either agriculture or industry.

Industrial relations. Trade union activity hasbeen relatively less pronounced in Punjab perhapsbecause of the small enterprise dominated characterof its industrial landscape. According to data reportedin the Punjab Development Report 2002, while thenumber of "industrial disputes" increased more thanfour-fold between 1968 and 1999 (the index rosefrom 100 to 441; figure 2.12), the number of workstoppages in 1999 was actually lower than in 1968.Judged by work stoppages, industrial relations in

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Source: Punjab Economic Report: Investment Climate (Technical Note).

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Punjab deteriorated in the 1970s and have, sincethen, progressively improved. However, while thenumber of disputes has gone down, the number ofman-days lost due to stoppages has increased nine-fold, reflecting an increase in the average number ofworkers involved in each work stoppage.

There have also been some changes in the causesof work stoppages since 1968. Disputes over wages,allowances and bonuses, once the most importantcause of work stoppages, are much less common now.In 1999, for example, such disputes accounted for 40percent of the work stoppages, compared to 75percent in 1968. On the other hand, issues such assuspension and termination have become more of abone of contention now than in the past; in 1999,they accounted for one-fifth of the work stoppagescompared to just 3.5 percent in 196837. At the sametime, there has been an erosion in faith in conciliationas a means of settling industrial disputes. In 1999,only 8 percent of disputes were settled through thismeans compared to 28 percent in 1968. Adjudicationcontinues to be the most important method, whilevoluntary arbitration appears to have gone out of use.One out of five industrial disputes are either pendingbefore the conciliation machinery or underexamination with the government, indicatinginefficiency, or inadequacy, of the industrial disputehandling system.

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Despite the general consensus for change andreform, GoP has not been very successful when itcomes to formulation and implementation of policies.For example, more than a year after passage of theFiscal Responsibility and Budget Management(FRBM) Act, 2003, GoP is yet to implement certainpolicies indicated in the Act. For example, the FRBMAct states that, "The Minister-in-charge of theDepartment of Finance, shall review, after every quarter,the trends in receipts and expenditures in relation to the

budget and place before the Punjab Legislative Assemblythe outcome of such reviews". No such reviews have beenprepared or placed before the legislature in 2003/04.The Act states that, "Whenever outstanding guaranteesexceed the limits specified in clause (d) of sub-section (2)of section4, no fresh guarantee shall be given…." Ourcalculation shows that the guarantees have exceededthe target by nearly 50 percent in 2003/04.

The Government has also not taken promptaction on a number of other fronts. While a VRSorder for surplus employees was issued on May 21,2003, the surplus pool is yet to be activated. Theenthusiasm to pass the Right to Information Bill andProcurement Bill has also diminished. It has taken anunusually long time to prepare the FinancialRestructuring Plan for the power sector as difficultissues remain unresolved. In the education sector,adequate information and analysis of data on differentaspects of service delivery are not easily available,indicating only limited attempts to understand trendsand patterns in the sector. In agriculture, on onehand, GoP encourages diversification, and on theother hand, insists on policies that are detrimental todiversification, e.g., pressurizing GoI to raiseminimum support prices (MSP) for paddy andwheat, opposing private sector entry in building andoperating mandis, and showing an unwillingness tointroduce participatory management in irrigationsector. The implementation of GoP's 2003 IndustrialPolicy has also been slow; for example, proposals toreplace octroi and entry tax with a single point localarea development tax and self-certification scheme forindustrial units have not made progress.

Frequent transfers of high-level officials imply aweaker capacity to frame policy in departments;Secretaries often have only a few months to learn abouta department before they are transferred to anotherposition. Most high-level officials in Punjab areoverloaded with routine administrative tasks, rangingfrom dealing with transfer requests, particularly in staff-

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intensive departments, such as health and education toappearing in court cases. We analyzed some 115 requestsfiled with senior officials by a small sample of Membersof Legislative Assembly (MLAs) in Punjab from March1, 2002 through September 18, 2003. As illustrated infigure 2.13, of these 115 requests, 55 could broadly beconstrued as being related to the public interest (48percent). The remaining 60 requests dealt entirely withpersonal matters, including transfers (making andoverriding them); appointments (making anappointment or changing the terms of an appointment);and benefits to individuals (withdrawing an FIR, landallotments, and the like). Nearly 92 percent of allrequests were directed at high-level officials in thegovernment. Because government officials have noalternative but to respond to these requests or risk beinglabeled as uncooperative and even transferred, aninordinate amount of high-level official time is spent onfairly trivial matters, thus hurting the capacity of thegovernment to formulate policy and think strategically.

Key departments are constrained by their limitedcapacity to implement reforms. For example, the

officials in the Finance Department (FD) are almostfully occupied in day-to-day operations, e.g., managingthe overdraft position with the RBI, juggling resourcesfrom various sources to meet the wage and pension billat the beginning of the month, spending substantialtime in approving individual transactions and enforcingcash rationing, and thus are left with little time toformulate strategies or implement the Medium-TermFiscal Program. Because of the lack of qualifiedmanpower in the treasury and finance departments, theaccounting information produced is not being used fordecision-making, which has weakened the budgetmonitoring system. In the power sector, while GoP hasset up an Empowered Committee and Expert Group to provide policy guidance on the reform program,there are no dedicated teams for day-to-day interactionwith the consultants and implementation of variousreform actions. Similarly, the government and thePunjab Agricultural University (PAU) have limitedcapacity to provide the necessary marketing, researchand extension facilities which are consistent with the government's ambitious agricultural diversificationprogram.

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9�&(�*��1 #%�&)�%#A�#,(,�)%&1��,�(&� �%#��+%�(,��*/D#.�G�44?:�-$�%#�234�

Source: GoP.

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The new government that came to power in the2002 state elections started the reform process

in earnest. It abandoned the populist, but fiscally andenvironmentally unsustainable, policy of free powerand water for farmers. Punjab became the secondstate after Karnataka to have a 'Fiscal ResponsibilityAct.' It came down hard on corruption andintroduced politically difficult measures to restrainrevenue expenditure including a surplus pool toredeploy redundant staff and introduced a number oftax policy and administrative reforms to raise state'stax to GSDP ratio. The Government constituted anExpert Committee to suggest reform for the powersector. It passed the 'Punjab Infrastructure andRegulation Act 2002' to encourage greater private-public participation in developing newinfrastructure. It accepted the recommendations ofthe Disinvestment Commission, which was set-up bythe previous government, came out with a well-articulated disinvestment strategy, and had someinitial successes. The Government undertook anambitious contract-farming project to diversify thestate's agricultural base away from the paddy-wheatcycle. The government also announced its intentionto undertake significant decentralization of primaryhealth and education services with the aim toimprove the quality of public services to its citizens.

The urgency to reform and the hectic pace ofpolicy making, unfortunately, appears to be fadingout. In sectors/areas like power, agriculture,

disinvestment and fiscal policy, where blueprints forreforms already exist, their execution have been quitesluggish. In other sectors/areas, like health andeducation, the pronouncement of strategies and ideasto improve service delivery have been rather slow. Ina few cases, GoP has actually rolled back reforms thatwere beginning to show results. In this chapter wetake a closer look at the major reforms announcedand implemented and policy reversals in Punjabduring the last two years. We also examine theprospect for reforms in the near-term.

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Fiscal Responsibility Act. Punjab hasdemonstrated its commitment to fiscal reform byenacting the 'The Punjab Fiscal Responsibility andBudget Management (FRBM) Act, 2003', on May 5,2003 (Punjab Act No. 11 of 2003). The rationale forbringing such an Act, as stated by the governmentwas, "... to ensure inter-generational equity in fiscalmanagement and long-term financial stability byachieving sufficient revenue surplus, containing fiscaldeficit and prudential debt management consistentwith fiscal sustainability through limits on the StateGovernment and conducting fiscal policy in amedium-term framework and for matters connectedtherewith or incidental thereto." While the just-presented 2004-05 budget was accompanied by aMedium-Term Fiscal Reform Programme - asrequired by the Act - overall the Act has not been

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given the attention it deserves and GoP is unlikely tomeet any of the fiscal indicators stated in it.

Ban on recruitment. A freeze on freshrecruitments was imposed for vacant posts. Withnatural attrition at 2.5 percent, the expectation wasthat there would be negative net growth in staff sizein the current year. This ban has been in effect, offand on, for the last ten years but the new governmentstated early on that it was serious about containingrecruitment. The ban, however, was lifted prior tothe 2004 Lok Sabha elections. Although all requeststo fill new positions will have to be approved by ahigh-level committee chaired by the Chief Secretaryand departments will have to submit a restructuringplan along with its request, it is not clear in practicehow strict the committee will be in view of politicalpressures. The most recent budget speech has alsoannounced the lifting of the ban on compassionateemployment.

Abolition of vacant posts. All vacant posts wereto be abolished after six months. Estimates placed thenumber of posts falling vacant during 2003 and2004 at 13,386 but it not clear whether any of thesehave been officially abolished. The total number ofvacant posts created through attrition is likely to be42,768 between 2002 and 2006, resulting in apotential savings of Rs. 6.05 billion. A ban wasimposed on the creation of new posts that can onlybe circumvented with the express approval of theChief Minister.

VRS and Pension Reforms. A VRS scheme forboth civil servants and public sector units includingPSEB has been framed, but not implemented. Witheffect from July 31, 2003, GoP has updated thecommutation factors for pension by using a higherdiscount rate of 8 percent.

User charges. User charges have been revised fortechnical and medical education and rural watersupply. User charges for canal water and powersupply to agriculture pump sets have been

reintroduced from November 2002. Two tariff ordersof PERC have been fully implemented. TheGovernment has imposed a cess of Rs. 1 per litre onpetrol and is contemplating imposition of tolls onbridges and roads that have been completed by thePunjab Infrastructure Development Board (PIDB).Unfortunately, the increases in user fees have notbeen associated with any perceptible improvement inservice delivery, making it difficult for GoP to furtherincrease any user charges.

Tax administration. In order to improve thequality and coverage of information on inter-statetransactions, the Excise and Taxation Departmenthad introduced the export-import (EXIM) form atall the 35 check-posts (Information CollectionCenters) in the state. After considerable delay,mandatory filling of the forms was introduced inSeptember 2003, but was withdrawn in January2004, for political considerations. In the short periodwhen it was in existence, the measure did increaserevenue collections, but traders were successful inthwarting the move towards better enforcement ofthe tax through the measure eventually.

Financial management. To stem the misuse ofthe food credit, a food account has been createdoutside the consolidated fund of the state budget.Nearly 85 percent of treasury operations have beencompleted. A number of Personal Ledger Accounts(PLAs) have been closed.

��During the last two years several important

steps have been initiated in Punjab towardsreforming the power sector. An "Empowered Group"headed by the Chief Minister and comprising fourministers was set up in 2001 to take policy decisionsfor implementing reforms. The GoP constituted an"Expert Group" in June 2001 to study the powersector and recommend key reform measures. ThePERC, set up in 2000, is functional and its two tarifforders have been implemented by the utility. TheGoP has also signed a MoU with the Government of

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India (GoI) under the APDRP program toimplement power sector reforms. Some of theimportant reform measures initiated so far include:� Rationalization of electricity tariffs to improve

cover cost - Power utilities have implementedtwo tariff orders issued by the PERC. InFY2003, tariffs were increased by 8-11 percentfor different consumer categories, andagriculture tariff of Rs 0.57/kWh or Rs60/HP/month was introduced ending the fiveyear long free power regime. In FY2004, theaverage tariff has been increased by 6-13 percentfor different consumer categories, except for theagriculture consumers. Cost recovery hasincreased from 62 percent in FY02 to 75percent in FY03.

� Transparent determination of subsidy foragriculture and residential consumers - PERChas set up a transparent process by which thegovernment is required to explicitly commit theextent of subsidy it proposes to provide forpower supply to specific consumer categories.The GoP committed to provide subsidy of Rs950 crores in FY2003, and Rs 857 crores inFY2004 for power supply to agriculture and tosmall households. The subsidy to agriculturalconsumers is based on fixed-rate tariffs andtherefore the losses incurred by the PSEB arelikely to be much higher than under a metered system.

� Reduction in cross-subsidies - The extent ofcross-subsidization among different consumercategories has fallen moderately in recent years.In its last two tariff orders, the PERC hasincreased industrial tariffs at a lower rate thanfor agricultural consumers. For FY2005, theutility has proposed a reduction in power tariffsfor large industries from Rs 3.55/kWh to Rs3.25/kWh (and Rs 3.00/kWh for powerintensive industries).

� Securitization of dues to Central Power SectorUndertakings (CPSUs) - The recommendationof the Ahluwalia Committee regarding a one-time settlement of outstanding dues towards

CPSUs has been accepted. GoP has signed anagreement for settlement of outstanding dues ofPSEB to CPSUs (NTPC, POWERGRID) andhas taken over the debt service liability.

� Energy audit and metering - All the sub-stations and 11 kV feeders (around 5500) haveelectronic meters. All consumers with aconnected load of more than 70kW areprovided with electronic meters. About 12 lakhsingle-phase electronic meters are beingprocured in the current year for installation onnew connections and replacement of about 10lakh old and slow meters. Consumer indexingfeeder-wise and transformer wise have beencompleted. The ABT regime is operational atthe state level since December 2002.

� Unbundling and corporatization - Toencourage investment and competition, the"Expert Group" has recommended thefunctional unbundling of PSEB andimplementation of a 'multi-buyer framework'.The "High Powered Committee" has acceptedthe recommendations of the expert group. It hasbeen agreed to unbundle PSEB into onegeneration, one transmission (wires only) andthree distribution companies. A holdingcompany is proposed to be put in place for afixed period of time, with the objective ofproviding co-ordination support during thetransition period. Consultants are assistingGOP to unbundle and introduction of openaccess in the power sector.

�� In order to combat overstaffing, GoP had

announced its intention to set up a surplus pool asearly as June 2003, but this has yet to be madeoperational. Part of the reason for the delay is thedebate over the rules governing the surplus pool. Thefirst draft of these rules allowed surplus employees toremain in the pool for its entire life of five years untilJune, 2008 after which they would face retrenchment- the government is now considering reducing the lifeof the pool to only two years to increase the

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incentives to accept either VRS or redeployment.Initially, the pool was meant to cover only core civilservants but GoP now plans to extend this to includePSU employees as well. The draft rules also requiredepartments to notify the Commissioner of theSurplus Pool of any vacancies, so that surplusemployees get first preference in filling these posts.Employees will be declared surplus on the "last-in,first-out principle" effectively discriminating againstyounger employees, offered VRS, and, if theydecline, transferred to the surplus pool forredeployment when an opening arises. GoP is stillwrestling with the design of the surplus pool:Obviously keeping the time in the pool to the barestminimum, preferably six months rather than two orfive years, is the only way to maximize incentives toaccept VRS or redeployment. It is essential that GoPundertake a serious assessment of redundancy usingbona-fide criteria that will pass legal muster in orderto shift people to the surplus pool and decide whatpercentage of vacant posts are actually surplus innature. In the event that a sizeable number ofemployees prefer to linger in the surplus pool, GoPwill have to show considerable political courage toretrench them at the end of the pool's life or risksimply having them on the government's payroll forno work for an indefinite period.

More work will be needed to be able toeffectively shed surplus staff. A Master ManpowerRegister (MMR) has been developed to accuratelyestimate the number of employees on GoP's payrolland the vacancies that will arise between 2002 and2006 but the MMR does not identify surplus postsin any way. Identifying surplus posts requires accessto "inside" information that departments may oftenbe reluctant to part with for obvious reasons. Anattempt by the Indian Institute of PublicAdministration (IIPA) in 2001 to examine thepossibilities for administrative rationalization inPunjab also failed to identify redundant positions inany systematic way. The only successful example ofidentifying surplus posts comes from the work of theState and Expenditure Review Commission (SERC)

in Tamil Nadu, which was led by a consummateinsider and former Finance Secretary who was able toferret out the necessary information on redundancy,using objective criteria (e.g., compliance withexisting workload norms, changing workload normsin the light of new technology; and the potential foroutsourcing). This spadework will have to be done,especially in PSEB, before any serious right-sizingtakes place in Punjab.

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The new government has moved aggressively toimprove the credibility of the Punjab Public ServicesCommission (PPSC), which handles recruitment toover 17,000 posts in the Punjab Civil Service (PCS),comprising mainly Class I and II bureaucrats, judges,university and college lecturers, and doctors. Inaddition, the PPSC provides advice on promotionand disciplinary cases. After repeated complaints andrumors of major corruption in recruitment, the newgovernment moved swiftly to remove and arrest theformer PPSC Chairman, who was charged withserious irregularities, including possessing assets farin excess of his official income. The new Chairman,a highly respected, retired General, is now in theprocess of revamping the recruitment process by:

� Improving the quality of the officers serving inthe PPSC. Traditionally, the PPSC's keydivisions, including the exam wing, were headedby clerks - an IAS officer will now head the examwing, as in Tamil Nadu, and PCS officers thewings dealing with scrutiny, promotions, anddisciplinary cases. In addition, an IAS officer ondeputation will serve as Secretary.

� Defining roles and responsibilities more clearlyto prevent the diffusion of accountability thatpervaded the old structure of the organization.The examination wing will now be clearlyseparated from all other wings, such as scrutiny,to prevent the possibility of collusion.

� Developing and publicizing rules of procedurefor the PPSC to reduce discretion; under the old

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structure, the rules were sketchy at best and notwell known by employees or applicants.

� Using e-governance to provide information toapplicants on the internet about examtimings, posts, sample tests, and applicationforms. Applicants will be able to takepreliminary exams on the internet and receivetheir scores immediately; the seating plan forfinal exams will be arranged by computer toensure that students taking the same exam donot sit near each other; roll-numbers will begenerated by computer to prevent theassignation of fictitious ones; an electronicdatabank of questions will be created withquestions being generated at random forexams; and evaluators will mark particularquestions, not a whole exam.

� �(($'�&+'!%,$#'&Punjab has drafted the Right to Information

(RTI) legislation to facilitate greater transparencyand empower ordinary citizens in their dealingswith the government. As currently formulated,the draft bill contains the following featuresincluding:

� Requiring government departments to bothcatalogue and index records on a regular basis tofacilitate public access.

� Making it obligatory for government to discloseall 'relevant' facts before initiating a project to thepublic, especially to those likely to be affected bysuch a project.

� Providing for whistleblower protection for thefirst time in India, shielding officials who reportwrong-doing in government in the publicinterest from any negative consequences.

� Permitting relatively narrow exceptions only:Cabinet deliberations (but not documents usedby Cabinet for such deliberation) are closed fora limited time-period only; Cabinet decisionsand the reasons for them, along with key 'facts' and 'analyses', must be reportedimmediately. Below Cabinet-level, information

relating to policy-making will be made publicafter the process of policy formulation iscompleted and/or a decision taken.

� Imposing penalties for officials, including a fineof Rs. 100/day for failure to provideinformation within the stipulated time period(24 hours for cases relating to life and liberty,seven days when information is easily available,and 15 days in all other cases) andimprisonment for willfully failing to discloselegally available information.

� Requiring Departmental Information Officersto furnish critical monitoring information tothe Government relating to number of requestsreceived and met every year; the names ofofficers denying requests; the number of appealsfiled and their consequences; the fee schedule;and any internal departmental guidelines onhow to implement RTI.

!' "!�%�&$��+'!%GoP has prepared a draft law "The Punjab

Transparency in Public Procurement Act, 2002" topromote greater transparency in procurement. Thebill is closely modeled on similar, well-regardedlegislation in effect in Tamil Nadu and Karnataka. Itprovides for the creation of separate tender invitingand accepting authorities, the publication of a tenderbulletin containing tender notifications anddecisions, along with a comparative explanation ofwhy a particular bid was successful.

GoP has also taken some steps to reform theprocurement process administratively particularlyin PWD, the Punjab Industrial DevelopmentBoard, and the Department of InformationTechnology (DIT). PWD has recently revised its listof registered contractors, PIDB has introducedthird-party inspections for all major works, andDIT has set up a high-level committee system to vetmajor procurement decisions, placed tendernotifications on the web, and made it easier toreward quality rather than just cost in technologyacquisitions.

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Despite hurdles, progress is being made inpromoting e-governance in Punjab. The state hasissued an overarching policy document for e-governance and streamlined IT procurementprocedures for departments. There are several on-going initiatives that are worth noting:

� Municipal Corporations: The LudhianaMunicipal Corporation has made progress incomputerizing some of its functions, includingthe registry of births and deaths for the previousfive years; salary payments for municipalemployees; bill generation, collection, andpayment; and creating a data-base of propertiesowned by the corporation. Further measureswill include computerizing the flow of mail, theworking of the Stores Department, and thecollection of octroi taxes, as well as tracking filemovement electronically. Double-entryaccounting has yet to be introduced in Punjab'smunicipalities and will require a legalamendment to the Municipal Accounts Code(1930). GoP intends to introduce one shortly.

� District Collectorates: Fatehgarhsahib was thefirst district to develop an IT-driven servicedelivery initiative, designed to provide a basketof services at a single-window, such as birth anddeath, domicile, and caste certificates; licenses;and land records. An information kiosk offersaccess to land records, requirements to qualifyfor government programs, and other data.Customers can now dial a number to getinformation on whether their pensions havebeen deposited in their bank accounts. Thisinitiative, labeled E-Sukhmani, has been scaledup to cover other districts in Punjab and is atvarious stages of completion. In Kapurthala, forexample, the E-Sukhmani center has teamed upwith the regional transport office (RTO) toissue drivers' licenses at the center, making avisit to an RTO office unnecessary.

� Community Police Resource Centers: Punjab haspioneered what is probably India's finest effortto improve relations between the police andlocal communities. In collaboration with theFord Foundation, the Vera Institute of Justice,and the Institute of Development andCommunication, the government has openedCommunity Police Resource Centers in most ofthe state's districts. These Centers provide arange of citizen services in a congenialatmosphere: A crime counter provides copies offirst information report (FIRs) and tracks thestatus of cases; a victim assistance unit providesprofessional counseling and support includingadvice on how to deal with the criminal justicesystem; a grievance redressal cell allows citizens'to file complaints against the police withouthaving to go to a police station. As registeredsocieties, the Centers have the right to raisemoney from external sources, although they arestaffed by a mix of NGO activists and policeofficers.

� Land Records: The computerization of landrecords is well under way, with data-entrycompleted for almost all districts. TheCommissioner of Land Records intends toreplicate Karnataka's Bhoomi, but also to gofurther by networking land records andregistration. GoP will issue an order making theuse of manual records illegal once the system isready.

� Stamps and Registration: All Sub-Registrar'sOffices (SROs) provide for automatic calculationof stamp duties and registration fees; digitalphotographing of buyers and sellers to preventimpersonation; and scanning of documents. Onthe other hand, franking machines have still notreplaced stamp vendors, encumbrance certificatesare yet to be computerized, and key information,such as guidance values, and sample deeds haveyet to be placed on the internet. Property valuesare set by district committees, rather than acentral valuation committee, and remain subjectto manipulation.

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� Transport: The Transport Department is widelyregarded as prone to corruption, especially atthe district level, using manual procedures forall its main functions (issuance of drivers'licenses, and registration certificates, and taxcollection). The process of computerization inthe department has slowly begun, with an initialpilot in Ropar.

In addition, Punjab intends to put in place awide area network (WAN) and develop a portal toallow citizens to access information and forms,register grievances, and, over time, processtransaction on-line.

�� &$!,0#1,$#'&GoP is in the process of introducing

administrative and financial decentralization ofeducation. Teachers are to be placed on deputationwith the Zilla Parishad (ZP), and Panchayats will haveadministrative and disciplinary control over them upto the point of removal or dismissal. Removal anddismissal powers presently lie with the department ofeducation. All teacher vacancies are to be filled by theZP on the basis of rules and regulations framed by theDepartment of Education. Teachers appointed bylocal governments are denominated PanchayatShiksha Sevaks and their salaries, paid by thePanchayats, will be transferred as a grant from theState government to the ZP. The responsibility for theconstruction of new schools, their repair andmaintenance, as well as teacher training will continueto remain with the Department of Education.

Teachers are to be recruited by a committee setup at the ZP level. These teachers would beappointed to schools, after a two-month trainingperiod if necessary, initially for a contract period ofone year. At the end of the year, their performancewould be assessed, and if satisfactory, reappointed foranother year, receiving a 15 percent salary incrementduring the second year. The policy on furtherincrements in subsequent years of service is not clear.Shiksha Sevaks will not receive any pension or other

allowances and their salary will be Rs. 5000 a monthfor graduates and Rs. 4,000 for higher secondarygraduates. Teachers will be allowed 13 days casualleave and 3 days optional leave. They cannot betransferred across Panchayats. These para-teacherswill receive far less remuneration than regular,unionized teachers, whose starting salary ranges fromRs. 10,000 to 12,000 plus benefits. It is also worthnoting that Shiksha Sewaks are not subject to themany demands of "authorized" leave imposed onregular teachers for election duty and otherfunctions, which means that they are likely to havesignificantly more time to spend in the classroomyear-round than their regular counterparts.

District and Block Education Committees, andVillage Education Development Committees(VEDC) are to exercise oversight over educationacross the three tiers of local government. The VEDCis to consist of at least two panchayat members andone female member from the local Parent-TeacherAssociation. VEDC's do not seem to be in place asyet, while District and Block Education Committeeshave not played a discernible role. Withoutmeaningful participation, these committees - and thePTAs themselves - could end up as hollow shells.

The reform in the Punjab Health SystemCorporation has greatly improved service delivery inPunjab (see Box-4). Recently, GoP has issued an ordertransferring supervisory and monitoring authorityover Primary Health Care to PRI institutions. ZillaParishad's, for example, are charged with monitoringattendance by doctors and paramedics. PanchayatSamitis are expected to monitor the quality of block-level health services, while mobilizing public healthcampaigns is primarily the task of the Gram Panchayat(GP). Yet, the order does not vest PRIs with the powerto exercise authority over medical personnel in theprimary health-care system: Hiring and firing,disciplinary penalties, and salary disbursementsremain the exclusive province of the healthdepartment. The order is thus unlikely to carry much weight.

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GoP has also announced plans to allow GramPanchayats to distribute old-age pensions. Theadvantage of doing this is that panchayats will now beinvolved in determining the accuracy of the old agepension beneficiary list which, according GoPofficials, has a high error rate; however, doing so incash is probably not desirable. The maintenance of864 village water supply schemes will be transferredto the GP but paid for by the government; over timemore such schemes will be turned over to GPs.

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Single window clearance system. GoPintroduced a single window clearance system forindustrial projects in May 1998. The system isadministered by the Udyog Sahayak (Industry

Facilitator), the industrial facilitation unit of theDepartment of Industries. Under the scheme, officialsfrom the relevant government agencies are positionedin Udyog Sahayak to guide and facilitateentrepreneurs. The state government has establishedtime schedules for making available the variousclearances required in order to set up an industrialunit. A committee, chaired by the Director ofIndustries, meets on a fortnightly basis to monitorprogress in the granting of approval of allapplications, including those submitted throughUdyog Sahayak. Difficult issues are forwarded to ahigher-level committee headed by the Chief Secretary,GoP. District level single window committees havealso been set up under the chairmanship of deputycommissioners in each district. There is some feelingthat the monitoring system is working reasonably wellbut no rigorous assessment has been done.

�5 With World Bank support, in 1996, the government of Punjab embarked on an ambitious program to improve thestate's secondary health services. The project upgraded 156 secondary level hospitals (including Community HealthCenters, Sub-division and District hospitals) and two training institutes. This added approximately 2,100 additionalbeds in the public sector and provided much needed equipment and medicines.

User Fees: Revenues from user charges have risen by twenty-five times in the last seven years. The introduction of user-charges has coincided with a large increase in the number of patients in the PHSC run hospitals. User charges haveallowed hospitals to raise their own funds for essential items such as drugs and routine maintenance insufficiently

covered in the budget. Official fees may have partially substituted the informal payments which patients wereaccustomed to pay prior to the reforms. All below-poverty-line (BPL) households are provided with free treatment.

Management and Training: With the computerization of the 50 larger hospitals and systematic record-keeping anddata entry at other facilities, the corporation had the ability to monitor inputs and outputs of the system and helpmanagers set basic targets for their facilities. Outsourcing sanitation has resulted in a dramatic improvement in thecleanliness of hospitals.

Results are clearly impressive. The number of patients attending secondary care facilities has increased to 8.5 millionout-patients each year. Patient satisfaction surveys illustrate that the prime reason that patients attend the PHSCfacilities is the inexpensive cost (31 percent) followed by the availability of skilled doctors (23 percent). Moreover, 78%of the patients surveyed appreciated the availably of diagnostic facilities and 98%, the quality of buildings. Thesatisfaction rates were almost always higher for PHSC run hospitals than non-PHSC facilities.

Improved public services are providing competition to the private sector. After first-rate diagnostic facilities wereintroduced in PHSC run hospitals, the market rates for common health checks and investigations fell: Market rates ofECG fell from Rs 120 to Rs 60; Ultrasounds from Rs. 450 to 150; and X-rays from Rs 100 to Rs 60.

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Self-certification scheme. In an attempt to lowerthe burden of inspections, the Government ofPunjab announced the introduction of a self-certification scheme in the 2003 Industrial Policy.According to the scheme, enterprises may engagepre-qualified engineers, who have been conferredpowers of an inspector, to inspect their compliancewith various Acts. The policy provides for randomaudit of upto 5 percent of the units in any district.The audits will be commissioned by a committeeconsisting of senior government officials andindustry representatives and carried out by randomlyselected officials from outside the district in whichthe enterprise is located. So far, the self-certificationscheme has not had many takers. The private sectorsuggests that the scheme needs greater publicity andawareness building and an assurance that thegovernment is serious about its implementation.

�&+!,($!" $"!�Facilitating greater Private-Public Partnership.

The Punjab Infrastructure (Development andRegulation) Act, 2002 aims to attract and facilitateprivate participation in infrastructure development.It seeks to provide a level playing field for privateparticipations; establish a transparent regulatoryframework governed by an autonomous regulator;and grant various concessions and incentives to makethe infrastructure projects and the investmentopportunities viable and attractive. The Act providesfor the establishment of an independent regulatoryauthority, the Punjab Infrastructure RegulatoryAuthority. The Government has also established afund, the Punjab Infrastructure Initiative Fund(PIIF), with a capital of Rs. 20 crores. TheGovernment has taken a policy decision to engagethe private sector through BOT schemes in roads andbridges. A number of projects are already underway.These include 1,000 km of state highways, and thebus terminals at Amritsar, Ludhiana and Jalandhar.

�,7'!Greater flexibility. The Punjab Government has

taken some recent initiatives to introduce greater

flexibility in the labor market. Firms in the IT sectorare now allowed to hire women workers at late hours.All firms are now permitted to hire people directly oncontract, but not through intermediaries. Therequirement to have a full-time doctor for the nightshift has been relaxed. A committee has been set upto look at the labor laws affecting industry.

Truck union. The 2003 Industrial Policy notedthe role of truck unions in restricting the freemovement of goods within and outside the State.The unions have been charging unduly high freightrates and other charges, although they do not haveany authority to do so. This has put commercialtransporters at their mercy and, according to theIndustrial Policy document, has "severely hamperedthe growth of industry in several parts of the State."In the policy document, the State Governmentcommitted to "suitable and effective measures tocheck exploitation of Industry by Truck Unions sothat the freight rates are market determined ratherthan these being dictated by the truck unions." Inaddition, industrial firms were to be given thefreedom to hire trucks of their choosing.

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The government's efforts in this area have beenconfined to fiscal subsidies and a host of public sectorindustry support institutions. Together, thesegovernment agencies, some of which are cross-sectoraland some sector-specific, provide a range of servicesincluding finance, technical consultancy, design,development, manufacture, standardization andtesting of machinery and equipment, testing ofproducts, training, extension and technical education.

Providers of finance include the Punjab StateIndustrial Development Corporation (PSIDC), thePunjab Financial Corporation (PFC) and the SmallIndustries Development Bank of India (SIDBI). ThePSIDC provides financial assistance to projectspromoted by private entrepreneurs through termloans, equity participation and underwriting. The

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PFC provides medium and long-term loans forsetting up new industrial units as well as for existingenterprises. The SIDBI is an apex financialinstitution of GoI, established for the promotion,financing and development of small-scale industries;it operates through a branch office in Chandigarh.

Until the early 1990s, PSIDC's equityinvestment did reasonably well given the controlledenvironment. These advantages were lost in the1990s. PSIDC did not have the capacity to make theinformed judgments about investment that isnecessary in the liberalized environment. As a result,a large number of bad projects were financed whichhas considerably weakened PSIDC's financialposition. Many private promoters have failed to buyback PSIDC's shares as was originally expected. TheIP-2003 talks about re-capitalizing PSIDC although,

so far, the fiscal crunch has prevented thegovernment from doing this. It is not clear that re-capitalization is a desirable option given the pastrecord of the PSIDC.

Punjab has phased out sales tax concessions andinterest subsidies. However, several other incentivesremain in place. The IP-2003 talks about a shift in therole of the government from direct promotion anddirect financial assistance to that of a facilitator. Itrecognizes that fiscal subsidies, an important elementof past industrial policies, have not worked. Despitethis, it retains fiscal subsidies for some categories ofindustrial units. For example, it proposes a capitalsubsidy scheme to promote technology upgradationin small scale enterprises in four sectors (25 percent offixed capital investment, up to a maximum of Rs. 25lakh per unit), and a similar scheme for small

/; Tamil Nadu has been at the forefront of reforms aimed at increasing private participation in infrastructure servicedelivery. These reforms have shown that private sector participation under appropriate regulatory arrangements wouldnot only help address the fiscal constraints of the state but also bring to the fore the benefits from increased efficiencyin infrastructure financing, delivery and management. Summarized below are two reform cases.

The Tirupur Water Supply Scheme is the first water sector project developed under the PPP framework in India. After agestation period of almost 10 years, GoTN accelerated and completed legal, financial and management agreements inMarch 2003. The construction is on schedule. A total of Rs.45 crores equity and subordinated debt financing from

GoTN has leveraged additional equity financing of Rs.217 crores and leveraged a debt of Rs.700 crores includingfinancing from Tirupur Exporters Association and foreign investors. The project will supply water to the fast-growinggarment export industry in Tirupur, domestic consumers in Tirupur Municipality and surrounding villages, as well asa sewerage system for the Tirupur Municipality and onsite sanitation facilities for slums. User charges are based on costrecovery with cross subsidies between industrial and domestic consumers.

The East-Coast Highway Project. The Tamil Nadu Road Development Company (TNRDC) was set up in 1998 tocatalyze private sector investment in the road sector and commercialize O&M. Its equity of Rs.10 crores was split 50:50between public and private funds. The first upgrading project financed by TNRDC is the 113 Km. long East CoastRoad (ECR) connecting Chennai and Pondicherry at a cost of Rs 60 crores. A Rehabilitate-Improve-Maintain-Operate-Transfer (RIMOT) framework was applied and commercial operations on the road commenced in March 2002. TheRIMOT framework allows user charges to recover improvement and maintenance costs only, resulting in lower tolls;project returns are capped at 20 percent and surplus if any, is reinvested in the road sector in Tamil Nadu. Theframework is a viable option compared to green field projects. Creative solutions in upgrading roads such as optimizingroad space by paving road surfaces and effective segregation of traffic, helped mitigate the risk of low traffic density andhigh capital costs that normally accompany a four-lane option.

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industrial units set up in border areas (30 percent offixed capital investment, up to a maximum of Rs. 30lakh per unit). In each case the total budgetaryallocation for the scheme will remain fixed withindividual grants reduced on a pro-rata basis ifdemand exceeds the available funds, i.e., Rs. 25 croresper annum for each scheme. Together with theIndustrial Dispute Act, which discourages expansionof employment beyond a certain size in the registeredsector as well as the SSIR policy, these schemes havebuilt an "anti-growth bias" into the system.

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While GoP has yet to undertake any politicallysensitive reform program in agriculture, e.g., gradualreduction in subsidies in favor of increased publicinvestment and income support schemes, it hassupported an ambitious contract farming program todiversify the state's agricultural base away from paddyand wheat. The Punjab Agro Foodgrains Corporation(PAFC), a public sector corporation, has been assignedthis task. PAFC has developed a five-year CF plan thataims to shift one million hectares out of rice-wheatcultivation to a variety of other crops including oilseeds,maize, basmati rice, durum wheat, and cotton. Forkharif 2003 the main focus was on basmati rice (target34,000 hectares) and maize (target 20,000 hectares).PAFC sees its approach to be that of a facilitator, tyingup farmers with agri-businesses that will supply qualityseeds and technical assistance, and buy back the crop.PAFC's venture into this field embodies a more market-oriented approach to agricultural development and asignificant shift away from the state's traditional focuson production as an end in itself.

To be successful, however, attention will have tobe paid to a number of aspects of CF, e.g., selection

of crops, development of a quick and effectivecontract enforcement and dispute resolution system,limiting fiscal risks to the Government from such anarrangement, keeping the number of parties incontractual arrangements to a permissible limit anddeveloping farmers' organizations capable ofcontracting with sponsors, with a view to reducingtransactions costs, increasing information flow andimproving farmers' negotiating position.

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By the sheer number of measures announcedso far, there is little doubt about GoP's intention toreform. But, unfortunately, its intentions have yet,in many areas, to be implemented on the ground.In sectors / areas like power, agriculture,disinvestment and fiscal policy, there already existblueprints for reforms. In other sectors, like healthand education, the strategies are graduallyevolving. But where the government has been lesssuccessful is in implementing the policies laid outin its strategy papers. In a few cases, it has actuallydone the opposite, i.e., rolled back reforms thatwere beginning to show results, e.g., theintroduction of export-import forms wereapparently yielding better compliance from the taxdealers but was discontinued. The recent decisionto lift the ban on fresh recruitment has also sent aconflicting signal about the government's intentionto control its salary bill. GoP has also not adheredto its own fiscal responsibility Act. In the case ofthe power sector, preparation of the FinancialRestructuring Plan for the sector has taken morethan a year. In agriculture, it has chosen the optionof encouraging diversification without tackling theissue of agricultural subsidy, marketing, and otherinstitutional reforms.

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As indicated earlier, there is no shortage ofgood policy recommendations for GoP, if it

wants to pursue reforms. A number of usefulreports already exist, including the White Paper onState Finances, two studies undertaken byNational Institute of Finance and policy (NIPFP,1994 and 1998), Report of the Punjab PublicExpenditure Reforms Commission (2002), theWorld Bank's Note on 'Some Key ReformChallenges in Punjab' (2003), Expert Group'sReport on Power Sector Reform (2003), the BankReport 'Revitalizing Punjab's Agriculture' (2003)and GoP's Report on Disinvestments (2002) toname a few. The problem in Punjab, more than inother states, is not articulating the reform programbut implementing it.

In this section we begin with some of the policyrecommendations that arise out of this report'sanalysis. A large number of recommendations arepresented as options for the government'sconsideration under three headings: restoring fiscalhealth; strengthening the enabling environment forgrowth; and improving the quality of administrationand service delivery. Many of the recommendationsare as applicable to most other Indian states as toPunjab. What is more unique to Punjab is, as thereport argues, the nature of the implementationchallenges. The report therefore concludes byanalyzing the critical implementation issuessurrounding Punjab's reform program, including

the issue of sequencing and prioritization of thereform measures.

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To restore fiscal balance, the Government needsto move on three things immediately. First, it needsto comply with its own Fiscal Responsibility andBudget Management Act. Placement of the Medium-Term Fiscal Reform Programme along with thebudget, as required by the Act, is a good, albeitbelated start, and this needs to be accompanied by anumber of measures required by the Act:presentation of quarterly reviews, adoption ofcorrective measures, as required, and, mostimportantly, adherence to the Act's fiscal targets.Second, it has to create 'fiscal space' by addressing theoverstaffing issue in government departments as wellas in the PSEB, and by exploring alternativemechanisms to deliver subsidies to farmers moreeffectively (say an idea explored in more detail later)and using the resultant savings to step-up publicinvestment in critical sectors like agriculture,irrigation, power, education and health. Third, it hasto aggressively pursue tax policy and administrationreforms, e.g., introduction of Value Added Tax(VAT), restructuring of the tax administrationdepartment on functional lines, computerization ofthe tax information system, etc., to generateadditional resources to meet the state's growingpublic investment needs.

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Punjab already has a comprehensive strategy toaddress its fiscal problem in the form of FiscalResponsibility and Budget Management (FRBM)Act. The real challenge is to implement it and ensurefull compliance with all its elements. The first step toimplement the FRBM Act would be to dovetail theannual budget preparation exercise with its ownMedium-Term Fiscal Program (MTFP). To do so itneeds to take the MTFP exercise more seriously. Thiswould involve preparation of a Medium-term actionplan for large spending departments, like educationand health, which will outline the goals and policiesthese departments intend to pursue, the outcomes tomeasure their performance by and the correspondingresource needs to implement such action-plans38. Toincentivize the system, sectoral departments shouldbe allowed to identify, retain and carry over savingsmade in one year to the next. This will provide themuch needed stability and predictability todepartmental budgets. The state MTFP should thenbuild on departmental action plans and, at the sametime, adhere to the fiscal parameters outlined in theFRBM Act. A Committee consisting of seniorSecretaries from various sector departments shouldbe formed to monitor the fiscal indicators and takecorrective actions when necessary.

Existing practices in revenue forecasting,expenditure management and performancemonitoring need to be improved. There is a need forPunjab to have a modern revenue-forecasting modelthat will allow it to estimate revenue with greateraccuracy. Incentives need to be built into theexpenditure management system to ensure that thereis more balanced drawdown of funds. An effectiveperformance measurement system that measures theimpact of development programs and providesaccurate and timely feedback to decision-makersshould be put in place.

GoP should set up a Guarantee RedemptionFund in line with the recommendations of the RBIand comply with the FRBM Act as far as issuance ofguarantees /contingent liabilities are concerned.

The irregularities on the food account and thelarge arrears and hidden liabilities in the system haveeroded the credibility of the state's financialmanagement system. GoP should regularize all 'excess'expenditure (which have not been approved by thelegislature) incurred in previous years in accordancewith the provisions of the Indian Constitution,reconcile all major departmental accounts with AGAccounts to eliminate any un-reconciled differencesand restore the credibility of the Treasury. This wouldcall for commitment at the highest levels of thegovernment, institutional changes to ensure that allpublic funds are part of the consolidated fund of thestate and training of officials in the Finance departmenton treasury management along with greater use ofoutside consultants with the right expertise. GoP mayalso wish to undertake a State Financial AccountabilityAssessment (SFAA) for the state.

The Government needs to modernize itsfinancial management and accountability systems inline with the best practice in India. Controllingofficers should be held fully answerable for managingand accounting for appropriations more effectivelyand for reporting on variances between actuals andbudget in the annual Appropriation Accounts.Similarly, ways to improve government response toexternal audit observations should be explored.Measures to improve the workings of the PublicAccounts and Undertakings Committees should beexplored with the Legislature.

There is a mismatch between the expertise andresources available with the Local Audit Departmentand the size of the task. Similarly the Internal AuditOrganization does not have the expertise to effectively

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38 Given the limited capacity of GoP, preparation of the departmental action plans should not be a very formal exercise but kept to the bareminimum. Initially, this exercise should be limed to only the current year and later it could be evolved into a Medium-term framework.

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discharge its duties. Both these organizations need alarge amount of capacity building, and theirresponsibilities need to be matched with theircapability. For the purpose of ensuring an effectiveinternal control system GoP may consider the optionbeing pursued by the Government of Andhra Pradeshof engaging professional accountants to conductinternal control functions.

�' %�"�##��In order to reduce overstaffing in government

and PSEB, GoP should operationalize the surpluspool with a life of no more than six months. Aninternal assessment should be conducted tosystematically assess redundancy using transparentcriteria. Surplus employees should be offered VRS orredeployment, and if they fail to accept these twooptions, be subject to retrenchment when the surpluspool ceases to exist. The surplus pool should providefor training to help employees improve their skillsprior to redeployment/entry into the private sector.

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A farmer in Punjab receives subsidies in at leastsix different forms: minimum support prices,subsidized power, subsidized canal irrigation,subsidized fertilizers, extremely low tax rates on dieseland agricultural inputs, and subsidized credit to buyagricultural equipment. The total amount involvedin these subsidies is likely to be Rs.3,500 crores orRs.17,000 per cultivator. But since these subsidies arenot properly targeted, the actual money received bythe farmers is much less. There are manyintermediaries who benefit from these subsidies inthe name of the farmers. The actual subsidy paid bythe government would be significantly lower ifappropriate mechanisms were developed to targetsubsidy better and exclude non-agriculturalbeneficiaries (who are generally wealthier thanaverage farmers). It is therefore important for GoP toexamine alternative mechanisms for deliveringsubsidy to farmers in consultation with Governmentof India (GoI), as the latter bears the cost of

providing some of these subsidies. Income supportschemes, where farmers receive direct transferpayments from the government at regular intervals,and the amount declines gradually over time, couldbe one possibility. Another possibility would be topeg all user charges to the cost and give vouchers tofarmers equivalent to the subsidy amount, which canbe used to pay for public services. Another alternativecould be to raise user charges to cover the cost ofproviding services and to earmark the resultantrevenue to be spent in the geographical area where itis collected, primarily to improve the public services.Better targeting of subsidy will not only be beneficialfrom the fiscal perspective but also help Punjab todiversify from the current agricultural practices thatare environmentally unsustainable.

�,�$��*��!��"%�"�$�The medium-term reform in the case of sales

tax is to adopt the VAT. However, this will have to becalibrated on the basis of the collective decision ofthe States in the Empowered Committee and thefacilitating measures taken by the Ministry ofFinance, GoI. The latter in particular, has to facilitatethe reform by ensuring a mechanism to deal withinter-state issues including the zero-rating of thecentral sales tax and dispute settlement mechanism,sharing of the power to levy tax on services,amendment to the declared goods list. Thus, theVAT in its pure form is likely to be only a medium-term reform.

The reform of the sales tax system however doesnot have to wait for the decision to implement theVAT and should be taken up immediately. Theexisting levy with a mix of the first point and the lastpoint incidence is found to be easy to evade. In thecase of Punjab, the reform measure should start byreducing the number of general rates from 6 into 4.This could be done by shifting all commoditiespresently taxed at 3 per cent to the 4 percentcategory, and all commodities taxed at 8 percent to10 percent category. An important measure in thisregard is in raising the rate of tax on diesel to the

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floor rate recommended by the EmpoweredCommittee of State Finance Ministers. The generalrate similarly should be increased to 10 percent, onpar with the rate prevailing in neighboring states.Eventually, when the VAT comes into vogue, this willhave to be raised to 12.5 percent. The tax can beconverted into a multipoint levy with set off given totax paid at the previous stage. Set off can also begiven to the tax paid on inputs, thus bringing in theVAT principles into the tax. The State is alreadygeared to levy the VAT and the machinery could beused to undertake the reform with a view toeventually switch over to the full-fledged VAT.

GoP may also wish to reinstate the payment of50 percent tax payable on the sales in Canteen StoresDepartments and reintroduce export-import(EXIM) form at the integrated computerized centers(ICCs). It is important to restore the property taxeson residential properties. This is the most importanttax for financing urban services in all countries andits rightful role should be restored. Besides, Punjabdoes not levy the profession tax. This could be animportant source of revenue. The state governmentmay levy and collect the tax and the proceeds may bepassed on to local bodies for financing urban services.This could provide another supplement in the effortof the State government in abolishing Octroi.

Rather than waiting for the introduction of theVAT, the Government may wish to move sooner toreorganize the Excise and Taxation Department onthe basis of functional distribution of responsibilities.The current four-tier structure (i.e., Headquarter,Division, Districts and Wards) could be compressedto a three-tier structure along functional lines. Thiswill reduce dealer-commercial tax officer interfaceand make it unnecessary to locate a sales tax officer inevery district or sub-district. The geographicaljurisdiction of the second-tier and third-tier of thecommercial tax department should be redrawn toreflect as closely as possible the operational needs ofthe department and to effectively and efficientlydeliver services to the dealers.

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Punjab can take a number of steps to create anenabling climate for its private sector to grow andprosper. It may wish to streamline its administrativeprocedures involved in establishing new business bycreating a more transparent and time-bound system.It could streamline its inspection system and simplifyrecord keeping and submission of returns procedurefor industries. It may wish to introduce competitionin agricultural marketing by allowing private sectorand grower cooperatives to set-up market yards as hasbeen outlined in GoI's model Act. It would need totake steps to reduce corruption, sanitize its policiesfrom influence of interest groups and strictly enforcecontracts and laws of the land. It also needs tointroduce greater competition in marketing ofagricultural goods at the wholesale level andimplement institutional reforms in agriculture. Itshould aim to supply quality power at reasonable costto industries and farm sector.

� ��(% �"$�""%��" �' �"! �"Reducing regulatory burden. Punjab can build

upon the reforms carried out in this area, such asthe establishment of Udyag Shahayak in 1998, andintroduce further actions to lower the regulatoryburden on its private sector. Recommended actionsare: (i) Introduce a composite application form forclearances as has been done in Tamil Nadu, AndhraPradesh, Karnataka and Gujarat; (ii) Establish alegal framework for single window clearances, ashas been done in Andhra Pradesh and is in theprocess of being established in Karnataka (see Box-6); (iii) Rationalize the maintenance of registers;and (iv) Eliminate redundant Acts related toreporting requirements.

Making the labor market more flexible. While thePunjab government has taken some steps to make thelabor market more flexible, more can be done withinthe parameters set by federal laws and policy andlearning from recent reform efforts of other states.Some options to consider are: (i) Carry out a complete

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review of the entire spectrum of labor laws governingPunjab and the machinery needed to implement theselaws; (ii) Simplify, rationalize and consolidate laborstatutes. Prepare a single statute with different chapterscovering the various facets of employment; (iii) Furtherliberalize rules regarding use of contract labor andtemporary worker; (iv) Establish an independent expertbody such as a Labor Regulatory Authority (similar inspirit to the independent regulatory authorities beingset up in the infrastructure sector) which will heararguments of different parties in the event of proposedlay-off, retrenchment or closure, and give a ruling thatwill be binding on all concerned parties.

Giving the Punjabi Diaspora a Stake in theState's Development. The Government of Punjab canplay a vital role in strengthening links between PPOsand their families in Punjab and thereby leverage the

philanthropic activities of its diaspora to the greaterbenefit of the state. To do so, it may consider thefollowing steps: (i) Institute a single-window contactmechanism for PPOs in the form of an autonomous,empowered and dedicated organization to handle themultiple issues generated by diaspora interactions withthe state (see Box-7) and to allow this organization toform a foundation to receive charitable donations andgenerate funds through sponsorship from privateindividuals and corporations; (ii) Provide matchingfunds to complement the investment made by thePPOs when the project is in state's interest; (iii) Workwith GoI to provide dual citizenship to members ofthe Indian diaspora and to simplify the ForeignContribution (Regulation) Act, 1976, to enable fasterflow of remittances to the state; and (iv) Prepare a databank of PPOs and establish direct communicationlinks between the diaspora and GoP39.

The Government of Andhra Pradesh has enacted the "Industrial Single Window Clearance Act, 2002" to expedite theprocessing and issuance of various requests for setting up new industrial undertakings in the state. The government hasconstituted two nodal agencies, one at the district-level and the other at the state-level, to receive and processapplications within a time-bound framework. The District Committee, chaired by the District Collector, approvesundertakings with investment below one crores (i.e., small scale industry) and the State Committee, chaired by theCommissioner of Industries, approves applications with investment above one crores (i.e., large and medium scaleindustry). In case of rejections of clearances or approvals of large and medium units with modification under the statelaws by the concerned authority, the District Committee forwards it to the State Committee and the latter may forwardit to the Empowered Committee. The Empowered Committee, headed by the Chief Secretary to Government, passesappropriate orders referred to it by the State Committee and when necessary refers the application to the State Boardfor decision. The State Board, chaired by the Chief Minister, is the final authority on the matter and passes theappropriate orders on the application referred to it.

The real benefit of the Single Window Clearance (SWC) Act is the provision of deemed approval and the time limitsset under the Act for various clearances. For example, approval from the power company about the feasibility ofproviding power and the final power connection to the industrial undertakings has to come within 7 and 25 days,respectively, failing which it is deemed approved subject to payment of the required fees. The same condition applies towater supply. The clearances from GP and licenses from Municipality, if not made available within 7 days, are deemedto be cleared. Apart from the issue of acquisition and alienation of land, which has a set time limit of 45-60 days underthe single window clearance system, the time limits for all other clearances are between 7 to 30 days.

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39GoP has a department for Non-Resident Indians (NRIs), which is largely dysfunctional.

Source: Unlocking Andhra Pradesh's Growth Potential: An Agenda To Achieve the Vision 2020 Growth Targets, The World Bank, 2003.

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��%��(�"(% � �"$%� #$%!�Agricultural marketing. Modernization of the

marketing system will require regulatory reforms aswell as other facilitating actions and investments.The priority is amendment of the PunjabAgricultural Produce Markets Act to allow privatesector entry in establishment and management ofwholesale markets. To promote agri-business andhigh value agriculture, the mandatory requirementthat all produce sold wholesale has to be sold throughregulated markets needs to be reconsidered. Toimprove farm profitability and also attract privatetrade back to the state, GoP should reduce thevarious market fees and cesses, which at the momentare the highest in the country. An amendment of theEssential Commodities Act (ECA) has to be alsoconsidered by GoI/GoP to permanently removetrade restrictions related to storage and movement ofagricultural produce.

Institutional reforms. To create an environmentwhere public services can work more closely with theprivate sector to respond nimbly to changing farmerand market demands, Punjab would also need toinstitute a number of other important reforms:

reversing the decline in agricultural publicinvestment in R&D, rural infrastructure and humanresource development (which, in turn, needsreduction in subsidies to release resources for thesepurposes), and institutional reforms in the research,extension and irrigation systems40.

�$2 %� �"$%� #$%!�Implementation of PSEB's functional

unbundling and restructuring plan. GoP is requiredto unbundle PSEB by June 2004, as per theElectricity Act 200341. This would involve taking adecision on the number of new discoms, splittingassets, liabilities and employees among them, andputting in place a professional management structurebased on a competitive selection procedure as hasbeen done in some other states. It will be useful tocreate task specific "working groups" to implementcritical components of the reform process and to getnecessary technical assistance to implement reforms.

Introduction of open access for large industrialconsumers. GoP's decision to introduce open access isa progressive step. One PSU has already submitted anapplication to PERC to purchase power from outside

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Many countries with successful diasporas have created viable structures to harness them for development. The Greek,Italian and Polish Governments have created well-staffed departments, usually housed in the Ministry of ForeignAffairs, to cultivate their diasporas. Poland's Parliament has committees dealing with diaspora issues. The Ministries ofCulture and Education are involved in servicing the educational and cultural needs of the Polish diaspora. Japan hascreated a "Council on the Movement of People Across Borders" to advise the Prime Minister and the Minister ofForeign Affairs on the Japanese diaspora. Italy has devised supplementary mechanisms to strengthen links with itsdiaspora and is considering enabling legislation to give citizens residing abroad representation in the Italian Parliament.South Korea has created a 15-member ministerial "Committee of Korean Resident Abroad" headed by the SouthKorean Prime Minister, as well as parallel autonomous organizations. The Philippines, which has a large emigrant blue-collar population, has passed legislation, created new institutions, and boosted the strength of its overseas Embassies towoo its far-flung diaspora.

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40 For more detailed policy recommendations for the agriculture sector, see World Bank Report "Revitalizing Punjab's Agriculture, 2003."

41 The newly elected government in the Centre has placed this provision in the Electricity Act under review.

Source: Report of the High Level Committee on the Indian Diaspora, 2003.

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the state. Punjab will need to define the rules andregulations governing open access; it will also need toidentify any technical constraints to theimplementation of open access and investmentsrequired to overcome them. Other thorny issuesinclude the extent of cross-subsidization under openaccess and the magnitude of the power subsidy.Successful implementation of open access will requirea coordinated effort and decisions by the government,the regulatory commission and the utilities.

Financial Restructuring Plan (FRP). A credibleFRP for the power sector is a must. The FRP shouldaim to remove all the past distortions in the financialstatements before unbundling, including treatment ofpast accumulated losses, receivables, unfundedemployee and other liabilities. The FRP shouldpresent a realistic assessment of the operational andfinancial condition of the new entities, and providerecommendations on the policy actions required toachieve financial viability. The FRP should present thefiscal impact on the GoP during the transition period.

Strengthening the regulatory capacity. PERCwas set up in April 2001 with the primary role oftariff setting. Under the national Electricity Act2003, the regulator has a much larger role andresponsibility in sector regulation, marketdevelopment and introduction of competition. Thereis an urgent need to strengthen the institutionalcapacity of the Commission to enable it to addressimportant regulatory issues that are likely to emergewith the implementation of the new Act.

Continued progress in tariff rationalization andcost recovery for sustained improvement in thefinancial viability of the power utilities. PSEB hasfiled the application for a review of its tariff forFY2005. The revenue gap, at the current tariffs andsubsidy level, is projected at Rs 694 crores. To partlycover this gap PSEB has proposed a tariff increase of

Rs 359 crores - an overall average tariff increase of 5.8percent. It is important that the revenue gap is fullycovered for which further support from thegovernment and efficiency improvements will berequired. A mechanism to temporarily adjust powertariffs to any sudden and sharp changes in the fueland power purchase costs should be explored.

Eventual privatization of distribution business.If efforts to restructure the PSEB under the existingstructure fail, privatization of the distributionbusiness should be explored. The national ElectricityAct 2003 facilitates private sector participation indistribution and the introduction of open access. Thestate government should prepare a comprehensivestrategy to commercialize and eventually privatize thedistribution business. Privatization of commerciallyviable parts of the distribution business may beinitiated to realize early gains.

�$��%��4$%"Providing additional road capacity and

enhancing service standards on the core Statehighway network could cost as much as Rs, 2,000crores. GoP is looking to the private sector to fundsome of the heavily trafficked corridors on aconcession basis, as well as to take an increasing rolein the maintenance of the network. Assuredmaintenance funding for the core network will beessential to sustain standards and promote privatesector participation. About Rs.85 crores is requiredannually for the maintenance of the 7,000kmnetwork42. The revenues from the Rs.1/liter cessgasoline and the Central Road Fund total overRs.100 million crore, but are used exclusively forrehabilitation and/or improvement. Maintenance isfunded from general revenues and, in the last twofinancial years, only Rs.20 crore were allocated, wellbelow the level needed for adequate maintenance.Expanding the capacity of the core network isimportant, but the development of an assured source

42 Maintenance funding for rural roads is probably more than sufficient, but excess funds cannot be transferred to maintain higher level roads.

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of funding for network maintenance, possiblythrough a cess on diesel sales, is critical.

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Transfers. Punjab needs to develop an effectiveand public database to track transfers by cadre, group,and department over time similar to Karnataka'sdatabase (see http://vsb.kar.nic.in/dpar.htm). Thiswill help Government monitor the problem offrequent transfers over time and raise publicconsciousness about its negative effects. Punjab couldalso consider institutional solutions to checkingpolitically-motivated transfers by creating a statutorycivil services board to authorize IAS and othertransfers in an objective manner. For largedepartments, such as Education and Health, thegovernment might consider introducingcomputerized "counseling" as a way to effecttransfers: This has already been done in Tamil Naduand Karnataka and the new system appears to befunctioning well. Setting quantitative caps ontransfers is also very effective: Karnataka has limitedannual transfers to no more than five percent of itscore civil service and has managed to stay almostwithin this cap for the last two years. Maharashtra'snew law on transfers also establishes a cap ontransfers. Clamping down on transfers will requirethat the Chief Minister exercise leadership in relationto his own MLAs to discourage them from puttingpressure on Secretaries to accede to their requests,whether written or oral in nature.

Administrative Rationalization. The governmentcould focus more on restructuring departments toenhance their functioning. The passage of the ninety-first constitutional amendment restricting the size ofthe Cabinet to 15% of the strength of the lower houseof the legislature provides a good starting point for thisprocess (states have six months to comply, that is untilJune, 2004). As a complement to paring down the sizeof the cabinet, GoP could consider regrouping

administrative departments to promote synergies andreduce overlapping functions.

One might, for example, consider grouping allurban-related departments (Housing, LocalGovernment, the Punjab Urban DevelopmentAuthority, and the Punjab Water Supply andSanitation Board) under a single principal secretary(and Minister) for Urban Development. Similarly, allrural-related departments (Agriculture, AnimalHusbandry, Forests, Rural Development andPanchayati Raj, and Cooperation) could be placedunder a Financial Commissioner Rural Infrastructureand Development.

All departments focusing on financial mattersincluding Planning, Program Implementation,Finance (Budget and Resources, Expenditure, andExternal Aid), and revenue-collecting agencies couldalso be placed under the supervision of a singleprincipal secretary for Finance and Resources. Asimilar rationalization could proceed in theeducation sector by placing elementary, secondary,vocational, and college education under a singleprincipal secretary for education as a whole; inhealth, one principal secretary could broadlysupervise the work of the public health, medicalhealth, and medical education departments.

In order to strengthen the capacity toimplement administrative reform, an AdditionalChief Secretary reporting directly to the ChiefSecretary could take overall responsibility forcoordinating the work of the GeneralAdministration, Personnel, Grievances, E-Governance and Administrative Reform, andVigilance Departments. A committee headed by theChief Secretary and reporting directly to the ChiefMinister should oversee the process of overseeing theregrouping of these departments.

Other steps to improve efficiency in theSecretariat might include revising the now out-of-date Manual of Office Procedures to encourage the

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greater use of information technology, more trainingand incentives to use the computerized filemonitoring system, getting the Human ResourceDatabase for Secretariat employees operational, andencouraging and monitoring the implementation ofdevices to speed up file movement, such as the single-file system.

��7��$%%(4"�$�Enhancing Transparency. GoP should adopt

both its draft Right to Information and Transparencyin Tenders and Procurement laws with necessarymodifications and continue the cleansing ofrecruitment processes, especially now that the ban onnew hires has been lifted, albeit with some restrictions.

The draft RTI bill could be strengthened by:

� Providing for an independent appeals processsimilar to the Maharashtra RTI law, whichallows for a first appeal to the Secretary of theDepartment followed by a second appeal to theOmbudsman ("Lok Ayukta").

� Reforming GoP's conduct rules to mesh withthe changes proposed in the draft RTI Act.

� Establishing an independent Advisory Council,similar to Delhi and Maharashtra, to monitorthe process of implementation, report to thelegislature, and improve public awareness.

� Promoting greater use of the internet to furnishimportant information routinely to the public.Unlike Tamil Nadu and Andhra Pradesh, GoP'swebsite lacks an inventory of relevant rules,circulars, and GOs; fails to provide most formsor applications on-line; and possesses very fewinteractive facilities that might allow for on-linetransactions (e.g., paying a utility bill) orviewing relevant personal information, such asthe status of one's file in a department.

GoP need not wait for GoI to make the nationalFOI law effective. It could begin by implementingthe central law administratively through circulars inmajor departments with large public interface

combined with training officers in providing accessto information and wide publicity for the newmeasures to improve access to information. It shouldbe noted that the new central government iscommitted to strengthening the central law further,as per the Common Minimum Programme.

The draft law on procurement is clearly animportant step forward towards a more transparentprocess and could be strengthened further by:

� Developing appropriate safeguards to ensurethat the exceptions to the tendering procedure(e.g., if supplies or additional supplies areavailable from a single-source only or ifcontracts are below Rs. 5 lakhs) are transparentlyenforced to prevent abuse.

� Extending the minimum time for submission ofbids after notification to no less than 30 days fortenders less than Rs. 2 crores in value and 45 daysabove that amount.

� Limiting registration of contractors to low-valuetenders only (e.g., below Rs. 20 lakhs). All othertenders should be thrown open to allcontractors based on specified, minimumqualification criteria.

� Ensuring that financial bids are opened verysoon after technical ones in the case of the two-cover system by placing a legal time-limit ondoing so.

� Providing for an independent panel to hearappeals to improve the credibility of the process.Clarifying whether a fee is necessary for filing anappeal in the rules.

Transparency in recruitment could beenhanced by:

� Expanding the use of e-governance in thePunjab Public Services Commission (PPSC).

� Extending the reform process to theSubordinate Services Commission (SSC) aswell; the SSC deals with recruitment for ClassIII and IV members of the civil services.

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� The Chairman of the PPSC should beappointed by a five-member panel consisting ofthe Chief Minister, Leader of the Opposition,Speaker, Chief Secretary, and a member of theUnion Public Services Commission (UPSC).

Strengthening Anti-Corruption InstitutionsCertainly, the current government has pursued

corruption cases vigorously: 1035 such cases wereregistered by the Vigilance Bureau in the first 18months of the current regime compared to 1289 casesfor the 1997-2002 period. The Vigilance Bureau hasinitiated investigations into 13,000 complaints in thelast 18 months compared to similar action on 18,000complaints between 1997 and 2001. The VigilanceBureau has also carried surprise checks of school andhealth facilities around the state, which revealed highrates of staff absenteeism.

The Vigilance Bureau is an integral part of thegovernment and there is the risk that some of itsactions, particularly when they involve high-levelpolitical figures, will be viewed as politicallymotivated. Punjab also possesses an independentOmbudsman or Lok Pal charged with investigatingcomplaints of corruption against Ministers,Members of the Legislative Assembly, and Chairmenof Public Sector Boards. The Lok Pal has a checkeredhistory in Punjab: The office was first established in1995 under the Lok Pal Act, 1995. A controversyover whether the Lok Pal ought to be a single ormulti-member institution led to a series of legislativeactions to repeal the Act and then re-enact it. Thecurrent law remains strong in principle: The LokAyukta has extensive powers to investigate andrecommend action in complaints filed againstpoliticians including the Chief Minister. S/he isappointed by a consensus decision involving theChief Minister, the Chief Justice, and the Speaker ofthe House; once appointed the Lok Pal cannot beeasily removed during his/her four-year term. On theother hand, unlike Karnataka, the Lok Pal does notpossess his/her own investigating staff and mustdepend on the Vigilance Bureau in this regard. Nor

does the Lok Pal possess suo-motu powers, allowinghim/her to investigate suspected abuses of powerwithout a formal complaint: An attempt to furtheramend the Lok Pal Act to permit this in 1999 failedto prosper.

The first two occupants of the office werelargely inactive, choosing to pursue only a handful ofcases against prominent public servants. Theappointment of a new activist judge in December,2001, Justice D.V. Sehgal, breathed some life into theinstitution: During Justice Sehgal's one-year inoffice, some 336 complaints were registeredcompared to just 24 during the previous six years. Healso disposed of some 59 complaints compared to 15in the previous six years. Since his death in office inDecember 2002, no successor has been named toreplace him; as a result some 12 pending cases filedagainst Ministers of the two major parties in Punjabhave seen no movement at all and the office as awhole is moribund. Punjab thus has an activeVigilance Bureau that reports to the government butno functioning independent mechanism to checkwrongdoing in high-office.

GoP should appoint a Lok Pal as soon aspossible to make the office fully functional. A publicwebsite should be created for both the Lok Pal andthe Vigilance Department to provide information onthe work and performance of these two institutions,and make it easier to facilitate the filing and trackingof complaints.

Agency ReformE-Governance: Develop capacity in departments;

ensure automatic releases of allocated funds for ITprojects. Complete roll-out of E-Sukhmani acrossdistricts; extend computerization to other major cities on the lines of Ludhiana; land recordscomputerization networked with registration; scale-upcomputerization of RTOs; and put WAN in place.

Citizens Charters: Design and widelydisseminate citizens' charters for departments with

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large public interface based on stakeholderconsultation and appropriate business processimprovements. Conduct independent usersurveys/report cards to benchmark progress inimproving services across agencies and cities.

-(!�� ' �$4! �"�- ��"+Better Expenditure Management. Current

spending patterns show that too little money is beingspent by the state government on health care, overallless than 4 percent of the total state budget.Moreover, the release of approved funds is often heldup due to overall budgetary shortages. Despiteallocating 55 percent of spending to the primarylevel, the system of PHCs and Subcenters is notfunctioning effectively. Part of this reason stems fromthe distribution of spending where more than 93percent of state health spending falls on salaries. Sucha high percentage of spending on salaries hassqueezed spending on drugs, while the allocations tomaintenance, minor works and vehicles have beencompletely eliminated from recent budgets.Increasing the overall health budget, while curbingsalary costs and ensuring timely releases are keyreform steps that GoP could consider. A Medium-term Fiscal Plan (MTFP) for health could bedeveloped to use health financing tools in a well-planned and focused way to improve the priorityoutcomes set out for the health sector.

Strengthening Government's Oversight Role.The state does not have a long-term policy orarticulated vision for the sector. Strategic planningand stewardship over the whole sector are non-existent outside the Corporation. The organizationalstructure of state Government of Punjab lacks astrong unit that can analyze health systemperformance and key health system strategies such ashealth financing. There is also limited technicalcapacity amongst senior and mid-level officers todesign, plan, implement, and evaluate major healthsystem innovations. Possible actions to rectify thissituation include developing a health policy andplanning cell within the Department of Health,

establishing an autonomous health policy institute,and contracting out specific work. The Departmentof Health also needs to draft a policy paper for thesector, focusing on the primary level, based onwidespread consultation and debate.

Transfers and Human Resource ManagementIssues. Drawing on its recent experience in secondaryhealth reforms, Government needs to strengthen itsperformance management system. Transfers need tobe depoliticized through the creation of cadremanagement committees and/or computerizedcounseling. Top-level positions in the departmentneed to be filled with excellent managers, publichealth specialists and health economists in additionto doctors.

Engaging the Private Sector. Most of Punjab'shealth care is provided by the private sector. GoPcould consider involving NGOs and private for-profit providers in primary health care deliverythrough contracting models. Several Indian statesand pilots in other countries have shown thatinvolving the private sector in primary health carecan lead to greatly improved efficiency.

Primary Health Care. A recent evaluationreported that primary health care facilities sufferedfrom high rates of absenteeism, frequent transfers,mismatched staffing, gross under-utilization offacilities, and lack of basic equipment. Governmentshould consider giving PRI's more authority to checkabsenteeism at the primary-level. This needs to becomplemented by an effective mechanism to trackthe flow of funds, as well as the development of anintegrated district health plan and budget.Panchayats' effective involvement in the process ofhealth planning and implementation should beaccompanied by increased financing responsibility.

Decentralizing Primary Health Care. Thecurrent initiative to decentralize control over primaryhealth care to PRIs is vague and unlikely to havemuch impact. In order to strengthen local-level

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accountability in the area of health, a much clearerplan needs to be adopted that spells out in detail theexact powers of PRIs in the areas of recruitment anddisciplinary processes for health officials.

Secondary Health Care. There is an urgentneed to institutionalize the PHSC. The Corporationhas been the main driving force behind improvedservice delivery at the secondary level. TheCorporation is due to be wound up as the projectthat supported it closes in 2004. It is vital that thesuccessful innovations and reforms that theCorporation introduced are protected eitherthrough a continuation of the Corporation or theadoption of the Corporation structure and modusoperandi within the Department of Health andFamily Welfare.

-(!�� ' �$4! �"��(��"�$�Reinforcing Teacher Accountability Through

Decentralization. While the plan to decentralizeteacher control is laudable, there are several issuesthat need to be resolved. First, the selectioncommittee responsible for recruiting teachers iscontrolled by the line department and does notinvolve PRIs or parents. It is essential that both thelocal Village Education Development Committee(VEDC) and Parents Teacher Association (PTA) begiven an effective voice in the selection process. Thiswould empower and give a sense of ownership toVEDCs and the user groups, and furnish anincentive for them to become active.

Second, the disciplinary and administrativepowers given to local governments need to beclearly specified. Experience from other Statesstrongly portrays the limited extent to whichPanchayats have been able to curb teacherabsenteeism and improve educational performance.Local governments, preferably the Gram Panchayat(GP), need to be given the authority to removeregular teachers and Shiksha Sewaks, who fail toperform their duties, including prolongedabsenteeism, or, at least, withhold salary payments.

Third, effective administrative decentralizationdepends upon a collaborative relationship andcommunication between line departments and thePRI staff. In some States, line departments haveconsistently attempted to subvert effectivedecentralization. Since the District EducationOfficers (DEOs) and sub-district level linedepartment personnel fear a gradual decline ofpower, it would be useful to introduce a program thatwould remove apprehensions, facilitate collaborationand promote the development of a shared visionbetween the district line departments and localgovernments.

Fourth, PTAs need to be closely involved withany decentralization initiative. There are instanceswhere schools have engaged teachers locally andmanaged to pay them a lump sum out of PTAcontributions. If an enabling environment is createdfor the VEDCs and the PTAs to work together, itcould increase pressure on teachers and headmastersto function properly. The VEDCs and the PTAscould also motivate parents to pay closer attention totheir children's educational achievement.

Improving Secondary Education. Improvingaccess and the quality of instruction are the two mainissues in secondary education. Increasing the numberschools does not appear to be a priority for Punjabconsidering the low Pupil-Teacher Ratios and theexpanding private sector; this situation could changedue to increase in demand for secondary educationcaused by increased elementary level output due tothe SSA interventions. GoP could also consider: (a)refurbishing existing schools, and (b) providing ascience laboratory in each school, along with aneffort to increase enrollment in the science andcommerce streams.

Strengthening Planning and EnhancingPerformance Management. GoP needs tocomputerize and publish data on secondaryeducation, put in place mechanisms to promotecollaboration between institutions concerned with

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education in the state, including a policy planningunit, and provide training to staff to enhance theirmanagerial/planning capacity. Key priorities toimprove performance management includesystematic and timely evaluation for teachers,schools, and administrators, establishment ofmechanisms to monitor compliance at differentlevels, and creating a credible system of incentives toreward (punish) good (poor) performance.

Efficient Deployment of Teachers. Teacherrecruitment needs to become more systematic andneed-based focusing especially on the weaker southand southwest districts. Transfers should be based onexplicit criteria and affected primarily throughcomputerized counseling. Teachers should beredeployed from urban to rural areas, upper primaryto lower primary schools and better performing tolower performing districts.

Increasing Outlays for Secondary Education.The overall expenditure on education in the State islow at 3.1 percent of the State Domestic Product(SDP). Further expansion of the secondary schoolsystem will depend on increase in plan expenditures.Reducing the relative weight of salaries is a priority.

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Decentralization is less likely to succeed withoutattention to the overall context. There are several pre-requisites for successfully pursuing decentralizationin Punjab. First, it is necessary to endow localgovernments with meaningful functions, and avoidfunctional overlap across different tiers ofgovernment. The Punjab Panchayati Raj Act placestoo many functions in hands of GPs and fails toclarify the functional relationship between PRI's andline departments. In order to promote economies ofscale in service delivery (the population of theaverage village panchayat in Punjab is just 1,150), thestate could consider facilitating associations of villagepanchayats, on the same lines as Karnataka. Theproblem of functional incoherence is exacerbated by

the failure to harmonize the work of the DistrictRural Development Authorities (DRDA) with localrepresentative government DRDAs in Punjab receivelarge amounts of money to fund centrally-sponsoredschemes in rural areas: While the ZP President chairsthe DRDA of his/her district, in practice the DRDAis fully independent of the ZP itself. Merging theDRDA with the ZP is an important priority ofreform in the system of local government in Punjab:This has already been achieved in states such asKarnataka and Kerala.

Second, successful decentralization will entailimproving the revenue-base of PRIs. No governmentcan operate without some level of own revenues.Own revenues provide local bodies with someautonomy. Even more importantly they are a keyfactor for creating accountability because localstakeholders have an incentive to monitor revenuesraised directly from them. Local revenues could beparticularly important in Punjab where villages arericher than on average in India so there is some localfiscal capacity. Field visits carried out showed thatsome Panchayats were able to generate significantlocal revenues from land leasing.

Unfortunately, the revenue powers devolved toPanchayats seem to be rather limited. The First PunjabFinance Commission (1st SFC) recommendedtransferring to PRIs 20 percent of the net proceeds offive taxes: stamp duty, Punjab motor vehicles tax,electricity duty, entertainment tax and entertainmentcinematograph shows tax, but the decision was onlypartly implemented and about 40 percent of the dueamount (Rs. 150.98 crores) from the budget outlayhas yet to be transferred. The Second State FinanceCommission (2nd SFC) recommended that the housetax levied by GPs be enhanced and the imposition ofa land holding tax. In an agriculture-rich state likePunjab such a tax could be a major source of localrevenue to finance services that benefit farminghouseholds. The 2nd SFC also recommended a tax topay for the cost of street lighting. No decision has beentaken on any of these recommendations.

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Devolving revenue powers may not be enoughthough. Panchayats may have a hard time convincinglocal constituents to pay taxes unless they can provefirst that they will deliver services. It is like an eggand chicken problem. It may be necessary first for thestate to provide some funds to cover the initial costsof service delivery, particularly for the poorer ones,with provisions for Panchayats to increase their ownrevenue mobilization over time. The system ofconditional grants proposed by the SFC intended toachieve precisely this and it should be implemented.The other problem is that fiscal capacity is likely todiffer greatly between richer and poorer Panchayats.The state would need to compensate for this to createsome degree of equity in service delivery.

Third, it is clearly important that Panchayatsreceive a higher proportion of untied funds to allowthem to adjust spending to locally-determinedpriorities. Most funding flows through central or stateschemes corresponding to different panchayatfunctions administered directly by line departments orimplementing societies. Most Central and StateFinance Commission allocations flow throughPanchayats, rather than to them, and are earmarked forspecific purposes. In this sense, Panchayats operate farmore often as post-offices than critical nerve-centers oflocal decision-making. Real empowerment will involvea substantial increase in untied funds - nothing,however, would prevent GoI or GoP from linking theflow of untied funds to certain desirable outcomes,such as increasing teacher attendance at school.

Fourth, it is essential to improve the auditcapacity of local bodies to prevent the possibility of anincrease in corruption as decentralization proceeds.The local fund audit has serious weaknesses: Auditreports are poor in quality and there is the generalimpression that they can be bought for a price. Severalaccounts have not been audited for more than tenyears and only government servants can be heldresponsible for lapses, not elected officials. An external'social' audit of panchayat finances and worksconducted by a team of journalists, civil society

members, and Panchayat leaders from neighboringdistricts might produce more reliable reports on thetrue state of affairs. The work of the Mazdoor KisanShakti Sangathan (MKSS) in Rajasthan in promotingfreedom of information at the local-level to checkcorruption in public works has proved remarkablyeffective over time. These changes need to becomplemented with timely releases of allocated funds,simpler accounting rules and conventions forpanchayats, computerization of accounts, andmandatory public disclosure of panchayat finances ona notice-board and/or through regular public hearings.

Fifth, PRIs need to be given greater control overfunctionaries supervising local administration. WhilePRIs can criticize shortcomings in the working oflocal officials, in most cases they do not have thecapacity to remove them from service or even haltsalary disbursements. The Chief Executive Officer(CEO) of the Zilla Panchayat remains answerable inthe end to the Deputy Commissioner, not theChairman of the ZP. Nor does the Panchayat Samitihave much control over the work of the BlockDevelopment Officer (BDO), the nodal officer forschemes. Line departments exercise considerablepower over health workers and teachers, weakeninglocal-level accountability mechanisms in the process.

Finally, the crucial unit of local democracy inPunjab, the Gram Sabha, seems to be inactive. The73rd Amendment viewed the Gram Sabha, villageassembly, as a key instrument to monitor the GP. So farattendance at Gram Sabha meetings in Punjab has beenthin. Since GPs have few powers and funds, and the useof the funds they do have has already been decided,there is very little for Gram Sabhas to do. Villageassemblies tend to be poorly attended unless majordecisions are to be taken, such as replacing theSarpanch. Government is thinking of amending thecurrent rules that require Gram Sabhas to meet once amonth rather than twice a year, as is the current norm,but this may be wishful thinking. Perhaps, it might bebetter not to overdo the Gram Sabhas to avoid meetingfatigue and reduce attendance costs for villagers, but

..

./

��

delegate to an elected committee the role of monitoringthe GP between the bi-annual Gram Sabhas. In short,the basic pre-requisites for decentralization - functionalclarity, sound local revenues, control over staff, andhigh local participation – have not been achieved inPunjab or, for that matter, much of the country.

�!4$2 %! �"The major areas for intervention with respect to

improving the status of women include: (i) Legislativereforms: Changing certain provisions in the PunjabLand Reforms Act 1972, Punjab Tenancy Act 1887,and the Hindu Succession Act 1956 thatdiscriminate against equal inheritance rights bywomen; (ii) Effective implementation of the PNDTAct: Statutory laws like the MTP Act, 1992, andPrenatal Sex Determination Test Act and Rules, 2003need to be strictly enforced; existing loopholesshould be plugged in the light of new technologicaldevelopments and appropriate authorities set upunder the Act should be more proactive inimplementing its provisions; (iii) Dealing withviolence against women and girls by setting up of"fast track" courts or Nari Adalats (Women's Courts)to deal with violence against women and girlsincluding rape, dowry, and honour killings.

�� -��As already noted, implementation is the key

challenge facing Punjab. To conclude the report, weoutline six areas that the state needs to focus to moveits reform agenda forward:

An overarching vision for the state Punjab's reform program is likely to bring about

changes that would affect most of its citizens in oneway or the other. During the transition, uncertaintyis likely to increase and special interest groups maymobilize to oppose reforms and even seek to derailthem. The fact that reforms may not deliver results inthe short-run is likely to make the transition periodeven more testing for the leadership. It is thereforeimportant for the state to craft an overarching visionfor the state to guide reform, build public support for

different elements of the reform program, getpolitical leaders to publicly demonstrate theirsupport for reform, motivate change agents in thebureaucracy by giving them clear signals andsupporting them in times of crisis and focus onresults on the ground.

Developing a consensus for reform There is a need to build greater consensus in favour

of reform among and within existing political parties.GoP also needs to develop a larger public constituencyfor reform, among the press, NGOs, professionalassociations, trade unions, and farmer organizations.Reforms that enjoy greater public and political support,like improving service delivery, may have to precedepolitically sensitive and unpopular reform programs, likefiscal restructuring, although economics would dictatethe sequencing to be other way around.

Taking GoI alongThe key to successful reform in Punjab lies not only

with its own leadership, but also with the GoI. In several regards, Punjab's situation is unique withinIndia's federation. It has unique disadvantages (the Rs.8,000 crores of debt incurred during the fight againstinsurgency during the 1980s) and unique advantages(the Rs. 2,000 crores of annual subsidy that Punjab'sfarmers receive as minimum support price for paddy andwheat production). Whatever the precise means throughwhich these problems are solved, they can only beaddressed by GoI. Without a resolution to these issues itwill be very hard both for Punjab to return to fiscalsustainability and discipline, and to diversify away fromthe environmentally unsustainable cropping practices.

Grounding reforms in the local context andusing local knowledge

Successful reforms tend to be context-specificand grounded in local knowledge. Generaleconomic principles to accelerate growth andimprove service delivery – e.g., market-basedcompetition, a healthy investment climate,appropriate incentives, sustainable fiscal policy,good institutions, protection of property rights,

��

contract enforcement – do not necessarily map intostandard policy packages. There is no necessarycorrespondence between the functions that goodinstitutions perform and the particular form thatsuch institutions take. The importance of localknowledge and context is critical in a state likePunjab, which is known for its conflicted andunique history. Punjab's policymakers thereforeneed to creatively package economic reformprinciples into institutional designs that aresensitive to local constraints and take advantage oflocal opportunities.

Sequencing and prioritization of reformsThe Government needs to pay close attention to

the sequencing of the reform program. In many cases,the underlying policies to achieve these three goals areconsistent with one another. For example, policiesaimed at eliminating subsidies to the wealthy and usingthe freed-up resources to increase public investmentwill stimulate growth, improve fiscal performance (bygenerating more revenue from the increased growth),and raise the quality of services. But at times, apparentconflicts may occur. For example, there is a clear needto raise public expenditure in priority sectors likeprimary health and education. But at the same time,currently 94 to 98.5 percent of the expenditure in thehealth and education departments are spent on salariesand pensions. There is therefore a compelling need torestructure the composition of public expenditure asmore funds are allocated to such departments.Similarly, when it comes to critical sectors like power,irrigation, transport, efforts should be made to improveservice delivery along with hikes in user charges, or else,the latter may turn out to be highly unpopular andultimately cause the derailment of the entire reformprogram. There is also a need to prioritize the reform

program, front loading it with reforms where someprogress has already been achieved, includingcompliance with the Fiscal Responsibility Act,addressing the overstaffing problem, reorganization ofthe tax departments on functional lines, liberalizationof the agricultural markets, implementation of thepower sector reform program, and decentralization ofhealth and education services.

Strengthening policy-making capacity Most high-level officials in Punjab are

overloaded with routine administrative tasks,ranging from dealing with transfer requests,particularly in staff-intensive departments, such ashealth and education to even appearing in courtcases. The result is a short attention span, madeworse by the problem of frequent transfers thatmakes both policy-making and management moredifficult. If the Punjab civil service is overstaffed, itis probably under-managed: More needs to be doneto improve capacity in critical areas, such as treasury.Neither the health nor the education departmentspossess a policy planning unit, for example. Nordoes Punjab have a strong network of traininginstitutes, similar to AP's Center for GoodGovernance or Karnataka's Administrative TrainingInstitute (ATI) that might bolster capacity. It is noaccident that the reform program has moved fasterin areas like tax administration and the power sectorpartly because of the willingness to actively involveskilled consultants. Capacity gaps therefore needs tobe filled by hiring consultants or specialists throughlateral entry. Over the longer-term, government willneed to find a way to create focal points for policy-making that feed directly into government throughrevitalized training institutions, policy planningcells, and closer ties to academic/research agencies.

/3

/5

EducationPunjab Economic Report: Education Component - Prema Clarke and Deepa Sankar, The World Bank

Financial ManagementPreliminary Assessment of the Public Financial Management System - Parminder Brar and PapiaBhattacharya, The World Bank.

GenderGender Inequities in Punjab - Varalakshmi Vemuru, The World Bank

Governance and Service DeliveryImproving Governance in Punjab - N C Saxena, Consultant.

HealthPunjab: Health Sector Assessment - Ismail Radwan, Paolo Belli, Jet Riparip, The World Bank; S.K.Sudhakar, Consultant.

Investment ClimatePunjab Economic Report: Investment Climate - Syed A Mahmood, The World Bank.

Political EconomyAn Introduction to the Political Economy of Punjab - Sumir Lal, The World Bank.

PovertyPoverty and Social Outcomes in Punjab - Rinku Murgai and Radhika Nayak, The World Bank.

PowerPunjab Economic Reform Study: Note on Power Sector - Bhavna Bhatia, The World Bank.

Productivity and Investment ClimateInvestment Climate and Total Climate and Total Factor Productivity in Manufacturing: Analysis of IndiaStates - C. Veeramani and Bishwanath Goldar, Indian Council for Research on International EconomicRelations (ICRIER).

Tax AdministrationPunjab- Tax Administration - Narayan Valluri, Consultant

Tax PolicyAnalysis of Tax Revenue in Punjab - M Govinda Rao, National Institute for Public Finance and Policy(NIPFP)

��-� ��-��<��

Note: The detailed bibliography of all the studies consulted in preparation of this Report is available in these Technical Notes. Anyoneinterested in getting a copy of one or more of the above Notes, may write to Deepak Mishra at [email protected] orVikram K. Chand at [email protected]

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7%4.

7%4.

7%4.

6%

Oth

er s

ervi

ces

4.5%

4.5%

4.4%

4.2%

4.3%

4.3%

4.2%

4.1%

4.0%

4.1%

Gro

ss S

tate

Dom

esti

c Pr

oduc

t10

0.0%

100.

0%10

0.0%

100.

0%10

0.0%

100.

0%10

0.0%

100.

0%10

0.0%

100.

0%

Sour

ce:C

entr

al S

tati

stic

al O

rgan

izat

ion

and

Res

erve

Ban

k of

Ind

ia

��

��

�2

��

��!�#��#��

��

��3�1�(��

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

Agr

icul

ture

and

alli

ed2.

1%0.

1%7.

0%-4

.5%

3.1%

7.3%

3.0%

0.8%

-2.5

%A

gric

ultu

re2.

0%0.

0%7.

0%-4

.7%

2.9%

7.2%

2.9%

0.6%

-2.6

%

Fore

stry

& lo

ggin

g-3

.6%

7.0%

-4.9

%18

.1%

-4.9

%22

.5%

9.0%

12.8

%-1

5.2%

Fish

ing

26.3

%8.

4%22

.4%

14.8

%23

.6%

6.0%

10.2

%11

.6%

11.1

%

Indu

stry

4.7%

8.8%

3.0%

10.6

%10

.6%

-0.8

%5.

2%5.

8%-4

.6%

Min

ing

& q

uarr

ying

-77.

3%11

.5%

0.9%

67.6

%-8

.8%

-17.

0%-3

2.8%

0.0%

0.0%

Man

ufac

turi

ng5.

8%6.

6%5.

8%4.

6%6.

5%5.

9%4.

8%5.

4%-6

.9%

Reg

iste

red

4.1%

2.2%

5.0%

4.9%

7.7%

6.9%

4.8%

5.9%

-10.

8%

Unr

egis

tere

d9.

7%16

.2%

7.3%

4.2%

4.2%

4.1%

4.8%

4.5%

1.0%

Con

stru

ctio

n1.

1%20

.8%

-8.5

%36

.8%

22.8

%-2

0.0%

9.0%

9.0%

1.3%

Ele

ctri

city

, gas

and

Wat

er s

uppl

y4.

7%3.

3%7.

5%4.

8%10

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4.3%

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%

Serv

ices

3.0%

6.8%

10.8

%7.

7%4.

1%7.

4%2.

9%4.

9%9.

2%Tr

ansp

ort,

stor

age

& c

omm

unic

atio

n8.

0%15

.8%

14.2

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7.8%

17.1

%7.

6%10

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23.9

%

Trad

e, h

otel

s an

d re

stau

rant

s1.

6%5.

9%7.

5%5.

8%3.

9%6.

9%3.

7%5.

1%6.

2%

Ban

king

& I

nsur

ance

9.9%

17.9

%38

.7%

13.1

%-6

.9%

11.4

%-2

.1%

4.7%

20.8

%

Rea

l est

ate,

ow

ners

hip

of d

wel

lings

and

bus

ines

s se

rvic

es2.

2%2.

2%2.

2%2.

2%2.

3%2.

2%2.

2%2.

2%2.

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Publ

ic a

dmin

istr

atio

n-1

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2.0%

10.3

%13

.9%

16.3

%4.

5%2.

4%3.

4%-0

.8%

Oth

er s

ervi

ces

3.1%

2.7%

2.7%

4.9%

4.6%

2.5%

1.9%

1.9%

2.9%

Gro

ss S

tate

Dom

esti

c Pr

oduc

t2.

9%4.

2%7.

4%3.

0%5.

2%5.

3%3.

4%3.

5%1.

2%

Sour

ce:C

entr

al S

tati

stic

al O

rgan

izat

ion

and

Res

erve

Ban

k of

Ind

ia

�� +�

��

�4

��#5��(�0�#��6)�#��

'(�7�� #��#��)��*

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

RE

BE

1. S

ocia

l Ser

vice

s11

.47

12.3

215

.91

16.3

920

.62

26.4

027

.16

29.9

331

.11

32.2

243

.45

46.3

4E

duca

tion

6.88

7.66

8.95

10.4

313

.02

17.1

618

.05

18.5

918

.32

20.9

223

.95

27.4

5

Hea

lth a

nd F

amily

Wel

fare

2.23

2.26

2.57

3.15

3.83

5.16

5.45

6.38

6.18

6.10

7.30

7.74

Wat

er S

uppl

y &

San

itat

ion

0.57

0.67

0.95

0.97

1.02

1.23

1.16

1.53

1.85

2.26

2.47

4.25

Hou

sing

& U

rban

Dev

elop

men

t0.

120.

120.

140.

150.

160.

220.

180.

150.

150.

150.

160.

17

Wel

fare

of

SCs,

ST

s an

d O

BC

s0.

270.

390.

320.

290.

480.

480.

290.

460.

480.

490.

880.

95

Labo

r &

Lab

or W

elfa

re0.

240.

270.

300.

360.

430.

610.

500.

530.

510.

540.

630.

90

Soci

al S

ecur

ity &

Wel

fare

and

Nut

ritio

n0.

560.

521.

030.

731.

071.

031.

351.

341.

131.

547.

864.

64

Oth

ers

0.60

0.43

1.64

0.31

0.59

0.51

0.18

0.96

2.49

0.21

0.20

0.24

II. E

cono

mic

Ser

vice

s9.

649.

619.

6223

.08

20.6

012

.80

18.4

621

.01

18.6

623

.10

32.2

744

.05

Agr

icul

ture

and

Alli

ed S

ervi

ces

2.21

1.90

2.64

2.19

2.79

3.47

3.39

4.48

4.20

4.30

4.96

5.98

Rur

al D

evel

opm

ent

0.30

0.18

0.37

0.24

0.46

0.54

0.47

0.67

0.61

0.39

0.75

1.07

Irri

gati

on a

nd F

lood

Con

trol

1.56

1.68

1.88

2.18

2.56

2.90

2.94

3.16

3.26

3.59

5.73

5.81

Ene

rgy

0.01

0.01

0.01

13.3

98.

740.

014.

046.

054.

517.

5214

.19

23.6

0

Indu

stry

and

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eral

s0.

540.

410.

350.

240.

520.

380.

380.

290.

230.

230.

240.

79

Tran

spor

t2.

532.

723.

053.

213.

714.

174.

584.

474.

054.

823.

143.

25

Scie

nce,

Tec

hnol

ogy

and

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iron

men

t0.

010.

010.

010.

000.

010.

010.

010.

020.

010.

000.

030.

05

Oth

ers

2.50

2.70

1.31

1.63

1.80

1.31

2.65

1.87

1.78

2.24

3.22

3.50

III.

Gen

eral

Ser

vice

s18

.75

38.0

230

.18

29.1

236

.43

43.9

155

.82

65.3

175

.67

90.7

294

.68

98.9

6

Org

ans

of S

tate

0.35

0.50

0.55

0.73

0.81

0.96

0.96

1.07

1.12

1.33

1.39

1.46

Fisc

al S

ervi

ces

0.53

0.79

0.77

0.77

0.90

1.56

1.37

1.58

1.53

1.71

1.82

2.02

Inte

rest

Pay

men

t10

.42

12.4

414

.90

16.3

418

.49

23.1

726

.37

23.4

331

.78

34.3

437

.37

38.7

2

Adm

inis

trat

ive

Serv

ices

5.47

6.69

6.71

7.76

9.63

10.9

610

.91

11.7

812

.30

14.1

915

.78

16.5

7

Pens

ions

and

Mis

c. g

ener

al s

ervi

ces

1.98

17.6

07.

253.

526.

607.

2716

.22

27.4

528

.94

39.1

538

.31

40.1

9

IV. O

ther

Exp

endi

ture

0.57

0.48

0.64

0.67

0.70

0.73

0.50

0.89

1.66

2.21

1.76

1.85

RE

VE

NU

E E

XPE

ND

ITU

RE

40.4

460

.43

56.3

569

.26

78.3

583

.84

101.

9511

7.13

127.

1014

8.25

172.

1619

1.21

Sour

ce:F

inan

ce D

epar

tmen

t, G

over

nmen

t of

Pun

jab

�� /�

��

�8

��#5��(�0�#��(��)��

'(�7�� #��#��)��*

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

RE

BE

I. S

tate

s' O

wn

Tax

Rev

enue

21.5

025

.99

26.5

127

.35

30.4

532

.62

39.4

748

.95

48.2

457

.15

65.5

971

.14

A.

Taxe

s on

Inc

ome

and

Exp

endi

ture

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

B.

Taxe

s on

Pro

pert

y1.

772.

492.

311.

852.

372.

613.

304.

314.

535.

687.

608.

11

a. L

and

Rev

enue

0.03

0.04

0.03

0.03

0.04

0.03

0.05

0.07

0.09

0.09

0.10

0.11

b. S

tam

ps a

nd R

egis

trat

ion

Fees

1.74

2.46

2.28

1.82

2.34

2.58

3.26

4.24

4.44

5.59

7.50

8.00

c. T

axes

on

Imm

ovab

le P

rope

rty

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

C.

Taxe

s on

Com

mod

itie

s19

.73

23.5

024

.20

25.4

928

.07

30.0

136

.17

44.6

443

.71

51.4

857

.99

63.0

3

a. S

tate

exc

ise

7.66

8.83

9.44

10.0

111

.44

12.0

412

.32

13.2

513

.50

14.2

915

.00

15.2

5

b. S

ales

Tax

9.61

11.9

611

.83

12.6

514

.01

14.9

019

.77

26.4

426

.84

30.7

235

.75

40.2

5

c. T

axes

on

Veh

icle

s1.

411.

781.

911.

952.

162.

673.

213.

383.

184.

444.

504.

65

d. T

axes

on

Goo

ds a

nd P

asse

nger

s0.

250.

000.

000.

000.

000.

000.

000.

000.

000.

000.

000.

00

e. T

axes

and

Dut

ies

on E

lect

rici

ty0.

730.

870.

930.

800.

380.

320.

761.

450.

031.

882.

592.

75

f. O

ther

0.06

0.05

0.10

0.09

0.09

0.09

0.10

0.12

0.15

0.15

0.15

0.13

II. S

hare

of

Cen

tral

Tax

es3.

794.

244.

425.

286.

575.

876.

397.

196.

076.

457.

528.

65

TA

X R

EV

EN

UE

25.2

830

.23

30.9

332

.63

37.0

238

.50

45.8

656

.15

54.3

163

.60

73.1

179

.78

III.

Sta

tes'

ow

n N

on-T

ax R

even

ue4.

1420

.04

17.7

719

.45

23.5

715

.07

23.6

129

.35

29.6

040

.36

47.6

960

.83

A.

Inte

rest

Rec

eipt

s, D

ivid

ends

& P

rofit

s0.

770.

890.

9214

.70

9.86

1.06

5.44

7.08

5.53

9.14

15.8

424

.94

B.

Gen

eral

Ser

vice

s0.

6816

.08

13.9

51.

6710

.53

10.6

214

.64

18.3

220

.28

27.2

426

.90

29.7

0

C.

Soci

al S

ervi

ces

0.46

0.50

0.39

0.52

0.52

0.51

0.70

0.73

0.77

0.96

1.17

1.25

D.

Eco

nom

ic S

ervi

ces

2.24

2.56

2.52

2.56

2.65

2.81

2.84

3.21

3.02

3.02

3.78

4.93

E.

Fisc

al S

ervi

ces

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

IV. G

rant

s fr

om C

entr

e3.

342.

743.

153.

612.

933.

995.

208.

275.

376.

7615

.96

16.1

7

NO

N-T

AX

RE

VE

NU

E7.

4822

.78

20.9

223

.06

26.5

019

.06

28.8

237

.62

34.9

847

.11

63.6

577

.00

RE

VE

NU

E R

EC

EIP

TS

32.7

753

.01

51.8

555

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157

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74.6

893

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89.2

911

0.71

136.

7715

6.78

�� 2�

��

��

��#5�� "�

'(�7�� #��#��)��*

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

RE

BE

STAT

E G

OV

ER

NM

EN

T

Rev

enue

32.8

53.0

51.8

55.7

63.5

57.6

74.7

93.8

89.3

110.

713

6.8

156.

8

Stat

e's

Ow

n R

even

ue25

.646

.044

.346

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.377

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3.3

132.

0

Cen

tral

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ourc

es7.

17.

07.

68.

99.

59.

911

.615

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.413

.223

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Non

Int

eres

t E

xpen

ditu

res

37.3

58.4

50.6

54.0

69.8

72.2

80.3

109.

410

7.1

120.

515

8.1

179.

2

Sala

ries

15.9

17.8

20.4

24.8

30.3

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40.7

45.3

44.3

46.7

53.6

59.7

Pens

ions

1.9

2.2

2.8

3.5

4.3

7.2

11.4

11.2

10.3

13.6

14.4

13.9

Adm

inis

trat

ive

Exp

endi

ture

s1.

11.

11.

41.

51.

51.

72.

02.

11.

32.

22.

83.

4

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s0.

60.

40.

414

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20.

35.

711

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67.

714

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.0

Lott

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0.1

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4.5

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10.4

10.9

12.0

8.9

12.2

12.7

10.9

7.4

16.1

18.1

25.6

25.2

Cap

ital

5.0

7.1

6.8

-2.4

9.7

11.4

4.4

13.9

9.8

4.2

15.1

25.5

Net

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2.3

3.3

2.4

3.5

0.2

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1.8

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2.3

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-9.8

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2.5

Inte

rest

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ts10

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GoP

Rev

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Sur

plus

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(-)

-7.7

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+)/D

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Deb

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5.0

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Deb

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Sour

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1979

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1984

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1989

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1996

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1999

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2000

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2001

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2002

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Inst

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BB

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399

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5412

5412

6712

8913

1513

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516

547

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1280

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1233

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7615

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22.5

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1979

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1984

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1989

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1996

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1999

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2000

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2001

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2002

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PWW

158.

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0.18

199.

7825

0.63

230.

42

Agr

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