ASIAN DEVELOPMENT BANK (ADB), RELATIONS WITH

ASIAN DEVELOPMENT BANK (ADB), RELATIONS WITH Established in 1966, the Asian Development Bank (ADB) was created as a multilateral development bank for the Asia-Pacific region, with India as one of the thirty-one founding members. However, India has sought assistance from ADB since only 1986. The bank's development assistance consists of loans to support investment and policy adjustments, technical assistance grants, political and credit risk guarantees, and a limited volume of investment in the private sector. Loan operations in India are funded exclusively from the ADB's Ordinary Capital Resources. These loans are linked to LIBOR (London Interbank Offer rate), with a five-year grace period and a twenty-year repayment period. In 2004 the rate of interest amounted to around 2.2 percent. India does not have access to ADB's concessional window, the Asian Development Fund. However, India does have access to a large volume of bilateral grant assistance as well as concessional International Development Agency (IDA) financing from the World Bank. The cost of ADB funds relative to loans and grants from other multilateral and bilateral development agencies active in India impacts on the profile of ADB's operations in India.

ADB's Operational Strategy and Quantum of Assistance

ADB's first "Country Operational Strategy" for India, prepared in 1986, and the second strategy, launched in 1996, both focused on combining infrastructure investments with assistance for reforms to strengthen growth. A major innovation of the 1996 strategy was the introduction of state-level operations in addition to loans and technical assistance at the federal level. The current operational strategy was introduced in April 2003, the first such strategy for India after adoption of ADB's own Poverty Reduction Strategy in 1999. The current India strategy recognizes that achievement of the global Millennium Development Goals by 2015 will depend significantly on outcomes in India, given its enormous size. Hence, the central organizing theme of the strategy is mainstreaming poverty reduction. The three pillars of the current strategy are "pro-poor" growth, social development, and good governance.

High growth is the main instrument for reducing income poverty. This is being addressed primarily through infrastructure-led growth. A large body of evidence in India and elsewhere, including studies by the ADB, the Department for International Development of the United Kingdom, the International Food Policy Research Institute, the Overseas Development Institute, and the World Bank, shows the strong poverty-reducing impact of infrastructure development. Accordingly, infrastructure—primarily energy, transport, and urban infrastructure—accounts for more than 80 percent of ADB's assistance pipeline. The pro-poor aspect of growth is being strengthened by extending assistance, including infrastructure investment loans, for agriculture and rural development. Since most of the poor depend on this employment-intensive sector, extending ADB assistance to this sector greatly strengthens the poverty-reducing impact of ADB operations in India. Support for pro-poor growth is being further strengthened by extending ADB's state-level operations to some of India's poorer states.

Social development is the main instrument for reducing human poverty. India prefers to use its own resources and external grants, or concessional funds such as IDA, for social development projects in education and health, and for environmental protection. Hence, ADB does not directly provide assistance for these sectors. However, the ADB program attempts to address these social and environmental goals mainly through specific components of its infrastructure projects, its projects in the rural sector, and public resource management projects in selected focal states.

ADB's financial assistance is quite small compared to India's total investment needs. However, the current assistance program of approximately U.S.$2 billion per year is being significantly leveraged through strong governance components, such as policy reform and capacity building, to maximize the development impact of every dollar of assistance. The government has often indicated that it looks to ADB to play a leading catalytic role in introducing international best practices in development projects, programs, and policies.

Programmed annual ADB assistance to India of around U.S.$2 billion per annum in loans, plus about $14 million in technical assistance grants, is the largest among all countries borrowing from ADB. As of 31 December 2003, ADB had cumulatively provided 72 public sector loans amounting to $12.9 billion. Investments in the private sector included 13 projects totaling $222 million. ADB also provided grants for 192 technical assistance projects for a total of $102 million.

Sectoral Interventions

Transportation sector

Transportation sector operations are primarily directed at strengthening rural-urban connections, linking poor rural producers to their markets in towns, cities, and ports. Accordingly, the ADB program includes investment for networks of rural roads, state roads, and national highways. ADB also leads the external assistance program for reforms being undertaken by the Indian railways. Projects are also being prepared to improve inland water transport systems as an energy-efficient and cost-efficient mode of transportation to link producers in poor, remote regions with their markets.

Energy sector

The main thrust of ADB's energy sector operations is to protect the environment by promoting the use of clean fuels across major Indian cities, and by supporting the government's efforts to increase hydropower generation. The program supports only those hydropower projects in which the potential for adverse social and environmental impacts, such as loss of biodiversity or displacement of people, is minimal. Several energy sector interventions are designed to help the state governments undertake reforms in the power sector, a critical issue in most states.

Urban sector

In its urban sector operations, ADB undertakes projects to improve water supply, sanitation, and solid waste management. Projects are also undertaken to build the capacity of municipal bodies for better service delivery. Urban projects also include components to create livelihood opportunities for the urban poor, for example, microcredit projects for women living in slums.

Agriculture and natural resources development

An important challenge in Indian agriculture is the distorted structure of incentives, which encourages overproduction of food grains. Marketing opportunities for fruits, vegetables, floriculture, and other agricultural products are very underdeveloped. Accordingly, ADB assistance is being directed to agribusiness development in several states in India. Another major constraint for agriculture, highlighted in India's tenth Five Year Plan, is inadequate development of irrigation and continuing dependence on rain-fed agriculture. Irrigation development is essential to support multiple cropping as the only means of increasing cropped acreage, given the virtual exhaustion of available cultivable land. It is also essential to protect farmers from the production instability associated with rain-fed agriculture. Hence, ADB is also providing assistance for environmentally friendly irrigation and water resource management projects in the poorer states.

Financial sector operations

In its financial sector operations, ADB is focusing on development and reform of the capital market, and improved access to financial services for the poor. The latter involves strengthening rural finance institutions, reforming cooperatives and regional rural banks, and restructuring the credit system for small and medium enterprises.

Fiscal consolidation

A large fiscal deficit, around 10 percent of gross domestic product, is one of the most serious risks that need to be addressed in India's macroeconomic management. About half of this is accounted for by the budgets of state governments, many of which are saddled with large stocks of debt and contingent liabilities. ADB's public resource management programs help states implement fiscal reforms by financing a part of the adjustment costs, which typically include costs of debt restructuring, government voluntary retirement schemes, social safety net payments, and initial revenue loss due to tax reforms. Public enterprise reforms under ADB's program loans encompass restructuring, privatization, or closure, with emphasis on social safety net mechanisms. These programs also include state-level tax reforms and expenditure rationalization, such as the reallocation of expenditure toward improved delivery of pro-poor social services.

Strengthening governance

ADB's efforts to support improved governance has four elements: fiscal consolidation at the central government level; sector-level policy reforms combined with capacity building for better service delivery in the sectors where ADB is active; state-level fiscal policy reforms combined with interventions to strengthen state and local governments to ensure greater accountability, transparency, and efficiency in service delivery, especially for pro-poor services; and core governance interventions such as support for enhancing efficiency in the justice administration system, which will play a key role in the next generation of reforms in India.

Private sector development

ADB's support for private sector development addresses three critical impediments: poor infrastructure, policy distortions that deter entry as well as exit in different sectors, and weaknesses of the financial system. The program also includes interventions to support public-private partnerships and direct investment in the private sector by the Private Sector Operations Department of ADB.

Social development and environmental protection

It was noted above that India does not directly borrow for social and environmental projects from ADB. Hence these concerns are being addressed through urban social infrastructure projects, such as supply of potable water, sanitation, sewerage, and solid waste management, which will directly improve public health, especially women's health. Similarly, in promoting the use of clean fuels, ADB is assisting in reducing pollution and also contributing to health protection. ADB's assistance for physical infrastructure projects also includes components that address relevant social issues, such as the spread of the human immuno-deficiency virus (HIV) and acquired immuno-deficiency syndrome (AIDS), transportation safety, trafficking of women and children, and livelihood programs for poor communities in project areas. The objective is to go beyond ADB's policies on resettlement and indigenous peoples to ensure that in addition to promoting growth, all ADB interventions, including growth projects, are socially inclusive and proactively address the issue of gender equity and other social obligations of the development community.

Sudipto Mundle

See alsoGender and Human Rights ; Industrial Growth and Diversification ; Infrastructure and Transportation, 1857–1947 ; World Bank (WB), Relations with

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