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Institutional loans and Naidu's gameplan

Andhra Pradesh Chief Minister Chandrababu Naidu has been facing flak for accessing loans from international financial institutions directly setting a new trend. Coming at a time when a coalition government is ruling at the Centre, some see it as a sign of New Delhi buckling under and its hold on the states weakening.

It was during Manmohan Singh's regime as finance minister the central government okayed the World Bank-Andhra Pradesh dialogue. There was no coalition government then.

Other states soon took the cue.

Congress-ruled Karnataka joined the bandwagon. The latest is Kerala, the Left citadel - but ruled by a Congress coalition, which is in talks with the Asian Development Bank. The Left parties have no objection to ADB loan per se, but the Kerala chief minister, they say, is not negotiating hard enough!

The institutional loans are a special package designed for correcting each state's fiscal situation, which has gone haywire.

Reforms in Andhra Pradesh, for instance, are in an advanced stage with a four-year schedule already completed with mixed results.

The World Bank knew that the second phase of reforms was tough, not so easy to make the state governments commit to reforms without some carrots thrown in. It also knew that no single formula would work. Flexibility has been the watchword and each project is tailor-made.

Obviously, the then finance minister saw the writing on the wall that the second phase of reforms would be a non-starter without the direct involvement of the states. Who would stick his neck out in the normal course, downsize staff, cut subsidies and abide by draconian fiscal discipline?

There were few takers then for World Bank's cash for yet another reason. It was becoming less attractive after the mid-'90s. Earlier, the cost of funds was low because of a significant component of soft loans (interest-free with just 0.75 per cent service charge) from the International Development Association, a World Bank's soft-loan window.

The debt servicing was low also because the IDA funds were long-term loans repayable over 20 years or so with a five-year moratorium. The instalments were, therefore, small.

'Blend' loans

New Delhi, through which the World Bank loans were routed, passed on to the states assuming responsibility for the repayment absorbing exchange fluctuation cost.

For the states, IDA loans were not free, but carried some 4 per cent interest. They were foreign currency-denominated loans, which carried risks because of steady depreciation of the rupee.

After India was denied pure IDA loans, which were replaced by 'blends' with insignificant IDA component, New Delhi was not averse to giving up the intermediary role.

The World Bank had internal compulsions to push for direct lending to the states. Way back in the early '90s, the then IMF Managing Director Michel Camdessus had once told me during a World Bank-International Monetary Fund annual meeting that he was concerned over the states' fiscal profligacy.

The states' and the Centre's combined deficit crossed 10 per cent of the gross domestic product. The states had to be bridled. But the IMF was helpless and obviously sought the World Bank's good offices.

The Bretton Woods twins started working together on this aspect.

Naidu's idea

Chandrababu Naidu saw that as a golden opportunity. He wanted Andhra Pradesh to leapfrog into development leveraging the World Bank's cash, especially for poverty-alleviation schemes.

He was itching to do something novel, something different from others. He was competing basically with Maharashtra, Tamil Nadu and Karnataka, which were advanced industrially.

The Centre for Monitoring Indian Economy's infrastructure development-2000 index was 144 for Tamil Nadu, 107 Maharashtra and 96.9 for Karnataka, while it was 96.l for Andhra Pradesh. A tall target indeed.

The memoranda of understanding that Naidu signed with the World Bank must have driven home the high cost of the debt route and the onerous interest burden. The state's debt stock, this year's budget shows, will jump 43 per cent in two years to a staggering Rs 49,912 crores (Rs 49.912 billion) in 2002-03.

In terms of the net state domestic product, the debt has grown faster than its GDP. In 2000-01, Andhra Pradesh's debt-NSDP ratio was 29.1 per cent against 19 per cent for Tamil Nadu, 19.4 per cent for Maharashtra and 24.3 per cent for Karnataka. This year, the state's debt will hit the peak of 30.1 per cent.

The World Bank model envisages the debt to level off next year and then start falling. It's a moot point. Several targets previously set have been missed.

The bane of Andhra Pradesh, in economic jargon, is low incremental output-capital ratio. The assets have to be optimised and used fully year after year. What is required efficient maintenance management.

Naidu's hype

The state's debt-servicing (loan instalment and interest), this year's Budget says, jumped 66 per cent in two years -- some 13 percentage points more than the debt itself. Surely, Naidu is aware of the high cost. But why did he opt for it?

First, apparently Naidu perceived that the World Bank too was keen to make the experiment a success and was ready to bend backwards. Andhra Pradesh missed the target of 2.5 per cent fiscal deficit fixed for this year in the memorandum of understanding signed four years ago. It is now budgeted at 5.0 per cent.

Secondly, the Andhra CEO wanted to seek international exposure for his state, riding on the back of World Bank, and use the International Finance Corporation, a World Bank affiliate, for accessing international investors.

In short, a personal equation with the World Bank, he perceived, will make it a gateway for his business forays overseas.

Naidu was only partly right. Like him, the World Bank too meant business. He couldn't make the World Bank agree to locate its back office in Hyderabad. Tamil Nadu snatched it away.

It is clear that the state's infrastructure is far from happy despite all the publicity. The state Congress leaders call it Naidu's 'hype'. He should do some introspection on why Tamil Nadu is preferred by most international organisations and multinationals for setting up their back offices.

Is it infrastructure or something else?

Prima facie, it appears to be a labour problem. Tamil Nadu excels in offering any type of labour at least cost. Tamil labour is hard working and highly flexible. In Mumbai, construction labour was once Andhra Pradesh's forte. But now it is dominated by Tamils.

Naidu too should mean business. His primary objective should be to cut the debt-servicing cost.

One way is to seek co-financing. He should try to access long-term lending financial institutions of western nations with the World Bank's good offices. Like the KfW of Germany and its counterparts in the United Kingdom, France and the Netherlands for low-cost loans and grants.

Andhra Pradesh can leapfrog over others by hard work and improved efficiency. There are no short cuts. Other states too can do it provided their CEOs establish a rapport with World Bank mandarins. But that is the crux of the problem.

Journalist R C Murthy had senior editorial assignments at the Business Standard and was a correspondent of the Financial Times, London. He also writes for several financial journals.

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