addressing sector specific issues - world...

Reviving Growth in RajasthanAddressing Sector Specific Issues2

Making Rajasthan a favored investment destination through: (i) speeding up government approvals and land allotment;and (ii) revising the 2003 Investment Promotion Scheme to make it more sector-specific.

Enhancing capabilities by: (i) improving the quality of primary education and introducing a vocational education streamat the secondary level; (ii) using NGOs to run schools and train teachers; (iii) introducing self-financing in some highereducation courses to increase employment possibilities; (iv) strengthening qualification and accreditation of educationalinstitutions; and (v) setting up a 100 km long knowledge corridor along the Delhi-Jaipur highway.

Strengthening the infrastructure agenda by: (i) taking remedial actions to deal with the deteriorating water situation; (ii)discouraging water-intensive crops, encouraging micro-irrigation—especially drip irrigation; (iii) using new technologyto raise productivity of crops; (iv) reducing transmission and distribution (T&D) losses in power, rationalizing powertariffs to reduce the burden on industry, privatizing distribution in at least one city; and (v) prioritizing the roadmaintenance program, providing menu of options for Build Operate Transfer (BOT) in roads.

Box 2.1: Some Key Recommendations of the Economic Policy and Reforms Council

If Rajasthan is to close its development gap withnational averages, its economy has to grow atabout 7-8 percent annually. Simple growth

accounting suggests that in order to achieve thisaggregate growth rate, agriculture should grow atabout 4 percent per year, and the non-agriculturalsector at about 8-9 percent. An immediate challengeis to restore growth rates that have fallen sharplysince 1999. On one hand, it is important to increasethe productivity of investment—both public andprivate. On the other, it is also crucial to create anenabling environment that provides the rightincentives for higher investment (particularlyprivate), competition, and better institutions.

The government recognizes that growth is currentlyconstrained by a wide range of bottlenecks. The state'sEconomic Policy Reforms Council (EPRC), set up

last year, comprising Chief Executive Officers (CEOs)of leading corporations, human resource developmentspecialists, and economists, has prepared an importantagenda of reforms. It aims at attracting privateinvestment, enhancing capabilities of the labor forcethrough human development, building upinfrastructure, and improving fiscal health to provideresources for development expenditures (Box 2.1).Although the GoR has begun implementing several ofthese reforms, a substantial agenda remains and thereis a need to set priorities.

This chapter examines how Rajasthan's goals can beachieved by analyzing recent developments andfuture policy challenges in agriculture, industry andservices, as well as in key infrastructure sectors. Thisreport studies recent reforms that have beenundertaken, and makes selective suggestions on how

these can be strengthened, and what new measurescould be considered. It distinguishes betweenimmediate priorities and measures that should beimplemented over a longer time horizon.

Improving Agricultural Performance and Water ResourceManagement

Raising agricultural growth rates will be central toreducing poverty in Rajasthan. In spite of itsdeclining share in GSDP, agriculture continues tobe, by far, the most important source of livelihood inRajasthan, employing about 66 percent of the state'stotal labor force.34 The rural poor account for 84percent of poverty in Rajasthan, and over three-quarters of them are dependent on agriculture.35

Poor performance in agriculture will also havespillover effects on growth in other sectors throughdepressing demand in rural areas for consumer goodsand services and agricultural implements.

Rajasthan's large expanse of deserts, inadequateirrigation facilities, falling ground water levels, andconsequent dependence on monsoons, all act asconstraints to developing traditional cereal-basedagriculture. The state can be divided into twodistinct climatic zones. The region to the west andnorth-west, comprising 11 districts and nearly 61percent of the state's area, is either desert or semi-desert. With low and unpredictable rainfall andlimited access to irrigation, agriculture in these areasis prone to risk, with productivity severelyconstrained by water supply. The south-east andeastern part is more productive, with better soils,higher rainfall, and greater access to irrigation. Atpresent, less than a quarter of the agricultural area inthe state is irrigated, leaving agriculture largely atthe mercy of the monsoons. In this context, themain thrust for growth, as recognized by recentgovernment initiatives, has to be on diversifyingagriculture into less water-dependent but high valuecrops, improving scarce water resourcemanagement, and promoting off-farm activityrelated to agriculture.

Within the state, regions or districts can be classifiedaccording to three broad agricultural productionsystems, which present varying challenges andopportunities (Figure 2.1). In the marginal drylandareas of Western Rajasthan, poor soils, limitedavailability of water, and insufficient access tomarkets impose significant obstacles to raising farmincomes. The production systems favor less waterintensive crops such as jowar and groundnuts.Similarly, hardier livestock, such as sheep and goats,are also concentrated in the marginal more drought-prone areas in the state. Districts with moderate tohigh agricultural potential have good bio-physicalendowments, but maximization of their potential ishampered by constrained access to markets. Limitedcommunications and road connectivity increasetransaction costs, which can in turn lead to lowerfarmgate prices and prohibit diversification to highervalue crops, tying farmers to the production of non-perishable products or food for home consumption.The characteristics of the production systems favormore water intensive crops such as rice, wheat andmaize. In the high-potential irrigated areas,agricultural productivity is better as rainfall-relatedoutput volatility and risks are lower, making multiplecropping and agricultural diversification to highervalue crops more economically viable. Returns tofactors of production, such as seeds, fertilizer, andlabor are also superior—in part due to better access toroads and transport systems, markets, electricity,communications, and other public services.

Improving Productivity andCompetitiveness in Agriculture andAllied Sectors

Recent Sectoral Performance

The need for a change in agricultural strategy isevident due to the significant slowdown in the sector'sgrowth in the 1990s, as well as insufficientagricultural diversification. As discussed above, theaverage growth rate of agriculture and allied GSDPfell from 4.3 percent per year during the 1980s toabout 1.1 percent per year during the 1990s, largely

34 Based on 2001 Census.35 Based on NSS 55th Round.

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RAJASTHAN: Closing the Development Gap

Figure 2.1 : Characteristics of Different Production Systems in Rajasthan

Note: Data from the GoR Agriculture Department. All values are presented as simple averages across districts classified as marginal dryland(marginal soils, limited rainfall and irrigation less than 30%), moderate to high potential (moderate to good soils, moderate rainfall andaccess to irrigation between 30% to 60%), and high potential irrigated areas (good soil, high rainfall or good irrigation over 60%).Rice, wheat, and maize are more water intensive crops, while jowar is less water intensive. Road connectivity data are from 2001.

36 As per Government classification, output from livestock or animal husbandry is included in agriculture.

Figure 2.2 : Recent Performance of Agriculture and Allied Sector

Note: Rainfall data from www.indiastat.com, various years. Sectoral GSDP data from States Database. In right panel, data points showaverage rainfall and bars show agricultural and allied sector output. Correlation between average rainfall and agricultural and alliedsector output is 0.6 and statistically significant.

on account of low and erratic rainfall (Figure 2.2).Growth in the last five years has also been highlyvolatile due to recurrent drought, and output isclosely correlated with monsoons (Figure 2.2).

Though fisheries show signs of better performance,the sector overall remains highly undiversified.36 Theshare of the allied sectors in GSDP has risen from 1.1percent in 1980 to merely 1.4 percent in 2003.

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Reviving Growth in Rajasthan

The livestock sector is growing in importance as amajor contributor to agricultural GSDP growth.Animal husbandry is important not only as a sourceof livelihood, especially in the arid and semi-aridareas, but also as a means of insurance againstfrequently occurring scarcity conditions. Incomefrom livestock accounts on average for 30-50 percentof household incomes. Livestock management is alsovery labor intensive, with a high concentration ofwomen contributing to it. The value of real livestockoutput grew at an annual average of 4.7 percent inthe 1990s. Meat, milk, and egg output also grewrapidly over the period. In 2001-02 Rajasthanaccounted for 9.2 percent of milk production and1.7 percent of egg production in the country.

Structural Constraints and Policy Challenges

Predominance of cereals. Cereals continue to dominatecrop production in Rajasthan, even though theyaccount for a low share of the value of output (Figure2.3). These are particularly important in areas outsidethe marginal drylands, as discussed above. However, itis encouraging to note that new sources of growth areemerging—like high-value fruits, vegetables, and spiceproducts. The livestock sector has become anothermajor driver of agricultural growth, accounting forabout 33 percent of the total value of agriculturaloutput in the state in the triennium ending 2001-02(Figure 2.3). These changes represent the emergingpotential that can be realized through the right policies.

Low yields and input use. For most crops, yields inRajasthan are close to or below that of the nationalaverages (Table 2.1). Farmers on average tend touse less inputs in Rajasthan compared to otherstates (Table 2.1). Even in states like Karnataka andMaharashtra, which have considerably lowerirrigated cropped area, fertilizer consumption ismore than double that of Rajasthan's. This is likelyto contribute to the lower productivity levels in thestate. Within the state, both yields and input useare lower in the marginal drylands of the West(Figure 2.1).

Constraints to livestock growth. Despite itsimmense potential, more rapid growth of thelivestock sector is constrained by: (i) lowproductivity of animals—about 60 percent of thecattle and 80 percent of buffaloes having low milkoutput; (ii) increasing deficit in feed supply,exacerbated by the large numbers of less productiveanimals; (iii) limited availability of livestock services,including animal health, veterinarian, and artificialinsemination services that could play a critical role inupgrading the livestock base; and (iv) inadequatelivestock extension services to farmers, hamperingtheir ability to learn about modern livestock animalhusbandry practices and technologies.

Restrictions on agricultural marketing. Trade inalmost all agricultural commodities is carried outthrough regulated markets, as in the case of other

Figure 2.3 : Shares of Various Product Categories

Note: Data from the GoR, for triennium ending 2001-02.

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Crop Rajasthan Maharashtra Punjab Karnataka AP UP All India

Wheat 2,477 1,304 3,335 2,034 2,692

Rice 1,140 1541 3335 2532 2779 1989 1913

Jowar 266 875 906 779 837 772

Bajra 400 702 933 668 926 1023 720

Maize 1,057 1409 2552 3021 3239 3254 1840

Gram 673 594 907 589 708 836 720

Groundnut 994 1092 944 818 927 867 924

Cotton 262 134 317 255 247 153 191

Input Use

Percent Irrigated Area 36.0 16.6 95.6 26.1 44.1 66.5 40.8

Fertilizer Use kg/ha. 36.9 76.3 173.4 101.5 143.5 130.4 90.1

Table 2.1Average Yield of Major Crops (kilograms/hectare) and Use of Inputs in Selected States

Source: Percent irrigated area shows percentage of gross cropped area irrigated, 1999-2000. Fertilizer use for triennium ending 2001-02. Other data for triennium ending 2000-01. All data from Center for Monitoring Indian Economy (CMIE).

37 These notified commodities (fresh and processed) include cereals, pulses, oilseeds, fibers (both kapas and ginned cotton),sugarcane and processed gur and sugar, fruits, vegetables, animal husbandry produce (egg, poultry, cattle, milk, ghee, wool, etc),fish, honey and tobacco.

Indian states. Under the Rajasthan ProduceMarketing Law of 1961, notified agriculturalcommodities grown within the designated area ofthe regulated market, if sold wholesale, have to bemarketed through mandis.37 While there areadvantages in this system—like protection tofarmers from exploitation by middlemen, provisionof facilities for marketing, and access to marketinformation through computerization under theMarket Information Network Scheme of the GoI—the Act restricts the development of markets andopen competition. Consequently, it also limitsmarket opportunities for farmers, and the efficiencyof agricultural marketing, since it does not allowfarmers to choose the best option in terms of pricesto sell their produce.

Inappropriate levels and composition of publicexpenditures. Public expenditures in the agricultureand allied services as a share of aggregate publicexpenditures declined markedly during the 1990s(Figure 2.4). Moreover, revenue expendituresaccounted for a large proportion of agricultural andallied expenditures. With the exception of the mid-to-late 1990s, capital expenditures accounted for

less than 10 percent of total expenditures. Withinthe sector, public expenditures concentrate on crophusbandry, forestry, soil and water conservation,and cooperation. The current levels andcomposition of expenditure are cause for concern.The decline in expenditures is weakening thedelivery of key agricultural services, such as research,extension and livestock services, and thereforehampering the government's goal of achievinghigher growth rates in the agricultural sector. This isillustrated by the fact that expenditures onagricultural research and education in Rajasthan aresignificantly lower than many other states, though ithas risen in the 1990s (Figure 2.4).

Government Reform Measures

Several measures have been undertaken to reducethe negative impacts of shortfalls in rainfall. These"drought proofing" measures include investments inwater harvesting structures, revival of traditionalwater resources, afforestation, and watersheddevelopment and management, though expandingthe reach and improving the effectiveness of theseprograms is a challenge.

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The government has taken steps to amend theAgricultural Produce Regulated Markets Act in orderto promote competition, and improve the returns tofarming. The proposed amendments includeprovisions for contract farming and direct purchaseto farmers, private management of markets, andborrowing by the Agricultural Marketing Board.These amendments will benefit the approximately13.1 million farmers in Rajasthan. They will havethe freedom to choose those buyers who can offerthem the best price for their produce and otherservices, whether in the mandi or through othermarketing channels. Different marketingarrangements could reduce marketing costs andmargins, thus enabling farmers to receive a betterprice while lowering prices for consumers.

The government is placing considerable emphasis onenhancing access to improved technologies, andpromoting increased diversification to higher-valuecrops as a means to enhance agricultural productivityand growth. The government recognizes that it isimportant to take an integrated view of developmentfor the sector. The issues of limited access toirrigation, the high concentration of lower valueagricultural crops, and their low productivity shouldbe tackled simultaneously to achieve a higheragricultural growth trajectory.

In order to sustain the growth of the high-potentiallivestock sector, the GoR is taking several steps toaddress constraints faced by the sector. Under thePlan, priority is being given to: (i) promotinginstitutions and establishing mechanisms to ensurequality consciousness, encouraging research andinnovations to enhance sector-level efficiency inproduction, processing, and marketing of alllivestock products particularly value addition; (ii)reducing the gap between demand and supply forfeed and fodder; (iii) strengthening breedingmanagement through a restructured artificialinsemination program comprising input generationand delivery systems; (iv) ensuring the activeparticipation of NGOs in livestock developmentprograms; and (v) educating animal owners on themodern scientific methods of livestockmanagement, by strengthening extension services.

Improving Management of WaterResources and Irrigation

Recent Developments and Policy Challenges

Rajasthan faces serious problems of water scarcitydue to insufficient water resources and recurrentdrought. The state accounts for 10 percent of thetotal land area in India, but has only 1 percent of

Figure 2.4 : Levels, Shares, and Composition of Public Expenditure on Agriculture and Allied Sector

Note: Data from the GoR, for triennium ending 2001-02.

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Figure 2.5 : Sources and Expenditure Composition in the Irrigation Sector

Note: Data for left panel from the GoR Irrigation Department for 2002-03. Data for right panel from States Database. In the right panel,the bars represent revenue and capital expenditures in billions of 1993-94 rupees (left axis), while the data points represent share ofirrigation capital expenditure in total public capital expenditure (right axis).

the country's water resources. At present, theagriculture sector is the major user of water,accounting for 83 percent of aggregateconsumption. Future projections up to 2025indicate a rapid rise in non-irrigation use, withdomestic and industrial demand set to increaseabout three to four times in volume. In addition,deterioration of water quality (due to highconcentrations of naturally occurring elements suchas fluoride and increasing surface pollution) is alsorestricting the use of water for domestic andirrigation supply, putting further stress on the state'savailable water resources.

In recent years, there has been a growing crisis ingroundwater management due to unsustainabledemand. Groundwater from wells and tubewells hasbecome the main source of water for agriculture inthe state (Figure 2.5). More than 90 percent ofgroundwater is used for agriculture. Today, thesustainable use of groundwater is threatened byover-exploitation in many areas. Of the 237 blocksin the state, 86 blocks were already over-exploited(utilization rate greater than 100 percent) in 2003,with another 80 blocks at the critical level(utilization rates 90-100 percent). Only 49 blocksare at safe levels of utilization (utilization rate below70 percent). The under-pricing of electricity foragriculture—and thus of groundwater—reduces the

incentives for efficient use of water and in turn leadsto the over-exploitation of groundwater resources.

The last decade saw some deterioration of surfaceirrigation infrastructure due to inadequatemaintenance and poor quality. Capital expenditurefor the development and rehabilitation of irrigationinfrastructure remains a major component of totalgovernment capital expenditures, although its sharehas declined (Figure 2.5). Inadequate priority andfunding for operations and maintenance (O&M)led to the rapid deterioration of canal systems,resulting in poor quality of services. Efficiency ofwater use in most irrigation systems has been low.System deterioration reduced productivity andsupply of water to tail-enders. Institutionalweaknesses in the Irrigation Department combinedwith minimal involvement of farmers and otherusers impeded greater improvement in quality and"user-orientation" of service delivery. The poorquality of services reduced farmers' incentive to paywater charges. With limited ability to raise fundsdirectly, exacerbated by the tightening fiscalsituation, the Irrigation Department was unable toprovide adequate funding for O&M. Overstaffingof the Irrigation Department further drewresources away from essential physical works,because funding for salaries took priority. The FifthPay Commission's generous wage hike in 1997-98

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A Government Order was issued in March 2005 establishing a separate State Water Resource Planning Department (SWRPD)within the GoR. The Order defines the objectives, functions, responsibilities and organizational structure of the SWRPD. Itsmain functions are the strategic and coordinated planning, development, and management of the state's water resources.Previously, these functions were performed by the Irrigation Department, which poses a conflict of interest, since it is also thelargest user of water for agriculture. The SWRPD has a separate budget head and will be headed by an officer with the rank ofSecretary or Principal Secretary.

It is expected that the SWRPD could play an important role in fostering greater inter-departmental coordination. At present,coordination between departments on water resource development and usage continues to be ineffective. For example, thePower Department will provide an additional 170,000 electricity connections for pump-sets in view of the rapid groundwaterdepletion in the state. To mitigate the drought crisis, the Irrigation Department has been charged with constructing 47,000check dams, of which 16,000 have been completed. However, there is no institutional provision for their maintenance.

Box 2.2 : The State Water Resource Planning Department

aggravated the situation. Under-pricing of wateralso reduced farmers' incentive to save and usewater efficiently, leading to over-application ofwater, and eventually resulting in water-loggingand salinity problems.


Development of overall water resource managementis one of the key pillars of the government's strategyfor fostering agricultural and rural development,food security, and poverty reduction. In recent years,the government has taken two important steps inthis direction.

In May 1999, the government adopted aState Water Policy that outlined thedevelopment framework for the longer termsustainable development of water resources.Specifically, the Policy emphasizes: (i)adoption of multi-disciplinary, multi-sectoral water planning, allocation, andmanagement; (ii) establishment of aregulatory framework for managing waterresources, including the full range of sectorenvironmental issues; (iii) reorientation ofgovernment water institutions, combinedwith increased participation of the privatesector through farmer managed Water UsersAssociations (WUAs) and other privatesector entities; (iv) adoption of modernmanagement functions such as financialmanagement, programming, and budgeting;and (v) improvement in water and water-related service delivery with increased focus

on better quality, cost-effective, andfinancially sustainable irrigation anddrainage services through commercially-oriented farmer managed entities. In orderto meet the goals of the Water Policy, aseparate State Water Resource PlanningDepartment (SWRPD) has also beenestablished by a Government Order issuedin March 2005 (Box 2.2).

In addition, the government has establishedan Expert Committee on Water ResourceManagement in June 2004 to examine ingreater depth water resources issues andpropose an action plan. The task force,composed of representatives fromgovernment, NGOs, academia, and otherexperts, has four sub-committees, namelyIrrigation, Groundwater, Water Harvesting,and Drinking Water. It is expected thatrecommendations from the task force willlead to a more integrated vision for waterresource management in the state.

In order to address the specific constraints ingroundwater and surface water management andirrigation, the government has taken a number ofmeasures recently.

The Farmers' Management of Irrigation Systems(FMIS) Act was passed in 2000. It provided alegal framework for enabling the participationof farmers in systems management as a meansof improving the delivery of irrigation servicesto them. The Act provides for the transfer ofresponsibility for management of the lower

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38 With support from the World Bank assisted Rajasthan Water Sector Restructuring Project, the Irrigation Department hadorganized 506 WUAs, 77 Distributory Committees, and two Project Committees in 90 schemes in the state till 2004.

end of irrigation schemes to farmers, whoorganized into WUAs.38 These farmer-managed institutions will, in partnership withthe Irrigation Department, take on an addedresponsibility of managing the systems underthem. Currently, the Irrigation Departmentcollects water charges, but the FMIS Actincludes provisions for the transfer of watercharge collection to WUAs. A necessary stepas part of the transfer of water chargecollection responsibilities to WUAs is theamendment to the FMIS Act to clarify therevenue sharing arrangements between theWUAs and the Irrigation Department. Theseare currently being drafted by the IrrigationDepartment, after which they will besubmitted to the Cabinet, and thereafter tothe Assembly for approval.

The government is taking steps to fostergreater financial sustainability in the sector.First, there are efforts to right-size theIrrigation Department. The first phase of staffreduction has been implemented throughcutting 30 percent (8,000) staff throughvoluntary retirement and redeployment toother departments in 2001. The IrrigationDepartment further aims to reduce its stafffrom about 55,000 to 38,500. Second, there

are efforts to increase cost recovery from userstowards O&M requirements andrehabilitation costs. In 1999, the IrrigationDepartment raised water charges for variouscrops by as much as 330-500 percent. Onaverage, this translated to about Rs. 191 perhectare of irrigated area, insufficient to coverO&M requirements estimated at Rs. 781 perhectare in 1999-2000. Although thegovernment anticipated raising water chargerates in a phased manner thereafter, there hasbeen no change since 1999. Total watercharges demanded cover about 3 percent ofO&M required in 2003-04 (Table 2.2).

The government has continued to supportthe increased adoption of drip and sprinklerirrigation systems. These systems have a waterdelivery efficiency of up to 60-80 percent.Currently, about 510,000 hectares are underdrip and sprinkler irrigation systems, makingthe coverage level one of the highest amongIndian states.

Agenda for the Future

The government's overarching goal is to raiseagricultural and rural employment and incomes, whileensuring equity and the sustainable use of resources,

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Category 1999-2000 2000-01 2001-02 2002-03 2003-04

Potential Irrigated Area Created, million hectares 2.82 2.83 2.96 3.04 3.11

O&M Requirement, Rs. million 1551 1556.5 1628 1672 1710.5

O&M Expenditures, Rs. million 399.9 464.3 506.9 380.1 362.8

Water Charges Demanded, Rs. million 251.9 251.8 206.2 18.0 59.6

As share of O&M Requirement 16.24% 16.18% 12.67% 1.08% 3.48%

Water Charges Collected, Rs. million 244.3 224.1 59.8 14.6 50.1

As share of water charge demanded 96.98% 89.00% 29.00% 81.11% 84.06%

As share of O&M Requirement 15.75% 14.40% 3.67% 0.87% 2.93%

As share of O&M Expenditures 61.09% 48.27% 11.80% 3.84% 13.81%

Table 2.2Operations and Maintenance Expenditures, and Cost Recovery in Irrigation

Note: Data from the GoR Irrigation Department.

The government's strategy for achieving equitable development of agriculture and sustainable growth places priority on thefollowing:

Attracting larger public and private investments for the development of natural resources and building up communityinfrastructure support, through:

Facilitating private entrepreneurs to setup agro-industry, technology parks, high-tech demonstration and production farms;

Supporting collaborative area-specific extension support to new firms and units entering into the promotion ofagricultural marketing, agro-industries and value addition;

Encouraging private sector to take over the delivery of goods and services and production of non-traditional inputslike bio-fertilizers, bio-agents, gypsum;

Encouraging financial institutions to take over the administration of supplies available for on-farm infrastructure development.

Mobilizing large-scale credit flow to operators on farm infrastructural development and expanding pledging facilities onfarm produce and other crop loan, and institutional support mechanisms.

Encouraging programs addressing the needs of resource-poor farmers for equity with greater focus on small, marginal,and women farmers.

Strengthening the agricultural extension and delivery system, agriculture information management, education and co-ordination system through:

Involving local people and NGOs in extension activities and core areas of development;

Strengthening institutional infrastructure for skill up-gradation and training of farming community, extensionmachinery and technical manpower, and using multi-media in agricultural extension;

Strengthening seed village and seed production programs to ensure production and availability of quality andimproved seeds both in the private and public sector;

Maintaining strict vigil on the quality aspect of supply of inputs;

Undertaking collaborative and contractual research on location-specific and crop-specific technology, indigenoustechnological knowledge, and gender-specific technology to improve extension services provided to farmers.

particularly land and water. In order to achieve thisgoal, the state aims at raising and maintaining theagricultural growth rate at a minimum of 4 percent. Thiscan be achieved primarily through programs that willraise agricultural productivity and foster agriculturaldiversification by introducing higher-value crops andlivestock. In this regard, the government has outlined itsagricultural strategy in its Tenth Five Year Plan (Box2.3). The strategy takes a comprehensive view of thechallenges facing the agricultural sector, and recognizesthe need for a coordinated effort along variousdimensions. As indicated in the strategy, bringingagriculture to a higher growth trajectory will requireincreased productivity-enhancing investments by boththe government and the private sector in rural areas.

Over the short to medium term, the governmentneeds to focus on the following reforms:

Amending the Agricultural Produce RegulatedMarkets Act to allow for direct sales and

contract farming, and implement the same, inorder to foster a commercial, market drivenand diversified agricultural sector.

Supporting efforts to diversify agriculture intohigh-value crops such as fruits, vegetables, spices,oilseeds, and medicinal plants. This can beachieved through public and privateinvestments in improving rural infrastructure(e.g. roads, markets, and electrification), andstrengthening the delivery systems for research,extension, credit, and market support servicesto increase productivity and meet the morecomplex needs of diversified agriculture. Thiswill require complementary institutionalreforms in the state agricultural research andextension agencies to enhance client orientationand delivery effectiveness, and foster innovativemechanisms for linking farmers to the markets,such as producer associations, outgrowerschemes and contract farming (Table 2.3).

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Box 2.3 : Agricultural Strategy for Rajasthan in the Tenth Five Year Plan

Focusing on appropriate roles of the public andprivate sector in implementing the state'slivestock sector strategy. Special emphasisshould be placed on ensuring both theavailability and good quality of animalhusbandry and livestock services to farmers.Given the growing needs for livestock servicesand the increasing competition for publicresources, encouraging greater participationand entry of NGOs and the private sector toprovide some of these services will be essential.Lessons from international experience indicatethat government services should concentrate onpublic good activities such as livestock researchand extension, veterinary surveillance, andquality control of drugs. Increased participationof the private sector should be encouraged inthe delivery of other services, such as preventiveand curative treatments, artificial insemination,and non-compulsory vaccinations.

Rationalizing the composition of publicexpenditure in both the agriculture andirrigation sectors, and improving its quality.This would involve careful expenditure

prioritization to effectively and productivelybalance the needs for rehabilitation versuscompletion of existing schemes in irrigation,and examination of the intra-sectoralallocation within agriculture and alliedexpenditures to meet requirements of researchand extension, and O&M.

Making the SWRPD operational as soon aspossible. This will necessarily involveappointing officials and staff to operate theSWRPD. Recommendations expected fromthe Expert Committee on Water ResourceManagement, available in June 2005, shouldalso be taken on board.

Amending the FMIS Act to clarify revenuesharing arrangements between WUAs andthe Irrigation Department. Continuedcommitment to the capacity building of thefarmer-managed institutions will be crucialfor ensuring the longer term sustainability ofthe irrigation infrastructure in the state.

Continuing with the phased adjustment ofwater charges towards full cost recovery will

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Main activity areas Specific elements

Diversification feasibility SWOT (strengths, weaknesses, opportunities, threats) analysis, including evaluation ofconsumer demand, and analysis of available agronomic resources and off-farmemployment opportunities.

Policy environment Land and water policies, food security, price support and input subsidy policies, policyenvironment that is crop-neutral, equality of access to assets, vulnerabilitymanagement, economic and market liberalization, and decentralization.

Input markets, infrastructure systems, Systems for meeting quality and safety requirements, investment in processing and and market access value adding, investment on transporting and food preserving technologies, options for

contract farming, venture capital, credit markets, fertilizer, seed, and technology supply,irrigation and drainage.

Private sector participation and supply Cooperation with NGOs, investment by and participation of the private sector, rural chain coordination producer organizations and community groups, risk management tools, communication

and logistical systems.

Research and extension systems Integrated management systems and conservation tillage, demand-driven site-specificresearch on wide-ranging agricultural products, increasing productivity, crop/livestockintegration, natural resource management, resource use efficiency, intensification, andsystems for market, technology, and grading system information flow.

Natural resources Sustainable land and water management systems, protection of biodiversity, biosecurity,government regulation, taxes and incentive systems to internalize externalities,appropriate technologies to conserve environment.

Table 2.3 Elements of Planning and Implementing Agricultural Diversification Programs

Source: Shawki Barghouti, Samuel Kane and Kristina Sorby. "Implementing Pro-Poor Agricultural Diversification: Practical Guidancefrom Past Experience", 2004.

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be critical. Ensuring financial sustainabilitywill require further improvement in thecollection efficiency of water charges as well.

In the medium to long term, the government shouldadopt a comprehensive strategy, based on two

elements. First, an integrated public privatepartnership (PPP) approach will be needed tointroduce high-value crops. Maharashtra'ssuccessful horticulture program provides a goodmodel to learn from (Box 2.4). Second, it would beimportant to formulate differentiated regional

The Horticulture Development Program is aimed at accelerating the expansion of horticultural production and generatingadditional employment in rural areas. The program was applied to 25 fruit crops, spices inter-cropped in coconut plantations,and medicinal and aromatic plants. The scheme was open to all farmers, with a minimum required area per project of 0.2hectares to a maximum of 4 hectares (0.1-10 ha in the Konkan region). The scheme provided full subsidy on wages and materialinputs (planting materials, fertilizers, agrochemicals) to small and marginal farmers, and SC/ST and other ethnic minorities, ona declining scale and to be phased out by the third year. Other farmers received a subsidy of 100 percent on wages and 75 percenton material inputs on a declining scale over three years. Wages were given in cash, while the material inputs were supplied inkind. The "grant" or subsidy received averaged Rs. 7,709 ($161) per farmer beneficiary.

The Government of Maharashtra (GoM) arranged the supply of inputs and services. The public extension service providedintensive technical support to farmers. During the first seven years, 140 government nurseries and 24 nurseries in the fouragricultural universities were established to supply high-quality planting materials. The supply of planting material was furtherexpanded by the entry of approximately 1,670 private nurseries. By 2002, the state was self-sufficient in planting materials.Pesticide residue testing laboratories with international standards were established in Pune and Nagpur. A website"agri.mah.nic.in" on agriculture-horticulture was launched by the GoM's Agriculture Department to disseminate informationabout the program. A GoI centrally sponsored scheme for sprinkler and drip irrigation facilitated the expansion of horticultureand floriculture production. In view of water scarcity conditions in many areas, the scheme aimed at increasing efficiency in wateruse. The drip/sprinkler scheme provided a subsidy equivalent to 75 percent of costs for all farmers and 90 percent of costs forSC/ST, up to a limit of Rs. 32,000, the cost of which was shared between the central and state governments at a ratio of 75:25.

Complementary public and private investments further supported the growth of the sector. The GoM's investments ininfrastructure, such as building the Pune-Mumbai expressway and other roads and upgrading airport and port facilities, reducedtransportation costs and helped to increase the competitiveness of Maharashtra's products domestically and in the export market.Private sector initiatives and investments also contributed to the growth of the sector. Large farmers and corporate investors inhorticulture and floriculture, who have invested in supporting marketing infrastructure, such as pre-cooling facilities, coldstorage, refrigerated transport, and agro-processing, promoted production and organized supply from other (smaller) farmers tomeet the bulk requirements for export and local demand and provided technical advice to meet export quality requirements.Some private companies also have been instrumental in introducing new technologies in the state and in providing combinedtechnology and advisory packages. Commodity marketing organizations including Mahagrapes, Mahamangoes, and theWestern India Floriculture Association were instrumental in promoting exports of local products.

The program has been a success from both the horticulture and employment perspectives. Of the one million hectare increasein area planted with fruits in the state between 1989-90 and 2000-01, 96 percent was supported through the horticulture-linkedEmployment Guarantee Scheme (EGS). Since the program's inception in 1990, approximately 1.28 million farmers covering35,525 villages have availed of the program. Approximately 7 percent and 11 percent of the beneficiaries were SC and STrespectively. It appears that the scheme has also generated considerable economic benefits. Assuming conservatively that only10 percent of the fruits and vegetable GSDP was due to the horticulture-linked EGS program, and taking costs as equivalent tothe total subsidies for the program during the same period (Rs 6.44 billion, constant 2000-01 rupees), the benefit-cost ratio cameto approximately 7:1. In addition, over the last decade, it directly created an estimated 213 million person days of work orapproximately 8,07,000 person years (assuming 220 days work per year). Moreover, as the fruit orchards, once initiated, wouldnormally require continuous employment to meet day-to-day labor needs, the scheme also opened opportunities for permanentfull-time employment for agricultural laborers. In addition, the increased fruit production generated positive multiplier effectsin terms of higher labor demand arising from increased demand for inputs and marketing services (transport, storage, packaging,processing, and trading). In the future, in view of the rapid uptake of technologies, the challenge will be to more exclusivelytarget assistance to poor and small and marginal farmers, who have limited capital.

Box 2.4 : Learning from Maharashtra's Horticulture Program

Source: World Bank (2004).

agricultural strategies for the different ecological andproduction systems that characterize the state,namely, the marginal dryland areas, the moderate tohigh potential areas, and the high potential irrigatedareas. As examined above, these three regions offerdifferent opportunities and challenges, andaccordingly, require different policy interventions.39

In terms of promoting a regionally differentiatedagricultural strategy, the government could focus oninterventions as discussed below.

Clearly the potential for the adoption ofhigher yielding varieties and diversificationto higher value crops will be greater wherewater supply is assured—that is, in the highpotential irrigated areas. New institutionalmechanisms will be needed to promoteagricultural diversification, includingprovision of better agricultural supportservices to farmers. There is also a need tobuild on the growing consensus to furtherreform land policy, particularly land tenancypolicy, and the land administration system atthe state level. A more holistic approach toland administration policies, regulations, andinstitutions is necessary to ensure security oftenure, reduce costs, and ensure fairness andsustainability of the system—and, ultimately,to improve the investment climate in ruralareas. Moreover, with increasing competitionfor water expected in the future and moreacutely in high potential irrigated areas,improved water resource management will beessential. However, increased priority toagricultural diversification does not implyphasing out support to foster furtherimprovements in the productivity oftraditional crops. At the same time, givenchanging consumer demand patterns withhigher demand for processed goods, therewill be opportunities to move up the valuechain in terms of agro-processing and relatedservices. The potential for off-farmemployment will increase, and exit strategiesfrom farm employment along with

development of the non-farm rural economyshould be encouraged.

In the moderate to high potential areas,intensification to increase output anddiversification into higher value and lesswater-reliant crops are two importantstrategies for fostering more rapidagricultural growth. This requires substantialpublic and private investments to increaseproductivity per worker and output per unitof land farmed. A high priority is to improvethe productivity, quality, and seasonalavailability of food crops, because householdsdepend so heavily on producing crops forhome consumption. A correspondingpriority is to raise farm profitability byimproving access to markets for inputs andoutputs, as well as access to technologies thatcan enhance the productivity of labor.Support will be needed for institutionalinnovations that facilitate coordination alongthe supply chain, including contract farming,outgrower schemes, and farmers' and traders'association. Capacity building is required forregulation and monitoring, which are crucialinstitutional elements for agriculturalmarkets to function well. New technologiesand advisory services that focus on issuesrelating to marketing policy, post-harvesttechnologies and practices, livestock andhigh-value commodities with strong marketdemand, and cost-saving technologies willimprove profitability and expandsmallholders' awareness of marketopportunities. As the productivity andprofitability of food crop productionincreases, priority should also be given todiversification. Further diversification toproducts requiring more inputs, processing,and handling, will present opportunities fordeveloping the non-farm economy.Expansion of irrigation where economicallyfeasible in moderate potential areas cancontribute significantly to increasingincomes and generating employment.

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39 The discussion of regionally differentiated strategies is adapted from World Bank (2005).

The strategy for improving livelihoods inmarginal dryland areas will need to putpriority to maximizing agricultural andnon-farm income gains from existingnatural endowments in the medium term,and also to giving household the means tobuild human capital to explore other betterand more stable income opportunitiesoutside of agriculture over the longer term.This involves improving the current cropand livestock systems in locations withsomewhat higher potential, and sustainingthem in the rest. It calls for increasedpriority to the research and development onmore drought-tolerant crop varieties andlivestock feed and fodder, appropriate soiland water conservation measures, andtechnical advice on alternative croppingsystems that can mitigate low rainfall and itsassociated agriculture production risks.Given the critical role of livestock, efforts toreduce the effects of inter-annual and inter-seasonal variation in feed availabilitythrough strategic fodder production, rangemanagement, and livestock marketing arecritical. For livestock producers to gainaccess to regional markets, they requireaccess to veterinary services, animal healthproducts, and more developed marketchannels, including provisions forcompliance with sanitary and food safetystandards. At the same time, without moresustainable land use practices, people inmarginal drylands will be hard pressed tomake the best use of scarce water resources,reduce soil erosion and water runoff, andconserve natural pastures and vegetation.Over the longer term, an importantpathway to reducing poverty is to exitagriculture by encouraging the shift to otherhigher-paying employment locally or inother areas. Also, it is important to promotemore profitable non-farm uses for land,such as manufacturing and services, toconserve natural resources and promote off-farm employment. In order to ensure asmooth transition for rural households,there should be a combination of riskmanagement at the farm level, safety nets atthe household level, and other forms oftransitional support.

Unleashing the Potential of thePrivate Sector: Industry and Services

Rajasthan's strong economic performance duringthe 1980s and 1990s was largely driven by robustgrowth in the industry and services sectors. Thisgrowth was stimulated by a wide range of structuralreforms introduced by the GoI in 1991 as part of abroader economic reform program. However, muchremains to be done to accelerate growth in thesesectors to reverse the slowdown and realize thestate's potential more fully. A key thrust area ofgovernment policy, going forward, will need to beon improving the climate for private investment.Special emphasis should be placed on sectors such asmining and quarrying, textiles, and tourism, whereRajasthan has a strong comparative advantage.

Recent Sectoral Performance

The marked slowdown in the industry and servicessectors since the late 1990s has taken growth rates inthese sectors almost back to that of the 1970s. Growthin both these sectors has seen a significant deceleration(Chapter 1). In industry, an intra-sectoral breakdownsuggests that this was mainly due to a slowdown inconstruction activity and a decline in manufacturinggrowth. On the other hand, mining and quarrying,where Rajasthan has a strong comparative advantagegiven its rich endowment of mineral resources, saw asharp increase in growth rates even in the 2000s whenother sectors were faltering. For the services sector, theslowdown was largely due to lower growth rates in realestate and transport services (Figure 2.6).

Though the overall share of industry and services inRajasthan's GSDP has increased, the share of high-potential sub-sectors remains disappointing (Table2.4). Compared to a national share of below 27percent, industry accounted for almost 30 percent ofGSDP in Rajasthan in 2003-04. However, a majordisappointment in Rajasthan has been the modestcontribution of mining and quarrying to GSDP,despite the state's abundant mineral resources. In2003-04, this sub-sector contributed just over 3percent of GSDP in Rajasthan—compared to 14 percent in Chhattisgarh and Jharkhand, and eight percent in Orissa. In services, the promising tourism

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sector accounted for just 14 per cent of Rajasthan'sGSDP in 2003-04 compared to 21 percent in Kerala.

The informal sector is particularly important inRajasthan, and may be partly responsible for lowpoverty rates. Off-farm activities, particularly intransport, storage, trade and hospitality, provideimportant sources of employment and help raiseincomes. These activities are reflected, for example, inthe private sector and NGO initiatives that helpcommunities address public service problems andtrain entrepreneurs. The Barefoot College ofRajasthan (Box 2.5), the successor of the well-knownNGO, the Social Welfare Research Center, provides

an illustration of community initiatives in informalactivities and entrepreneurship. They are alsoreflected in the rapid growth of informal sectors suchas the dairy industry in Rajasthan (Box 2.6). Theimportant challenge will be to help these informalfirms to grow sufficiently in scale to become formalsector firms. Addressing key investment climateconstraints can help in this effort.

Cross-Cutting Investment ClimateConstraints

To date, Rajasthan's record in attracting privateinvestment has been rather modest, but what is of

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1980-81 1990-91 2003-04

Industry 20.93% 22.24% 29.62%

Mining & Quarrying 2.07% 1.88% 3.17%

Manufacturing 11.83% 11.94% 14.22%

Construction 5.33% 6.06% 8.14%

Electricity, Gas and Water Supply 1.70% 2.36% 4.09%

Services 30.16% 32.77% 42.82%

Transport, Storage & Communication 3.40% 3.13% 6.31%

Trade, Hotels, Restaurants 11.01% 13.84% 14.20%

Real Estate & Ownership of Dwellings 5.72% 3.93% 6.12%

Banking & Insurance 2.16% 4.29% 3.84%

Public Administration 3.13% 3.34% 4.03%

Table 2.4Share of Selected Sub-sectors in Rajasthan's Real GSDP

Note: States Database

Figure 2.6 : Recent Performance in Industry and Services Sectors

Note: Data from States Database. All growth rates from logarithmic functions. Data for 2000s goes up to 2003-04.

more serious concern is that private investmentrates have been falling since the early 1990s.Private investment in Rajasthan stood only at lessthan 6 percent of GSDP in 2002-03 (as against15.7 percent nationally), while public sectorinvestment stood at 5.7 percent of GSDP (asagainst 6.3 per cent nationally). There has beenvirtually no Foreign Direct Investment (FDI) inindustry, with the notable exception of thepetroleum sector.

Private investment and productivity across sectorsin Rajasthan continue to be constrained by severalfactors. Key among them are: (i) legal andregulatory inefficiencies and red tape that restrictthe entry, exit and efficient operation ofbusinesses, particularly small and medium firms;(ii) insufficient access to credit; and (iii)infrastructure shortages. In addition, slow urbandevelopment is another constraint to growth.These are discussed below.

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The innovative Barefoot College in the village of Tilonia, Rajasthan, was set up for villagers in search of traditional and new ways to bettertheir lives. The college gives simple school lessons in reading, writing and accounting to adults and children. Much of the teaching, bypeople from the local villages, takes place in night schools because students, including children, are too busy during the day.

The prime function of the college is to impart skills people need in their everyday lives. More than education, for example,people in Tilonia need water. The Barefoot College first took the regular approach of digging wells and hand-pumps but soonsaw them run dry. It then set up a system of diverting rainwater to dry wells. By a natural system of percolation, this broughtclean water back through hand-pumps. Rainwater flowing down gutters from roofs is trapped in underground tanks. TraditionalRajasthan puppetry is another skill the college promotes strongly.

Women are very active in the college. Girls heavily outnumber boys in the night schools and many of the engineers trained in thecollege are women. One of the most successful solar lamps in use in villages in the area was designed by a woman using local wastematerial. Women have been going from village to village to gather support for developmental measures such as building local dams.

The Barefoot College's work now extends well beyond Rajasthan. For instance, 300 villages in Ladakh, high up on the Tibetanplateau, have received solar panels from the college. Such projects extend all the way along the Himalayas to Sikkim in the east.Though the Barefoot College began in Rajasthan, it has spread out in recent years. There are now 20 such colleges in 13 statesin India. They draw up their own local priorities, but the fundamental principles remain the same—people in the college mustbelong to the villages, live there and work on developing skills that will improve the quality of everyday life. The college is nowalso involved in training villages from other countries, including Afghanistan, Ethiopia, Bhutan, Senegal and Sierra Leone.

Box 2.5 : The Barefoot College in Rajasthan—Innovation for a Better Life

In Rajasthan, the dairy industry currently contributes 40 percent of India's wool and 10 percent of milk production, and issteadily growing in importance. With large parts of the state classified as desert and the rest prone to drought, livestock providesthe poor with a source of security, income, food, and is an asset in times of need.

The Rajasthan Cooperative Dairy Federation (RCDF), established in 1977, has been a prime mover behind dairy development.It is a three-tier system working with registered dairy cooperative societies (DCS), who receive technical support, improved feed,and veterinary services, in exchange for competitively priced milk procurement through dairy unions. The RCDF providesmarketing outlets for milk products, and overall planning and programming. It has been actively promoting the Saras brand ofmilk products, and has 12,000 outlets selling 26 diversified milk products ranging from milk to butter and ice cream. Thegrowth of DCS from 5,200 in 1998-99 to 8,500 in 2005 has resulted in sales of Rs. 50 billion for the cooperative to date.

The RCDF has also actively linked up with programs targeted at the poor, such as the Rajasthan's District Poverty InitiativeProject (DPIP). It proposes to support 32,000 poor BPL households, help them establish cooperative societies, provide training,cattle insurance and improved feed and care—in exchange for the procurement of 200,000 litres of milk per day or dailypayments of Rs. 2.2 million to poor households for milk. The society is investing in new milk routes and chilling plants toincrease its milk procurement and meet the rapidly increasing demand both within and outside the state. The RCDF has set atarget of increasing household income by 70 percent through access to these new milk routes.

Box 2.6 : Rajasthan's White Revolution

Legal and Regulatory Barriers

Rajasthan presents a mixed picture as regards keyindicators of the business environment (Figure2.7).40 There are notable areas in which Rajasthanperforms comparatively well. For instance, starting abusiness is less time consuming in Jaipur, where ittakes about 59 days compared to 89 in Mumbai.41

The costs of enforcing a contract in Rajasthan are thelowest among the regions surveyed. Transferringproperty titles from a buyer to a seller in Jaipur takes61 days compared to 67 days in Mumbai and 142days in Chandigarh. However, there are areas whereRajasthan is lagging behind other regions. For instance,even if entry takes less time, the costs of entry inRajasthan are the highest among the regionssurveyed. Also the costs of registering property inJaipur are nearly 14 percent of the property value—one of the highest among the regions surveyed. The

time taken to go through insolvency is about 10years in Jaipur, compared to about 8 years inBangalore and Chandigarh, or about 9 years inChennai and Hyderabad. This reflects the state'scomplex bankruptcy laws. Enforcement of contracts,which is indicative the efficiency of courts to someextent, takes 875 days in Jaipur on average,compared to 425 days in Mumbai, or about 700days in Chennai or Hyderabad.

According to industry representatives, easing labormarket rigidities can improve the investment climatein Rajasthan. Firms have to contend with severalmarket rigidities at present.42 First, labor lawsimpose onerous regulations on employment inregistered firms in the state. Any registered firm hiringmore than 100 workers can retrench labor only withthe permission of the state government.43 This isespecially burdensome for exporters who have to

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40 All the indicators presented in this section are based on data from the World Bank's Doing Business database. See DoingBusiness in 2005: India Regional Profile, World Bank, November 2004.

41 This has happened largely due to the elimination of registration for professions tax that has reduced the number of steps requiredfrom 11 to 10.

42 Confederation of Indian Industry (2004).43 Clause 5B of the IDA (1947, Amendment)

Figure 2.7 : Selected Indicators of Business Environment in Surveyed Regions of India(The Survey covered only Particular Cities in the States Indicated)

Note: Data from Doing Business database. For each state, regions surveyed are Jaipur (RJ), Mumbai (MH), Chandigarh (PJ), Bangalore(KN), Lucknow (UP), Kolkata (WB), Hyderabad (AP), and Bhubaneshwar (OR). For recovery rate, higher value indicates betterperformance. For all other indicators, lower value indicates better performance.

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compete with producers in other exporting countriesand have to adjust to changing demand. Ultimately,such laws motivate firms to avoid hiring permanentlabor and to use more capital-intensive methods.Alternatively, it also provides incentives for small andinformal sector firms to maintain the same status.Second, laws prohibiting the use of contract labor areanother major cause of uncertainty for firms.Although the use of contract labor has beenincreasing significantly in Rajasthan as in otherstates, firms face considerable uncertainty arising dueto the presence of Contract Labor (Abolition) Act,which can affect investment adversely. Under theAct, firms face the risk of being compelled to hirelabor under the "ultimate employer" provision. InRajasthan this could mean that, on average, firmsmay be compelled by law to increase theirpermanent labor force by over 30 percent. Third,labor market-related inspections and prosecutions aremarkedly higher in Rajasthan compared to states likeWest Bengal or Tamil Nadu—with about 75 percentof firms or registered firms being inspected. This canprovide opportunities for harassment, rents, andbribes that can deter investment.

Although labor market regulations are a concurrentsubject with the union government, stategovernments have the authority to amend the law.Rajasthan could examine recent reforms by UttarPradesh where amendments to the IDA allow firmsto hire up to 200 workers, while retaining labormarket flexibility. There are also lessons to be drawnfrom Andhra Pradesh which has amended itsContract Labor law, under which firms can hireclearly defined non-core workers withoutuncertainty. Clarifying labor laws could help toreduce the harassment, rents, and bribes thatinspections can create.

Insufficient Access to Credit

Accessing credit from commercial banks in Rajasthanappears to be a problem for industry in general, andsmall and medium enterprises (SMEs) andhousehold firms in particular—though this may be

partly mitigated by the better financial health ofrural credit cooperatives. Overall, per capita credit toindustry in Rajasthan is less than half the nationalaverage.44 Although rural areas fare relatively betterin terms of credit penetration, data indicate thatRajasthan also performs below the national averagein the availability of rural banking services. At thesame time, the rural credit cooperative banks whichhave been established to provide credit to smallerborrowers in Rajasthan are in better financialhealth—compared with other Indian states likeBihar and Orissa, where the credit cooperativesystem is in a state of deep financial distress. Theaverage capital adequacy ratio of Rajasthan's 26District Central Cooperative Banks (DCCBs), with396 branches across the state, was the highest amongthe Indian states. Nevertheless, the problem ofinadequate credit in Rajasthan remains andgovernment will need to consider introducinginnovative financing and risk- bearing schemes forthe "missing" middle segment of farmers and smallenterprises that are the most deprived. Such schemesmay include using warehouse receipts, securing ruraland urban land titles, and providing technicalassistance alongside credit to help small enterprisesand farmers develop good business plans.

Inadequate Infrastructure

Perhaps the single most important obstacle toincreased private investment and productivity acrosssectors is the relatively poor quality of Rajasthan'sinfrastructure, particularly power and transport.45

Although the situation has improved recently, theprivate sector has long suffered from unreliablepower supply. Poor connectivity to ports by thelandlocked state imposes a serious constraint oncompetitiveness in manufacturing. Rajasthan's poorroad infrastructure and inadequate rail connectivityresult in higher delivery time for exporters. Inlandcontainer depot facilities in Rajasthan are severelystretched, resulting in an unduly long waiting timefor clearing finished goods. This problem is furtherexacerbated by congestion in the ports to whichindustry in Rajasthan has access (Nava Sheva,

44 CMIE, District Level Indicators in India, 2000. 45 See next section.

Pipavav, and Mundra). This is largely due toincreased container traffic from Rajasthan. Thestate's acute water problem also implies that firmsoften have to source their water from privatetankers. This has significant cost implications forfirms in sectors (such as textiles) where water is a keyinput, or in tourism (where drought affects thebiodiversity of Rajasthan's eco-reserves).

Slow Urban Growth

The slow development of cities and towns can alsoprove to be a hindrance to economic growth. Non-agricultural sectors are likely to drive Rajasthan'sfuture growth, which will be reflected mainly in theexpansion of cities. Thus, supporting urbandevelopment should be accorded a high priority.Although Jaipur and some of the major cities havebeen growing rapidly, Rajasthan remains largelyrural, with an urbanization rate (23.4 percent) thatis slightly below the national average (27.8 percent).More importantly, urban growth in the 1990s, at2.7 percent per annum, is half a percentage pointslower than what it was in the 1980s, and barelyabove the overall population growth rate of 2.5percent annually. Inadequate urbanization alsosuggests that there are only a few cities withsufficient scale and benefits of agglomeration thatare important sources of growth.

After a period of neglect, the government hasturned its attention to urban development whereseveral issues need to be addressed. Havingincreased the financing for urban development inits last budget, the government will now have tosustain it. Further, focus will be required in threebroad areas: (i) reducing the multiplicity ofmunicipal functions and institutions that leads toa lack of coherence in city development; (ii)strengthening weak institutional and legalframeworks that lead to difficulties inimplementing municipal responsibilities asspecified in the 74th Constitutional Amendment;and (iii) providing cities with greater financialresources as well as tax bases to raise revenues so

that they can invest in and maintaininfrastructure. At present, municipal governmentsin India have an own revenue collection of merely0.6 percent of GDP compared to 7.9 percent inBrazil and 5.3 percent in South Africa. Thesefiscal issues are addressed in more detail insubsequent chapters.

Investment Climate Obstacles FacingKey Economic Sectors

A host of bottlenecks have held back the growth andpotential of three important sectors in Rajasthan:tourism, mining and quarrying, and textiles. Thereis considerable potential for growth in mining andminerals, given Rajasthan's resources. Its historyand natural beauty makes Rajasthan one of India'smost sought after tourist destinations and a favoredplace for conventions. Another sector withenormous potential is textiles (particularly syntheticand blended yarn), where Rajasthan has a historicadvantage as the bulk of industrial licenses to thissector were granted post-Independence. However,several constraints hamper the development of thesethree sectors as discussed below (Boxes 2.7-2.9).


In recent years, the GoR has introduced severalmeasures to improve the investment climate. Itrecognizes that success in attracting and sustaininghigher private investment and increasingproductivity in industry and services will requireaggressive efforts to improve the state's investmentclimate. The focus should be on betterinfrastructure, removing legal and regulatorybarriers to business and enhancing access tofinance for firms.

Given that Rajasthan's annual infrastructureinvestment requirements are estimated to beat around US$ 4 billion annually, or fourtimes the government's entire annual capitaloutlay, private sector participation ininfrastructure will be essential in meeting theserequirements.46 Rajasthan was, in fact, one of

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46 Mira Mehrisihi, Presentation.

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the first states to enact a Build OperateTransfer (BOT) policy in 1994, a reformfurther deepened with the enactment of theRoad Development Act in 2002 andsubsequent amendments in 2004. The statehas also set aside a project preparation fundand set up a Power DevelopmentCorporation as a joint venture with theprivate sector for project development.

The government has taken some steps toreduce bureaucratic hassles and red tape for newinvestors. To facilitate interface with privateinvestors, the government has recently set upan office in Delhi. A single-window clearancesystem to facilitate approvals for newbusinesses has recently been introduced.

A number of measures have also beenannounced to encourage the growth of SMEs,which are viewed by the government as a keyengine of growth, job creation and poverty

reduction. In particular, the government hasfocused on training, technology and marketingsupport to SMEs in sectors such as handlooms,handicrafts and other rural non-farm activities(e.g. wool, leather, ceramics, etc.).

An EPRC was established in 2004,comprising CEOs of leading firms andeconomists. A thrust area of the council is tosuggest reforms that could help attractinvestment (particularly from the privatesector), generate employment, andaccelerate growth.

The government continues to placeconsiderable faith in the ability of specialincentives and state-sponsored schemes toboost private investment. For instance, an"Investment Incentive" policy was announcedlast year, which provides for a 100 percentrebate on luxury tax and a 50 percent rebateon stamp duty and conversion fees on new

Rajasthan has all the ingredients to become the brand state for cultural tourism in India, as well as the potential to developnature-based tourism. About 80 percent of the Indian heritage properties are located in Rajasthan. Moreover the state has overa dozen natural sanctuaries, two reserves and two national parks, one of which (Keoladeo National Park) is one of only fourIndian parks listed as UNESCO heritage sites. In recent years the number of both domestic and foreign tourists has beenincreasing sharply. Rajasthan received 8.3 million domestic and international tourists in 2001 (3 percent of India's tourists),13.1 million tourists in 2003 (4 percent of India's tourists), and an estimated 17 million tourists in 2004. The number oftourists is expected to continue to increase and reach almost 20 million by 2010. Moreover, it is estimated that tourism directlyand indirectly employs 15 million people or 24 percent of the state's population. However, the contribution of tourism inRajasthan's GSDP is still far below its potential: the 2003 receipts from foreign tourists amounted only to US$ 200 million orless than 1 percent of the state's GSDP. The sector faces some major bottlenecks.

Obstacles to the expansion of the supply of hotels. As in the case in the rest of India, the expansion of Rajasthan'stourism industry is severely hampered by limited hotel infrastructural facilities. In comparison, Shanghai has a largernumber of hotel rooms than the 4,500 currently available in the entire state. In 2002, Rajasthan had 7 percent of India'shotels and 5 percent of India's hotel rooms, with a concentration in the heritage segment (49 percent of the nationaltotal) and in the five-star category (11 percent of the national total). If Rajasthan is to keep pace with the projectedincrease to 43 million tourists by 2020, it needs an additional 160,000 hotel rooms across the whole spectrum. Themajor obstacles in the expansion of the supply of hotel rooms include: (i) cumbersome processes required to startoperating a hotel, like obtaining 15-17 licenses that can take 8-14 months; (ii) lack of comprehensive biddingarrangements for leasing and licensing; (iii) inadequate access to finance as banks require a 60:40 ratio of equity toexternal financing. Although the latter is common in India where the hotel industry is relatively young, the issue isparticularly acute in Rajasthan, as many of the potential new entrants are small and do not have access to equity.

Obstacles to the expansion of nature-based and eco-tourism. The wetlands of Rajatshan's renowned parks (KeoladeoNational Park and Lake Pichola in Udaipur) and tiger reserves (Sariska and Ranthambhore) are under threat due to watershortages.

Inadequate consultations and coordination. Unlike many other emerging or already established tourist economies,Rajasthan has no permanent forum where the government and private industry representatives can discuss policyformulation and implementation.

Box 2.7 : Tourism—Potential and Constraints

industrial investments, and also for themodernization/extension of existingindustrial units. In addition, theseinvestments also benefit from a rebate of 50 percent on electricity, mandi andentertainment tax for the first seven years.The government has also announced the

establishment of various special economiczones and industrial parks to promoteinvestment in industry. Several specialschemes have also been announced to providefinancial assistance to entrepreneurs,including assistance through the RajasthanFinancial Corporation.

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Rajasthan is a state rich in minerals, with a virtual monopoly in the production of 25 minerals including zinc, lead, and calcitein the country. The state has 20 percent of major minerals being worked in India, and ranks fifth in terms of value of majormineral production. In the case of minor minerals, Rajasthan ranks first in the country, accounting for 30 percent of nationalproduction. The state has large resources of other minerals such as limestone, marble, sandstone, and copper that make it anattractive manufacturing location for industries based on these minerals. In fact, Rajasthan is the largest producer of cement inthe country, accounting for over 15 percent of national production.

However, despite a high rate of growth in recent years, the sector's contribution to GSDP remains modest (3 percent), especiallyrelative to the mineral base in the state. Furthermore, in the recent past, the growth trend in minerals in the state has not beenvery encouraging. According to CMIE data, the total value of mineral production in Rajasthan actually declined marginally inthe financial year ended March 2004. Further, for the seven-month period up to November 2004, the total mineral productionincreased negligibly (0.4 percent) compared to the same period last year. While fuel minerals continue to register a very highrate of growth, the production of non-fuel minerals has declined.

In terms of future growth prospects, the state is witnessing interest in investment (proposed and under-implementation) in the cementand non-ferrous metals sector, possibly attributable to the upswing in the end-user markets. Further, as the state benefits from thecommercial production of petroleum and natural gas, the contribution of mining to GSDP is likely to improve. An analysis of theproject investment data provided by CMIE indicates that of the "proposed" investments in the state, 12 percent is in the mining andmineral-based industries (including metal products). Cement accounts for two-thirds of this proposed investment and the miningsector accounts for the remaining third. Of the total value of "projects under implementation", the mining and mineral-basedindustries sector accounts for 15 percent of the value. According to CMIE data, as of April 2005, all the projects currently"announced", "proposed", or "under-implementation" in the mining sector are by public state undertakings and not the privatesector. Going forward, base metals, non-ferrous and allied metals, and fuel minerals represent significant growth opportunities.

The key problems faced by the sector faces are mentioned below:

Business regulation and red tape. This includes: (i) lengthy and onerous procedures for starting a mining operation andextending a lease that involve clearances and no-objection certificates from several departments; the process is conduciveto rent-seeking; (ii) uneven application of environmental and forest laws; (iii) inadequate information on mineralresources and their availability so that they cannot be used as basis for any commercial decision-making; (iv) historical"land grabbing" of mining leases that has resulted in the cornering of potential mining areas by the early movers as a pre-emption strategy—leading to under-utilization of mining due to the continual extensions of such inactive leases; and (iv) ineffective enforcement of laws against illegal mining.

Infrastructure bottlenecks. They are: (i) limited access to regular power supply since mines and quarries are often locatedin rural areas where electricity from the grid is not available, forcing firms to invest in high-cost captive power generation;further, even for mines that have a connection to the grid, power supply is unreliable, and, consequently the industryestimates that the cost of power generation for the mining sector, especially the smaller mines, is 20-50 percent more thanthe cost of obtaining power from the grid; (ii) the location of the mines and quarries in rural areas that often not connectedto the existing state road network, implying that the mine owners have to invest in building road connections to the neareststate road, thereby increasing the cost of doing business. Additionally, the poor quality of roads results in higher per-unittransportation cost through its impact on optimum lot sizes and dimensions of minerals transported. Similarly, forexporters, the land-locked geography of Rajasthan adversely impacts the transportation cost and lead time for delivery.

Access to finance. This is a serious bottleneck for mine owners, especially the SMEs, more so than for other sectors sincemining leases do not qualify as collateral in obtaining finance from banks and financial institutions. This is because ofthe tenure of the lease as well as the "tenancy" nature of the lessees" rights that allow for cancellation at short notice.Non-recourse and non-transferability of leases contribute to the unwillingness of banks in accepting the lease as collateral.

Box 2.8 : Mining and Quarrying—Potential and Constraints


Despite recent efforts, the state's entrepreneurialpotential is yet to be fully realized. There is anurgent need for the GoR to revisit the state's

private sector and industrial developmentpolicies to reduce the current emphasis onspecial incentives and schemes, while focusingon creating a better climate for privateinvestment.

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Though known largely for its unorganized textile sector, Rajasthan is also the fourth largest producer of spun (synthetic andblended) yarn in the country, accounting for about 7.5 percent of the national production (November 2004) and the fifth largestproducer in the country of mill-made fabrics, accounting for 5.4 percent of all-India output. The textile industry, includingyarn and fabric production, is the second largest employer in the state after mining and quarrying.

During the period April 2004-November 2005, Rajasthan's spun yarn production grew by about 9 percent, compared to 6.6percent in the corresponding period in 2003-04. With the end of the Multi Fibre Arrangement in January 2005 and the liftingof quotas on textile exports from developing countries, Rajasthan, like the rest of India, can look forward to a significant increasein textile exports to developed countries. To exploit this potential, Rajasthan needs to improve the investment climate fortextiles. Firms complain that they currently face the following key investment climate bottlenecks:

High cost of power, which appears to be the single most important constraint to firm-level profitability andcompetitiveness, since firms cannot rely on power from the grid and have to install their own generators.

Connectivity to ports is another problem for these firms, particularly those that are export-oriented.

Delays at ports have increased, and the waiting time for a container to enter the port is usually 8-10 days. This is largelybecause the number of containers reaching ports each month has increased almost tenfold over the last three years evenwhile the number of terminals has not kept pace with the increased volume.

Water shortage raises costs, since water is a key input, and firms have to rely on private tankers in the water-deficient state.

Rigid labor laws, which make it difficult for the larger firms (employing more than 100 workers) to lay-off surplus laborand also to hire contract workers.

The government needs to address these bottlenecks urgently. Firms, too, can take steps to better exploit the potential offered bythe liberalized environment. One textile company that is meeting the new challenge is Rajasthan Spinning, one of the leadingmanufacturers of polyester (along with Indo-Rama and Reliance). The company is making two big moves—capacity expansionand garment manufacturing—that makes it worth consideration in a deregulated scenario. It is expanding its yarn capacity by60 percent. What sets Rajasthan Spinning apart from the other two big polyester manufacturers is its forward foray intogarments. Exports have been increasing, going up from Rs. 1.62 billion in 2002-03 to Rs. 2.50 billion in 2003-04, or 38 percentof turnover; the company expects this to increase to 50 percent by 2005-06. At Rs. 54, the stock discounts its projected 2006-07 earnings 4.3 times. Unless high crude prices send raw material prices soaring and polyester manufacturers are unable to passon these hikes, the stock looks tailored to deliver good returns. Other textile firms in Rajasthan should follow this example.

Box 2.9 : Developing Textiles—Potential and Constraints

'000 tons % share

Tamil Nadu 838.3 39.22

Punjab 220.4 10.31

Maharashtra 208.0 9.73

Rajasthan 160.5 7.51

Gujarat 150.3 7.03

Madhya Pradesh 113.9 5.33

Andhra Pradesh 105.4 4.93

Himachal Pradesh 69.6 3.26

Other States 271.2 12.67

All-India 2137.5 100.00

Spun Yarn production: April-November 2004

Million sq. meters % share

Gujarat 250.0 33.12

Maharashtra 248.3 32.88

Punjab 76.4 10.12

Tamil Nadu 55.3 7.32

Rajasthan 40.8 5.40

Other States 84.3 11.16

All-India 755.1 100.0

Fabric (Mill Made) production: April-November 2004

Over the short to medium term, the governmentshould focus on the following reform measures:

Prioritize and implement the recommendationsof the EPRC. Accordingly, the machinery forthe implementation, involving private sectormembers, needs to be put in place as soon as possible.

Further improve the legal and regulatoryframework for doing business. As a firststep, it may be useful for Rajasthan tolearn from the experience of other stateswhich, according to the Doing Businesssurveys, have been more successful instreamlining critical business procedures.This would require comparing businessprocedures and looking for lessons thatcan be implemented.

Adopt more flexible labor laws. Firms hiringmore than 100 workers (say, up to 300workers) need to be granted the flexibility toretrench labor without seeking thepermission of the state government. Greaterclarity in contract labor laws is required toreduce uncertainty faced by firms.

Encourage PPPs in infrastructure. The keypriorities in the near future are toimplement BOT projects with transparencyand credibility that can create ademonstration effect, and to set up adedicated, cross-sectoral PPP unit that canbroaden the PPP program by transferringlessons and experiences across sectors. Theimportant next steps include: (i) developingplanning and evaluation capacities to ensurethat the PPPs that go forward representpriority projects for the state and are bestdone through the PPP route rather thanthrough traditional public procurement; (ii)strengthening capacities to monitor thefiscal costs of PPPs, including forms ofsupport such as real estate developmentrights, tax breaks, and contingent liabilities;and (iii) ensuring that these PPPs earn theirreturns from user fees, as far as practical,while recognizing affordability issues forsome consumers. On this last point, it isimportant that competition in the award ofthe PPP be used to minimize the costincurred by the state under PPP contracts.

An overall policy framework that sets outthe rationale for PPPs and specifies thatPPPs will only be pursued where they canoffer efficiencies and a better deal forconsumers and taxpayers, will be importantin developing political commitment.

Encourage the high potential tourism sector. Thegovernment could create a TourismDevelopment Board with strongrepresentation from the private sector. The"20-Year Perspective Plan for Tourism"should be taken to the next level and adetailed implementation plan with associatedtimeline should be formulated.

Encourage the mining and quarrying sector.The government could: (i) reduce the timetaken to obtain a new mining lease and/orextend a lease by considering a "singlewindow system" for the mining sector; (ii) setup specialized cells within the MiningDepartment dealing with major minerals tohelp facilitate the approval process—especially with the various departments andoffices at the state level, develop mineralresources in the state, act as the interfacebetween the private sector and othergovernment departments, and help in sortingout legal issues emerging out of the frequentlitigation against the industry; (iii) ensure amore uniform and transparent application ofenvironmental and forest laws that wouldfacilitate new entry and reduce the incidenceof illegal mining; (iv) generate and providebetter information on mining resources andtheir availability (location and magnitude) tohelp lower the costs for obtaining a mininglease and reduce the incidence of "landgrabbing"; and (v) ensure better enforcementof laws to curb illegal mining.

Over the medium to long term, the governmentshould focus on removing the constraints toinvestment as discussed above. A comprehensive viewof development should be adopted, including theidentification of and focus on engines of growth.Key issues that can be addressed by the GoR includeinfrastructural bottlenecks such as: (i) reducing powersector bottlenecks so that firms have access to reliable

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power supply at reasonable costs; (ii) improvingconnectivity to ports, which would requireimprovements in the in-state rail infrastructure (acentral government concern) as well as in-state roadinfrastructure (a joint concern of the center and thestate government); and (iii) addressing the watershortage problem through better water managementand measures such as water harvesting. WhileRajasthan's rural credit cooperatives are in betterfinancial health than those in many other states,efforts are nevertheless needed to further improvethe financial and operational performance of theseinstitutions. This would facilitate better access tofinance, particularly for smaller enterprises.

Developing Infrastructure: Powerand Roads

The above discussion has drawn attention to theimportance of infrastructure in raising overallgrowth rates in the state. In particular, well-developed infrastructure facilities can improve theinvestment climate for the private sector and help inrural development through accessibility to marketsand better connectivity of villages. This sectionlooks at recent developments in the power and roadssectors, and possible measures to addressoutstanding challenges.

Power

Rajasthan's power sector is positioned to become akey driver of the state's economic growth but hasseveral outstanding constraints to overcome. Thestate has developed its electricity infrastructure,restructured the Rajasthan State Electricity Board(RSEB), improved commercial management(especially through metering and sustained increasesin collections), and implemented a new regulatoryframework overseen by a specialist regulator.Installed capacity in the state has risen by 25 percentover the period 1999-2004, and payments to powerproducers have become timely and transparent.Utilization of thermal plants has increased fromaround 65 percent in 2000-01 to above 85 percentat present. The fundamental challenge in the sectoris to improve the efficiency of the electricitydistribution operators and manage the demand

from agricultural consumers more effectively. Inparallel, there is a need to increase power supply,expand access, and improve reliability.

Rajasthan has undertaken impressive reforms in thepower sector in recent years. It was the first Indianstate to implement the multi-buyer model (April2004), and is one of the first states preparing tointroduce competition through open access totransmission and distribution (T&D) facilities, arequirement of India's Electricity Act 2003. TheRajasthan Power Sector Reforms Act (effective June2000) unbundled RSEB into one generationcompany, a transmission and bulk supply company,and three regional distribution companies (discoms)at Jaipur, Ajmer, and Jodhpur. It also established theRajasthan Electricity Regulatory Commission(RERC). Rajasthan was also the first state in Indiato unbundle in a single stage, and, more recently,devolved bulk power purchasing responsibilities todistribution companies. The state is one of India'smost advanced in terms of metering (more than 95percent of electricity is metered, including 50percent of agricultural customers) and collections(sustained rates of about 95 percent). The RERChas given two tariff orders till date. The reliability offinancial information has improved, and thecompanies have finalized the annual accounts andaudits on time. The total investment flows sinceunbundling have exceeded Rs. 53 billion, andpower supply has stabilized.

Sector Issues

Despite growth in connectivity at the town andvillage level, there are issues like unconnectedhouseholds and low average consumption ofelectricity that need to be addressed. Agricultureaccounts for over 29 percent and industry for over33 percent of total consumption of electricity in thestate. Though almost three-quarters of electricityconsumers are domestic, they account for only 22percent of the total consumption. Overall, 55percent of the households in the state have access toelectricity. Around 91 percent of villages areconnected, but electrification has not penetratedadequately at the household level with 56 percent ofrural households still unconnected. Customer rolls

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have been growing slowly since unbundling, andnow stand at 3.85 million. This track recordunderscores the challenge of expansion into ruralareas, where most of those who do not have accessto electricity reside. Net per capita consumption inthe state is only 294 kwh per annum, well below theall-India average of 390 kwh/person/year.

The power sector faces serious financial problems,with rising losses in recent years (Figure 2.8). About45 percent of the revenue had gone into servicingthe mounting debt during FY2004 (as compared to36 percent in FY2001). Financial losses are drivenpartly by aggregate network losses. In 2004-05, salesin Rajasthan were 16,653 gwh. Bulk powerpurchases by the three distribution companiesamounted to 29,697 gwh—implying losses of13,044 gwh, or almost 44 percent of purchases.Distribution losses have remained stubbornly high,and went up after the severe drought in 2002-03, inresponse to increased demand from the agriculturalsector that strained already over-burdenednetworks. Transmission losses have come downsomewhat over this period, from over 8 percent to6.2 percent. Also, financial losses are driven partlyby very low prices for agricultural users—who accountfor only 14 percent of the revenues whileconsuming about 29 percent of total electricity

supply. The reform program has not stemmedfinancial losses. Accumulated losses sinceunbundling amount to Rs. 60 billion, almost all ofwhich has been covered by subsidies from the stategovernment or by borrowing by the Rajasthan RajyaVidyut Prasaran Nigam (RVPN) Limited that isguaranteed by the state. Audited financialstatements of all companies in the sector remainqualified since inception. Corporate governanceissues such as the role and effectiveness of the auditcommittee need attention.

Recent Policy Initiatives

The state has taken two important steps recently tohelp develop the power sector in Rajasthan. First, atariff hike was announced by RERC, with effectfrom January 1, 2005, to raise power tariffs by 10percent on average, after a gap of about four years.Tariffs were held steady for industrial users but forothers were increased typically, in the range of 15-20 percent. The aim was to bring about somefinancial relief to the sector. The state governmentannounced the implementation of the tariff revisionfor domestic and agricultural consumers from May,2005 after putting in place a subsidy schemetargeting agriculture and BPL consumers, whileagreeing to provide compensation to the companies

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Figure 2.8 : Financial Crisis in Power Sector

Note: In the left panel, data for 2005 denote provisional and for 2006 denote budget estimates. In the right panel, distribution losses are shownon the right axis as a share of discom purchases. Average cost and revenue are denoted on the left axis, with the bar denoting the revenuegap. Data from the GoR.

for revenue loss on this account. However, despiteimplementation of the tariff hike, there remains asignificant gap of about Rs.1.40 per kwh betweenaverage revenue and the average cost of supply ofRs. 4.68 per kwh in 2004 (Figure 2.8). Meteredelectricity rates in agriculture remain very low, atonly 110 paise per kwh. Serving this category willtherefore be a continued source of loss requiringconsiderable subsidy from the state. Second, thegovernment has taken various measures to reducelosses in distribution to a target of about 15-20percent over the next three years. Recentdevelopments include progress in the feederrenovation program to provide power to ruralfarmers, remove scope for pilfering, and improvereliability of supply, while reducing losses andtransformer burnouts. Complementary programs toreduce urban and industrial losses are alsounderway.


The development of the power sector will beconstrained unless Rajasthan is able to devise andimplement a lasting financial solution. Subsidieswill continue at least into the next decade, but willneed to be progressively better targeted andtransparently accounted for in the budget. Theintroduction of private distribution operators willnot solve the financial problem, which is a political-economic issue related to pricing. A furthercomplication is that an increase in the average costof supply has affected the power sector in Indiaadversely. This situation is of immediate concern toRajasthan, given its relative paucity of in-stateenergy resources.

Over the short to medium term, the governmentcould focus on the following reform measures:

Loss reduction programs could be pursuedaggressively, as could complementaryinitiatives, such as full metering of agriculturalcustomers to strengthen commercialmanagement and the governance of energyflows. It is critical to scale-up feederrenovations so the discoms can move closer tothe regulatory loss target of 29 percent by

2006, complementing this largely investment-driven program with incentives for betterperformance, and suitable monitoring,evaluation and reporting arrangements.

The pricing issues need to be addressed in amanner consistent with the Electricity Actand prevailing regulatory arrangements.While political and social realities dictate thatno rapid rise in prices can be tolerated,Rajasthan will nonetheless need to exploreways of filling the financial gap. This gap willremain during the transition period in whichoperating efficiency is raised to acceptablelevels and tariffs are adjusted in a politicallyand socially acceptable manner. The RERC,the companies, and the GoR should followthe law and undertake an annual review ofrevenue requirements. They need to providenecessary support to meet the revenue gap,and take appropriate actions against theutilities for any failures in performance. Theearly adoption of a balanced financialrecovery plan, after due consultation withkey stakeholders, would be a usefulinstrument for monitoring the performanceof each of the major stakeholders—theutilities, the government and the regulator.

An immediate challenge is to make therationing regime more predictable andaffordable to the power sector (given itspower capacity and financial constraints) andthe consumers (taking into account theirincome constraints and access to irrigationwater supply). Given the enormouselectricity demand from farmers connectedto the power network (over 3,000 MW in asystem where the peak supply is about 4,500MW), power supply to farmers will berationed in the foreseeable future. Over themedium term, Rajasthan will need to exploremechanisms for reducing energy and waterintensity in agriculture.

In order to meet the increasing demand forpower, Rajasthan could look at options toexpand generation in a least-cost manner,with clear allocation of risks, and use scarcefiscal "headroom" to leverage private capital.

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The state could also consider the strategy ofaccelerating implementation of open accessfor industrial and other energy-intensiveconsumers.

The reform road map should be revisited toreflect current financial recovery andtechnical loss reduction scenarios, with aperformance monitoring mechanism in placefor the same. The reliability of financialinformation provided by the companies tostakeholders could be further enhanced. Theroad map should encompass a strategy forfull compliance with the Electricity Act 2003and introduction of appropriate forms ofPPPs—to make governance, utilityperformance and customer services better.

Over the medium to long term, it is important tomove towards more integrated and comprehensivepolicies that reflect agricultural and ruraldevelopment realities. Increased access for poorlyconnected areas must not impose additional losseson distribution companies. Alternative ruralsupplier models should be fully assessed, and if apromising model is identified, it should be piloted.Better synergies between power and water pricingpolicies need to be developed. An integrated

strategy is needed that: (i) limits the agriculturaltariff rate only to irrigation, and only for certaintimes of the day; (ii) provides for full metering of allagricultural customers; (iii) addresses critical waterand power pricing issues in unison; and (iv)introduces technologies to reduce water use byfarmers without reducing yields.

Roads

Despite considerable expansion in the road networkduring the past decade, Rajasthan continues to faceserious challenges in the form of inadequate coverageand connectivity. An effective roads network is aprerequisite for developing trade and markets,improving access to public services, and the all-round development of a region. Rajasthan, however,has the lowest road length per unit area of the majorIndian states and a high share of unconnected ruralhabitations (Figure 2.9). Although about three-fourths of Rajasthan's 161,777 km long roadnetwork are village roads, more than half of therural habitations still remain unconnected.47

However, the state is at the forefront inimplementing the rural connectivity program underthe Pradhan Mantri Gram Sadak Yojana (PMGSY),and, by the end of 2005, it will achieve about 60

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Figure 2.9 : Road Length and Connectivity in Major Indian States

Note: All data from Ministry of Rural Development, GoI. The left panel shows data from 1999, and the right panel from 2001. In left panel,data points show road length per population and bars show road length per 100 square kilometers.

47 As of 30th November 2004; Source: Public Works Department, GoR. This comprises of 5,655 km of National Highways(NHs), 10,729 km of State Highways (SHs), 6,502 km of major district roads (MDRs), 18,742 km of other district roads(ODRs) and 120,149 km of village roads (VRs).

percent connectivity. Also, while the road length perpopulation unit places Rajasthan ahead of severalstates like Bihar, Haryana, West Bengal, UttarPradesh, and Gujarat, the road length relative toarea is low, reflecting the large size of the state andthe presence of the Thar desert.

Sector Issues

The state highways in Rajasthan face two majorproblems. First, there are serious capacity constraints,with steady traffic growth of more than 10 percentper year in the last decade leading to increasedcongestion. Over 70 percent of the state highwaysare single lane or narrower roads. Second, there areinadequate funds for maintenance of state highways,with the funds available for routine maintenanceunder the budget being only around Rs. 16,000 perkm for 2004-05—which is approximately 53percent of the requirement. In 2004-05, theallocation for periodic maintenance of statehighways is Rs. 1 billion.48 With a renewal cycle ofsix years, this translates to about 550,000 per km—or about 55 percent of the requirement. Thescenario with regard to maintenance funding haschanged significantly after the award of TwelfthFinance Commission (TFC) under which thefunding for maintenance would double for the nextfive years, though the issue would need to beaddressed subsequently.

The expansion of rural roads in Rajasthan facesseveral challenges. First, the extent of all-weathermotorized rural access is low, with an estimated22,000 rural habitations of the 37,900 beingunconnected. This limits economic activity in ruralareas, and prevents the poor from being fullyintegrated into the economy or able to accessessential services. Second, in the past, the planningof investment has been poor, without a clearframework for road use, management, andownership of rural roads in the state. Third, lack ofadequate maintenance of the existing rural roadsnetwork continues to threaten the long termsustainability of further investment. In 2003-04,

only 10 per cent of the core rural roads network inthe state was subjected to routine maintenance. Theactual maintenance expenditure (routine andperiodic) for the core rural roads network in thestate was 25 percent of the requirement. However,for 2004-05, the state has made a provision foraround Rs. 0.25 billion for maintenance of the corerural roads network—which is about 70 percent ofthe estimated requirement. Though a significantimprovement from the previous year, it should benoted that most of the maintenance funds will besourced from a Rs. 1.42 billion loan from theNational Bank for Agricultural and RuralDevelopment (NABARD).

Recent Policy Initiatives

The state has taken some important steps in recentyears to help develop the roads sector in Rajasthan.The key steps include the following:

To reduce capacity constraints, there areongoing efforts to complete four-laning ofhigh density traffic corridors. Under a MegaHighways Project, the state is seeking to two-lane five state highways, with paved shoulders.

For fiscal year 2005-06, funds available forroutine maintenance of state highways andmajor districts roads are more thanadequate.49 However, there is no provisionfor strengthening of roads in terms ofaugmentation of capacity.

An accelerated program of rural connectivity isin place to connect four villages per daybetween 2004 and 2005. Under the PMGSY,the state is undertaking a large number ofworks to connect rural villages, and there areplans to connect another 3200 villages by theend of this year.

The government has issued the RajasthanRoad Development Ordinance, 2002, whichmodifies the Road Development Policy,framed in 1994, to encourage private sectorparticipation in the development of the roadsector. In 2004, the government and

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48 Under Plan head 5054 A (V): Central Road Fund.49 This includes Non-Plan and NABARD funds.

Infrastructure Leasing & Financial ServicesLimited (IL&FS) have formed a 50:50 jointventure company named Road InfrastructureDevelopment Company of Rajasthan(RIDCOR) to undertake development ofstate highways on a BOT basis.

The state legislature has passed the RajasthanRoad Development Fund Act, 2004, in orderto address the shortfall in roads sectorfunding. As per this Act, a Rs. 0.50 cess hasbeen levied on petrol and diesel fromSeptember 2004. The non-lapsable state roadfunds are to be used exclusively for thedevelopment of state roads—mainly formaintenance but also for construction,upgradation, strengthening, widening andimprovement, and to provide support toBOT projects in the road sector. The stateexpects to collect about Rs. 1.8 billion perannum through this cess. A State RoadDevelopment Fund Management Board willbe constituted for managing the Road Fund.

In order to improve investment planning inthe sector, the state is enforcing the use ofmore rational and transparent planning anddesign tools, as well as helping to streamlinefunding flows for the sector, with theintroduction of the PMGSY scheme in 2001.

A four-year Road Development Plan is beingput in place to prioritize based on trafficdensities, age of road, and population criteria.


In order to strengthen road sector, Rajasthan needsto reduce several bottlenecks. Important stepsinclude: (i) identifying a sustainable source of fundsfor maintenance expenditures; and (ii) furtherfacilitating and expanding the role of the privatesector in engineering, construction, andmaintenance services. The government hasrecognized these challenges. In order to identifyfunding for maintenance, the state is taking severalsteps like introduction of a cess on petroleumproducts that could net up to Rs. 4 billion in thefuture, creation of a dedicated and non-lapsableState Road Fund (SRF) for maintenanceexpenditures along with an SRF ManagementBoard, and a four-year Road Development Plan. Inorder to work with the private sector, the state hasformed a 50:50 joint venture company calledRIDCOR with the IL&FS for the Mega HighwaysProject—where engineering, construction andmaintenance will be done through the privatesector. These measures are steps in the correctdirection, and could be strengthened and deepened.

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