Social sector loans to get priority

The finance ministry is discouraging multilateral lending institutions from giving the structural adjustment loans to states. They have been asked to focus instead, on social sector programmes when deciding on aid giveaways.

While the Department for International Development (DFID) has already been asked to switch off the structural adjustment loans component of their portfolios, the ministry is expected to communicate the same message to both the World Bank and the Asian Development Bank. The focus will now be on smaller programmes, including the achievement of the Millennium Development Goals.

The department of economic affairs has taken the stand that structural adjustment loans are not utilised properly by states. The net effect of such loans is, therefore, one of making states careless on fiscal discipline, while not much is achieved by way of restructuring of state finances.

Moreover, the central assistance to states from the Planning Commission is based on a hard Budget constraint. But the structural adjustment loans facility eases the constraint for states, the officials said. They added that this issue would be discussed with the multilateral institutions, for firming up of the next round of country assistance programme.

"The structural adjustment loans give states leeway and make them lax on issues of fiscal discipline," said officials of the ministry. As an example, they have pointed out that most states which have received such assistance with the accompanying conditionalities, have failed to receive the second tranche.

This was because the institutions have very little control over the policy framework of the states, unlike the stiff conditions they can impose on nations.

The World Bank had given Andhra Pradesh a structural adjustment loan of $500 million. However, the next tranche may not come through as the state has decided to supply free power to farmers.

One of the conditions of the structural adjustment loans provided to Andhra Pradesh was that the state undertake power reforms. Maharashtra's proposal for a $ 750 million loan is still pending. Eight states have approached the bank for these structural adjustment loans to tide over fiscal crisis over the years.

Other than Andhra Pradesh and Maharashtra, Tamil Nadu, Orissa and Rajasthan have asked the World Bank for the loan . The total amount allocated by the World Bank for these loans is about $ 2.5 billion annually.

For the lending institutions, these loans was an attractive proposition as the sum involved was substantial and reduced the pressure of identifying a corresponding number of small bankable loans.

Giving smaller loans for social sector programmes involves a lot more paperwork in terms of fund utilisation and consequent monitoring of the targets achieved, which was largely obviated in the case of the structural adjustment loans, said officials.

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Adjusting the structure

The department of economic affairs thinks that the structural adjustment loans are not utilised properly by states

The structural adjustment loans give states leeway and make them lax on issues of fiscal discipline

The World Bank had given Andhra Pradesh a structural adjustment loan of $500 million. However, the next tranche may not come through as the state has decided to supply free power to farmers instead of power reforms