World Bank may cut off state loans

States offering free power to farmers to be hit.

The World Bank may not sanction fresh loans for fiscal reforms to states that have decided to supply free power.

The bank's stand will have an impact on several states, including Andhra Pradesh, where the newly elected Congress government has decided to provide free power to farmers.

It can also affect Maharashtra. While the bank has cleared a structural adjustment loan of $500 million for Andhra Pradesh, the Maharashtra government's proposal for a $750 million similar loan is still pending. Over the last couple of years, eight states approached the World Bank for such loans to tide over fiscal crises.

The structural adjustment loan is a euphemism for the fiscal support plan of the World Bank. The total support that states have sought from the bank is $6,4 billion.

The structural adjustment loan is different from other loans given by the World Bank, since it is not related to any specific project.

Instead, it involves compliance by state governments with agreed upon fiscal reform yardsticks. One of the basic yardsticks that the Washington-based institution insists upon is power sector reform. This involves levying a cost-based user charge on consumers of electricity.

In 2004-05, as per the annual Plan projection, the gross subsidy on power by all states is expected to be Rs 33,797 crore. This is almost 6 per cent more than the revised estimate for 2003-04 at Rs 31,941 crore.

Apart from the loan to Andhra Pradesh, the bank has provided a $250 million support to Karnataka, which has asked for a similar support again.

Uttar Pradesh has got $250 million and is waiting for another tranche. The largest loan request has come from Rajasthan at $2.1 billion. Incidentally, the total amount allocated by the World Bank for structural adjustment loans in India is about $2.5 billion annually.

Finance ministry officials said Punjab, Rajasthan and Maharashtra would not be eligible to receive assistance because of their non-compliance with the terms of the Medium Term Fiscal Reforms Programme.

Similarly, Tamil Nadu, which has applied for $600 million, has also been refused access to structural adjustment loans for failure to undertake agreed reforms. The bank has, however, appraised the Orissa government's package of $600 million.