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TRANSCRIPT
Rajasthan Playing to
its Strengths A Strategy for Sustained and
Inclusive Growth
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Rajasthan Playing to
its Strengths A Strategy for Sustained and
Inclusive Growth1
1 Prepared by a team led by Volker Treichel (MFM), and consisting of Vibhuti Mendiratta and Rinku Murgai (poverty), Daniel Pajank (growth analysis), Frederico Gil Sander, Smriti Seth, Manoj Jain and Indira Iyer (fi scal policy), Madhur Gautam, Raman Ahuja, Pratap Birthal (agriculture), Vincent Palmade, Ashish Narain, Vandana Chandra, Harsh Jhanjaria and Raman Ahuja (manufacturing and services), Stefania Abakerli, Amy Chamberlain and Jim Phillips (tourism), Sangeeta Goyal and Namrata Tognatta (education), Sheena Chhabra (health), Shrayana Bhattacharya and Vanita Leah Falcao (Social Protection). John Blomquist (Program Leader) coordinated the human development pillar. Overall guidance was provided by Junaid Kamal Ahmad (Country Director), Martin Rama (Chief Economist, South Asia) and Shubham Chaudhuri, Deepak Mishra and Manuela Francisco (Practice Managers, MFM). Comments by peer reviewers Sudhir Shetty (Chief Economist, East Asia and Pacifi c) and Cem Mete (Practice Manager, Human Development) are gratefully acknowledged. The team sincerely appreciates the excellent collaboration of the Government of Rajasthan, in particular of the Planning Secretary Akhil Arora who provided overall coordination for the preparation of the report.
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Contents
Introduction 5
A. A positive track record: High growth and fast poverty reduction 6
B. Growth-Poverty nexus 12
C. Staying the course or changing direction? — Challenges and Strengths 17
C.1 Challenges 18
Challenge 1: Sustainability of water resources 18
Challenge 2: Persistent intra-state disparities and weak social indicators 19
Challenge 3: Inadequate job growth 23
Challenge 4: Limited fi scal space 25
C.2 Strengths 31
Economic potential through a spatial lens 31
Strengths at the sectoral level 35
Sector analysis: Agriculture has been growing rapidly, and several drought-resistant crops and livestock products show considerable promise. 35
Sector analysis: Labor-intensive manufacturing has grown rapidly, and investors have favorable perceptions of Rajasthan’s potential in these sectors. 38
Sector analysis: Tourism development in Rajasthan has inherent potential to support the state’s structural transformation, given the state’s unmatched cultural heritage and natural endowment. 41
D. The way forward: Four pathways 44
Pathway 1: More productive and environmentally sustainable agriculture 44
Pathway 2: Promoting structural transformation by supporting promising sectors in industry and services 46
Pathway 3: Strengthening service delivery 47
Pathway 4: Enhance fi scal policy to spend more, better and sustainably 48
E. Concluding Statements 50
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Figures
Figure 1: Compound average per capita GDP growth of Rajasthan, all-India and other LIS 7Figure 2: Average GDP per capita of selected countries relative to Rajasthan (1994-96 vs. 2013-15) 7Figure 3: Gross state domestic product per capita growth rates, Rajasthan, all-India and other LIS (in percent, FY1994-2015) 8Figure 4: Gross state domestic product growth rates, Rajasthan and all-India (in percent, FY1994-2015) 8Figure 5: Sector Shares, Rajasthan and India, FY1994, FY2005, FY2015 (in percent) 10Figure 6: Rajasthan's GSDP per capita ranking vis-à-vis Indian states and territories, FY1992-2014 12Figure 7: Population below poverty line (in percent) 13Figure 8: Rural/Urban population below poverty line (in percent) 13Figure 9: Elasticity of poverty reduction to growth (1993-94 to 2011-12) 13Figure 10: Inequality in Indian states, Gini Coeffi cient 2012 14Figure 11: Poverty headcount for social groups over time in Rajasthan (in percent of population) 14Figure 12: Poverty headcount for social groups in India over time (in percent of population) 15Figure 13: Compound annualized average growth in agriculture 2005-2012, in percent 16Figure 14: Change in employment in construction sector compared to other LIS and all-India 16Figure 15: Status of groundwater use in Rajasthan, 2010 18Figure 16: Blue water present usage and projections under a business-as-usual scenario (in BCM) 19Figure 17: GDDP and GDP per capita, PPP (current international $) in 2012 20Figure 18: District growth rates in GDDP, Rajasthan, (in percent FY05-12) 20Figure 19: Child sex ratio: age 0-6, females per 1,000 males (2011) 21Figure 20: Secondary education attainment among women, 2012 (in percent of adults) 21Figure 21: Prevalence of stunting and underweight in rural and urban areas 22Figure 22: Stunting in children < 5 years,2005-06 and 2015-16 (in percent) 23Figure 23: Households practicing open defecation, 2012 (in percent 23Figure 24: Public Finances, GoR (% of GSDP) 25Figure 25: Fiscal defi cit of Rajasthan compared to other states (% of GSDP) 26Figure 26: Fiscal situation – Business as usual will lead debt levels to grow indefi nitely 27Figure 27: Rajasthan’s challenges and pathways forward 30Figure 28: Estimated economic potential index (EPI) rankings 31Figure 29: EPI and Economic Performance 32Figure 30: EPI and Economic Performance 32Figure 31: India -- Correlation of economic densities with GDP per capita 33Figure 32: Rajasthan – Level and pace of urbanization 34
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Figure 33: States’ Manufacturing Sector Growth, 2004-14 (in percent) 38Figure 34: Rajasthan’s share in India’s manufacturing 38Figure 35: Growth in Gross Fixed Capital Formation in Rajasthan, 2003-13 39Figure 36: Availability of industrial land with RIICO, Rajasthan 40Figure 37: Domestic and foreign tourist arrivals in perspective 41Figure 38: Progress in health service delivery outcomes, (in percent, 2005/06 to 2014/15) 43
Tables
Table 1: Employment, output, productivity and population, Rajasthan, FY2005-12 10Table 2: Changes in output per worker by sector, Rajasthan, FY2005-12 11Table 3: Evolution in Access to Basic Services in Low-Income States, 2005-2013 17Table 4: Social indicators, Rajasthan and bottom fi ve performers 22Table 5: Change in employment by sector of economic activity, Rajasthan, FY05 and FY12 24Table 6: Key fi scal indicators by FY 2030 under three scenarios 27Table 7: Production of some important commodities in Rajasthan, 2015-16 35Table 8: Trend in animal health infrastructure in Rajasthan (number) 36Table 9: Investment Potential Index of selected Indian states 39
Boxes
Box 1: ICT-enhanced health system monitoring, Rajasthan 43
Annexes
Annex 1: Rajasthan’s comparative advantage in selected crops – The State’s attractiveness relative to market competitors in selected priority sectors 51
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Introduction
1. India’s largest state by area, Rajasthan also stands out in economic performance: over the past 20 years Rajasthan has grown faster, and achieved a greater reduction in poverty than any other low-income state. This strong performance refl ects broad-based eff orts towards policy reform across sectors that resulted in a more productive and diversifi ed agriculture sector, higher investments in manufacturing, and substantial improvements in public service delivery. In particular, policy reforms undertaken since 2003 succeeded in ending a growth slump from 2000-2005 and ushered in a period of strong growth.
2. These achievements notwithstanding, Rajasthan still lags behind many other states in India. Its per capita Gross State Domestic Product continues to rank 22nd among India’s states and territories, the same position it had in 1992. Moreover, while income poverty has declined signifi cantly, social indicators remain among the worst in India and, even among low-income states, rank near the bottom. The state is also among the lower performers in womens’ and girls’ education and gender gaps have shown little improvement over the years.
3. Rajasthan is now at a crossroads and faces serious challenges to sustaining rapid and inclusive growth. In recent years, growth has slowed down and the crucial tourism sector has lost market share. A worsening water crisis is making traditional agricultural practices increasingly unsustainable, while growing fi scal pressures, due partly to defi ciencies in the electricity sector, are narrowing the fi scal space available to implement comprehensive policy actions. At the same time, a dearth of high-quality jobs and stagnant social indicators, especially for women, make it imperative to devise ways to improve the sustainability and inclusiveness of growth. If these challenges are not addressed, Rajasthan’s progress might be reversed: conditions in rural areas may become more diffi cult at a time when the environment in urban areas is not yet conducive to rapid growth and job creation in the manufacturing and services sectors. As a result, growing unemployment compounded by persistent geographical and social disparities could threaten the improvements in the state’s welfare.
4. Against this background, the Government of Rajasthan has asked the World Bank to prepare this report. The purpose of the report is to help develop a possible growth strategy as part of the ongoing dialogue with the state.2 In particular, the report is expected to serve as important input to the Bank’s lending strategy for the state going forward by proposing an overall strategic framework for the development of
2 The report does not discuss in detail reform strategies in the power and water sectors which are covered in other recent Bank reports (Programmatic Electricity Distribution Reform Development Policy Loan for Rajasthan (World Bank, 2016); and Rajasthan Cross Sectoral Water Issues and Strategies (World Bank, 2017).
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the state. The focus on Rajasthan refl ects two considerations: fi rst, Rajasthan is a low-income state that has made considerable progress in implementing its reform agenda, but has now recognized the need to recalibrate its growth strategy; second, highlighting key features of Rajasthan’s recent economic and social developments and possible policy directions under strategic pathways can help other states in India develop their own strategic development framework.
5. The report fi nds that under-pricing of electricity and price incentives for wheat have contributed to tilting the structure of the economy towards production of water-guzzling crops, thus adversely aff ecting the sustainability of water resources and narrowing fi scal space. As a result, the sustainability and inclusiveness of growth is at risk and opportunities to accelerate growth in areas in which Rajasthan has a comparative advantage are not being fully harnessed. To create conditions for the restructuring of policy incentives and fully exploit the state’s growth potential, the report suggests that Rajasthan uses its inherent strengths in agriculture, manufacturing and services to promote less water-intensive forms of agriculture, labor-intensive manufacturing and a more diverse off er of tourism. Furthermore, the report proposes that the state build on its recent track record in using innovative forms of service delivery to further strengthen access to education, health care and social protection. With a view to creating the fi scal space for the measures necessary to support the restructuring of the economy and ensure continued fi scal sustainability, the report also discusses policy directions aimed at strengthening revenue collection and expenditure effi ciency.
A. A positive track record: High growth and fast poverty reduction
6. Both Rajasthan’s growth performance and its record on poverty reduction distinguish it from India’s other low-income states (LIS). Rajasthan has had an impressive growth performance over the past two decades. Figure 1 compares Rajasthan’s per capita GDP growth with those of all-India and the average of other low-incomes states, including Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, and Uttar Pradesh. Over the last two decades, Rajasthan’s average annual per capita growth rate was 4.9 percent, about 1.2 percentage points above the growth performance of the LIS.3 However, the all-India average per capita annual growth rate surpassed Rajasthan’s by 0.3 percentage points.
7. Moreover, Rajasthan has outperformed most countries of the world in per capita GDP growth. Figure 2 shows the average GDP per capita of a selected number of countries relative to Rajasthan for two periods: 1994-96 and 2013-15—in other words, the beginning of a period of accelerated reforms in India and the most recent period for which data are available.4 Per Capita GDP in most countries fell during 2013-15 relative to Rajasthan, indicating slower growth in those countries.
3 As discussed further below, performance varies considerably by sub-period. However, the two decades since the beginning of reforms off er an overall view of growth performance that allows to step back from intra-year fl uctuations. 4 The few exceptions are (a) countries that recovered from the crisis triggered by the collapse of the Soviet Union, such as Georgia (GEO), Armenia (ARM), Azerbaijan (AZE), Turkmenistan and Belarus (BLR); (b) countries that were in severe internal confl ict in the mid-1990s, such as Myanmar (MNR) and Bosnia and Herzegovina (BIH); (c) countries that saw an exceptional period of rapid growth, such as did China (CHN) and Macao (MAC); and (d) a small African country, Equatorial Guinea (GNQ), that discovered oil in the 1990s.
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FIGURE 2: AVERAGE GDP PER CAPITA OF SELECTED COUNTRIES RELATIVE TO RAJASTHAN (1994-96 VS. 2013-15)
0
50
100
150
200
2013-2015 (avg) Rajasthan1994-1996 (avg)
Myanm
ar
Nep
al
Tanzania
Bang
lad
esh
Seneg
al
Kyrg
yz R
ep
ub
lic
Lao
PD
R
Zam
bia
Vie
tnam
Ind
ia
Ghana
So
uth
Asia
Cam
ero
on
Kenya
Sub
-Sahara
n..
.
Mo
ldo
va
Nig
eria
Co
ted
'Ivo
ire
Nic
ara
gua
Ho
nd
ura
s
Pakis
tan
Rajasthan 100
Source: Calculation based on data from Central Statistics Offi ce (CSO) and World Development Indicators.
8. Growth varied signifi cantly by sub-period (Figure 3). From 1994 to 2000 and from 2005 to 2012, Rajasthan’s growth performance surpassed that of India as a whole as well as that of its low-income states. The intervening periods of slower performance, especially from 2013-2015, were mostly associated with droughts, which adversely aff ected agricultural production, and a slowdown in other sectors.
9. Water availability has always been an important challenge for Rajasthan. While the state has made progress in improving water management through micro- and drip-irrigation and promotion of less water-
FIGURE 1: COMPOUND AVERAGE PER CAPITA GDP GROWTH OF RAJASTHAN, ALL-INDIA AND OTHER LIS (IN PERCENT, FY 1994-2015)
Source: Calculation based on Central Statistics Offi ce (CSO) and World Development Indicators.
0
1
2
3
4
5
6
Other LISAll IndiaRajasthan
4.95.2
3.7
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guzzling crops, water resources are increasingly stressed as consecutive droughts have put growing pressure on groundwater. Subsidies have not only distorted the structure of the economy, but also limited fi scal space, hence constraining capital and social expenditure that are vital to promote growth.
FIGURE 3: GROSS STATE DOMESTIC PRODUCT PER CAPITA GROWTH RATES, RAJASTHAN, ALL-INDIA AND OTHER LIS (IN PERCENT, FY1994-2015)
0
1
2
3
4
5
6
7
8
Other LIS (exel. RJ)IndiaRajasthan
5.24.8
2.4 2.1
3.9
2.1
7.0
6.5
5.6
4.1
5.1
4.4
FY2012 - FY2015FY2005 - FY2012FY2000 - FY2005FY1994 - FY2000
Source: Calculation based on data from Central Statistics Offi ce (CSO).
FIGURE 4: GROSS STATE DOMESTIC PRODUCT GROWTH RATES, RAJASTHAN AND ALL-INDIA (IN PERCENT, FY1994-2015)
0
2
4
6
8
10
12
IND ServiceIND IndustryIND AgricultureIND GDP
FY2012 - FY2015FY2005 - FY2012FY2000 - FY2005FY1994 - FY2000
0
2
4
6
8
10
12
RJ ServiceRJ IndustryRJ AgricultureRJ GDP
7.0
7.9
3.3
4.7
11.2
10.2
8.3
4.3
6.8
1.31.6
6.06.6
5.1
7.8
8.8
6.0
9.910.4
8.5
5.7
2.5
4.8
8.7
8.5
2.3
3.2
9.8
8.6
4.2
5.7
5.8
Source: Calculation based on data from Central Statistics Offi ce (CSO).
10. Figure 4 shows sectoral growth performance during the same sub-periods and compares it to India. Two periods of high growth stand out: the fi rst from 1994-2000 and the second from 2005-2012. The fi rst was driven by strong performance of the manufacturing and services sectors, refl ecting major investments in the chemical, petrochemical, and mining industry. These investments were the result of the major wave of liberalization and deregulation undertaken by India at that time. The second wave of
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industrial growth post-2005 coincided with the discovery of oil in the Thar desert, and saw further growth of investments in chemical and petrochemicals as well as food and beverages. In addition, agriculture saw broad-based growth driven by both livestock and crops, with the latter rooted mostly in yield growth and area expansion.
11. While droughts have contributed to volatility in economic performance, agricultural growth has been remarkably resilient in part due to policy shifts. The early 2000s saw a series of successive weather shocks (monsoon defi cits above the long-term average) – a country-wide phenomenon. These shocks, culminating in the 2003 drought, had a signifi cant impact on crops as well as livestock, and, given the importance of agriculture for Rajasthan’s economy, contributed to the slowdown from 2000-2004. However, the normalization of monsoons since 2005 as well as important policy shifts along with rising prices contributed to the strong growth performance in agriculture over the past decade. Policy shifts included liberalization of agricultural output markets, investment in rural infrastructure, promotion of water harvesting and effi cient management of water resources, and increased research on drought tolerant crops, such as guar, fruits and pulses. The positive agricultural performance over the past 20 years has been partly driven by growth in less water-guzzling crops and by structural reforms demonstrating the state’s strong potential which could be further harnessed in the future.
12. The services sector, which includes tourism and more recently a growing share of modern services, has also been an important and relatively steady driver of growth. With the notable exception of the period of 2000-2005, services sectors have expanded substantially and contributed to the state’s economic growth. The slowdown of services growth in 2000-2005 was driven primarily by a slowdown in public administration and tourism-related sectors (Figure 4). In addition, the deceleration of growth in the sector was related to the 2003 drought, which given the importance of agriculture in Rajasthan had important second-round eff ects on other sectors of the economy. Moreover, Rajasthan’s loss of competitiveness in manufacturing and services during the 2000-2005 period may also refl ect a weaker fi scal impulse, i.e. the delayed impact of cuts in capital expenditure on infrastructure during the late 90’s as the state was forced to consolidate its fi nances.
13. In recent years, however, services growth has lagged the national average and contributed to slower structural transformation of the economy. Figure 5 compares the pace of structural transformation of Rajasthan with that of India as a whole. From 1994-2005, the changes in the structure of Rajasthan’s economy mimicked those of the Indian economy. However, when in 2012 India’s structural change process slowed down, it came to a halt in Rajasthan. Between 2012 and 2015, while India’s GDP continued to shift from agriculture to services, the relatively small gains in services in Rajasthan came at the expense of industry. Recent interest in the manufacturing and services sectors has shown that these sectors could again become important drivers of growth. Moreover, the tourism sector which has recently fallen behind other states could see stronger growth, provided the underlying business model is modernized and new promising markets are being tapped (discussed further below in section 3).
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FIGURE 5: SECTOR SHARES, RAJASTHAN AND INDIA, FY1994, FY2005, FY2015 (IN PERCENT)
0
10
20
30
40
50
60
IND ServiceIND IndustryIND Agriculture
FY2015FY2005FY1994
0
10
20
30
40
50
60
RJ ServiceRJ IndustryRJ Agriculture
FY2015FY2005FY1994
29.7
35.5
23.5
30.4
39.8
19.7
25.6
30.6
33.3
43.8
18.019.4
30.6
51.849.9
30.6
46.9
41.1
Source: GoR, Central Statistics Offi ce (CSO).
14. A sharp increase in labor productivity was the single most important driver of growth (Table 1, Table 2), followed by capital accumulation. In fact, while the agricultural sector saw the biggest employment losses in absolute terms from 2005 to 2012, the sector witnessed a signifi cant (76 percent) increase in labor productivity. The services sector, like the manufacturing and mining sectors, also saw sizeable increases in labor productivity (60, 134 and 270 percent respectively), but from much higher levels. At the same time, the construction sector saw a major decrease in output per worker (-30 percent). The entry of more workers into the sector – largely from the agriculture sector – was not accompanied by improvements in technology. Along with the sharp productivity increase in agriculture and the signifi cant drop in construction, the initially signifi cant gap in labor productivity between these two sectors had almost disappeared by 2012. The sharp increase in population in school refl ects both the release of labor from agriculture – refl ecting productivity increases in that sector – as well as stagnant growth in job opportunities in the manufacturing and services sectors.
TABLE 1: EMPLOYMENT, OUTPUT, PRODUCTIVITY AND POPULATION, RAJASTHAN, FY2005-125
2005 2012 % change
GDP (value added) (in million) 1,277,457 2,308,593 80.7
Total population (in million) 61 69 13.9
Total population of working age 35.2 41.0 16.7
Total number of employed 26 28 5.1
GDP (value added) per capita 21,056 33,718 60.1
5 Labor market data are only available through 2012.
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2005 2012 % change
Output per worker 48,542 83,486 72.0
Employment rate 74.82 67.3 -10.0
Working age population not in school (million) 34.5 40.3 16.8
Ratio of farm workers to working age population not in school
45.4 34.5 -24.0
Ratio of non-farm workers to working age population not in school
28.7 34.1 18.8
Share of population of working age 58.0 59.4 1.4
Source: Table obtained using Job Generation and Growth (JoGGS) decomposition tool with value added and population data from the Central Statistics Offi ce (CSO) in the 2004-05 series and employment data from the NSS surveys FY05 and FY12.
TABLE 2: CHANGES IN OUTPUT PER WORKER BY SECTOR, RAJASTHAN, FY2005-12
2005 2012 % change
Agriculture 20,981 35,571 69.5
Mining 90566 327178 261.3
Manufacturing 69464 158855 128.7
Construction 62080 43066 -30.6
Other industry 482366 190757 -39.5
Services 119103 192,785 61.9
Total output per worker 50096 83,949 67.6
Source: Table obtained using JoGGs decomposition tool with value added and population data from the Central Statistics Offi ce (CSO) in the 2004-05 series and employment data from the NSS surveys FY05 and FY12.
15. Overall, notwithstanding its good growth performance over the past 25 years, Rajasthan has not been able to catch up with India’s more advanced states in terms of per capita GDP. Figure 6 shows Rajasthan’s gross GDP per capita ranking among all states and union territories over the past 20 years. In 1992, Rajasthan ranked 23rd among 28 states and union territories. In 2016, it continued to rank 22nd among 31 states and Union Territories for which data was available. While between 1992 and 1999, Rajasthan grew on average as fast as the best-performing states and managed to overtake several other states, it fell behind from 2000 until 2010, when a period of much higher and solid growth began.6 The lack of convergence refl ects a pattern of volatile economic growth as well as the impact of fi scal and weather shocks.
6 Rajasthan’s growth story is part of a greater pattern of divergence between low and high-income states in India. States that started with a lower per capita income level in the early 1990s grew more slowly than initially richer states.
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FIGURE 6: RAJASTHAN'S GSDP PER CAPITA RANKING VIS-À-VIS INDIAN STATES AND TERRITORIES, FY1992-2014
15
20
25
30
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
23
20
26
20
22
19 19
22
24 24
26
24
20
26 26 26
27 27
26
2221 21
22 22 22
Source: Central Statistics Offi ce and World Bank staff calculationsNote: Rankings based on state GSDP per capita in nominal terms.
16. Rajasthan’s growth performance was even more striking at the district level: Within the state, some districts have a per capita GSDP at the level of Jamaica – a middle-income country -- and others of Nepal – a low income country. Moreover, there has been little indication of economic convergence: Rajasthan has exhibited a pattern of low-density growth with few regions of the state exhibiting high growth, and others being left behind. Yet, with the Delhi-Mumbai freight corridor close to completion, opportunities for spatially more equally distributed growth may emerge (section 3).
17. The disparity in economic performance has also translated into persistently weak, albeit much improved, social indicators. Improvements in social indicators partly refl ect the use of advanced information technology where Rajasthan has been at the vanguard of reforms (section 3 discusses this point in more detail).
B. Growth-Poverty nexus
18. Comparisons aside, Rajasthan’s growth performance has been impressive in its own terms, not least because of its major impact on the state’s poverty level. During 2005-2012 – a period of fast poverty reduction for India – economic growth was much more eff ective at reducing poverty in Rajasthan than in all-India. A one percent increase in growth was accompanied by a 1.75 percent decline in the poverty rate in Rajasthan, compared to a 1.06 percent decline in all-India (Figures 7-9).7 The state’s poverty rate plummeted by 19.7 percentage points, from 34.4 to 14.7 percent, during 2005-2012, while the all-India rate declined by 15.3 percent from 37.2 to 21.9 percent over the period. Importantly, poverty declined in both urban and rural areas (Figures 7-9).
7 Poverty measured using the Tendulkar poverty line. For low-income states, the growth elasticity of poverty was only 0.89.
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FIGURE 7: POPULATION BELOW POVERTY LINE (IN PERCENT)
0
10
20
30
40
50
60
70
80
20121994 2005
MZDLNLGAPJJKKLSKTRUKHPHRMGGJRJWBMPAPTNAIUPMHKACGASARODBHJHMN
Source: National Sample Survey rounds (NSS) of 1993-94, 2004-05 and 2011-12.
FIGURE 8: RURAL/URBAN POPULATION BELOW POVERTY LINE (IN PERCENT)
0
10
20
30
40
50
201220051994
UrbanRuralTotal
38
34
41
36
16
30 30
11
15
Source: National Sample Survey rounds (NSS) of 1993-94, 2004-05 and 2011-12.
FIGURE 9: ELASTICITY OF POVERTY REDUCTION TO GROWTH (1993-94 TO 2011-12)
-2.0
-1.5
-1.0
-0.5
0.0
JharkhandChattisgarhBiharUPMPIndiaOrissaRajasthan
-1.75
-1.24
-0.89 -0.88
-0.60 -0.56
-1.06-0.94
Source: Staff estimates from National Sample Survey and CSO data.
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19. Inequality in Rajasthan has remained broadly stable between 1994 and 2012. Only urban areas became slightly more unequal – the Gini coeffi cient increased from 0.27 in 1993-94 to 0.31 in 2011-12. Inequality in Rajasthan is lower than for all-India. It is also lower than in every LIS, with the exception of Bihar (Figure 10). As discussed further below, this relatively moderate income inequality stands in contrast to persistent and sometimes rising disparities of social indicators.
FIGURE 10: INEQUALITY IN INDIAN STATES, GINI COEFFICIENT 2012
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
MNMGSKBHNLTRASRJJHJKODMZGJAPUKGAHPPJUPCGMPWBHRAITNARMHKADLKL
Source: National Sample Survey, 2011-12.
20. Poverty has also declined more rapidly in Rajasthan for Scheduled Castes (SC) and Other Backward Classes (OBC) compared to all-India and other LIS. Scheduled Tribes (ST), on the other hand, have remained poorer and have made slower progress than other social groups (Figure 11)—a phenomenon broadly in line with the situation of STs for India as a whole (Figure 12).
FIGURE 11: POVERTY HEADCOUNT FOR SOCIAL GROUPS OVER TIME IN RAJASTHAN (IN PERCENT OF POPULATION)
0
10
20
30
40
50
60
GeneralOther Backward CasteScheduled CasteScheduled Tribe
20122005
58
49
28
19
40
19
-5% per year
-13% per year
-15% per year
-21% per year
9
4
Source: National Sample Survey rounds of 2004-05 and 2011-12.
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FIGURE 12: POVERTY HEADCOUNT FOR SOCIAL GROUPS IN INDIA OVER TIME (IN PERCENT OF POPULATION)
0
10
20
30
40
50
60
GeneralOther Backward CasteScheduled CasteScheduled Tribe
20122005
60
51
38
23
43
29
-5% per year
-8% per year
-8% per year
-8% per year
21
12
Source: National Sample Survey rounds of 2004-05 and 2011-12.
What explains Rajasthan’s strong record in poverty reduction?
21. Proximity of many districts in Rajasthan to the Delhi National Capital Region and the Delhi-Mumbai economic corridor has contributed to growth and poverty reduction.8 The economically most active locations in Rajasthan tend to fall in the cluster around Delhi9 — a region characterized by greater economic opportunities and lower poverty rates. At the same time, the Southern districts of Rajasthan tend to be the least productive locations – these districts have a majority ST population and the highest percentage of poor. Hence, slower progress in poverty reduction observed for Scheduled Tribes in Rajasthan is in part a refl ection of the state of progress of the districts where they live.
22. The importance and performance of the agriculture sector, as well as the relatively large shift of workers to the construction sector are possible explanations for the greater responsiveness of poverty reduction to growth. Agriculture employs half of Rajasthan’s workers, many of whom poor or vulnerable. The fact that agricultural growth was an important contributor to Rajasthan’s economic growth in the 2005-2012 period (as shown earlier), and that agriculture grew faster than the all-India average as well as in most low-income states, implies that growth benefi ted disproportionately (relative to other states) the poor and vulnerable households dependent on agriculture (Figure 13). In addition, although the construction sector did not grow faster in Rajasthan compared to other states, it created more jobs (Figure 14). As Chatterjee et al. (2016) show, job growth in the construction sector is strongly linked to poverty reduction.10 Therefore, Rajasthan’s growth was especially eff ective in reducing poverty because it increased productivity (and incomes) of households dependent on agriculture, and more households exited agriculture into the more productive (and higher-paying) construction sector than in other LIS.
8 Yet, this does not explain the large diff erence in poverty elasticity between Rajasthan and the rest of India. 9 Rama, M. and Y. Li (2015). Households or Locations? Cities, Catchment Areas and Prosperity in India. Cities, Catchment Areas and Prosperity in India. World Bank Policy Research Working Paper no. 7473 (November 5).10 Chatterjee et.al., “Pathways to reducing poverty and sharing prosperity in India: lessons from the last two decades”, Synthesis Report, World Bank., Washington DC, 2016.
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FIGURE 13: COMPOUND ANNUALIZED AVERAGE GROWTH IN AGRICULTURE 2005-2012, IN PERCENT
0
2
4
6
8
10
Uttar PradeshOdishaMadhya
Pradesh
JharkhandChattisgarhBiharIndiaRajasthan
6.0
4.24.7
6.7
8.6
5.5
3.0 3.1
Source: Central statistics offi ce and author’s estimates
FIGURE 14: CHANGE IN EMPLOYMENT IN CONSTRUCTION SECTOR COMPARED TO OTHER LIS AND ALL-INDIA
-15
-12
-9
-6
-3
0
3
6
9
12
ServicesOther industryConstructionAgriculture
All IndiaUttar PradeshRajasthanOdishaMadhya PradeshJharkhandChattisgarhBihar
-11.3
7.3
-0.5
4.5
-5.6
2.52.3
0.7
-12.8
-0.5
6.0
-11.1
7.48.4
-0.7
3.4
6.0
-1.7
3.6
-11.7
-9.9
9.5
-8.0
0.0
2.2
7.0
3.0
1.1 1.7
-10.6
5.1
1.3
4.3
Change in worker/working age pop ratio, 2005-2012
Source: CSO, 2004-05 series Source: NSS
23. Improvements in access to basic services in Rajasthan appear to have also had an important impact on poverty reduction and growth. While Rajasthan lacked adequate infrastructure and had poorer education outcomes than other states at the beginning of the period, by 2012/13 it had made marked improvements in electrifying households, providing drinking water on premises and access to housing and sanitation – all preconditions for increased productivity of the population. As shown in Table 3, Rajasthan’s improvements in these areas have signifi cantly surpassed those in other LIS. These improvements partly refl ect the substantial increase in capital expenditure over the last 15 years (see fi scal pathway below). Nonetheless, on most social indicators Rajasthan continues to rank near the bottom of low-income states, refl ecting the very low level at the start.
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TABLE 3: EVOLUTION IN ACCESS TO BASIC SERVICES IN LOW-INCOME STATES, 2005-2013
Rajasthan Bihar Chhattisgarh Jharkhand Madhya Pradesh
Uttar Pradesh
Odisha
2005 Power, Electrifi cation (%) of households
58 16 67 37 76 37 39
Road density - km per '0000 sq km
43.8 127.4 53.5 22.6 53.2 106.5 138.2
Literate (% adults) 48 48 58 52 54 52 59
Secondary education and above (% adults)
16 17 16 17 18 20 16
2006 Maternal mortality rate ('00,000 live births)+
388 312 335 312 335 440 303
Infant Mortality rate (per '000 live births)
67 60 61 49 74 71 73
2008 Drinking water on premises (% households)
43 63 25 22 26 62 20
Open Defecation (% households)
64 74 73 75 70 65 79
2012 Power, Electrifi cation (%) of households
82 31 87 69 87 51 70
Road density - km per '0000 sq km
72.6 147.1 56 33 65.3 167.3 163.6
Literate (% adults) 59 58 71 62 67 60 68
Secondary education and above (% adults)
25 24 24 28 26 27 21
Drinking water on premises (% households)
56 73 27 29 34 63 27
Open Defecation (% households)
44 68 68 74 61 61 73
2013 Maternal mortality rate (per '00,000 live births) ++
244 208 221 208 221 285 222
Infant Mortality rate (per '000 live births)
47 42 46 37 54 50 51
Source: Sample Registration System, Census of India. + 2004-2006; ++ 2011-2013
C. Staying the course or changing direction? — Challenges and Strengths
24. Rajasthan’s record in poverty reduction and growth performance has indeed been impressive. It refl ects the fact that Rajasthan has over the past decade implemented a strategy that focused on supporting sustained and inclusive growth by increasing agricultural productivity, attracting investment in the manufacturing and services sectors and improving service delivery. Results of this strategy included (i) higher-than-expected growth in agriculture, partly based on higher productivity and diversifi cation towards crops and livestock activities more suitable to Rajasthan’s climatic conditions; (ii) large investments in the manufacturing sectors, especially the chemical, food and beverage and petroleum industry; and (iii) improved outputs in service delivery.
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25. Yet, Rajasthan is still a low-income state and remains far below the level of development to which it aspires. The question is whether Rajasthan should continue with its current development strategy or change direction. The following challenges indicate that, while the adopted strategy has served the state well, it is not sustainable going forward. A change of direction is needed.
C.1 Challenges
Challenge 1: Sustainability of water resources
26. Perhaps the most important challenge to the long-term sustainability of Rajasthan’s growth performance is the impending water crisis. Water scarcity has always been a serious issue for Rajasthan, but the most recent data show that it is approaching critical dimensions. Rajasthan’s water reserves are depleted from drought and overuse, which threatens the viability of current agricultural practices as well as prospects for developing water-intensive manufacturing. Moreover, the depletion of groundwater is resulting in toxic concentrations of naturally occurring minerals such as arsenic and fl uoride, which is aff ecting the health of millions of people in the state (Figure 15). With 86 percent of water used by the agriculture sector, this situation largely refl ects the structure of the agriculture sector and the continued large share of water-guzzling crops, fuelled in part by agricultural subsidies.
27. Under a business-as-usual scenario, Rajasthan’s economy will require twice as much water in ten years.11 A recent Bank study highlights that at current water use intensities in the agriculture, industry and services/drinking water sectors, and assuming the state’s growth objectives, the requirements for blue (fresh) water will increase from 38.9 billion cubic meters (BCM) in 2013-14 to 87.6 BCM in 2024-25 – an increase of 126 percent. Yet, water availability of drinking water on a per capita basis is estimated to be in the range of 650 to 780 cubic meters (per year), about a third less than the generally accepted norm of 1000 cubic meters.12 By 2050, this availability is further expected to drop below 450 cubic meters (per year), which is lower than the absolute minimum requirement of 500 cubic meters (per year).13 The chart below depicts the projected demand and supply gap by 2024-25 (Figure 16).
11 Smita Misra, Rajasthan Cross Sectoral Water Issues and Strategies (forthcoming World Bank publication, 2017). 12 United Nations. hdr.undp.org/en/media/HDR06-complete.pdf13 United Nations. hdr.undp.org/en/media/HDR06-complete.pdf
Overexploited
70%
Critical
10%
Semi-critical
7%
Safe
13%
FIGURE 15: STATUS OF GROUNDWATER USE IN RAJASTHAN, 2010
Source: Smita Misra, Rajasthan Cross Sectoral Water Issues and Strategies (World Bank, 2017).
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FIGURE 16: BLUE WATER PRESENT USAGE AND PROJECTIONS UNDER A BUSINESS-AS-USUAL SCENARIO (IN BCM)
0
20
40
60
80
100
Additional blue water supply required
in 2024-25 (BDM)Blue water usage in
2013-14 (BCM)
Blue water requirement in
2024-25 (BCM)
TotalServices + Drinking WaterIndustryAgriculture
33.31
73.12
39.81
1.334.2
11.4
7.23.1
1.77
38.85
87.63
48.78
Source: Smita Misra, Rajasthan Cross Sectoral Water Issues and Strategies (World Bank, 2017)
28. Water overconsumption is closely linked to agricultural electricity subsidies. Electricity users, especially in the agriculture sector, have always enjoyed a tariff level substantially below the costs of supply, with the State subsidizing consumption for irrigation, often through water pumps that deplete groundwater levels. This ineffi cient approach to agricultural subsidies provides little motivation to farmers to preserve resources and invest in more effi cient means of production. In addition, it discourages distribution utilities from accurately monitoring of electricity used for irrigation.
Conclusion: Unless the water situation is addressed through a comprehensive package of measures, Rajasthan will not attain its development objectives. If left to worsen, the water situation will almost inevitably result in an employment and social crisis, which will compromise the progress that has already been achieved.
Challenge 2: Persistent intra-state disparities and weak social indicators
29. Rajasthan displays large disparities (i) between locations; (ii) between men and women; and (iii) between members of diff erent socio-economic groups. Moreover, in contrast to income, performance in improving social indicators has been lagging behind the rest of India.
30. Disparities between locations are large and growing. Figures 17 compares district per capita GDP (PPP terms) with countries at similar levels of development. Astonishingly, within Rajasthan, per capita GDDP ranges from Jamaica – a higher middle-income country – to Nepal, a low-income country.
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FIGURE 17: GDDP AND GDP PER CAPITA, PPP (CURRENT INTERNATIONAL $) IN 2012
0
2000
4000
6000
8000
10000
Nep
al
Dungarp
ur
Bangla
desh
Bhara
tpur
Nagau r
Ghana
Jod
hp
ur
Myanm
ar
Ud
aip
ur
Pakis
tan
Raja
sth
an
Chitta
urg
arh
Ajm
er
Bund
i
Ind
ia
Jaip
ur
Philip
pin
es
Alw
ar
Bhilw
ara
Moro
cco
Bhuta
n
Arm
enia
Hanum
angarh
Jam
aic
a
Higher-middle income in red, lower-middle income in blue, low income in orange
So urce: Calculation based on data from Central Statistics Offi ce and World Bank International Comparison Program
Perhaps more importantly, there is no evidence of income convergence, with districts that started out poorer no more likely to grow faster than those that started out richer: Figure 18 presents the distribution of average district growth rates across the state for the FY2005-12 period. Growth rates vary from almost 20 percent for Barmer to less than 4 percent in Chittaurgarh.
FIGURE 18: DISTRICT GROWTH RATES IN GDDP, RAJASTHAN, (IN PERCENT FY05-12)
0
5
10
15
20
UDTOSRSKSMRJPRPPLNGKOKRJDJHJJHLJLJSHNGGNDUNDHLDAUCHRCHTBUNBKBHLBHPBRMBRBNALAJ
Avera
ge G
DD
P g
row
th d
uring 2
005-2
012 (%
)
R2 = 0.0372
Note: Jaipur, which was an outlier, is excluded Log of GDDP in 2005
Source: Directorate of Economics and Statistics, Government of Rajasthan
31. Disparities between men and women are a source of particular concern. The child sex ratio is among the lowest in India, and continues to decline (Figure 19).14 The state performs poorly on maternal and infant mortality, which remains worse than the all-India average in spite of having almost halved since 1999.
14 See also Dreze and Sen (2013): An Uncertain Glory; pages 231-239, for a discussion of selective abortion.
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FIGURE 19: CHILD SEX RATIO: AGE 0-6, FEMALES PER 1,000 MALES (2011)
800
840
880
920
960
1000
HRPJJKDLRJUKGJMHUPHPMPAIBHMNAPODGATNNLJHKAWBTRSKASKLCGMZMGAR
972
834
Source: Census 2011, Offi ce of Registrar General, India.
32. The state is also among the lower performers in women’s and girls’ education, in the context of persistent caste-based inequities (Figure 20). Gender gaps in education, training and labor market participation are evident and have shown little improvement over the years.
FIGURE 20: SECONDARY EDUCATION ATTAINMENT AMONG WOMEN, 2012 (IN PERCENT OF ADULTS)
0
10
20
30
40
50
60
TRBHRJODCGMPWBJHUPASSKGJAIAPJKARMZMGUKKAHRTNMHPJMNHPKLNLGADL
57
52
48
43 4138 38
35 34 34 3331
30 28 28 26 26 26 26
22 21 21 20 20 2016 16 16 15 14
Source: National Sample Survey rounds (NSS) of 1993-94, 2004-05 and 2011-12.
33. Moreover, there has been a sharp decline in female labor force participation since 2005, albeit from a higher base: more women work in Rajasthan than in other states, but that largely refl ects the higher share of the labor force in agriculture. The majority of women in rural Rajasthan work in farming, in part because there are more non-farm job opportunities for men in rural Rajasthan. In urban areas, very few women work. Only 16 percent of service sector workers are women; including only 7 percent in the hotels and restaurants sector. Those who do are more likely to be engaged in casual labor, while men are more likely to have formal employment. Only 5 percent of women are employed in regular wage jobs compared to 17 percent of men.
34. There are also large disparities in health outcomes across spatial, social and economic lines. Rural-urban diff erences are visible across most health outcomes. Rural areas have, respectively, a 78 and 22 percent higher infant mortality rates (IMR) and total fertility rates (TFR) than urban areas. Signifi cant
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gaps for stunting and underweight continue to exist – they are 25 percent higher in rural areas (Figure 21). Importantly, while in the past decade there has been some progress in reducing child malnutrition among rural children – the proportions of children under fi ve who are stunted and underweight have gone down – these levels have remained static in urban areas, with virtually no change between the National Family Health Surveys of 2005/6 and 2015/16 (NFHS-3 and NFHS-4).
FIGURE 21: PREVALENCE OF STUNTING AND UNDERWEIGHT IN RURAL AND URBAN AREAS
Children under 5 stunted (in percent) Children under 5 underweight (in percent)
46.3
40.8
33
42.5
38.4
30.1 30.7
33.9
0
10
20
30
40
50
NFHS-4NFHS-3
UrbanRural0
10
20
30
40
50
NFHS-4NFHS-3
UrbanRural
Source: 2005/6 (NFHS-3) and 2015/16 (NFHS-4).
35. Consistent with national trends, SC and ST households have worse indicators of IMR, under-fi ve mortality rate and malnutrition than the state average. Among SC/STs, under-fi ve mortality and IMR were signifi cantly higher than for other castes in 2005-06. Stunting rates were close to 42 percent for SC/STs15 compared to 34 percent for other castes. In terms of geographic variations, there are 10 districts with stunting rates higher than 41 percent. More generally, while progress in improving social indicators has been considerable, Rajasthan continues to rank near the bottom of low-income states (Table 4 and fi gures 22 and 23).
TABLE 4: SOCIAL INDICATORS, RAJASTHAN AND BOTTOM FIVE PERFORMERS
Infant Mortality Rate(per ‘000 live births)
Under Five Mortality Rate(per ‘000 live births)
Maternal Mortality Rate(per ’00,000 live births)
Sex ratio (females per ‘000 males)
State 2015 State 2015 State 2011-13 State 2013-15
Madhya Pradesh 50 Madhya Pradesh 62 Assam 300 Haryana 831
Odisha 46 Uttar Pradesh 51 UP 285 Gujarat 854
Uttar Pradesh 46 Odisha 56 Odisha 222 RJ 861
Assam 47 Assam 62 RJ 244 Delhi 869
RJ 43 RJ 50 MP 221 Maharashtra 878
Source: Sample Registration System, Offi ce of Registrar General, India.
15 RSOC, 2013-14.
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FIGURE 22: STUNTING IN CHILDREN < 5 YEARS,2005-06 AND 2015-16 (IN PERCENT)
0
10
20
30
40
50
60
Ke
rala
Go
a
An
da
ma
n &
Nik
ob
ar
Da
ma
n &
Diu
Pu
du
ch
err
y
Trip
urt
a
Pu
nja
b
Him
ac
ha
l P
rad
esh
La
ksh
ad
we
ep
Tam
il N
ad
u
Ja
mm
u &
Ka
sh
mir
Miz
ora
m
Tela
ng
an
a
Na
ga
lan
d
Ch
an
dig
arh
Ma
nip
ur
Aru
na
ch
al P
rad
esh
Sik
kim
An
dh
ra P
rad
esh
De
lhi
We
st
Be
ng
al
Utt
ara
kh
an
d
Ha
rya
na
Od
ish
a
Ma
ha
rash
tra
Ka
rna
taka
Assa
m
Ch
att
isg
arh
Ind
ia
Gu
jara
t
Ra
jasth
an
Da
da
r N
ag
ar
Ma
dh
ya
Pra
de
sh
Me
gh
ala
ya
Jh
ark
ha
nd
Utt
ar
Pra
de
sh
Bih
ar0
10
20
30
40
50
60 55
.6
56
.8
49
.8 55
.1
50
.0
43
.1
51
.1
48
52
.9
46
.5
43
.1 46
.3
45
.0
45
.1
44
.4
44
.6
42
.2
38
.3 43
.3
35
.6 38
.8
39
.8
35
.0
30
.9
38
.6
36
.1
35
.1
25
.6
24
.5
NFHS-4 NFHS-3
Source: NFHS 3 (2005-06) and NFHS-4 (2015-16)
FIGURE 23: HOUSEHOLDS PRACTICING OPEN DEFECATION, 2012 (IN PERCENT)
0
10
20
30
40
50
60
70
80
JHODCGBHUPMPRJKAAITNAPJKGJMHWBHPHRUKPJARASGAMGKLTRMNMZSKDLNLNL
58
74
Source: National Sample Survey (NSS)
Conclusion: Persistent large disparities, especially in non-income dimensions of welfare, mean that many people have been excluded from the benefi ts of growth and are ill-equipped to contribute to future growth. Unless these disparities are addressed, they could be easily perpetuated and worsen, as people who were left out of the earlier upturn fi nd themselves at an increasing disadvantage. This dynamic could undermine the state’s overall growth performance going forward.
Challenge 3: Inadequate job growth
36. While job growth in Rajasthan was among the highest in India after 2005, it did not keep up with the expanding working age population that is not in school. That population increased from 35 million
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in 2005 to 41 million in 2012, creating a demand for 6 million new jobs, whereas the working population (those with formal sector jobs) increased by only 2 million over the same period.
37. All sectors except agriculture and mining registered absolute growth in the numbers employed (see table 5 which presents employment data by sector for FY05 and FY12). Construction saw a particular boom, adding close to 3 million new jobs to the economy, in many cases absorbing workers coming from the agriculture sector which lost 2 million jobs. The services sector added about a million new jobs, while the manufacturing sector did not create a signifi cant number of new jobs. The net result by 2012 was a gap of about 4 million people of working age who were not in employment.
TABLE 5: CHANGE IN EMPLOYMENT BY SECTOR OF ECONOMIC ACTIVITY, RAJASTHAN, FY05 AND FY12
Total employment (in millions) Employment/pop. of working age (percent)2005 2012 % change 2005 2012 pp change
Agriculture 15.6 13.8 -11.6 41.6 29.7 -11.9
Mining 0.3 0.3 0.1 0.8 0.6 -0.1Manufacturing 2.3 2.5 7.0 6.1 5.3 -0.8Construction 2.5 5.2 108.2 6.7 11.3 4.6Other industry 0.1 0.2 20.5 0.3 0.3 0.0Services 4.7 5.5 18.1 12.4 11.8 -0.6Total 25.5 27.5 7.6 68.0 59.0 -8.9 Total population (in millions) Pop. in school/pop. of working age (percent)In School 2.9 6.3 114.1 7.8 13.5 5.7
Source: Table obtained using JoGGs decomposition tool with value added and population data from the Central Statistics Offi ce (CSO) and employment data from the NSS surveys FY05 and FY12.
38. On the positive side, most of those of working age not in employment were in school, furthering their training and accumulating skills (Table 5). An additional 3.5 million young adults were in school in 2012 compared to 2005. Given Rajasthan’s relatively low secondary enrolment rates and that one of the constraints to faster growth identifi ed by manufacturing fi rms is the shortage of qualifi ed labor, this increase in school attendance may help. However, many graduates have diffi culties fi nding employment due to the mismatch between the acquired and required skills.
39. On the other hand, much of the decline in employment was concentrated among women who dropped out of the labor force. Many exited agriculture, but were unable to fi nd suitable jobs in services and industry, partly as work conditions were not suitable for women. As a result, the share of women in Rajasthan who were neither in school nor employment increased by 6.2 percentage points to 47.5 percent. Overall, the slowdown in jobs creation refl ects also the slowdown in economic transformation, especially as many educated women have also dropped out.
Conclusion: Rajasthan has not been creating a suffi ciently large number of jobs in manufacturing and services, refl ecting an inadequately skilled workforce, barriers to women joining the labor market, and lack of dynamism in these sectors. In the absence of adequate improvements to education and training corresponding to the needs of sectors in which Rajasthan has a comparative advantage,
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Rajasthan could account for a large share of the country’s unskilled youth and working-age adults.16
Moreover, the state’s growing underemployment or unemployment could adversely aff ect social stability.
Challenge 4: Limited fiscal space
40. Over the past two decades, Rajasthan has generally run high defi cits – sometimes on-budget, sometimes off -budget. From 2000 to 2005, Rajasthan’s fi nances were characterized by growing current expenditures due to salary revisions and high fi scal defi cits, which reached over 6 percent of the Gross State Domestic Product (GSDP) in FY03 and FY04 (Figure 24). From 2005 to 2011, following passage of the Rajasthan Fiscal Responsibility and Budget Management (FRBM) Act, defi cits gradually declined and averaged 2.4 percent. However, this was also a period of growing contingent liabilities in the state-owned electricity distribution companies (DISCOMs), which were burdened by large and growing losses from the agriculture sector. The third and most recent phase, since 2011, has been one of renewed fi scal stresses and rising defi cit levels, as DISCOM losses have increasingly been taken over by the state. The fi scal defi cit rose to an average of 2.6 percent during FY13-FY15, reaching 3.1 percent in FY15. In FY16, on-budget support to the power sector (which entailed taking over 50 percent of outstanding liabilities of DISCOMs under the UDAY scheme) increased the state’s fi scal defi cit to 9.4 percent of GSDP.
41. Rajasthan’s post-FRBM on-budget consolidation was considerable. While the degree of fi scal consolidation varied signifi cantly between states, Rajasthan reduced its fi scal defi cit by 2.6 percentage points of GSDP in the 5 years following adoption of the FRBM, a substantial eff ort compared to other large states (Figure 25). Similarly, in terms of debt-GSDP ratio, Rajasthan ranked in the middle of the range pre- and post- FRBM and 12th amongst 28 states on the decline of the debt-GSDP burden.17
FIGURE 24: PUBLIC FINANCES, GOR (% OF GSDP)
0
2
4
6
8
10
Fiscal Deficit (RHS)
2016-1
7
2015-1
6
2014-1
5
2013-1
4
2012-1
3
2011-1
2
2010-1
1
2009-1
0
2008-0
9
2007-0
8
2006-0
7
2005-0
6
2004-0
5
2003-0
4
2002-0
3
2001-0
2
2000-0
1
0
5
10
15
20
25
30
Total ExpendituresTotal Revenues
PRE-FRBM POST-FRBM CONSOLIDATION RECENT DETERIORATION
Source: Government of Rajasthan
16 McKinsey Global Institute (2012). The World at Work, Report. 17 In 2005, Rajasthan enacted the FRBM Act which prescribes quantitative fi scal management targets on revenue defi cit, overall fi scal defi cit and outstanding debt as share of GSDP. The targets were updated in the subsequently enacted amendments. The currently applied targets include: revenue defi cit at 0 percent of GSDP, fi scal defi cit as percent GSDP at 3 percent, and a numerical ceiling for debt-to-GSDP at 36.5 percent in FY15.
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FIGURE 25: FISCAL DEFICIT OF RAJASTHAN COMPARED TO OTHER STATES (% OF GSDP)
-3
0
3
6
9
12
15
0
5
10
15
20
25
30
FD Avg 5 yrs before FRBM FD Avg 5 yrs after FRBM Change in FD
Source: Government of Rajasthan
42. Capital expenditure in Rajasthan now lag behind other low-income states and have not supported infrastructure development at the scale required by the state at its current level of development.18 For example, Andhra Pradesh spent nearly 5.3 percent of GSDP on capital outlays during FY06-10 to ramp up infrastructure development; similarly, Bihar and UP spent an average of 4.3 and 4.4 percent of GSDP respectively during the same period – while Rajasthan spent only 2.7 percent.
43. Increasing capital expenditure will be essential to build the infrastructure necessary for sustainable and inclusive urbanization, including housing for low-income segments of the population as well as water and sanitation infrastructure. Urbanization has long been recognized as a driver of growth, and most new jobs are created in cities. While Rajasthan’s rate of urbanization has been rapid, the state remains less urbanized than other states. Continued urbanization is one of the key drivers of poverty reduction in India, and will only be possible if the requisite infrastructure is being built.
44. Paring DISCOM losses and boosting revenue collections will be critical for Rajasthan to sustainably increase expenditures in priority areas, notably infrastructure. An analysis of three possible scenarios demonstrates that a combination of expenditure rationalisation – particularly of support to the power sector – and revenue enhancement is necessary to create adequate fi scal space and increase capital expenditure in Rajasthan to the 90th percentile of all states (Table 6). If DISCOM losses are allowed to increase at historical rates, and all other expenditure and revenue perform as per business as usual (scenario 1), Rajasthan’s debt will not stabilize and could become explosive (Figure 26 and Table 6). The debt/GSDP ratio would increase from 33.6 percent of GSDP in FY 18 to 38.4 percent of GSDP in FY 30 and would continue to rise indefi nitely. Reducing DISCOM losses as envisioned under UDAY leads to fi scal sustainability, but would be insuffi cient for mobilising resources to allow adequate increases in capital expenditures – capital expenditure can be increased to an average of only 3.5 percent of GSDP during FY19-FY31, while maintaining the fi scal defi cit below the FRBM target
18 Capital expenditure was relatively front-loaded in Rajasthan through the 2000s and exceeded that of other LIS (Jharkhand, Bihar, Chattisgarh, Odisha) during FY01-05. Capital outlays in Rajasthan lagged behind other LIS (Bihar, UP, MP, Chattisgarh, Odisha, Jharkhand) during FY11-15, and even FY06-10 in some cases.
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of 3 percent of GSDP (scenario 2). However, a combination of higher revenue growth (equivalent to the collections of best-performing states) and reduced support to the power sector will allow increasing capital expenditure to an average of 5 percent of GSDP during FY19-FY31 (scenario 3).19
FIGUR E 26: FISCAL SITUATION – BUSINESS AS USUAL WILL LEAD DEBT LEVELS TO GROW INDEFINITELY
-3.5%-3.0%-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%
Real GDP growth Debt. GSDP ratio (RHS)Real interest ratePrimary balance
FY31FY30FY29FY28FY27FY26FY25FY24FY23FY22FY21FY20FY19FY 18
30%
35%
40%
34%
39%
Source: Government of Rajasthan and staff calculations
TABLE 6: KEY FISCAL INDICATORS BY FY 2030 UNDER THREE SCENARIOS
Scenario 1 Scenario 2 Scenario 3
Business-as-usual
DISCOMs performance
improves
Revenue also increase
Revenue % of GSDP 17.1 17.1 19.9Expenditure % of GSDP 21.5 20.1 22.8Debt/GSDP ratio 38.4 31.4 31Fiscal balance % of GSDP -4.3 -3 -2.9Power sector expenditures % of GSDP 3.6 0 0Capital expenditures % of GSDP (excl. support to power) 2.7 4.3 7.1
Source: Staff Estimates
Conclusion: Rajasthan has made major progress in fi scal consolidation since the adoption of the FRBM act. However, growing fi scal pressures from the electricity distribution companies and the rising needs for higher development and social expenditure could threaten fi scal sustainability going forward. The analysis has shown that continued high levels of support to the power sector would lead to a breach of the FRBM-stipulated defi cit ceilings and to debt levels growing indefi nitely, even if capital expenditure is maintained at their current levels.
19 All scenarios assume salary revisions in FY19 and FY20 as the 7th Pay Commission recommendations are implemented.
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45. In a nutshell, the main challenges confronting Rajasthan and their interlinkages can be described as follows (Figure 27): Under-priced energy for agriculture sets off a vicious cycle in which agricultural production has a larger share of the economy than would be desirable in view of the necessary structural transformation of the economy and favours crops that do not correspond to the state’s comparative advantage. Consequently, water usage becomes unsustainable with adverse eff ects for public health and the economy as a whole, while high electricity subsidies for farmers limit the fi scal space for the type of infrastructure and social spending that would be necessary to address lagging social indicators and the jobs defi cit.
46. Hence, at the core of the strategy going forward is to fundamentally transform Rajasthan’s economy away from water-intensive activities towards sectors in which the state has a long-run comparative advantage. However, to attain this goal the design of the strategy needs to take into account the political economy, given that such water-intensive activities, in particular wheat cultivation, represent an important source of livelihood for large segments of the population. Hence, removing existing incentives – and in fact creating the dis-incentives required to address the negative externalities of excessive water usage - will only be feasible if other activities that hold long-term promise for Rajasthan grow faster and create better jobs. The gravity of this challenge has already become apparent in the analysis of Rajasthan’s labor market above, which has demonstrated that much of the labor released by an increasingly productive agriculture sector could not be absorbed in either the manufacturing or the services sectors. In particular, many women that were previously active in agriculture have dropped out of the labor force.
47. Against this background, the report proposes a strategy that aims at creating conditions for sustainable and inclusive growth by building on the state’s inherent strengths in agriculture, manufacturing, tourism and service delivery. While more adequately pricing of electricity and adjustment of minimum support prices (MSP) is a crucial component of a strategy aimed at facilitating the structural transformation of the state, it will not be feasible for such a reform to be implemented unless in parallel a comprehensive package of measures is being implemented that will allow to harness opportunities in sectors in which Rajasthan has a comparative advantage. To this end, the report discusses major policy directions and key policy measures for environmentally sustainable agriculture (pathway I) and structural transformation through employment-generating manufacturing and services (pathway II). With a view to enhancing the inclusiveness of growth as well as ensuring the political and social feasibility of potentially disruptive transformations in agriculture and industry, the report also emphasizes the need to further strengthen service delivery (pathway III). Given that fi scal space is currently too limited to allow for the increase in funding of social and infrastructure spending that is required to eff ectively implement the proposed strategy, it will be necessary to enhance fi scal policy to spend more, better and sustainably (pathway IV).
48. Three cross-cutting themes permeate the proposed strategy. First, the need for improved dialogue and collaboration between the public and private sectors. Second, the importance of strengthening the evidence base for policy-making. Third, the need to eff ectively integrate spatial considerations into policy-making.
• Public-private sector collaboration: Analysis undertaken in the context of this report has underscored the importance of more eff ective collaboration between the public and the private sectors. In agriculture, for example, Centers of Excellence for Guar, the establishment of producer organizations and the construction of post-harvest infrastructure, such as farm-based storage, would be areas in which the
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public and the private sectors could collaborate with a view to creating better conditions for crops in which the state has a comparative advantage. In manufacturing, the institutional framework and eff ectiveness of the public-private sector dialogue may have to be reviewed to ensure that a structured and continuous exchange between policymakers, businesses and technical experts can unfold. Such a dialogue would be essential to ensure that truly binding constraints to growth in the most promising sectors are identifi ed and addressed in the most eff ective way. In tourism, the state has dominated service delivery through state-owned corporations, and private business feel that it should be given more space. A forward-looking vision would allow the private sector to become an eff ective partner of government in tourism planning, development and management under a shared vision.
• Data and evidence-based policy planning: Rajasthan currently lacks the statistical basis to provide suffi cient support for evidence-based policy-making. Areas in which this shortcoming has become evident include the lack of market information to promote effi cient price discovery for crops, and the absence of ICT based extension services for high impact and demand-driven service delivery. Also, there is a lack of market research in the area of tourism which prevents the identifi cation and eff ective targeting of promising customer segments. Lastly, fi scal policy could be better informed by expenditure reviews and medium-term expenditure frameworks. To enhance policy-making, it will be essential to strengthen the data collection systems and analytical capacity across the board.
• Spatial dimension: Rajasthan has exhibited a low-density growth pattern. There are promising clusters in a number of locations; however, many parts of the state have not benefi ted from the acceleration of growth since 2002. The expected completion of the Delhi Mumbai freight corridor will off er new opportunities for growth in locations close to the corridor. Moreover, the diversifi cation of the portfolio in the tourism area will off er new opportunities in previously-neglected locations.
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FIGURE 27: RAJASTHAN’S CHALLENGES AND PATHWAYS FORWARD
DISCOM losses,
high subsidy
spending
Low social
spending
Lower non-agricultural job
growth
Hig
h ag
ricul
tura
l em
ploy
men
t
Water guzzling crops
Subsidized electricity for agriculture
Unsustainable Agricultural Practices
Slow Structural
Transformation
Limited fi scal Space
Inequality
Public Private sector collaboration
Date and evidence-based policy planning Special dimension
More productive and sustainable Agriculture
• Promoting less water-guzzling crops and adopting more effi cient water management
• Higher-productivity and more knowledge-intensive agriculture also creates good jobs
• High electricity subsidies and failure to collect electricity payments from farmers contributing to losses of DISCOMs is the principal threat to fi scal sustainability
Sustainable Fiscal Policy
• Greater fi scal space is vital to improve water management infrastructure and to fi nance policies to facilitate transition away from agriculture
• Better social protection, and better access to education and health also require increased spending, which is made possible by additional revenues
• Higher revenues enhance fi scal space and create room for larger investments in physical and human capital
Manufacturing and Services
• Manufacturing and Tourism reforms will help move people out of agriculture which accounts for 86 percent of the water use
• Manufacturing and tourism can create better jobs compared to agriculture and construction
• Labor-intensive manufacturing industries and tourism are particularly suitable for women
• Manufacturing and tourism are mostly urban activities, where access to education and health tend to be better
• Expansion of the tax base, especially as agricultural income is not taxed
Improve Service Delivery
• Public service delivery systems – including social protection, health and education – are required to facilitate the transition away from agriculture into less water-intensive sectors
• Enhanced social protection and better access to education and health across all groups the main route to achieve enduring reduction in inequalities
• Better targeted social protection programs will enhance expenditure effi ciency and allow the state to do more with less
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C.2 Strengths
49. While Rajasthan faces major challenges, it also has a number of strengths that, if properly harnessed, can be the basis for sustainable and inclusive growth. Before discussing strengths at a more sectoral level, a look at Rajasthan’s economic potential using the recently developed Economic Potential Index (EPI).
Economic potential through a spatial lens
50. Economic potential can be defi ned as the extent to which a state or district possesses factors that may determine its ability to experience high productivity and rapid economic growth.20 Five components of economic potential and their respective indicators are used to estimate a state’s ranking in the Economic Potential Index (EPI): (a) a measure of market access, constructed using state or district GDP levels and travel time by road; (b) economic density, expressed as GDP per km2; (c) the level of urbanization, expressed as the share of population living in urban areas; (d) human capital, approximated by the share of the population which is literate; and (e) local transport connectivity, expressed as density of primary and secondary roads (length per 100 km2 of land area). EPI is a relative measure, with the average Indian state, territory or district having an EPI of 50. Figure 28 shows the EPI scores for all of India’s states and territories.
51. With an EPI of 46.7, Rajasthan ranks 20th out of India’s 34 states and territories – below the Indian average and in the middle of India’s low-income states. Its economic potential is, however, higher than that of most other states of similar income level (Figure 28).
FIGURE 28: ESTIMATED ECONOMIC POTENTIAL INDEX (EPI) RANKINGS
0
20
40
60
80
100
Aru
nachal P
rad
esh
Meg
hala
ya
Miz
ora
m
Bih
ar
Sik
kim
Jam
mu &
Kashm
ir
Manip
ur
Assam
Him
achal
Nag
ala
nd
Orissa
Chhattis
garh
Jhark
hand
Uttara
nchal
Raja
sth
an
Trip
ura
Mad
hya P
rad
esh
Uttar
Pra
desh
Tela
ng
ana
Guja
rat
Karn
ata
ka
And
hra
Pra
desh
Mahara
shtr
a
West B
eng
al
Dad
ra a
nd
...
Punja
b
Tam
il N
ad
u
Hary
ana
Goa
Dam
an a
nd
Diu
Pud
ucherr
y
Kera
la
Chand
igarh
Delh
i
46.7
Source: Staff estimates
Moreover, as shown in Figure 29, while several districts performed above their potential, about half of all districts were below potential. This shows the scope to enhance economic performance in districts that are growing slowly and may account for a larger share of the poor. At the same time, though, Rajasthan as a whole performed in line with its potential. Allowing districts to attain their full economic potential will require investments in binding constraints to growth, in particular connectivity and development of human capital.
20 Mark Roberts, 2016. ‘Identifying the Economic Potential of Indian Districts’. World Bank, Policy Research Working Paper No. 7623.
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FIGURE 29: EPI AND ECONOMIC PERFORMANCE
Source: Staff Estimates
52. Moreover, simulations (Figure 30) show that medium-potential districts could have possibly increased their per capita GDP by about 10 percent, if factors constraining performance below potential were addressed.
FIGURE 30: EPI AND ECONOMIC PERFORMANCE21
Banswara
Dungarpur
Bharatpur
ChuruDausa
Dhaulpur
JhunjhununKarauli
Sikar
Barmer
Jaisalmer
Jalore
Ajmer
NagaurSawai Madhopur
Tonk
AlwarBaran
BhilwaraBikaner
Bundi
Chittaurgarh
GanganagarHanumangarh
Jhalawar
JodhpurPali Rajsamand
Sirohi
UdaipurJaipur
Kota
-60.00
-40.00
-20.00
0.00
20.00
40.00
60.00
-1.50 -1.00 -0.50 0.00 0.50 1.00 1.50
lait
net
oP
dn
a ec
na
mrofr
eP
ne
ewt
eb
ecn
eref fi
D
(%)
Economic Potential Index (Z-score)
Source: Staff Estimates
21 The size and color of the bubbles indicate the level of GDP per capita (measured in Indian Rupees at 2000 constant price) and the level of performance vs. potential, respectively.
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53. One of the features of Rajasthan’s past growth trajectory that may explain performance below potential is that it is low density – resulting in low economies of agglomeration (Figure 31). Yet, agglomeration economies are a fundamental driver of productivity and thus sustainable economic growth.22 They arise when fi rms and people locate near one another (particularly in cities and industrial clusters), thereby reducing the time and cost of accessing output and input markets as well as the cost of infrastructure through higher utilization, economies of scale, specialization, competition and cooperation. Rajasthan’s low level and slow pace of urbanization highlight the unexploited potential for agglomeration economies (Figure 32).
FIGURE 31: INDIA — CORRELATION OF ECONOMIC DENSITIES WITH GDP PER CAPITA
Economic densities across Indian states are positively associated with GDP per capita. Rajasthan, where the majority of districts experienced low economic densities, lags behind most of other states in this regard.
Source: Staff Estimates
54. Given its geographic location and the upcoming DMIC (Delhi-Mumbai Industrial Corridor), Rajasthan is poised to greatly benefi t from such dynamics, as fi rms in Gujarat, Maharashtra and Delhi seek to locate in cheaper, yet well connected, locations. This is the dynamic already at play in Bhiwadi (a new industrial city in the Balwar district not far from Delhi) as well as in Jaipur and Kota, also along the DMIC. But much greater investments and agglomeration benefi ts would occur if the Government of Rajasthan would improve planning around the industrial zones (e.g. improved connectivity, transportation services, facilities for housing and health services – especially key to promote women employment which is very low) as well as improve the facilities within the zones to facilitate SME investments and linkages with larger fi rms (e.g. Plug and Play industrial buildings like in China, and Combined Effl uent Treatment Plants like the one in Jaipur Integrated Texcraft).
22 ‘Leveraging urbanization in South Asia- Managing Spatial transformation for prosperity and livability’ (P. Ellis and M. Roberts), World Bank 2016.
BiharUttar Pradesh
Punjab
West Bengal
Haryana
Kerala
Goa
Puducherry
Delhi
y = 0.6003x-4E-16 -3
-2
-1
0
1
2
3
4
-3 -2 -1 0 1 2 3 4
Log of economic density (normalized), 2009/10
GD
P p
er
cap
ita (
norm
aliz
ed
), 2
009/1
0
Rajasthan
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FIGURE 32: RAJASTHAN – LEVEL AND PACE OF URBANIZATION
Rajasthan’s level of urbanization is low, around the average level of all Indian districts; and slow as shown in small growths in recent years
0.0
0.5
1.0
1.5
2.0
201120011991 Him
acha
l Pra
desh
Bih
ar
Ass
am
Odi
sha
Meg
hala
ya
Utt
ar P
rade
sh
Aru
nach
al P
rade
sh
Chh
attis
garh
Jhar
khan
d
Raj
asth
an
Sik
kim
Trip
ura
Jam
mu
& K
ashm
ir
Mad
hya
Pra
desh
Nag
alan
d
Man
ipur
Utt
arak
hand
Wes
t Ben
gal
And
hra
Pra
desh
Har
yana
Pun
jab
And
aman
&N
icob
ar Is
land
s
Kar
nata
ka
Guj
arat
Mah
aras
htra
Dad
ra &
N
agar
Hav
eli
Ker
ala
Tam
il N
adu
Miz
oramGoa
Pud
uche
rry
Dam
an &
Diu
Laks
hadw
eep
Cha
ndig
arh
Del
hi
55. As discussed in the 2015 World Bank South Asia Urbanization Flagship report, improved planning at the State level and increased empowerment of local governments would go a long way to put Rajasthan on a higher density-productivity growth strategy. Improved planning at the State level would help ensure that infrastructure investments are better coordinated across sectors and focused on the areas of highest economic potential. Increased decentralization of local governments would also be key – especially if it entails giving them more authority over land markets (e.g. zoning and land titling together with the power of collecting/spending property taxes) while making them accountable through local elections. In eff ect, such empowerment would provide local governments with the authority, fi nancial means and incentives to promote productive use of land (e.g. better use of land will generate more property tax revenues which can be re-invested in developing more productive land through careful planning and infrastructure investment).
56. While considering ways to enhance the empowerment of local government, Rajasthan could seek to anchor its spatial economic development along a few Economic Development Authorities in the areas of highest economic potential. This model has proven quite successful across the world (especially in East Asia) and in India (e.g. Noida in UP). Such authorities are given control over large land areas in the outskirt of cities with the power to plan, acquire, rezone, develop and auction the land to private investors – with the diff erence between the land acquisition and auction prices fi nancing the next phase of development. This model is quite similar to the one followed by RIICO, but on a greater scale and broader mandate which enables to properly plan and develop high potential areas encompassing industrial and services clusters together with housing, social, transportation and commercial facilities.
Conclusion: Based on the gap between EPI and per capita GDP, a large number of districts in Rajasthan have considerable unexploited economic potential. Market access and urbanization are key factors driving economic potential. While market access is expected to improve with the completion of the Delhi-Mumbai freight corridor, more rapid urbanization and improved education could help unleash the full potential of some of the districts.
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Strengths at the sectoral level
Sector analysis: Agriculture has been growing rapidly, and several drought-resistant crops and livestock products show considerable promise.
57. Despite challenges of water scarcity, lack of infrastructure, and uneven access to inputs, the state’s varied climatic zones and soils off er opportunities to increase the production of high-value crops and livestock products. Rajasthan is one of the largest producers of oilseeds, pulses, guar, and seed spices (Table 7). Most of these commodities, because of their nutraceutical and pharmaceutical attributes, are in great demand in domestic and international markets. The state is also the country’s largest producer of goat meat and wool, and the second largest producer of milk.
TABLE 7: PRODUCTION OF SOME IMPORTANT COMMODITIES IN RAJASTHAN, 2015-16
Commodity Share in all India in percent (ranking)Garlic 12.1 (4)Coriander 43.1 (1)Cumin 24.9 (2)Fenugreek 64.3 (1)Fennel 23.2 (2)Ajwain (caraway) 56.1 (1)Pearl millet 43.8 (1)Chickpea 11.2 (3)Total pulses 11.9 (2)Rapeseed-mustard 47.9 (1)Guar 63.8 (1)Milk 12 (2) Goat meat 35 (1) Wool 30 (1)
Source: Agricultural and Processed Food Products Export Development Authority (APEDA), and Animal Husbandry Department, Government of Rajasthan.
58. Rajasthan’s agriculture sector has made major strides over the past decade. Agriculture has been growing rapidly, and several drought-resistant crops as well as livestock have shown considerable promise. Crops have become more diversifi ed and yields have increased.23 The livestock subsector has grown even faster, at a consistent rate of 7 percent or more throughout the past two decades; despite a lower share of total output, livestock has been the main driver of sectoral growth throughout.24
23 Between 1991-93 and 2013-15, production of cereals, oilseeds and pulses increased 2 to 2.5 times (GoR 2015a) and production of milk increased 3 times (www.animalhusbandry.rajasthan.gov.in). The state’s varied types of soils favor production of nutrient-rich grain crops such as pearl millet, chickpea and green gram; spices such as coriander and cumin; and medicinal plants such as isabgol (Plantago ovata), fenugreek, aloe vera and amla (Indian gooseberry or Phyllanthus emblica), even under stressed water conditions.24 Livestock is an important part of households’ traditional resilience strategy – even in years when crops fail to produce grains, their straw is available as fodder for animals. Livestock provides a cushion to agricultural growth and a buff er to the livelihoods of farming communities during crop failure.
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59. Importantly, some crops more suitable for Rajasthan’s climatic conditions—such as guar and pulses—have shown strong growth. For example, India’s exports of guar—70 percent of which is produced in Rajasthan—have more than tripled. Demand for guar is expected to grow rapidly in the future given its use for medical purposes and as a lubricant in the oil industry. Rajasthan is also the second largest producer of barley, accounting for 28 percent of the total area and 32 percent of the total production of the crop in the country. Barley, which is used as animal feed, is projected to have considerable potential going forward in view of increasing demand for animal-based protein in India. Other crops that have shown strong potential include rapeseed-mustard and pearl millet.25
60. Also, in rural Rajasthan, animal husbandry is a major economic activity, especially in arid and semi-arid areas. Income from livestock accounts for 30 to 50 percent of rural households’ income, with wide variations by region. In addition to being an important source of nutrition, livestock activities are particularly important in generating gainful employment for women, landless laborers, and small and marginal farmers. Rajasthan has some of the largest herds in India (including camel, goats, sheep, buff alo and cattle), and while recent growth in the sector has been rooted partly in productivity growth, per-animal productivity remains relatively low, largely due to the low genetic merit of the overall herd, combined with signifi cant feed and fodder constraints. Access to adequate and balanced feed and fodder -- which is 70 percent of the cost of production and 90 percent of animal nutrition -- are particularly important in the face of climate change and increasing aridity.
61. Good performance of the agriculture and livestock sectors refl ects both the state’s policies and its comparative advantage. For example, the Government of Rajasthan has spent considerable amounts on development of market infrastructure and on crop insurance. The state has also been a strong participant in the National Dairy Plan with important investments in breed improvement, nutrition, fodder and milk production. In addition, there has been an increase in infrastructure related to animal health, contributing to improved health and productivity of the livestock population, in particular goats (Table 8).
TABLE 8: TREND IN ANIMAL HEALTH INFRASTRUCTURE IN RAJASTHAN (NUMBER)
1992 2003 2014
Polyclinics 8 12 34
Veterinary hospitals 1009 1413 2293
Veterinary dispensaries 350 285 198
Veterinary sub-centers 120 1727 2171
District mobile veterinary units 0 6 34
Tehsil mobile veterinary units 0 0 288
Total 1487 3443 5018
Source: GoR (2015a).
25 Based on food demand projections for India used in N. Alexandratos and J. Bruinsma (2012): “Global Agriculture Towards 2030/2050 (The 2012 Revision).” Agriculture Economics Development Division, FAO, Rome. www.fao.org/economics/esa.
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62. Several crops show promising comparative advantage relative to other states (Annex I). Notably, in the production of a number of crops such as pearl millet, guar, barley and spices, Rajasthan is very well placed relative to some of its main competitors, including Madhya Pradesh and Gujarat, along a number of dimensions. Considering factor endowment, labor availability, cost and scale of production, expansion potential, logistics access to markets, and agro-ecological suitability, Rajasthan has signifi cant scope to build on its comparative advantage in domestic and global export markets.
63. The livestock sector similarly off ers substantial scope to support resilience, growth and poverty reduction. The large arid and semi-arid regions of the state are well-suited for rearing small ruminants (goat and sheep), off ering a major opportunity for employment and growth by tapping into the rapidly growing demand for meat in India. After poultry, mutton and goat meat are projected to have the fastest growth in market demand among all food commodities over the next 30 years, off ering Rajasthan a unique opportunity to grow through strategic investments in improved breeds, feed and fodder, animal health, food safety and traceability systems, and promoting private investments in modern value-chains and processing (e.g., for meat, wool).
64. Given the still-high share of the rural population and the fast reduction in rural poverty, agriculture has had a major impact on poverty reduction.26 Going forward, improved productivity, value addition and agro-processing hold considerable promise for growth and much needed employment in the post-harvest value chains for high value agriculture and livestock products.
65. Rajasthan’s potential in agriculture and livestock refl ects the following areas of strength:
• The state’s natural resources (soils, climate and water – green and blue, albeit limited), together with annual and diurnal temperature variations, off er a diverse set of opportunities for growing a variety of crops.
• Improved rural infrastructure, such as feeder roads and livestock-related facilities, have enhanced opportunities for growth in agriculture;
• Strong growth in water-effi cient crops, such as guar and barley, has demonstrated areas of Rajasthan’s comparative advantage;
• Good potential for value addition and transformation exists in a number of crops, such as oranges and clementines, as well as guar and livestock.
Conclusion: In recent years, Rajasthan’s agriculture sector has shown considerable growth and promising potential to diversify into crops that are more suitable for the state’s climatic and water conditions as well as livestock which plays an important role as a source of resilience for the poor segments of the population.
26 Between 1991-93 and 2013-15, production of cereals, oilseeds and pulses increased 2 to 2.5 times (GoR 2015a) and production of milk increased 3 times (www.animalhusbandry.rajasthan.gov.in). The state’s varied types of soils favor production of nutrient-rich grain crops such as pearl millet, chickpea and green gram; spices such as coriander and cumin; and medicinal plants such as isabgol (Plantago ovata), fenugreek, aloe vera and amla (Indian gooseberry or Phyllanthus emblica), even under stressed water conditions.
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Sector analysis: Labor-intensive manufacturing has grown rapidly, and investors have favorable perceptions of Rajasthan’s potential in these sectors.
66. Manufacturing has been a signifi cant growth driver over the past two decades. Rajasthan has not only maintained its position among the top fi ve fastest-growing states in manufacturing, but has increased its share in India’s overall manufacturing output (Figures 33 and 34). Several manufacturing sectors have had exceptionally strong performance over the past 10 years, especially automobiles, electronic, and wood and wood products (Figure 35).
FIGURE 33: STATES’ MANUFACTURING SECTOR GROWTH, 2004-14 (IN PERCENT)
0
2
4
6
8
10
12
Jhar
khan
d
Ass
am
And
hra
Pra
des
h
Goa
Ker
ala
Cha
ttis
garh
Kar
nata
ka
Mad
hya
Pra
des
h
Jam
mu
& K
ashm
ir
Utt
ar P
rad
esh
Bih
ar
Har
yana
Od
isha
Mah
aras
htra
Raj
asth
an
Tam
il N
adu
Pun
jab
Tela
ngan
a
Guj
arat
Source: CSO and staff estimates
FIGURE 34: RAJASTHAN’S SHARE IN INDIA’S MANUFACTURING
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2012-132002-031992-93
Source: CSO and staff estimates
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FIGURE 35: GROWTH IN GROSS FIXED CAPITAL FORMATION IN RAJASTHAN, 2003-13
-10 0 10 20 30 40 50 60 70 80
Tobacco productsOther manufacturing
TextilesPublishing activities
Basic metalsBeverages
Paper and paper productsRubber and plastics products
Chemicals and chemical productsPrinting and reproduction of recorded media
Manufacture of machinery and equipment n.e.c.Food products
Electrical equipmentFurniture
Other transport equipmentLeather and related products
Wearing apparelComputer, electronic and optical products
Wood and wood productsOther non-metallic mineral products
Coke and refined petroleum productsFabricated metal products, except machinery and...
OthersMotor vehicles, trailers and semi-trailers
Source: CMIE database.
67. Rajasthan’s potential in manufacturing refl ects the following areas of strength:
• Rajasthan does well in terms of investors’ perceptions. Based on the National Council of Applied Economic Research (NCAER) State Investment Potential Index, which looks at 51 sub-indicators and a perception survey to provide a single composite score, Rajasthan ranks 9th among Indian states in investment potential (Table 9).
TABLE 9: INVESTMENT POTENTIAL INDEX OF SELECTED INDIAN STATES
Raj Guj Del TN AP Mah
Overall State Ranking 9 1 2 3 4 5
No. Parameter
1 Labor 10 4 19 2 7 11
2 Infrastructure 19 3 1 9 14 7
3 Economy 8 4 1 6 2 3
4 Governance & Political 13 1 11 2 9 12
5 Perception Survey 2 1 12 9 5 11
Source: NCAER State Investment Potential Index, 2016.
• The state has the geographical advantage of being strategically situated near commercial hubs and ports. It borders Delhi and Haryana to the North and Gujarat to the South, and is connected by good roads to the ports in Maharashtra and Gujarat which are becoming increasingly competitive. Its geographical advantage will be further strengthened by the Delhi-Mumbai Industrial Corridor (DMIC), almost 40 percent of which will traverse the state.
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• The state’s road connectivity and power infrastructure have improved signifi cantly in recent years. The power infrastructure is now a factor in attracting business to the state.
• The availability and ease of access to industrial land is one of the state’s most important comparative advantages (Figure 36).
FIGURE 36: AVAILABILITY OF INDUSTRIAL LAND WITH RIICO, RAJASTHAN
Existing Industrial Areas, division wise (no of plots) Raw Land & Upcoming Industrial Area (in ha)
0
5000
10000
15000
20000
25000
UnallottedPilots sold
UdaipurKotaJodhpurJaipurBikanerBharat-pur
Ajmer0
500
1000
1500
2000
2500
Upcoming Industrial AreaRaw Landbank
UdaipurKotaJodhpurJaipurBikanerBharat-pur
Ajmer
Source: Rajasthan State Industrial Development and Investment Corporation (RIICO).
• Peaceful labor relations and conducive labor regulations are attractive for investors. Firms contacted for the study reported that labor relations were good, and that this was a major incentive for them to operate in the state. Key amendments have been made to the Trade Union Act, the Industrial Dispute Act, the Contract Labor Act, the Factories Act (1948) and the Apprenticeship Act (1961). These changes have allowed fi rms more fl exibility to adjust their workforce, and have provided for greater transparency in the regulatory framework. The Government of Rajasthan has also reduced the regulatory burden by streamlining processes and procedures by setting up a Labor Department Management System (LDMS), which allows online fi ling of applications, registrations, licenses, renewals, payments and fi ling of returns under 12 major labor legislations. Rajasthan – due to reforms put in place over the past 10 years – is now ranked 5th among India states in the Ease of Doing Business, 27 and the benefi ts are being felt by fi rms.28 The percentage of fi rms reporting labor regulations as a major or severe obstacle to their operations in Rajasthan (4 percent) is less than half the India average (10.6 percent), and less than a quarter of the average for low-income Indian states (17.9 percent).
• A good regulatory environment is another positive feature of the state’s business environment. Rajasthan has been making rapid strides in improving the enabling environment for business, and is now ranked 3rd by the central government in both regulatory framework and ease of doing business.
Conclusion: Rajasthan has considerable opportunities in the manufacturing sectors that, if exploited, could go a long way towards facilitating the state’s structural transformation which has in many countries been a critical component for the creation of better jobs.
27 Ease of Doing Business Report, 2015. 28 Enterprise survey conducted by the World Bank, 2012/13.
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Sector analysis: Tourism development in Rajasthan has inherent potential to support the state’s structural transformation, given the state’s unmatched cultural heritage and natural endowment.
68. Tourism has historically been one of Rajasthan’s most important economic sectors. Currently, the sector accounts for approximately 9 percent of GSDP and directly supports an estimated 890,000 formal and informal jobs, or about 3 percent of total employment.29 Rajasthan consistently ranks in the top 10 states in India for both foreign and domestic tourist arrivals. In 2015, the state saw nearly 1.5 million foreign visitors and about 35 million domestic visitors30, ranking 6th for domestic and 10th for foreign visitation among Indian states (Figure 37).
FIGURE 37: DOMESTIC AND FOREIGN TOURIST ARRIVALS IN PERSPECTIVE
Percent share of Top 10 States in Foreign Percent share of Top 10 States in Domestic Tourist Visits in 2015 Tourist Visits in 2015
Goa2
Karnataka3
Bihar4 Kerala
4Rajasthan
6
W. Bengal6
Delhi10
Others12
Uttar Pradesh13
Maharashtra19
Tamil Nadu20
Rajasthan3
Gujarat3 W. Bengal
5 M. Pradesh5
Telengana7
Maharashtra7
Karnataka8
Andhra Pradesh
9Uttar Pradesh
14
Tamil Nadu23
Others16
Source: India Ministry of Tourism, India Tourism Statistics 2015
69. Rajasthan’s potential in tourism refl ects the following areas of strength:
• Exceptional wealth and diversity of tangible and intangible cultural heritage and natural assets. Around 80 percent of designated Indian heritage properties are located in the state, as well as over a dozen natural sanctuaries, two reserves and two national parks, one of which (Keoladeo National Park) is one of only four Indian parks listed as UNESCO World Heritage Site.31 These assets are known around the world and appeal to a diverse range of markets and demographics. Consequently, the state has, for decades, attracted visitors from Asia, Europe and North America, as well as from within India itself.
29 These estimates are from an economic impact analysis carried out by the India Ministry of Tourism: Regional Tourism Satellite Account Rajasthan, 2009-10, National Council of Applied Economic Research.30 India Ministry of Tourism, India Tourism Statistics 201531 World Bank, Rajasthan: Closing the Development Gap, 2006.
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• A largely untapped opportunity for the development of innovative products directly targeted at growing markets. Rajasthan’s cultural and natural assets – particularly those in more isolated rural areas outside the urban centers – present considerable opportunities for development of tourism products that center on immersive cultural experiences and nature and adventure-oriented pursuits. Such products are particularly appealing to markets that are currently demonstrating extraordinary growth and interest in Asian destinations (e.g. Millennials). Moreover, the private sector in Rajasthan is already demonstrating an interest in the development of such products.
• A strong product base for appealing to the signifi cant Chinese outbound market. China’s outbound market, the world’s largest and fastest growing (in terms of visitor spending), demonstrates a particular interest in sightseeing activities, which currently represent the core of Rajasthan’s tourism product off er.
• Extensive existing tourism infrastructure. Given its comparatively long history and experience with tourism, the state boasts a considerable amount of tourism-related infrastructure and businesses.
• An entrepreneurial crafts and artistic sector. Rajasthan’s creative industries generate employment opportunities, particularly for vulnerable communities, and have the potential to drive tourist visitation – and benefi ts – beyond urban centers to rural communities.
• A private sector eager to play a greater role in enhancing the state’s competitiveness. While under the current model the state government is largely responsible for all aspects of the tourism sector, Rajasthan’s private sector has shown – and continues to show – interest in playing a larger role. For instance, private sector actors have expressed interest in investing in currently state-owned hotel properties to enhance visitor infrastructure in some of the most visited sites and areas of the state.
• A strategic geographical location. With its proximity to other popular attractions in the country (e.g., Agra, New Delhi), the barriers to visit Rajasthan are lower than for many other states.
Conclusion: Tourism has the potential to support the rapid creation of job opportunities beyond agriculture, signifi cantly increase both economic and non-economic net benefi ts for society, including the state’s signifi cant rural population, and provide a reliable source of revenue for the adequate conservation of a destination’s assets. Rajasthan’s strong asset base and experience in tourism represent a key opportunity for inclusive, sustainable and long-term growth as part of the state’s structural transformation reforms.
Service delivery: The government has eff ectively increased the use of ICT to enhance service delivery and this has helped outcomes.
70. In health services delivery, Rajasthan is leveraging the use of ICT to improve effi ciency, while increasing transparency and enhancing accountability. Several impressive standalone initiatives have contributed to streamlining the monitoring of the state’s health system (Box 1).
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BOX 1: ICT-ENHANCED HEALTH SYSTEM MONITORING, RAJASTHAN
The Government of Rajasthan has launched ASHA Soft, an online monitoring and management system, through which the health department is able to generate details of services given by the Accredited Social Health Activist (ASHA) to the community. The ASHA is a community health worker and functions as a health care facilitator for provision of reproductive, maternal, newborn, and child health services. The system provides on-line payments to the ASHAs for the work that has been performed.
Another web-based application, e-Aushadhi, provides inventories of various pharmaceuticals and commodities at district drug warehouses, which helps to streamline supply chain management. This is coupled with e-Upkaran which improves inventory management and equipment maintenance services in hospitals.
Other new health services systems include (a) a Pregnancy, Child Tracking and Health Services Management System (PCTS); (b) E-Mitra, an e-governance tool to enhance transparency and allow citizens access services using an e- platform; (c) Swasthya Sandesh Seva, which generates SMS alerts for citizens and health workers; and (d) Rajasthan Sampark, which provides citizens with a centralized online grievance platform related to any health agency.
Rajasthan has also deployed a Computerized Human Resource Information System (CHRIS), an integrated employee database for all contractual and permanent staff that includes real-time information on vacancies.
71. ICT has signifi cantly contributed to improvements. Examples include full immunization, institutional births, and improved sanitation and nutrition indicators (Figure 38).
FIGURE 38: PROGRESS IN HEALTH SERVICE DELIVERY OUTCOMES, (IN PERCENT, 2005/06 TO 2014/15)
0
20
40
60
80
100
NFHS4NFHS3
Children 6-8 months receiving solid
or semi-solid food
Improved Sanitation
Exclusive Breastfed for
6 months
Institutional births
Women who received atleast 4 ANC
Full Immunization (12-23 months)
Source: NFHS 3 and 4
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72. In education, Rajasthan has used ICT to improve the effi ciency, accountability and transparency of educational planning by setting up an education management information system (EMIS) at the elementary (Shala Darshan) and secondary levels (Shala Darpan). The platform collates information on schools, teachers and staff , and students, and includes detailed profi les of more than 4 million students and 0.3 million teachers at the primary and secondary levels. These data are used for planning purposes, and also to track and monitor several student benefi ciary schemes. For teachers, the online portal has brought about greater effi ciency and transparency in teacher reassignments. Teachers can directly submit transfer requests on the portal and receive assignments based on their qualifi cations, skills and circumstances. The EMIS also tracks retirements and exits of teachers, thus providing critical information on anticipated vacancies and staffi ng needs.
73. In the area of social protection, Rajasthan has been an early adopter of information technology to help manage and improve existing schemes in the state. The fl agship eff ort in this regard is the Bhamashah scheme which was created in 2008 as a single biometric database of all residents in the state. As of mid-2016, there are 11.7 million households and more than 41 million individuals in the database, representing about 85 percent of the households in the state. Bhamashah serves as an end-to-end service delivery platform to transfer cash and non-cash benefi ts directly to households using biometric identifi cation and centralized banking. Applications can be made online, and once a household is enrolled, demographic details such as changes in address, marriages and deaths can be updated, and benefi ts can be accessed. The Bhamashah card is linked to the bank account of the female head of the household, with cash benefi ts such as pensions directly transferred. PDS food grains are also connected with Bhamashah, and tracking of PDS rations is also enabled through mobile phones. While implementation challenges remain, such as limited connectivity and infrastructure in remote areas and a lack of fi nancial literacy and awareness of banking facilities among some population groups, the potential is enormous for the system to continue to improve the timely receipt of benefi ts and to help ensure intended recipients are receiving support.
Conclusion: The use of ICT to improve service delivery in health and education as well as in social protection demonstrates the government’s ability to eff ectively use modern technology and bodes well for the government’s capacity to bring about further improvements in service delivery.
D. The way forward: Four pathways
74. To address the challenges to Rajasthan’s growth by building on its core strengths, the report proposes a strategy organized along four main pathways.
Pathway 1: More productive and environmentally sustainable agriculture
75. Agriculture is the predominant source of employment in Rajasthan, and both crops and livestock have shown considerable promise and strength in the recent past. In light of the water crisis, however, a transformational agriculture strategy is needed that promotes improved water management, incentivizes the production of crops that require less water, and makes farm incomes more resilient through the growth of livestock output (challenge 1). Choosing crops and livestock products that lend themselves to processing and value addition will have the further advantage of promoting structural transformation and hence facilitate the creation of more and better jobs (challenges 2 and 3). The report proposes that Rajasthan reduce its dependency on wheat and other water-intensive crops, and transition to crops such as guar, barley, pearl millet, spices, psyllium husk and oranges, in which Rajasthan already has shown strong growth in recent years.
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76. To facilitate the transition to these new crops, the Government of Rajasthan could collaborate closely with the private sector to identify and address constraints to their adoption through a production cluster approach. Public sector interventions could be structured around targeted support for infrastructure (such as logistics or warehouses), and reforms of the governance and the policy and regulatory framework for agriculture. In particular, the application of minimum support prices as well as the use of intermediaries could be rationalized; and feeder roads and warehouses could be built in specifi c regions of the state, where cropping areas have the potential for expansion.
77. Livestock activities are particularly benefi cial for creating gainful employment opportunities for women, landless laborers, and small and marginal farmers (challenge 3). In addition to consolidating and scaling up its dairy sector, Rajasthan has a major opportunity to exploit rapid growth for livestock products in India, especially for meat, as incomes are expected to rise over the next 20-30 years. Demand for meat is expected to be concentrated on small ruminants (goats and sheep), in which the large arid and semi-arid regions of the state have a comparative advantage. Because of limited opportunities in the harsh agro-climate of these areas, high quality livestock products can be an important avenue for shared prosperity (challenge 2). Exploiting the full potential of the livestock sector (with a focus on dairy and small ruminants) will require strategic investments in access to better breeds, feed and fodder resources, animal health, food safety and traceability systems, and promoting private investments in modern processing (including cold chains) and marketing (e.g., for meat, wool).
78. Subsidies for agricultural electricity consumption have contributed to fi scal pressures and overexploitation of underground water resources through pumping. A sound agriculture reform strategy is hence a prerequisite for restoring the sustainability of Rajasthan’s water resources (Challenge 1). Moreover, by aligning growth with local climatic and soil conditions, agriculture can contribute to more equitable growth (Challenge 2 and 3). In addition, a Direct Benefi t Transfer for Electricity (DBTE) scheme for agricultural electricity consumption could lay the ground for a reform of the subsidy regime to farmers which has been a burden on the budget (challenge 4). Such a scheme would allow funds saved from subsidy allocations to be monetized at a rate closer to the cost of supply of the DISCOM’s. Any excess consumption by the farmer would be charged at the regular, unsubsidized tariff , thus increasing incentives for economizing electricity. The key features of this regime would be: (i) determination of minimum energy support (MES) for farmers; (ii) design of cropping incentives for less water-intensive crops; (iii) initiatives to increase micro and canal based irrigation; and (iv) extensive consultations with farmers to assure them that their power subsidy allocation is secure and build their ownership.
79. The following policy options may be considered with priority to support this pathway:
• Rationalize MSP and procurement of wheat and incentivize high-potential crops by emphasizing water-sustainability and nutritional value. As policies governing these aspects of crop production incentives are controlled by the central government, it would be necessary for the state government to lobby the central government to modify the MSP, perhaps in partnership with other states facing a similar situation. At the same, the state could consider incentives for farmers to favor production of less water-intensive crops (including options such as countervailing premia for sustainable use of water and health benefi ts).
• Invest in and partner with the private sector to improve the competitiveness and marketability of Rajasthani products through (a) improved food safety and standards, branding and packaging, market promotion and providing farmers with appropriate market information; and (b) adopting cluster-based approaches to build post-harvest infrastructure, including warehousing, logistics, processing, etc. Greater availability of warehouses and reduced costs of logistics will be central to creating better conditions for crops that hold long-term promise, such as guar, spices and pulses.
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• Invest in breed improvement, access to better fodder, and animal health services as well as improving food safety and standards, branding and packaging, market promotion and information. These measures can go a long way towards unlocking the considerable potential of the livestock sector.
Pathway 2: Promoting structural transformation by supporting promising sectors in
industry and services
80. Rajasthan has considerable potential for further growth in industry and modern services. Rajasthan’s potential as a manufacturing hub is demonstrated by a number of recent large-scale investments, the state’s favourable geographical location, its good business environment, and positive perceptions among potential investors. This comparative advantage increasingly manifests itself also in investments in the modern and skills-intensive services industry, including hospitals, educational facilities and ICT. For example, the private health care sector in Rajasthan has grown strongly over the past decade, and major national hospital chains are now looking for investment opportunities in Jodhpur. In the area of education, major private sector institutions of higher learning have established branches.32 Rajasthan’s locational advantage is bound to improve further after the Delhi-Mumbai Industrial Corridor is fully operationalized, and in view of the growing attractiveness of Jaipur and other cities in Rajasthan relative to Delhi.
81. With its immense cultural heritage, natural assets, and existing hospitality infrastructure, Rajasthan also holds great potential for tourism to emerge as a signifi cant job creator. Rajasthan could achieve much higher growth in the tourism industry by capitalizing on two market segments that have high growth potential going forward: traditional sightseeing tourists from emerging markets in Asia (for example China); and higher-spending Indian millennials interested in unique experiences.33 To this end, two key challenges will need to be addressed: (i) the dominance of the public sector in tourism governance, which tends to discourage private sector involvement in the sector, and (ii) the limited tourism product portfolio, currently focused largely on sightseeing. As such, going forward it will be important to restructure the governance of the sector in a way that improves the collaboration between the public and the private sectors, and diversifi es the product profi le, so as to become more responsive to the demands from the most promising target groups.
82. Sustained growth in manufacturing and services will help move people out of agriculture and hence help maintain the sustainability of water resources (Challenge 1). In addition, with manufacturing and services being largely urban activities where access to education and health care are better and many labor-intensive industries (e.g. apparel) particularly suitable for women, growth in these two sectors will help address the persistent disparities in education and health and support jobs creation (challenges 2 and 3). In fact, in a virtuous cycle, manufacturing and services will both catalyze urbanization and benefi t from urbanization. Lastly, growth in manufacturing and services will also broaden the tax base and thus help address the fi scal challenges (challenge 4).
83. The following policy options may be considered with priority to support this pathway34:
• Business environment: The enabling environment for business could be improved through action in the following areas which have emerged as crucial from enterprise surveys: Review of registration,
32 For example, BITS Pilani (Birla Institute of Technology), Manipal University (Jaipur), and in the public sector-National Law University (Jodhpur), AIIMS Jodhpur (All India Institute of Medical Sciences), IIT – Jodhpur, NIFT (National Institute of Fashion Technology, Jodhpur.33 See for example analysis of the United Nations World Tourism Organization, 2015 Annual Report, which discusses these segments of travelers. 34 These shortcomings were identifi ed in a number of surveys, including the 2016 NCAER State Investment Potential Index as well as the 2015 Rajasthan Investment Climate Assessment.
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clearance and approval processes for businesses under the Factories Act and those issued by the Labor and Environment Departments; evaluation of eff ectiveness of single window system with a view to making it fully functional; implementation of a formal building code applicable to the entire State and an online portal for providing construction permits.
• Access to labor: With a view to strengthening access to skilled and unskilled labor, consider curtailing incentives to stay in rural areas, and providing safe transportation and safe housing for women workers in and around industrial zones.
• SME promotion:
· Review implementation of the “plug and play” policy and RIICO rules to facilitate access of SMEs to industrial parks through the provision of standardized factory space available for rent/lease. More functional industrial parks can play a crucial role in unlocking the considerable potential of the SME sector.
· Promote linkages and help SMEs penetrate markets through vendor development programs, reverse buyer-seller meet and setting up a product-wise market information database.
• Tourism: To improve targeting of promising market segments, it will be essential to build capacity to engage in comprehensive market research and visitor surveys. Furthermore, it will be essential to improve the public-private dialogue for the planning and management of destinations.
• Modern services: To facilitate medical tourism, a concerted marketing and branding campaign supported by the government and assistance for smaller medical facilities in obtaining the required certifi cation will be essential.
Pathway 3: Strengthening service delivery
84. A robust system for service delivery and social protection will be necessary to ensure the political feasibility of potentially disruptive transformations in agriculture and industry as well as to help ensure that all citizens benefi t from economic growth and can better manage the risks they face. Eff ective service delivery will be essential to facilitate structural transformation, allowing people to move more freely to where jobs are, and help equip the labor force with the required skills and stock of health to productively contribute to and share in the state’s growth.
85. Improving social services delivery involves addressing a set of overlapping constraints, depending on the particular service. Broadly, constraints include: (a) expanding equitable access to services; (b) improving the quality of services; and (c) enhancing the governance systems, including the effi ciency of expenditures. The following policy options could be considered with priority.
• Equitable access to education services can be enhanced by paying more attention to demand side constraints preventing adolescent girls and some ST children from attending school, including cultural barriers, safety and security, facility quality and opportunity costs for domestic work. Quality remains the largest constraint for primary education, as literacy and numeracy rates in Rajasthan are among the lowest in the country. Provision of good quality teachers is required, together with reliable feedback on teachers and student learning and regular review of learning practices. Demand constraints can be alleviated at several levels of education through voucher schemes and targeted scholarships. Community, parent and youth awareness and information programs can help improve educational choices and job market opportunities.
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• Health outcomes have made signifi cant progress, but still lag behind all-India averages. There are fi ve key policy directions that emerge: (i) enhance state funding for health to reduce out-of-pocket payments and strengthen allocations to poorer rural districts; (ii) address malnutrition and stunting through universalization of a package of priority interventions; (iii) prioritize functionality of public health facilities, including staffi ng, equipment and diagnostics; (iv) promote adolescent health practices and delay early marriage; and (v) improve health outcomes through multi-sectoral convergence using existing local platforms such as Village Health and Sanitation Committees, anganwadi workers, ASHAs and ANMs.
• Social protection service provision represents a challenge not least because the state is large with a scattered population. This feature makes last-mile delivery and monitoring diffi cult and often costly. Going forward, the state may consider consolidating the advantages of Bhamashah, while improving social protection systems through the adoption of a Management Information System. Moreover, replacing subsidies for agricultural electricity consumption with direct benefi t transfers would provide both social protection benefi ts to rural communities that are likely to be poor or vulnerable, as well as support the transition towards less water-intensive agriculture.
• Across all social programs and services, there is the need for better data collection and systematic use of information for decisions. While there are several health information systems that track service utilization or incentive payments to workers and transfers to benefi ciaries, there is substantial scope for integrating these into a comprehensive health information system. The Bhamashah scheme combined with Aadhar and possibly a social registry approach across programs could allow signifi cant improvements in targeting the right benefi ciaries, ensuring benefi ts are received and used and outcomes are measured.
Pathway 4: Enhance fiscal policy to spend more, better and sustainably
86. Successful implementation of Rajasthan’s inclusive growth strategy will require spending better and spending more, while conducting fi scal policy in a sustainable manner. The delivery of high quality health, education and social protection services, as well as needed infrastructure, requires an improvement in the effi ciency of expenditure, an increased level of resources to fi nance larger spending in some areas, and a stable fi scal policy stance to ensure spending programs receive predictable funding.
87. Spending better requires deepening ongoing public fi nancial management reforms to improve resource allocation and service delivery. Notwithstanding substantial reforms in recent years, several public fi nance areas can be strengthened. Actual compliance with the Rajasthan State Public Procurement Portal Act and the internal control framework still remains a challenge due to lack of capacity and skills. Audit institutions in the state need to be reoriented towards in-time and action-oriented reporting, which will help enhance executive response and accountability. There is a need to enhance budget realism, make the budget more performance-oriented and enhance its medium-term focus, which contributes also to the objective of ensuring predictable funding to priority projects. The state already prepares a medium-term fi scal framework in the context of the annual FRBM exercise, and this could become the basis for a Medium-Term Expenditure Framework.
88. A key priority in expenditure management is the energy sector. Subsidies to agricultural energy consumers have exacerbated the water crisis by sending the wrong signals to farmers on the actual costs of groundwater extraction. Meanwhile, the greatest threat to Rajasthan’s fi scal sustainability and a large drain on state resources have been the losses of state-owned power distribution companies (DISCOMs).
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Reforming the agricultural energy subsidies – possibly by moving to a direct benefi t transfer that is dissociated from energy use – and ensuring that the operational improvements envisioned under the UDAY scheme are achieved are critical in this regard.
89. Spending more will require raising more revenues. In the past two years, Rajasthan’s fi scal defi cits have been at the FRBM-imposed limit, or even above, when UDAY debt takeover is included. Going forward, spending on infrastructure or towards a substantive upgrade in service delivery in health and education will require higher resources derived from a higher level of revenues collected by the state, rather than borrowing. Rajasthan could enhance revenue collections in three areas: improving tax administration and compliance, especially in commercial and vehicle taxes; enhancing revenues from mining taxes; and deepening the reforms to stamp duties with a view to increasing revenue from properties.
90. Fiscal sustainability is critical to ensure that spending is steady. There is little risk for Rajasthan to default on its debt obligations or otherwise enter a fi scal crisis. However, there is a risk that the state may need to cut expenditures in order to meet fi scal targets and avoid a fi scal crisis. Such expenditure cuts and uneven disbursements detract from effi cient expenditure, and the limits posed by absorbing the cost of fi scal risks constrain the growth of priority expenditures. Therefore, maintaining fi scal sustainability is critical for the eff ective implementation of Rajasthan’s growth strategy. To this end, both the revenue and expenditure effi ciency measures described above, but also building adequate capacity for planning and debt management will be essential.
91. The fi scal pillar is critical to overcome the key challenges. Reforming energy subsidies will be important both to address the water challenge, but also to support an environmentally sustainable agriculture more broadly. Higher levels of resources and expenditure effi ciency will allow the state to provide the safety nets and infrastructure (including urban infrastructure) that will support the structural transformation away from agriculture and rural areas and into urban-based industry and agriculture, thus also helping address the jobs challenge.
92. The following policy options could be considered with priority:
• Strengthening tax administration: (i) Regular or automated revisions in non-tax user fees and charges; and (ii) Business process re-engineering in transport department to address linkages between vehicle registrations and generation of revenue demand.
• Use of analytical tools to support planning and prioritization of expenditures: (i) Develop more reliable revenue forecasts; (ii) conduct a comprehensive expenditure review, and introduce a public investment policy; (iii) prepare a debt management strategy to reduce interest payments and identify how cost and risk vary with the composition of the debt portfolio.
• Strengthening governance, enabling fi nancial recovery and improving operational performance of DISCOMS: (i) Setting clear performance targets and agreements for DISCOMs and providing operational autonomy to the utilities, establishing targets for reducing the gap between the cost of supply and recovery of revenues, and enhancing employee accountability for utility performance; (ii) regularizing the submissions by the DISCOMs to the regulatory commission for annual revenue requirements and tariff revisions and improving transparency and competition to reduce the costs of energy procurement; and (iii) modernizing the monitoring and control of the distribution network, including the introduction of new technologies for effi ciency gains (smart metering, pre-paid metering program and energy effi cient lighting)
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E. Concluding Statements
93. Rajasthan has made impressive progress in accelerating growth and poverty reduction and stands out among low-income states. Notwithstanding the scarcity of water, Rajasthan has shown considerable potential in the agriculture sector by beginning to capitalize on crops that are compatible with its climatic and soil conditions. It has also attracted investment in manufacturing and, increasingly, services, partly on account of its favorable location and partly due to improvements in the business environment. Lastly, it has eff ectively utilized modern information technology with a view to improving service delivery.
94. These accomplishments underscore Rajasthan’s ability to harness its natural strengths and areas of comparative advantage. Yet, challenges to continued strong growth and progress in social indicators abound, notably the worsening water crisis. This report shows that Rajasthan’s strengths in the areas of agriculture, manufacturing and services, including tourism as well as its progress in utilizing modern information technology, can be leveraged to address these challenges.
95. A strategy built on Rajasthan’s comparative advantages in the areas of agriculture, livestock, manufacturing and services, as well as measures to improve service delivery and revenue mobilization can go a long way towards ensuring Rajasthan’s continued sustained and inclusive growth performance: Agriculture can continue to support growth and poverty reduction, if more water-effi cient crops are being systematically supported and measures are taken to further enhance productivity. Manufacturing and services can become even more eff ective drivers of growth, if the business environment is further improved, focusing in particular on a specifi c set of policy actions aimed at addressing key concerns of investors. Both manufacturing and services can also be a catalyst for urbanization as well as benefi t from urbanization. Rajasthan can regain lost market share in tourism, if particularly promising market segments are being targeted. Also, there are considerable opportunities in medical tourism and higher education. Service delivery can be further enhanced, if a renewed emphasis on the functionality of government institutions is being placed, especially at the local government level. Lastly, Rajasthan can create the necessary fi scal space to reach its development objectives, if it reins into the DISCOM’s and harnesses opportunities for higher revenue collection and greater expenditure effi ciency. This fi scal space will be crucial to fi nance much needed infrastructure and social spending, including more rapid urbanization which has already proven to be an important driver of poverty reduction.
96. Growth in manufacturing and services as well as enhanced service delivery will also be essential to create better job opportunities and improve social indicators for women. Many sectors in which Rajasthan is competitive – such as apparel or footwear – off er suitable conditions to women and accelerating their growth performance will allow greater female labor force participation. Combined with improved access to education and health care, in particular in rural areas, Rajasthan may be able to narrow its current development gap in gender equity with some of the more advanced states.
97. The proposed strategy should also permit a reform of the electricity subsidy which is an essential prerequisite to make the electricity sector fi nancially viable and ensure fi scal sustainability over the long term. The political economy surrounding this type of reform is necessarily complex and navigating it will require consultations with all concerned stakeholders and measures to protect those that might be adversely aff ected. However, in its absence, it will be diffi cult to mobilize the resources necessary to create conditions conducive to sustainable agriculture and to growth in those sectors that can drive Rajasthan’s structural transformation. Rajasthan’s strong track record in implementing reforms and its success in reducing poverty augur well for the eff ective implementation of such a strategy.
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An
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in R
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top
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oduc
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Targ
et –
setti
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iven
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ch v
aria
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is a
ssum
ed to
be
equa
lly im
port
ant.
