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'Development is not a linear process'

Chaitanya Kalbagand Sanjiv Shankaran | Print Edition: Sep 16, 2012

Roberto Zagha has been the World Bank's Country Director in India since January 2009, when the economy was reeling from the global financial crisis and just before the national elections that brought the UPA back to power. Zagha, a Brazilian national, has been closely involved with India policy at the Bank for 17 years. During his tenure, the Bank became involved in several transformative projects; annual lending to India reached a record $9.3 billion in 2010. Days before he ended his India assignment, Zagha sat down with Chaitanya Kalbag and Sanjiv Shankaran for a frank, wide-ranging interview. Edited excerpts:

CK: What do you feel about this general air of pessimism on the economy, and why do you think there is a feeling that everything is going in the wrong direction?
RZ: When an economy grows at very high speed - I think it was growing at 9 to 10 per cent just before the economic crisis - this is a very profound system change and that creates a lot of shocks…shocks in vested interests, shocks in established systems, established ways of operating. So, you need constant change to sustain that. To achieve this change, you need a lot of political re-alignment and consensus.

As the economy grew and created pressure, for example, in energy and power, the fact that you had such a huge increase every year like 12-14 per cent increase in demand for power created a very significant stress. Now, the institutions and the systems in place were not geared towards responding to that for a variety of reasons. Coal India needs to be very responsive to demand. The tariff setting system is such that if you were to substitute Coal India coal by imported coal, you would have to factor in a new cost structure. The captive mines were not allowed to sell in the domestic market. So, you had a series of places where the regulators were not operating the way one expected them to operate (after) the reforms of the power sector in 2003. So, you need to adapt and change and coalition politics can very easily impede that change.

Video:Sustaining India's growth requires 'big' changes

CK: But you must have met people from all parts of the political spectrum. One of the things that people say for a country of India's size is that there ought to be political consensus, that the country needs to get richer and more developed, whatever happens in terms of politics there needs to be continuity of economic policy.
RZ: That is what the Prime Minister has said, that it is a national security issue, and I think he is very right. The question is how do you translate that in a democratic setting. India is not unique. You look at the United States, and they have failed massively in a variety of policy areas because it is very hard for democracies to build consensus. The same in Europe. Europe is going through an unnecessarily profound economic crisis, because people have different ideas about how to respond.

CK: Meanwhile, you have the sorry spectacle of one-tenth of humanity, in India, suffering two days of power blackouts. When something like that happens here, the scale is gigantic.
RZ:
India is global.

CK: There seems to be an absence of urgency and passion in terms of where we need to go.
RZ:
India has many gods. You just cannot push a button and resolve the power crisis. You need to bring them along. Coal India, the private mines which have been given licences to operate, the state governments, the central government. So, when you start looking at what's needed to resolve the power crisis, it's not beyond India's capacity to do it. It is in a sense very easy. But when you look at the confluence of different interests and systems and institutions that need to be brought along, it becomes very difficult. Because they have their own ideas - the coal ministry has one approach, the ministry of power has another approach, the state governments have different views. We have an interesting case with one of our own projects - the

The World Bank's country head, Roberto Zagha, seen here in New Delhi's Lodhi Garden, adopted Indian attire during his 44-month tenure. At formal events, even allegedly at a Bank meeting in Washington, D.C., he was resplendent in <em>dhoti and kurta</em>.
The World Bank's country head, Roberto Zagha, seen here in New Delhi's Lodhi Garden, adopted Indian attire during his 44-month tenure. At formal events, even allegedly at a Bank meeting in Washington, D.C., he was resplendent in dhoti and kurta.
Vishnugad Pipalkoti project on the Alaknanda river. It is throwing up a whole series of issues - how do you bring different parts of society to agree on something; how they are going to use the water going into the Ganga, which is considered sacred. So, we said at one point that if we had a power unit which would leave a minimum flow in the river, which would enable pilgrims to bathe and reach their shoulders, that would be enough. But not really, because some people feel that that would desecrate the waters. Others feel the waters are losing their health impact because if they don't reach the rocks and go through a cement tunnel, they lose the capacity of gathering minerals. You have to respect those and as a result of that our project is paralysed until the issue is resolved even though the green tribunal (set up in 2010 to quickly clear cases relating to environmental protection and conservation of natural resources) has cleared the project. Now, there are 77 (hydro-electric) projects in the Himalayas which are in different stages of implementation. Any economic progress has some environmental consequences. So, society needs to decide how it is going to resolve different preferences.

The bottom line is that you need to bring a lot of people to agree on important issues, and India is a very argumentative democracy, very active - some people feel power accrues to the rich and you don't need power for the poor. You hear, why don't you do nuclear. So, these are not simple choices. If the economy was not growing there would be no demand for power. But now, with the economy growing, it puts a stress on the decision making process. I am confident that a solution will be found, I don't know exactly which one.

CK: That must be frustrating in many ways.
RZ: It is not frustrating. You have to respect the way development takes place. Development is not a linear process. The simple fact that you have to increase power generates a whole series of questions about how society values progress, how society values its natural resources, how society resolves conflicts. That's why I said there are many gods and at some point they have to agree.

So, was I frustrated? I mean, you know, you would rather see things being resolved rather than not resolved and at the same time you have to admire the capacity of this country to have put itself together after two centuries of stagnation. Between 1750 and 1950, India barely grew in per capita terms. Less than one per cent or 0.5 per cent (annually). Over 60 years, which is two generations, not that long, you have an economy which is much more productive, able to maintain democratic systems, has achieved growth rates that are demonstrably high, has reduced poverty massively.

You went from less than 10 per cent enrolment in primary education to almost 100 per cent. Still, the problems are enormous: gender disparities, sex ratios of girls and newborns, quality of education, power, water, urbanisation. Now, we don't need to go through this agony and in three-four years you are done quickly if every human being was generous, willing to give away his private interest for the collective good. But that is not the way human beings function. Selfishness … my two cents are more important than your 20 dollars.

CK: India is a unique case study in itself. You cannot draw parallels with any other developing economy that might have been on a similar path.
RZ: I think India is unique in that it is so large. In Brazil we have had periods of very high growth that created similar situations, But we have an area that is three and a half times that of India, and a population that is today the population of Uttar Pradesh. So, it faces less stress.

SS: You have also talked about the "low hanging fruits" of policy. What are these?
RZ: What I meant by low hanging fruits is that there are solutions and I don't think you can push a button. The fruits are not waiting for you to pluck them. But the solutions are there. It is not beyond human ingenuity to resolve the power crisis. I think there are easy solutions for some things. For example, today you have private mines which could easily increase production and this is an easy low hanging fruit. If you increase production of coal mines, you can have better utilisation of existing thermal power. This is an easy solution. This will not by itself resolve the power crisis. The power crisis has different elements: what the situation is today, what the situation will be in five years, different roles of hydro, thermal, nuclear, and how you are going to create a system that is financially sustainable. Today you don't have that in India. Consumers are not getting power. State electricity boards are not financially solvent. So, I cannot give you one solution, push that button that will happen. But I find it fascinating that you have so many variables.

CK: There is a big problem that people don't want to pay market rates. I keep hearing farmers are willing to pay for electricity if there is assured supply. Do you think the government needs to say we are at a mature enough stage and end subsidies?
RZ:
I don't think that you can do that at one stroke…it has to be done over time. But you have to have a clear objective. If you decide today, how you are going to move, doesn't mean that you do all the decisions all at once. But you have a clear path...I think you need to have institutions which are more responsive to the needs of the public but have more authority in terms of their finances. On the basis of consumers being willing to pay whatever they are asked to pay, there is a need for a new equilibrium. This happens all over the world and it happens in India in a number of areas as well. Gujarat, for example, and even in Mumbai, people pay for their electricity and haven't suffered as much. It is a pretty reliable system. Even Kolkata is doing well. So, you can see that this is not a crazy proposition. People will pay if they get the service. No city in India gets water 24 hours a day, seven days a week. Don't even talk about the quality.

Now, you are 30 per cent urbanised. In 20 years time, you will be 50 per cent urbanised. And in 2060-70, I don't know, you will be 80 per cent urbanised, which is absolutely great. But just imagine the change that implies in terms of public transportation, delivery of power, delivery of water and a variety of services. So what you see now are the stresses of a system that has not yet adapted to the new circumstances.

SS: Just to get back to power, there was a World Bank study on the extent of debt that state electricity boards have. You have an internal group that is studying the problems right now. What is it they have found and what solutions do they have in mind?
RZ:
You will have to talk to them as I haven't yet taken stock of that. In my perspective… clearly, number one you have to have a different system for coal. The system has to be a mix of private production, a revitalised Coal India, and imports. That means the price of coal needs to be more market based. And if the price of coal is more market based then you need thermal power companies, generators which can reflect these higher costs. Which means regulators which are more ready to balance the interests of consumers and producers. And you need to have them more attuned to the interests of the producers. You cannot ask producers to produce power at a loss. This is what has been happening. So, that is one set of issues. The other is the environmental dimension...Coal happens to be in protected forest areas or where the tribals are. So, what do you do? Destroy the forests? Or destroy them temporarily and restore them? These are issues that need solutions. But you need to take decisions at some point: we are not going to destroy the forests. So, all the coal India needs is going to be imported from Australia and Indonesia. Or you have a different policy regarding clearing forests and people living in them.

SS: The Bank's country programme strategy. You plan to almost double the funding from $14 billion to $25 billion. There also seems to be a change in the World Bank's approach here because you are clearly looking at big transformational projects, which would suggest that you have taken the big risk of dealing with all the political problems that come with it like land and so on, like the Dedicated Freight Corridor at the eastern end. Why are you taking on these huge transformational projects?
RZ: When you look at the six decades of the Bank in India, what always impresses me is that my predecessors have been doing a remarkable job of putting the Bank where it is most useful to India. So, when you look at the 1950s…what I found remarkable is that when you look at what have been the pillars of India's development, the World Bank has been present (for) most of them. The first loan of the Bank was for the Railways. We had 20 loans and the last request was in 1991, and it was turned down because we wanted the Railways to do very simple accounting reforms - not structural reforms. And that is when we stopped lending to Indian Railways and started lending only to offshoots of the Railways like the Container Corporation.

The general point is that the Bank was where the action was. In infrastructure and railways. Very important to integrate India. In the 1950s, 60s, 70s, you name it, the Bank was present. The creation of India's financial sector. There is hardly one financial institution where the Bank has not been associated at one point or the other. ICICI, IDBI, HDFC, IL&FS, NABARD and so on and so forth.

The manufacturing sector - again there is hardly one public sector enterprise where the Bank has not been involved. The Cement Corporation of India, Indian Oil Corporation, SAIL, HPCL, HMT…

When India started focusing on education, the Bank was very instrumental and this involved changing, because the Bank was evolving over time with respect to sectors, projects etc and we were engaging in some of the formative projects. For example, in Uttar Pradesh, we have a small health project which tries to improve the efficiency of public sector spending, which is 20 times as large as the Bank's project. In some cases you need, especially in new areas, you need to have a large project and a large role. Some areas you don't.

CK: Have those kinds of projects actually catalysed the way the Indian government handles the larger projects in the same domain?
RZ:
That is the goal. It is a bit early to tell you that success has been achieved. It is work in progress. But that is the ambition. The Ministry of Finance has developed a kind of strategy called Finance Plus in which they expect multilateral institutions, not just the Bank, but ADB (Asian Development Bank) or JICA (Japan International Cooperation Agency), to have not only the financing but also system change and transformation. Sometimes we play a larger role to achieve the objective, sometimes we don't.

But when you speak about the doubling in lending, the reason was essentially that India was accelerating its responses to developmental challenges and expanding in infrastructure investments, expanding investments in education, expanding investments in environment.
More and more you see Bank projects being used as agents of system change. To go back to the example of the railways, the bank was financing projects like tracks and locomotives and signalling equipment and so on. But over time it became clear that what was needed was more profound institutional reforms. We moved out of the railways when it wasn't willing to do this. In the power sector, we had a more simple-minded approach. We learnt (that) if the tariffs are not sufficient to ensure maintenance and ensure the expansion of the system as demand increases, you don't have an institutional framework to increase tariffs.

When the Bank was created (in 1944) the focus was the reconstruction of Europe and Japan and institutions were present. What you needed was capital. There was not much thought given to institution-building, systems, the soft part of development. In the 1950s, 60s and 70s, as we started moving towards developing countries where the transformation of societies had not yet happened, the focus on policies and institutions became much more important. Therefore, we are much more concerned about financial management systems because we want to make sure resources are being used for intended purposes.

SS: You have had this problem in South Asia regarding siphoning of funds. Your transparency unit feels abuse of power is a very big issue in corruption. What kind of design changes have you brought about because three or four years ago you had a big problem with health sector funding here?
RZ: You know better than any bank official, the problems associated with the delivery of public services. There are two things that are very important. One is corruption, when people misbehave. The other, you cannot call it corruption, but it is equally serious in developmental terms when people don't do what they are supposed to do. For instance, when a power plant is not being maintained properly. This is not corruption, but is not an accountable, responsible use of public resources. So, the Bank has tried to put in checks and balances in the design of projects. Most bank projects, you have an ombudsman and a grievance redressal mechanism.…So, accountability is a very important concept that evolves over time. Look at the US today. Who's accountable for the financial crisis of 2008? Very few bankers ended up in prison.

CK: In general, there is a feeling things have started to reach a boiling point in India in terms of corruption. Is that true?
RZ: I don't think so. People are more indignant about it. The system is less tolerant about it. India has more money than opportunities.

CK: There's a feeling that Bihar was being given stepchild treatment by successive central governments. Is there a case for actually pushing transformation in a very big manner with the bank stepping in?
RZ:
Bihar was historically one of the centres of India's culture. Bihar has been bypassed for the last 60 years because of education and infrastructure. So, it makes a lot of sense to have an emphasis on Bihar so Bihar can catch up.

CK: You think the bank's involvement is yielding good results?
RZ:
I think Bihar is doing well. Whether the bank is doing well in Bihar, let's see what happens. We have a livelihood project that's doing well. We have other projects which are just starting. We have had some technical assistance in Bihar that's very useful in establishing treasury systems, financial management.

The first phase was to help Bihar establish its own financial management procedures. It was technical assistance to manage its resources better. The second phase is to expand government programmes that will have a useful contribution to Bihar. In the third phase we are trying to support large investments in managing floods and also agriculture.

CK: There's a theory that development in Gujarat is not an accident that happened because Narendra Modi came in.
RZ: The earthquake reconstruction project in Bhuj has been remarkably successful - earthquake-proof buildings and also creating a disaster-management agency which is very well run. Every project the bank has had in Gujarat has been implemented very well. It has a very strong administration. There is a tradition of efficiency in the public administration of Gujarat.

SS: What is the focus of the future country programme strategy?
RZ: It will be conducive to this Finance Plus approach (of the Ministry of Finance), which (is to) leverage resources better, be more strategic in choice of projects, try to increase focus on low-income states. So, I don't see anything earth-shattering.

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