Receiving World Bank loans is no longer what it used to be, thanks both to the finance ministry and the Bank itself.

In the last three years of the United Progressive Alliance regime, the finance ministry's relations with the World Bank have changed in quite a few significant ways. The first big change pertains to the pattern in which the finance ministry has begun transferring the loans from the World Bank to the states.

Instead of on-lending the World Bank loans to the states in the ratio of 70 per cent grant and 30 per cent loan, the finance ministry under the UPA regime has been permitting the World Bank loans to be transferred to most states on the same terms and conditions the centre gets them.

The 11 special category states (the seven north-eastern states, Tripura and the hilly states of Jammu & Kashmir, Uttarakhand and Himachal Pradesh) continue to get a preferential treatment by receiving the Bank loans in the form of 90 per cent grant and 10 per cent loan. But for all other states, receiving World Bank loans is no longer what it used to be in the past.

Not only has it meant increased liability on account of loan repayment and a higher interest payment burden, the states now have to absorb the impact of exchange rate fluctuations as well. In the present scenario of an appreciating rupee, the states may actually benefit by exchange rate fluctuations. But nobody fails to notice how the states are now more watchful of exchange rate fluctuations.

This has meant more effective use of loans from the World Bank. The states now realise that the bulk of the money that comes from the World Bank does not come as grants. In fact, it costs them as World Bank loans carry an interest rate that is not cheap by any yardstick. Even the World Bank's own assessment shows that the loans now being routed to the states under the new system have helped achieve moderate to good success in most projects.

There is yet another change in the way the finance ministry has been dealing with the World Bank in the last three years. The ministry now plays a relatively passive role in World Bank-aided projects in the country. The Bank also has shifted away from its "focus state approach," where it used to engage with a limited number of poor states. Now it is looking at a larger number of states.

According to its current India Country Strategy (effective from 2004 to 2008), the Bank is engaged in policy dialogue with as many as 12 states including West Bengal. And the dialogue is aimed at bringing about reforms in areas such as fiscal management, governance, services delivery, power sector and investment climate.

It is important to note here that the World Bank's engagement with these states on policy reforms and release of loans under various schemes (like development policy lending) has happened without any political controversy. The dialogue with most states has been smooth and the Bank now hopes to step up its total lending to India including the states to $3 billion a year (in 2003-04, the total Bank lending was estimated at $1.4 billion).

Only a few years ago, there was a major debate over why multilateral financial institutions should be allowed to deal with the states directly to engage in policy reforms dialogue and provide loans. India's economic sovereignty could be undermined if the states were allowed to deal with the Bank directly, it was argued. Eventually, these consultations had come to an abrupt end.

Clearly, the scenario has improved in the last three years. The World Bank, too, has played a role in bringing about the improvement. For instance, the Bank is no longer looking at only a few states and asking them to reform their policy to become eligible for loans or assistance. It has now made a longer list of states, which need such assistance. Most importantly, conditionality to loans has become a dirty word. No World Bank official talks about granting loans only when certain conditions are fulfilled.

The biggest change, therefore, is in the language and approach of the Bank. Policy dialogue may still talk of reforms, but changes are initiated through consultations instead of the desired changes being imposed through conditionality. The finance ministry has also facilitated this process by staying out of it and allowing the states to deal with the Bank directly and pay for such loans. Mercifully, opportunistic politicians have not yet woken up to it and made this an issue.