Revised Program Administration Manual. India: Khadi Reform and Development Program

Revised Program Administration Manual Program Number: 26194 Project Number: 42151 Loan 2452 and TA 7142 November 2016 India: Khadi Reform and Development Program

Contents I. PROGRAM DESCRIPTION 1 A. Program s Rationale, Location and Beneficiaries 1 B. Impact and Outcome 3 C. Outputs 3 II. IMPLEMENTATION PLANS 7 A. Loan History 7 B. Overall Program Implementation Plan 9 C. Revised Program Implementation Plan 11 III. PROGRAM MANAGEMENT ARRANGEMENTS 15 A. Program Implementation Organizations: Roles and Responsibilities 15 B. Key Persons Involved in Implementation 15 C. Program Organization Structure 16 IV. COSTS AND FINANCING 17 A. Cost Estimates by Expenditure Category 18 B. Allocation and Withdrawal of Loan Proceeds 19 V. FINANCIAL MANAGEMENT 20 A. Financial Management Assessment 20 B. Disbursement 21 C. Accounting 21 D. Auditing 22 VI. SAFEGUARDS 22 VII. PERFORMANCE MONITORING, EVALUATION, REPORTING AND COMMUNICATION 23 A. Revised Program Design and Monitoring Framework 23 B. Monitoring 28 C. Evaluation 28 D. Reporting 29 VIII. ANTICORRUPTION POLICY 29 APPENDIXES 1. Terms of Reference for the Reform Implementation and Monitoring Committee 2. Reform Implementation Division Responsibilities and Actions 3. Reform Management Unit's Responsibilities and Actions 4. Development Policy Letter and Revised Khadi Reform Package 5. Revised Policy Matrix and Revised Policy Conditions 6. List of Ineligible Items 7. Withdrawal Application 8. Sample Certificate From the Borrower 9. Proforma of the Executing Agency's Program Progress Report 10. Sample Audit Letter

CURRENCY EQUIVALENTS (31 October 2016) Currency unit Indian rupees (Re/Rs) Rs1.00 = $ 0.015 $1.00 = Rs 66.78 ABBREVIATIONS ADB - Asian Development Bank CSP - central sliver plant DRA - direct reform assistance FY - financial year FYP - five year plan GDP - gross domestic product GOI - Government of India KI - Khadi Institutions KVI - khadi and village industries KVIB - khadi and village industries board KVIC - Khadi and Village Industries Commission MIS - management information system MO - marketing organization MOU - memorandum of understanding MMSME - Ministry of Micro, Small and Medium Enterprises NGO - nongovernment organization PPP - public-private partnership RID - reform implementation division RMU - reform management unit RNS - rural nonfarm sector TA - technical assistance

I. PROGRAM DESCRIPTION A. Program's Rationale, Location and Beneficiaries 1. Rapid economic growth in India has led to a marked decrease in poverty incidence from 45% in fiscal year FY1993-94 to 37.2% in FY2005 to 21.9% in the 2011-12 1. Nevertheless, in absolute numbers, as on 2011-12 India still has 269 million poor; with 80% or nearly 216 million of the poor live in rural areas. The growing rural urban divide is reflected in sharp disparity in per capita income. In addition, gender inequalities in terms of nutrition, health, education, work burden, and powerlessness persist. While over 70% of the Indian population resides in rural India and 56% draw their sustenance from agriculture, agricultural productivity has been decelerating. As a result, the agriculture sector is unable to absorb the large rural work force even at subsistence levels. 2. With an overarching focus on inclusive growth, the 12 th Five Year Plan (FY2012 2013 to FY2016 2017) seeks to increase employment, with a significant increase in the rural nonfarm sector (RNS). According to Planning Commission analysis of performance of the sectors during 12 th Plan Period, wherein the total employment in agriculture is expected to reduce from 242.4 million in 2011-12 to 226 million in 2016-17 (CAGR -1.4%), while in case of RNS, the same is expected to increase from 226.1 million to 276.4 million (CAGR 4.1%) in the corresponding period indicating a structural change away from agriculture toward the RNS. Growth of real per capita nonagricultural output through the promotion of the RNS can have a significant impact on reducing rural poverty. The RNS has immense potential to generate new jobs with relatively low direct investments, by utilizing local skills and resources or by meeting local demands by adopting simple technology. 3. Khadi and village industries (KVI), originally promoted by Mahatma Gandhi in 1920s for rural self-employment, is integral to the RNS and has been identified by the 12th Five Year Plan as one of the subsectors with significant prospects for employment. Khadi and Village Industry (KVI) sub-sector is an integral part of the rural non-farm sector (RNS) and largest source of employment after agriculture in the country. Khadi, a handspun and handwoven cloth, is the single largest component of KVI subsector. The production of khadi is organized by nongovernment organizations known as khadi institutions through artisans (spinners and weavers). Khadi is marketed by the outlets of khadi institutions throughout the country. At the apex, the Khadi and Village Industries Commission (KVIC) provides policy, technical, and marketing support. The Government extends financial support through subsidies to promote khadi. 4. Notwithstanding the recognition of khadi in India and the large and diverse potential market that the country provides, khadi sales has nearly stagnated even when the textile market is making remarkable progress. Production and marketing inefficiencies left unattended for decades have isolated khadi from changing consumer preferences. The constraints include (i) aging equipment and inconsistent product quality; (ii) khadi institutions are fragmented and dispersed; and lack professional expertise, financial means, and unified vision to adjust to changing market trends; (iii) marketing and sales are primarily through 7,050 outlets of khadi institutions that are isolated from current marketing trends in terms of products design and service quality; and (iv) incentive structures through subsidies for production and marketing have impeded reforms meant to anchor khadi to changing consumer preferences. 1 Planning Commission, July 2013 - Percentage and Number of Poor Estimated by Tendulkar method, using Mixed Reference Period (MRP)

2 5. In order to fully realize the significant growth potential of KVI sector, the Khadi Reform and Development Program (KRDP) is being implemented by Government of India and KVIC since 2010, with assistance from Asian Development Bank (ADB). The key outcome of the program focused on revitalization of the Khadi and Village Industries (KVI) subsector with enhanced sustainability and promotion and marketing of khadi; increased employment, higher incomes and welfare for the Khadi artisans; institutional strengthening; and development of traditional village industries. The policy conditions related to the private sector participation in raw material production and setting up of Marketing Organization with majority private sector shareholding could not be complied despite attempts made by KVIC and MMSME. In this context, ADB and GOI has agreed to drop such infeasible conditions and restructure the Program. 6. Over the duration of the program, reform measures were made in various areas and a substantial progress was achieved including but not limited to (a) formulation and implementation of the Khadi Mark, which was being launched by the Honourable President of India (b) notification for market pricing enabling the Khadi Institutions to make profits and redistribute among the Khadi stakeholders (c) development of the 5 village industry clusters (d) policy level reforms including introduction of benefit chart and production incentive plan (e) direct reform assistance to Khadi Institutions enabling them to increase their productivity with the assistance of new implements and increase their sales with the renovation of their sales outlets (f) capacity building and institutional strengthening of KVIC with a focus on technological advancement and so on. 7. The Program covers the Khadi Village Industries Commission, Head Office in Mumbai and six zonal and 36 state/divisional offices. The Program originally planned to implement comprehensive reforms in 300 khadi institutions in the following states which as part of restructuring has been increased to 400 institutions. West Zone South Zone North-East Zone North Zone Central Zone East Zone Table 1: Khadi Locations Maharashtra, Gujarat Tamilnadu, Kerala, Karnataka, Andra Pradesh Assam, Arunachal Pradesh Delhi, Rajasthan, Punjab, Jammu & Kashmir, Himachal Pradesh, Haryana Uttaranchal, Uttar Pradesh, Gorakhpur, Madhya Pradesh, Chattisgarh Bihar, Orissa, Jharkhand, west Bengal 8. The reform of khadi institutions, the primary producers, will enhance quality, design, and artisan income. Nearly half of the program resources are directed to supporting khadi institutions. The institutional reforms at KVIC will strengthen its development role. The Program envisaged gradual disengagement from production of raw material and khadi marketing. However, the private sector participation in these activities were found to be infeasible during the implementation period so has been removed from the policy conditions as part of the restructuring. 9. At the macro level, the Program supports poverty reduction by enhancing employment and incomes, and thus contributing to stability and peace in rural areas. KVI subsector provides

3 employment opportunities to the rural poor including in remote and hilly areas. The poverty impact will be widespread and cover the country s poorest states, and those with low human development and social indicators, as khadi production and marketing encompass the entire country. The Program will have positive impacts in terms of reducing non-income poverty. Increases in household incomes will lead to a change in expenditure patterns in favor of nonmaterial consumption, such as education and health. The impact of khadi on rural development, and in reducing rural urban migration is also significant. Development of khadi will therefore promote inclusive growth, involving women, and socially and geographically marginalized groups. The Program will not have any adverse impact on indigenous peoples. 10. The Program will enhance artisans employment and earnings through production, marketing, and governance reforms for khadi institutions. Governance reforms ensure artisan representation on boards of directors of khadi institutions to empower artisans by involving them in decisions relating to wages and distribution of surplus. The regulatory conditions for the use of a Khadi Mark along with the removal of restrictions on pricing of products and the enhanced efficiency of the artisans with the new implements to be given under the program, will help provide higher wages for artisans. B. Impact and Outcome 11. The impact of the proposed Khadi Reform and Development Program (KRDP) is enhancement of income and employment growth for the KVI sector. The Program outcome is revitalization of the KVI subsector with enhanced sustainability of khadi, increased employment generation and incomes, increased artisan welfare, and development of select traditional village industries. The reform of production and marketing of khadi will lead to sustainable employment opportunities at low per capita investment. In addition to reduction in income poverty, the Program will also reduce non income poverty. Khadi is a geographically widespread economic activity encompassing all states and regions in the country. Given the high involvement of women, and marginalized groups in the KVI subsector, its development will promote inclusive growth. Reforms of khadi will help facilitate KVI subsector wide reforms. C. Outputs 1. Establishing a Policy Reform and Implementation Framework 12. A Comprehensive Reform Package for the Development of Khadi. The policy and institutional framework for khadi needs be anchored to the core principle of sustainability. Khadi has to move away from a welfarist approach to a market-based approach. Accordingly, as part of the Program, the Government has formulated a comprehensive reform package for khadi and established an implementation framework for KVIC to carry out the proposed reforms. Specifically, under the Program (i) (ii) (iii) The Government conducts review of the performance of KVIC and other subsidiary institutions and developed a khadi reform package for strengthening production and marketing of khadi. Khadi reform package comprising policy, legal, marketing, and institutional reforms for achieving sustainability of khadi and enhancing artisan income and empowerment has been agreed between the Government and KVIC. KVIC has developed (a) criteria for selecting khadi institutions eligible for assistance under the khadi reform package, and (b) memorandum of understanding (MOU) on comprehensive reforms of khadi institutions with

4 (iv) performance benchmarks and sanctions for khadi institutions that fail to meet the performance benchmarks. KVIC is in the process of selecting 400 khadi institutions eligible for support under the Program. 13. These activities have been completed and set a strong foundation for implementation. 2 During implementation, KVIC will disseminate the khadi reform package nationwide through workshops and will sign MOUs with 300 eligible khadi institutions to implement the khadi reform package. Prior to assistance under the Program, independent auditors will audit the khadi institutions. Based on audit findings, a minimum threshold for acceptance of khadi institutions will be developed. During implementation, assessment of the reforms will be conducted and appropriate measures undertaken to address the feedback. 2. Promoting and Marketing Khadi 14. Establish Identity of Khadi through a Khadi Mark. Creating a niche as a handspun and handwoven fabric produced through fair trade practices is the most likely way for khadi to become commercially viable in a highly competitive textiles market. Under KRDP, KVIC has already developed a Khadi Mark including the design of a logo (i) as an indicator of genuine khadi and to build awareness and popularity of khadi, and (ii) to guarantee the Earth Friendly (handspun/woven nature) and People Centric / Ethical (employment, primarily to women on specified base wages) attributes of khadi. The Khadi Mark will be linked to specified base earnings for artisans. Originally, the Khadi Mark was envisaged to be registered under the Trade Mark Act in order to ensure legal protection 3 and regulations for granting the use of Khadi Mark will be developed. KVIC and MMSME faced the legal impediment in registering it under the Trade Mark Act as a certifying mark as KVIC is still involved in production and marketing activities. To achieve the similar level of legal protection, the Khadi Mark Regulations 2013 was notified by GOI and gazette in July 2013 along with a logo to provide distinct identity to khadi. All khadi institutions affiliated to KVIC and KVIB will adopt the Khadi Mark. In addition to khadi institutions, institutions external to the KVIC khadi program will also be allowed to use the Khadi Mark. Further, basic testing infrastructure for Khadi Mark will be created and KVIC will conduct random spot audits on the adherence to licensing requirements for Khadi Mark. 15. Effective Marketing. Professional capability and orientation to assess evolving market dynamics and the flexibility to respond swiftly is critical for the effective marketing of khadi. Under the Program, KVIC was required to identify private partner to set up a majority privateowned marketing organization outside of KVIC. The responsibilities of the marketing organization include (i) developing marketing strategies, (ii) identifying products to be marketed in domestic and international markets, (iii) introducing public-private partnership (PPP) in the department sales outlets of KVIC, and (iv) rejuvenating the sales outlets of khadi institutions (or Institutional Sales Outlets). This policy condition was found to be infeasible after earnest effort made by MMSME and KVIC. The condition has been dropped as part of the restructured Program. KVIC will retain the right of promoting and using Khadi Mark and can transfer the same to third party under a licensing agreement. 2 The relevant information is at the Supplementary Appendixes of the RRP. 3 Such protection includes the right for the holder of a registered intellectual property right, i.e., trademark or a trade description to file a suit in the court seeking permanent injunction against the person infringing the trademark; claim damages; and restraining the other party from disposing assets in a manner which adversely affects the ability of the holder of the registered intellectual property rights to recover the damages, costs, or other remedies.

5 3. Realizing Procurement and Production Efficiencies 16. Facilitate Procurement and Processing of Raw Materials. High cost of raw material, processing inefficiencies, and inadequate testing capabilities are major constraints in the khadi value chain. Accordingly, the Program requires actions for improving procurement, processing, and quality control of raw material i.e., sliver. KVIC will establish quality norms for raw material procurement by khadi institutions and also train them on quality testing of raw materials. Under KRDP production efficiencies were to be gained by bringing private sector participation in the CSPs. However there was limited interest in private sector due to issues such as old state of machinery, outdated technologies and smaller production capacity. Hence considering the critical role or production efficiency, KVIC and MMSME shall explore an alternate approach for refurbishment of CSPs to ensure improvement in quality and quantity of raw material output. 17. Market-Linked Pricing to Replace Cost-Based Pricing. Inflexible product pricing due to the cost chart and its linkage with the rebate limits the scope for enhancing artisan earnings. The cost chart also inhibits creativity, enterprise, and the potential for artisans to enhance earnings. A benefit chart, as a replacement, would ensure better linkage of production, marketing, and pricing by enabling the khadi institutions to set khadi prices as determined by the market. While the proposed Khadi Mark is intended to ensure payment of base wages 4 by all producers of khadi, the benefit chart is intended to ensure that surpluses are used for the benefits of the khadi artisans and workers. 5 Accordingly, the Program requires KVIC to formulate and implement a benefit chart in respect of khadi institutions. KVIC will organize training in coordination with the marketing organization for product pricing and familiarization with the benefit chart. The impact of benefit chart on artisans earnings will be assessed. 18. Rationalize Financial Assistance for Khadi. Anchoring the production of khadi to markets requires that financial support that impedes innovations and enterprise be discontinued. However, this will need to be done gradually in a manner that does not cause disruption in the artisan income and employment status. Under the Program, KVIC will formulate a production incentive plan for all khadi products and shift to production incentives in lieu of the sales rebate and market development assistance. Further, during the Program period, KVIC will also determine the product categories on which the production incentives could be phased out. Interest subsidy eligibility certificate will also be phased out along with phasing out of production incentives on specific product categories. In addition, working capital requirements for khadi institutions will be assessed and access to working capital will be facilitated. 19. Rationalize Financial Assistance for Khadi. Create New Khadi Ventures with Greater Entrepreneurial Activity and Enhanced Artisan Empowerment. In order to spur growth in khadi and empower artisans, under the Program, KVIC will develop and implement a producer company 6 model and an entrepreneur model, for new khadi ventures under the KVIC khadi program. These will complement the khadi institutions by enhancing the production and marketing base of khadi. The producer company, as a means of artisan empowerment, only comprises primary producers (artisans, spinners, and weavers) which collectively appoint a governing board responsible for all decisions to be made for the producer company. The 4 Khadi institutions will have the flexibility to pay over and above the base wages. 5 Options for artisan s benefits suggested are (i) at least 50% of the surplus to be distributed as bonus on fiscal year end to artisans based on production record, and (ii) the balance earnings to be utilized for creating provisions for future capital requirements including improved equipment and benefits for artisans. 6 Set up as per provisions of Companies (Amendment) Act 2002, the producer company can form alliance or partnership with any entrepreneur or entity for marketing its products. Details of models for new khadi ventures are in Supplementary Appendix H of the RRP.

6 enterprise model enables enterprises without sacrificing artisan income and empowerment and authenticity of khadi that could avail assistance from KVIC in the form of Rural Employment Generation Programme assistance. As part of the restructuring, MMSME has decided to cover the implementation of the new ventures through other schemes. 4. Implementing Institutional Reforms 20. Organizational Restructuring of KVIC for Better Focus on Facilitative and Development Role. Given the enormous inclusive development, employment, and income generating scope of khadi, KVIC has significant responsibilities to discharge and a pivotal role to play as the nodal institution for the development of khadi. Efforts to reform KVIC have so far been fragmented and, as a result, it currently is neither appropriately organized nor skilled to bring about an intended transformation in khadi. KVIC needs to focus on promotional and development role and gradually disengage from direct commercial activities, such as production and marketing, which are not specifically based on its core competencies. Simultaneously, KVIC needs to play a facilitative role to strengthen khadi institutions, enhance the stake and role of artisans, facilitate the flow of raw materials and finances, and to create a niche for khadi through Khadi Mark. Under the Program, KVIC has adopted a restructuring and devolution plan including (i) restructuring khadi, village industries, science and technology, and economic research directorates; (ii) strengthening of human resource and administration directorate; (iii) realignment of reporting relationships; and (iv) devolution of powers and responsibilities to zonal offices. KVIC shall continue to leverage on the restructured plan. Under KRDP, KVIC shall also bring operational efficiencies through development and implementation of an integrated management information for the Khadi Institutions and Integrated Financial Management System for KVIC and its stakeholders. 21. Revitalize Khadi Institutions. Being fragmented and dispersed, the khadi institutions lack the professional expertise, financial capacity, and a unified vision to adapt to evolving market trends. As primary level producer and marketers of khadi, the reform of khadi institutions constitute the base for the transformation of khadi envisaged by the Government. Under the Program, KVIC will implement the comprehensive reform plan for 400 khadi institutions, selected primarily on the basis of performance, to ensure enhanced artisan earnings and empowerment and improved viability of khadi institutions, through (i) production, (ii) marketing, (iii) governance, and (iv) information technology. The model comprehensive reform plan has been developed with due recognition of the need for adaptation to requirements of specific khadi institutions. Reforms are phased to enable evaluation and incorporation of lessons learned. The revised scope of comprehensive reforms at khadi institution level is in Linked Document 13 of the major change RRP. 22. In addition, all khadi institutions 7 will be recategorized based on new norms that emphasize (i) role for artisans, (ii) governance structure, (iii) human resources, (iv) financial health, and (v) diversified networks and market linkages. 23. Strengthen the Capability of All Institutions. Systemic skills deficit persists at all levels in the set up for khadi which will have to be addressed. The Program requires the development of a comprehensive capacity building plan, including physical infrastructure and training of trainers, to strengthen capabilities at all levels. The comprehensive capacity building plan, based on assessment of existing training arrangements (infrastructure, capacity of 7 The Program covers 300 eligible khadi institutions whereas the reform of all khadi institutions is part of the khadi reform package. The Government will develop customized restructuring plan for weak khadi institutions.

7 trainers, and curriculum), will adopt a two-pronged focus (i) demand: a team within KVIC s human resources development directorate to focus on regular interaction with all other directorates and the marketing organization, to continuously assess the demand (nature/sector/skill level) for training; and (ii) supply: developing linkages with external training programs, enhancing the training institutes under the KVIC, and detailing and implementing capacity building. 24. Under KRDP, KVIC will develop and implement a Comprehensive Reform Plan to be implemented in a phased manner for 400 KIs selected with focus on regional balance and the inclusion of backward areas. The elements of the Comprehensive Reform Plan shall comprise of a Direct Reform Assistance to ensure viability of KIs and enhancement of artisan earnings and empowerment and shall comprise of (i) Production reforms to include supply of new model charkhas, looms, warping machine, yarn processing unit, spinning sheds and working capital support to cover the increase in working capital requirement due to capacity enhancement and other reform measures (ii) marketing reforms, linking to overall marketing reforms to enable expert inputs from the MO for product strategy including product processing, designing and local marketing strategy. Marketing reforms will also include renovation of sales outlets; (iii) Governance Reforms: Re-organization of artisans into Self Help Groups and (iv) system Reforms: Supply of basic information technology infrastructure (including accounting systems) and electronic networking of KIs with KVIC. 25. Develop Synergies with Traditional Village Industries. There are inherent synergies between khadi and traditional village industries, which are in line with the overall ethos of khadi handmade, use of organic inputs/processes and/or socially aware. The Program identified five traditional village industries as part of the first tranche namely Handmade Paper, Honey, Herbal Health and Cosmetic products, Leather and leather products and Agro food products. A cluster approach to pool efforts for developing the identified traditional village industries will be adopted. The capacity building needs for the cluster will be integrated with the comprehensive capacity building plan and implemented simultaneously. II. IMPLEMENTATION PLANS A. Loan History Milestones Dates Inception of the PPTA 04 January 2008 Consultation mission for PPTA 17-21 March 2008 Review mission for PPTA 10-17 April 2008 Concept paper 6 June 2008 Fact Finding Mission 17-24 June 2008 Consultation Mission 24-25 July 2008 1st MRM 30 July 2008 Appraisal Mission 7-11 August 2008 2nd MRM 20 August 2008 Loan Negotiations 27-28 August 2008 Loan Approval 02 October 2008 Signing of loan and Program agreement 22 December 2009 Loan Effectiveness 02 February 2010 First Tranche Disbursement 17 February 2010 First Loan Extension Loan Closing date 30 September 2013

8 Milestones Dates made effective on 26 September 2011 Second Loan Extension Loan Closing date 30 September 2015 made effective on 04 December 2013 Third Loan Extension Loan Closing date 30 June 2016 made effective on 01 February 2016 First Consultation Mission for exploring loan 24 February 03 March 2016 revival Second Consultation Mission for exploring 27 April 29 April 2016 loan revival Third Consultation Mission for exploring 11 May 13 May 2016 loan revival First Review Mission for restructuring 29 June 7 July 2016 Fourth Loan Extension Loan Closing date 31 December 2016 made effective on 01 July 2016 Second Review Mission for restructuring 17 August 24 August 2016

9 B. Overall Program Implementation Plan Plan ned Activity Precedent to Tranches Activities 2008 2010 2011 2012 2013 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1.1 A comprehensive reform package for the development of khadi Khadi reform package formulated and approved by the Government and KVIC (by Oct 2008) Selection criteria and the list of 300 selected khadi institutions for implementation of khadi reform package (by Oct 2008) Draft MOU between KVIC and selected 300 khadi institutions (by Oct 2008) Audit findings for the selected 300 khadi institutions by independent auditor (by Nov 2011) KVIC conducts first independent assessment of the khadi reform package (by Nov 2011) KVIC conducts second independent assessment of the khadi reform package (by Jan 2013) Reform implementation and monitoring committee constituted (by Oct 2008) Reform implementation division established (by Oct 2008) 2.1 Establish identity of khadi through khadi mark KVIC agrees to undertake steps to develop khadi mark and link the artisan s base earnings to the use of khadi mark through approval of khadi reform package (by Oct 2008) KVIC undertakes (i) the formulation and execution of the MOU with the Ministry of Textiles for testing infrastructure, (ii) the formulation and execution of the model agreement for licensing the use of khadi mark; (iii) the development of the detailed plan for the creation of basic testing infrastructure for khadi mark at KVIC; and (iv) the arrangement for managing khadi mark by KVIC State/Divisional offices supported by ADB ADTA (by Oct 2010) KVIC adopts procedures and assigns the khadi coordination directorate to grant usage of khadi mark to khadi institutions and others supported by ADB ADTA (by Oct 201 0) KVIC through its khadi directorate ensures that the khadi institutions registered at either KVIC or KVIB adopt the khadi mark (by Oct 2010) Khadi mark developed and reg iste re d by KVIC (b y Oct 2010) KVIC through the khadi directorate prepares and maintains a list of khadi institutions and others authorized to use khadi mark and publish this in its website supported by ADB ADTA (by Nov 2011) KVIC creates the basic testing infrastructure for the khadi m ark (by Nov 2011) The khadi mark is used by at least all KVIC/KVIB registered khadi institutions and other third party authorized institutions supported by ADB ADTA (by Jan 2013) First spot audit report by KVIC of khadi institutions and others regarding adherence to licensing requirements for the use of khadi mark (by Nov 2011) Second spot audit report by KVIC on khadi institutions and others regarding adherence to licensing requirements for the use of khadi m ark (by Jan 2013) 2.2 Market khadi th rough p rivate sector participation KVIC identifies potential private partners for the new marketing organization and incorporates marketing organization through an MOU and incorporation certificate supported by ADB ADTA (by Oct 2010) MMSME issues a directive to allow KVIC to provide capital contribution for the establishment of the joint-venture marketing organization (by Oct 2010) The Khadi Marketing Extension Program is developed for incentivizing the establishment of new DSOs by the marketing organization (by Oct 2010) Licensing agreement established under which KVIC transfers the rights of promotion and usage of khadi mark to marketing organization under a licensing agreement supported by ADB ADTA (by Oct 2010) Survey report of KVI products and a marketing strategy for all khadi related institutions and on identifying products for both domestic and international markets supported by ADB ADTA (by Oct 2010) Marketing organization develops framework for introducing PPP in the DSOs and introduces PPP in 2 DSOs supported by ADB ADTA (by Nov 2011) Marketing organization develops the Institutional Sales Outlets Rejuvenation Plan (by Nov 201 1) Marketing organization prepares a product catalogue and sets up the market information system (by Nov 2011) Marketing organization introduces PPPs in at least two other KVIC DSOs (by Nov 2011) First progress report on marketing organization s implementation of the Institutional Sales Outlets Rejuvenation Plan (by Nov 2011)

10 Activities 2008 Q4 Marketing organization im plements the Institutional Sales Outlets Rejuvenation Plan (by Jan 2013) Marketing organization formulates guidelines for the setting up of new sales outlets by khadi in stitu ti on s (b y Jan 2013) Marketing organization introduces PPP in at least 4 DSOs supported by ADB ADTA (by Jan 2013) Marketing organization establishes at least 13 DSOs (by Jan 2013) Sales outlets owned and operated by 300 khadi institutions are renovated (by Jan 2013) Second progress report on marketing organization s implem entation of the Institutional Sales Outlets Rejuvenation Plan (by Jan 20 1 3 ) Planned Activity Precedent to Tranches 2010 2011 2012 2013 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 3.1 Facilitate raw m aterial p rocu rem ent an d co tto n sliver prod uction KVIC develops quality norms for raw material procurement by khadi institutions (by Oct 2008) KVIC initiates creation of a fund to kick-start private sector participation in sliver/roving production (by Oct 2008) KVIC conducts training for the 300 eligible khadi institutions on quality testing of raw m aterials supported by ADB ADTA (by Oct 2010) KV IC e xecutes P PP a greem ents, on pilot basis, in two CS P s suppo rted by AD B A DTA (by O ct 20 1 0 ) Progress report on KVIC assessment of PPP in CSPs supported by ADB ADTA (by Nov 2011) KVIC develops the sliver capacity augmentation plan for khadi institutions (by Nov 2011) KVIC executes PPP in the remaining CSPs supported by ADB ADTA (by Jan 2013) 3.2 Replace co st based pricin g with m arket-linked p ricing KVIC agrees to undertake steps to allow khadi institutions to set their khadi prices through approval of khadi reform package (by Oct 2008) KVIC formulates benefit chart supported by ADB ADTA (b y Oc t 2010) KVIC notifies the benefit chart and the requirement for the benefit chart to be implemented by khadi in stitu ti on s (b y Nov 2011) Progress report on the effectiveness of the implementation of the benefit chart supported by ADB AD TA (by J an 2013) 3.3 Rationalize financial assistance to khadi KVIC agrees to undertake steps for the khadi institutions to shift to the production incentive plan through approval of khadi reform package (by Oct 2008) KVIC formulates and starts im plem entation of the production incentive plan to all khadi products supported by ADB ADTA (by Oct 2010) KVIC reassesses working capital requirem ent for khadi production (b y Oct2010) KVIC appoints a focal person to engage with the bankers to enhance access of working capital to k h ad i in stitu tio ns ( b y O ct 2010) In consultation with marketing organization, KVIC determines the product categories to phase out of production incentives, and commence phasing out supported by ADB ADTA (by Nov 2011) First progress report on KVIC assessm ent of the impact on sales as a result of production incentives phasing out on certain product categories supported by ADB ADTA (by Nov 2011) First progress report on the phasing out by KVIC of the ISEC, in line with the production incentives phase out supported by ADB ADTA (by Nov 20 1 1 ) Second progress report on the phasing out of production incentives by KVIC on other categories of products (by Jan 2013) Second progress report on KVIC assessm ent of the impact on sales as a result of phasing out of production incentives on other product categories through a progress report (by Jan 2013) Second progress report on the phasing out of ISEC by KVIC on other categories of products in line with phasing out of production incentives (by Jan 2013) 3.4 Create new khadi ventures with greater entrepreneurial activity and enhance artisan em p ow e rm en t KVIC agrees to pursue the producer company model and enterprise model for new ventures in khadi through approval of khadi reform package (by Oct 2008) KVIC develops the framework for producer com pany model and enterprise model for new ventures in khadi supported by ADB ADTA (by Oct 2010) KVIC implements the framework for producer company model and enterprise model for new ventures in khadi supported by ADB ADTA (by Nov 2011) First progress report on KVIC implem entation of the producer company model and enterprise model for new ventures in khadi supported by ADB ADTA (by Novr 2011) Second progress report on KVIC implementation of the producer company model and enterprise model for new ventures in khadi (by Jan 2013) 4.1 Restructure KVIC organizationally for better focus on facilitative and developmental role KVIC creates the steering committee and users comm ittee for the IT/IS planning and im plem entation (by Oct 2008) KVIC adopts restructuring devolution plan (by Oct 2008) KVIC implements restructuring devolution plan supported by ADB ADTA (by Oct 2010) KVIC develops staffing norms consonant with the khadi reform package supported by ADB ADTA (by Oct 2010) KV IC d evelops integrated MIS supported by ADB ADTA (b y Oc t 2010) KVIC develops IT/e-governance roadmap, infrastructure requirements, and linkage of IT/IS strategy to the khadi reform package supported by ADB ADTA (by Oct 2010) MMSME reviews the functions of the marketing directorate of KVIC (b y Oc t 2010) KVIC reviews the existing structures and process for certification of khadi institutions and to streamline the certification process including the directorates within KVIC the authority to make such certification (b y Oct 2010) KVIC implements the MIS supported by ADB ADTA (b y Nov 2011) KVIC implements the integ rated application sy stem supported by ADB ADTA (b y Nov 2011)

11 C. Revised Program Implementation Plan Restructured Tranche Conditions Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Timeline for completion Policy Reform and Implementation Framework KVIC shall have ensured the completion of the audit for hundred and eighty (180) eligible Khadi institutions by independent auditors. Aug-16 KVIC shall have disseminated the Khadi Reform Package nationwide through workshops. Aug-16 KVIC shall have (a) undertaken the initial assessment of the Khadi Reform Package; (b) held a stakeholder consultation on the outcome of the assessment; and (c) prepared appropriate measures to address the feedback. KVIC shall have ensured the completion of the audit of remaining two hundred and twenty (220) eligible Khadi institutions by independent auditors. KVIC shall have (a) undertaken the independent assessment of the Khadi Reform Package; (b) held a stakeholder consultation on the outcome of the assessment; and (c) prepared appropriate measures to address the feedback. Promoting and Marketing Khadi KVIC shall have developed the Khadi Mark, including designing its logo, and notified the Regulations for enforcing Khadi Mark under the KVIC Act, 1956. KVIC shall have(a) undertaken pan India arrangements for independent testing of Khadi; (b) obtained undertaking from users to abide by regulations for use of Khadi Mark (c) developed the detailed plan for the creation of basic testing infrastructure for Khadi mark at KVIC; and (d) undertaken the arrangement for managing Khadi Mark by KVIC state/divisional offices. KVIC shall have adopted the procedures and assigned its Khadi directorate to grant usage of Khadi mark to Khadi institutions and other entities. KVIC through its Khadi directorate shall have ensured that the Khadi institutions registered at either KVIC or KVIB adopt the Khadi Mark. KVIC shall have commissioned a product specific market survey of Khadi and Village Industries products through a specialist firm. KVIC through its Khadi directorate shall have prepared and maintained a list of Khadi institutions and other entities authorized to use Khadi Mark and publish this in its website. Aug-16 Aug-16 Jun-17 Aug-16 Aug-16 Aug-16 Aug-16 Aug-16 Aug-16

12 Restructured Tranche Conditions Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Timeline for completion KVIC shall have created the basic testing infrastructure for the Khadi Mark. Sep-16 KVIC shall have conducted random spot audits of Khadi institutions and other entities authorized to use Khadi mark regarding their adherence to the licensing requirements for the use of Khadi mark. Based on the outcome of the survey, KVIC shall have identified products for both domestic and international markets and develop marketing strategies for all Khadi related institutions and products. The KVIC shall have prepared a product catalogue and set up the market information system. KVIC shall have continued to conduct random spot audits of Khadi institutions regarding the adherence to licensing requirements for the use of Khadi mark. Aug-16 Jan-17 Feb-17 May-17 Realizing Procurement and Production Efficiencies KVIC shall have conducted training for the three hundred (300) eligible Khadi institutions on quality testing of raw materials. Aug-16 KVIC shall have issued a notification to allow Khadi institutions to set market linked prices. Aug-16 KVIC shall have formulated the benefit chart. Aug-16 KVIC shall have formulated the production incentive plan and provides production incentive to all Khadi products. KVIC shall have reassessed working capital requirement for Khadi production. Aug-16 Aug-16 KVIC shall have appointed a focal person to engage with the bankers to enhance access of the Khadi institutions to working capital. KVIC shall have developed the framework for producer company model and enterprise for new ventures in Khadi. Aug-16 Aug-16 KVIC shall have formulated the benefit chart. Aug-16 KVIC shall have monitored and assessed the effectiveness of the implementation of the benefit chart. KVIC shall have continued the phasing out of production incentives on other categories of products and assess the impact on sales as a result of this. May-17 Oct-17

13 Restructured Tranche Conditions Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Timeline for completion Implementing Institutional Reforms KVIC shall have (a) restructured its Khadi directorates, village industry directorates, science and technology directorates, and economic research directorates; (b) strengthened the human resource and administration directorates; (c) realigned reporting relationships for efficiency; and (d) devolved power to zonal offices. Aug-16 KVIC shall have (a) reviewed the existing structures and processes for the certification of the Khadi institutions; and (b) issued appropriate guidelines to empower a committee within the directorates of KVIC with the authority for the certification of Khadi institutions, under the guidance and advice of the central certification committee. Aug-16 KVIC shall have developed an integrated management information system and roll out in 100 KIs. Aug-16 KVIC shall have developed IT/e-governance roadmap, infrastructure requirements, and linkage of IT/IS strategy to the Khadi Reform Package. Aug-16 The Borrower through the Program Executing Agency shall have reviewed the functions of the marketing directorate of KVIC. Aug-16 KVIC shall have modified categorization norms for Khadi institutions and recategorize 400 Khadi institutions using the modified norms. Aug-16 KVIC shall have adopted the comprehensive reforms plan to empower and revitalize the four hundred (400) eligible Khadi institutions. Sep-16 KVIC shall have signed MoUs with one hundred and eighty (180) eligible Khadi institutions for comprehensive Khadi institution reforms. Aug-16 KVIC shall have completed (a) the assessment of existing training arrangements (infrastructure, capacity of trainers, curriculum, and demand for training); and (b) based on the assessment, the comprehensive plan for (i) demand driven training delivery, (ii) the creation of linkages with external training program, (iii) the upgrading of physical infrastructure, and (iv) the enhancement of the skills of training staff. Aug-16 KVIC shall have identified five thrust traditional village industry clusters based on market assessment study. Aug-16 KVIC shall have formulated the cluster development strategy for the identified village industries. Aug-16 KVIC shall have implemented the management information system in 400 KIs. Jan-17

14 Restructured Tranche Conditions Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Timeline for completion KVIC shall have implemented the integrated application system. Oct-17 KVIC ensures that the 80 eligible khadi institutions implement the comprehensive reforms plan and implementation plan developed and approved for 100 additional KIs. KVIC shall have signed with two hundred twenty (220) eligible Khadi institutions the MOUs for comprehensive Khadi institution reforms. KVIC shall have implemented the comprehensive capacity building plan. Aug-16 KVIC shall have periodically published in its website the training calendar. Aug-16 KVIC shall have ensured the establishment of one (1) cluster for each of the identified village industry. KVIC shall have ensured the implementation of the comprehensive capacity building plan in the identified clusters. KVIC shall have examined and reviewed the role and relevance of the central certification committee in the certification process of the Khadi institutions. KVIC shall have ensured that three hundred and twenty (320) eligible Khadi institutions shall have implemented the comprehensive reforms plan. Aug-16 Sep-16 Dec-16 Dec-16 Aug-16 Jul-17 KVIC shall have evaluated the performance of the four hundred (400) eligible Khadi institutions. Sep-17 KVIC shall have monitored the performance of the clusters. Sep-17 KVIC shall have recategorized the remaining Khadi institutions using the modified norms. Dec-16

15 III. PROGRAM MANAGEMENT ARRANGEMENTS A. Program Implementation Organizations: Roles and Responsibilities 1. Executing Implementing Agencies 26. MMSME, the Executing Agency (EA), will be responsible for overall Program implementation. KVIC, the Implementing Agency, will be responsible for implementation of reforms. MMSME and KVIC will ensure a conducive environment, provide adequate powers and resources to KVIC s reform implementation division (RID) and the reform management units (RMU), and be responsible for issuing necessary notifications and directives to facilitate implementation and establishment of the Khadi Mark. 2. Program Management Organization 27. Prior to loan effectiveness, MMSME will set up a reform implementation and monitoring committee (RIMC) to be chaired by the MMSME secretary. The committee will serve as the program steering committee, and (i) provide policy and technical guidance to KVIC and the RID, (ii) review the progress of program implementation, (iii) monitor the performance of the RID and RMUs, and (iv) ensure program coordination. It will meet at least quarterly and include representatives from the Department of Economic Affairs of Ministry of Finance, Ministry of Textiles, KVIC, a marketing expert from the Confederation of Indian Industry, and a financial expert from the banking sector. The terms of reference for the reform implementation ad monitoring committee is in Appendix 1. 28. Prior to loan effectiveness, KVIC will establish the RID, which will be responsible for (i) coordinating actions under the Program in accordance with the implementation schedule, and (ii) monitoring overall program progress. The RID will be headed by a KVIC director with sufficient knowledge and experience in KVI related programs, who will report to KVIC s chief executive officer. The RID will comprise four subdivisions: (i) promotion and marketing, (ii) raw material procurement and production, (iii) institutional reform, and (iv) program coordination and administration. KVIC will assign about 13 of its officers to the RID and about 7 administrative staff. Consultants will be hired to provide specialist support. RID s responsibilities and actions are provided in Appendix 2. 29. Within one month of loan effectiveness, KVIC will establish an RMU at each of its state and divisional offices to manage and monitor program implementation at khadi institutions. Each RMU will be headed by a KVIC assistant director or an official of similar rank, and at least one officer will be assigned to support the head. The RMUs will coordinate with khadi institutions and facilitate monitoring and implementation of the reforms under the Program. RMU s responsibilities and actions are provided in Appednix 3. B. Key Persons Involved in Implementation Names Company Position Address Telephone / Fax No / email address B. H. Anil Kumar MMSME Joint Secretary 171, Udyog Bhawan, New Delhi-11011 T-23-061543 F-23-062858 Usha Suresh Khadi and Village Industries Chief Executive Officer Gramodaya. 3. Irla Road, Vile Parle (West), Mumbai-400056 T- 91-22-26713679

16 Names Company Position Address Telephone / Fax No / email address Commission S.K. Sinha Khadi and Village Industries Commission Deputy CEO (RID / Khadi / EcR) M. Teresa Kho ADB Country Director, INRM Leonardus Boenawan Sondjaja Balabhaskara Reddy ADB Deputy Country Director, INRM Gramodaya. 3. Irla Road, Vile Parle (West), Mumbai-400056 4 San Martin Marg, Chanakyapuri, New Delhi 110021 4 San Martin Marg, Chanakyapuri, New Delhi 110021 ADB PMU Head 4 San Martin Marg, Chanakyapuri, New Delhi 110021 Bathula Ruchira Pande ADB Project Analyst 4 San Martin Marg, Chanakyapuri, New Delhi 110021 C. Program Organization Structure As per original PAM T-91-22-26715860 F-91-22-26715860 T - 91 11 2410 7200 T - 91 11 2410 7200 T - 91 11 30900641 T - 91 11 30900629 PROGRAM MANAGEMENT CHART ADB Program Loan $150 million MOF DEA Reform Implementation and Monitoring Committee $150 million MMSME (Executing Agency) Joint Venture Private Sector Partner Equity KVIC (Implementing Agency) RID Marketing Organization Joint Venture Company $150 million Policy and institutional reforms: $48 million Marketing reforms: $27 million Strengthening of khadi institutions: $75 million State KVIBs Zonal Office KVIC State/Divisional Office 36 states RMU Khadi institutions (300) MOU = line of authority, = information flow, = adjustment cost fund flow, = agreement / MOU

ADB = Asian Development Bank; DEA = Department of External Affairs; KVIB = Khadi and Village Industries Board; KVIC = Khadi and Village Industries Commission; MMSME = Ministry of Micro, Small and Medium Enterprises; MOF = Ministry of Finance; MOU = memorandum of understanding; RID = reform implementation division; RMU = reform management unit. Source: Asian Development Bank. 17

18 As per revised PAM ADB MoF / DEA Reform Implementation & Monitoring Committee (RIMC) Zonal Offices MSME (Executing Agency) KVIC (Implementing Agency) Reform Implementation Division (RID) Khadi Reform and DRA (USD 72.07 mn) Khadi Mark (USD 1.44 mn) Marketing Reforms (USD 0.83 mn) Production Efficiency (USD 8.79 mn) Financial Management (USD 0.63 mn) Institutional Capacity Building (USD 6.67 mn) IT - MIS & E-gov (USD 11.26 mn) Khadi New Ventures (USD 0.21 mn) Village Industries Program (USD 3.11 mn) Marketing Directorate State KVIB KVIC State / Divisional Office 36 states RMU ADB = Asian Development Bank; DEA = Department of External Affairs; KVIB = Khadi and Village Industries Board; KVIC = Khadi and Village Industries Commission; MMSME = Ministry of Micro, Small and Medium Enterprises; MOF = Ministry of Finance; MOU = memorandum of understanding; RID = reform implementation division; RMU = reform management unit. Source: Asian Development Bank. MoU Khadi Institutions (400) IV. COSTS AND FINANCING 30. A loan for $150,000,000 from the ordinary capital resources of the Asian Development Bank (ADB) was approved and provided under ADB s London interbank offered rate-based lending facility. As per restructure program, the loan amount has been reduced to $ 105,000,000. The loan will have a 15-year term including a grace period of 3 years, and an interest rate to be determined in accordance with ADB s London interbank offered rate-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the loan agreement. 31. The loan is restructured to be released in 3 tranches. The first tranche of $20 million has been released on 17 February 2011. The second tranche shall be $40 million to be released in December 2016 and the third tranche of $45 million to be released by December 2017. 32. The ADB funds will support reforms that address complex and fundamental issues as described in the development policy letter (Appendix 4) and policy matrix (Appendix 5). Costs

19 are triggered by policy and institutional reforms, especially for revitalizing khadi institutions; and constitute the bulk of the cost. KVIC estimates the cost of strengthening all 2,223 khadi institutions at nearly $800 million over 4 years. The cost of reforms is expected to exceed these estimates, if delays are encountered. The impact of proposed reforms on phasing out subsidies will only be felt in the medium term, i.e., when the khadi institutions selected for program support make a turnaround and become sustainable, and other khadi institutions are reformed along similar lines through Government support. The Government will ensure that the counterpart funds are used for costs associated with reforms introduced under the Program. A. Cost Estimates by Expenditure Category Program Components Khadi Reform and DRA Khadi Mark Marketing Reforms Production Efficiency Financial Management Institutional Capacity Building IT- MIS and E-Gov Khadi New Ventures Key Cost Items Audit Workshops Direct Reform Assistance Basic Testing Infrastructure Random Spot Audits Market Survey Catalogue CSP development Study & Assessment Dissemination costs Administered by Details KVIC National and State / Divisional Workshops @0.2 mn INR; DRA per KI @ INR 11 mn KVIC KVIC INR 30 mn for Testing infrastructure INR 25,000 for random spot audit per KI INR 14 mn for market survey INR 10 mn for product catalogue Amount US$ 000 Amount Rs. Crores First Tranche USD 20 mn ($1= INR 47.8) Second and Third Tranche ($1= INR 66.46) 72067 469 1437 9 825 5 KVIC 8787 42 KVIC INR 10 mn for study and assessment INR 3.6 mn for Dissemination Training Cost KVIC INR 200 mn (INR 25000 * 8000 trainees) MIS Development and Implementation E-Gov / IFMS KVIC INR 544 mn for MIS development and roll out INR 100 mn for IFMS 631 3 6673 40 11259 72 Field Visit KVIC 212 1

20 Program Components Key Cost Items Administered by Details Amount US$ 000 Amount Rs. Crores First Tranche USD 20 mn ($1= INR 47.8) Second and Third Tranche ($1= INR 66.46) Village Industries Program Survey Cost Cluster Strategy Capacity Building KVIC Survey and fee to technical agency of INR 10 mn for each VI Development of cluster strategy of 10 mn for each VI 3109 25 Capacity building plan of INR 1 mn per cluster Subtotal 105,000 666 B. Allocation and Withdrawal of Loan Proceeds 33. The following provisions of Schedule 3 of the Loan Agreement shall apply to the withdrawal of Loan proceeds from the Loan Account: (a) Withdrawals from the Loan Account shall be made for the financing of the cost of Eligible Items. (b) No withdrawals from the Loan Account shall be made in respect of any expenditures which have been financed by credits from official international or bilateral aid agencies or any other loans made by ADB. 34. (a) An application for withdrawal from the Loan Account shall be submitted to ADB by the Borrower and shall be in a form satisfactory to ADB. 35. (b) Such withdrawal application shall be accompanied by a certificate of the Borrower confirming that (i) in case the proceeds of the Loan will finance imports already made, the value of Eligible Imports in the period concerned exceeded the amount of the requested withdrawal, or (ii) in case the proceeds of the Loan will finance items to be imported, the value of Eligible Imports in the immediately preceding one-year period was equal to or greater than the amount of the requested withdrawal plus all other amounts expected to be withdrawn from the Loan Account during the succeeding one-year period. (c) For the purposes of this paragraph, the term "Eligible Imports" means the total imports of the Borrower during the relevant period minus the following imports during the same period: (i) imports from countries which are not members of ADB;

21 (ii) (iii) imports for ineligible items specified in the Attachment 1 of the Schedule; and imports financed from credits from official international or bilateral aid agencies or any other loans made by ADB. (d) The Borrower shall allow experts appointed by ADB to verify the value of Eligible Imports during any period in respect of which the Borrower has certified the value of Eligible Imports in its withdrawal application. 36. (a) Prior to submitting the first application to ADB for withdrawal from the Loan Account, the Borrower shall nominate an account (the Deposit Account) at RBI into which all withdrawals from the Loan Account shall be deposited. The Deposit Account shall be established, managed and liquidated in accordance with terms and conditions satisfactory to ADB. (b) Separate accounts and records-in respect of the Deposit-Account-shall be maintained in accordance with consistently maintained sound accounting principles. Upon ADB's request, the Borrower shall have the Deposit Account audited by independent auditors, whose qualifications, experience and terms of reference are acceptable to ADB, in accordance with appropriate auditing standards. Promptly after their preparation but in any event not later than six (6) months after the date of ADB's request, certified copies of such audited accounts and records shall be furnished to ADB, all in the English language. (c) Throughout the Program implementation period, the Borrower shall submit trade statistics and any other information as ADB may require from time to time to assess the Borrower's compliance with the formula for determining Eligible Imports. 37. Notwithstanding any other provisions of the Loan Agreement or the Loan Regulations and except as ADB may otherwise agree, no withdrawals shall be made from the second tranche unless ADB shall be satisfied, after consultation with the Borrower, that (a) sufficient progress has been achieved by the Borrower in the carrying out of the Program; and, in particular, (b) the Borrower has fulfilled the conditions for the release of the Second Tranche specified in Attachment 2 of the Schedule. 38. Notwithstanding any other provisions of the Loan Agreement or the Loan Regulations and except as ADB may otherwise agree, no withdrawals shall be made from the third tranche unless ADB shall be satisfied, after consultation with the Borrower, that (a) sufficient progress has been achieved by the Borrower in the carrying out of the Program; and, in particular, (b) the Borrower has fulfilled the conditions for the release of the third tranche specified in Attachment 3 of the Schedule. 39. Notwithstanding any other provisions of this Loan Agreement or the Loan Regulations and except as ADB may otherwise agree, no withdrawals shall be made from the fourth tranche unless ADB shall be satisfied, after consultation with the Borrower, that (a) sufficient progress has been achieved by the Borrower in the carrying out of the Program; and, in particular, (b) the Borrower has fulfilled the conditions for the release of the fourth tranche specified in Attachment 4 of the Schedule.

22 A. Financial Management Assessment V. FINANCIAL MANAGEMENT 40. The objective of the financial management assessment is to determine whether the entities implementing the Program components have acceptable financial management arrangements including procedures for making payments, accounting treatment of transactions, financial reporting, audit of financial statements, and internal control procedures to avoid misuse or misappropriation of funds and assets. The assessment indicates that the Program is being prepared in an area of low financial management risk, as the entities that will implement the KRDP have successfully undertaken (or are currently undertaking) Programs from numerous donor agencies (including the World Bank and the United Nations Development Program). As a result, the overall financial management capacities of the executing agency (EA) and implementing agency (IA) are developed to a satisfactory level to ensure smooth functioning of the KRDP. 41. The EA for the KRDP will be the Ministry of Micro, Small and Medium Enterprises (MMSME). The KVIC will be the IA. The MMSME will set up a reform implementation and monitoring committee (RIMC) which will be the program steering committee. A reform implementation division (RID) is to be set up at KVIC. At the State Khadi and Village Industries Board (KVIB), which cover the second and third year program implementation, and each KVIC institution for pilot implementation, a reform management unit (RMU) will be established. The responsibility for major payments, accounting, and conduct of audit will remain with the RID. B. Disbursement 42. In accordance with provisions of ADB s Simplification of Disbursement Procedures and Related Requirements for Program Loans (1998), the proceeds of the program loan will be disbursed to the Government as the Borrower. The loan proceeds will be utilized to finance the full foreign exchange costs (excluding local duties and taxes) of imports produced in, and procured from, ADB member countries, other than those specified in the list of ineligible items (Appendix 6) and imports financed by other bilateral and multilateral sources. The Government will certify that (i) the value of the country s eligible imports is equal to, or exceeds, the amount of ADB s projected disbursements under the loan in a given period; and (ii) the loan proceeds will be utilized in a manner satisfactory to ADB. The loan proceeds will be disbursed based on certification provided by the Government confirming that the requirements for the loan have been met. ADB will have the right to audit the use of the loan proceeds, and to verify the accuracy of the Government s certification. 43. Simplified disbursement procedures and related requirements will be adopted. Prior to submitting the first application to ADB for withdrawal from the loan account, the Government of India (Borrower) would be required to open an account in RBI into which all loan disbursements would be deposited. 44. In order to withdraw loan proceeds the Borrower would have to submit a withdrawal application (Appendix 7). Such withdrawal application shall be accompanied by a certificate from the Borrower (Appendix 8), confirming that (i) the value of country s eligible imports is equal to, or exceeds, the amounts of ADB s projected disbursements under the policy loan in a given period (in accordance with the policy matrix in Appendix 2); and (ii) the policy loan

23 proceeds would be used in a manner satisfactory to ADB. ADB would have the right to audit use of loan proceeds to ensure that they are used for the intended purposes. C. Accounting 45. The Government and KVIC will maintain records and accounts to identify all goods and services financed by the loan proceeds. The RID will be responsible for maintaining the records, and will submit annual accounts and financial statements to Department of Economic Affairs. The Government will ensure that accounts and financial statements are audited annually, in accordance with sound accounting principles, by independent external auditors. D. Auditing 46. The RID will be responsible for maintaining the records, and will submit annual accounts and financial statements to MMSME. The MMSME will ensure that accounts and financial statements are audited annually, in accordance with sound accounting principles, by independent external auditors. The external audit of the EA and IA are conducted according to International Organization of Supreme Audit Institution s auditing standards. The Comptroller and Auditor General of India, an independent constitutional authority, conducts the external audit of the EA and IA. Audit to a khadi institution is regularly conducted and the standing order No.1616 of KVIC stipulates (i) profoma of audit/inspection report on the affairs of khadi institutions, (ii) code of operation on the finding of the audit report, and (iii) code of administrative action on findings of audit reports for the fund flow from KVIC to khadi institutions. The independent audit to eligible khadi institutions is also a part of policy conditions. 47. An audit of the use of the loan proceeds will be undertaken if requested by ADB and ADB retains the right to (i) audit any account and (ii) verify the validity of the certification issued by the Government for each withdrawal application. Immediately after the loan effective date, the Government shall establish a special account at a commercial bank acceptable for ADB for the special purpose of depositing and utilizing the counterpart funds. Prior to withdrawal, the Government will open a deposit account at the Reserve Bank of India to receive all loan proceeds. The accounts will be established, managed, operated, and liquidated in accordance with terms satisfactory to ADB. MMSME, through KVIC, will maintain separate records and accounts on the use of the counterpart funds following sound accounting principles, and will have such accounts and records audited annually by auditors acceptable to ADB, and will furnish, within 6 months of the close of the financial year, certified copies of the audit report with auditors opinion to the Government and ADB. VI. SAFEGUARDS 48. The Borrower shall, and shall cause KVIC to ensure that all activities under the Program shall be carried out in accordance with all applicable environmental laws and regulations of the Borrower, and ADB s Environmental Policy (2002). 48. The Borrower shall, and shall cause KVIC to ensure that under the Program no persons shall be (a) adversely affected in terms of ADB s Involuntary Resettlement Policy (1995), and applicable laws and regulations of the Borrower related to resettlement and rehabilitation, and (b) affected in terms of ADB s Policy on Indigenous Peoples (1998) and related laws and regulations of the Borrower.

24 VII. PERFORMANCE MONITORING, EVALUATION, REPORTING AND COMMUNICATION A. Revised Program Design and Monitoring Framework Impacts the program is aligned with: Enhancement of income and employment growth for the RNS 1 Result Chain Outcome Performance Indicators with Targets and Baseline Data Source and Reporting Risks Revitalized KVI subsector provides Sustainable employment to artisans with higher earnings a. At least 12% increase in number of artisans employed by khadi institutions by 2017 (2010 baseline: 0.98 million) b. At least 20% increase in khadi sector earnings by 2017 (2010 baseline: INR 4.25 billion) a. Annual Reports of KVIC b. Annual Reports of KVIC Competing avenues for rural employment specifically the Centrally sponsored National Rural Employment Generation Scheme(NREGS) Outputs 1. Policy reform and implementation framework is established to carry out the proposed reforms 1. Khadi reform package implemented (by December 2017) 1a. Independent assessments of program implementation and impact 1b. KVIC annual report 1a. Weak reform implementation 1b. Reluctance and resistance from Khadi Institutions 2. Khadi is effectively promoted and marketed to ensure commercial viability as well as generate market demand for khadi 2. Increase in sales by 40% on over the numbers prevailing in 2010 by 2017 (Baseline for sales in 2009-10: INR 8.67 billion) 2a. KVIC annual report 2b. Official gazette/ Relevant government notifications 2a. Competing product especially handlooms and linen 2b. Reluctance among Khadi Institutions for adopting marketing reforms 3. Reduce the working capital blocked in the production value chain and enhance capacity utilization of CSPs 3a. 25% reduction in debtor days of CSPs from prevailing number of days in 2010 (by Sep 2017) (Baseline for debtor days of CSPs in 2009-10: 389 debtor days) 3b. 10% increase in capacity utilization of CSPs from prevailing utilization levels in 3a. KVIC CSP Reports 3a. Low demand for sliver produced by CSPs 3b. Purchase of sliver on credit by KIs due to inadequate working capital 1 12 th Five Year Plan document of Planning Commission, Government of India extracts placed in revised PAM for KRDP

25 Result Chain Performance Indicators with Targets and Baseline 2010 (by September 2017) (Baseline for capacity utilization of CSPs in 2010: 87% 2 ) Data Source and Reporting Risks 4. Institutional reforms are implemented to restructure KVIC, revitalize khadi institutions and develop synergies between khadi and traditional village industries 4a. The comprehensive reform plan is implemented for 400 eligible khadi institutions (by Dec 2017) 4b. IT and e-governance systems and practices of KVIC are strengthened (by Dec 2017) 4c. Five traditional village industries implement the cluster development strategy (by Sept 2017) 4a. KVIC Annual Report 4a. Reluctance of KIs to adopt reforms 4b. Low competencies in IT operations at institutional level Activities with milestones (Second and Third Tranche) 1. Khadi Reforms and Direct Reform Assistance 1.1. KVIC shall have ensured the completion of the audit for hundred and eighty (180) eligible Khadi institutions by independent auditors by August 2016 (Second Tranche) 1.2. KVIC shall have disseminated the Khadi Reform Package nationwide through workshops by August 2016 (Second Tranche) 1.3. KVIC ensures that the 80 eligible khadi institutions implement the comprehensive reforms plan and implementation plan developed and approved for 100 additional KIs by August 2016 (Second Tranche) 1.4. KVIC shall have (a) undertaken the initial assessment of the Khadi Reform Package; (b) held a stakeholder consultation on the outcome of the assessment; and (c) prepared appropriate measures to address the feedback by August 2016 (Second Tranche) 1.5. KVIC shall have signed MoUs with one hundred and eighty (180) eligible Khadi institutions for comprehensive Khadi institution reforms by August 2016 (Second Tranche) 1.6. KVIC shall have modified categorization norms for Khadi institutions and recategorize 400 Khadi institutions using the modified norms by August 2016 (Second Tranche) 1.7. KVIC shall have recategorize the remaining Khadi institutions using the modified norms by December 2016 (Third Tranche ) 1.8. KVIC shall have evaluated the performance of the four hundred (400) eligible Khadi institutions by September 2017 (Third Tranche) 1.9. KVIC shall have ensured that three hundred and twenty (320) eligible Khadi institutions shall have implemented the comprehensive reforms plan by July 2017 (Third Tranche) 1.10. KVIC shall have (a) undertaken the independent assessment of the Khadi Reform Package; (b) held a stakeholder consultation on the outcome of the assessment; and (c) prepared appropriate measures to address the feedback by June 2017 (Third Tranche) Inputs $66.8 million 2 Data for target and achievement for production provided by KVIC

26 Activities with milestones (Second and Third Tranche) 1.11. KVIC shall have signed with two hundred twenty (220) eligible Khadi institutions the MOUs for comprehensive Khadi institution reforms by September 2016 (Third Tranche) 1.12. KVIC shall have ensured the completion of the audit of remaining two hundred and twenty (220) eligible Khadi institutions by independent auditors by August 2016 (Third Tranche) 1.13. KVIC shall have adopted the comprehensive reforms plan to empower and revitalize the four hundred (400) eligible Khadi institutions by September 2016 (Third Tranche) 2. Establish identity of Khadi through Khadi mark 2.1. KVIC shall have conducted random spot audits of Khadi institutions and other entities authorized to use Khadi mark regarding their adherence to the licensing requirements for the use of Khadi mark by August 2016 (Second Tranche) 2.2. KVIC shall have developed the Khadi Mark, including designing its logo, and notified the Regulations for enforcing Khadi Mark under the KVIC Act, 1956 by August 2016 (Second Tranche) 2.3. KVIC shall have(a) undertaken pan India arrangements for independent testing of Khadi; (b) obtained undertaking from users to abide by regulations for use of Khadi Mark (c) developed the detailed plan for the creation of basic testing infrastructure for Khadi mark at KVIC; and (d) undertaken the arrangement for managing Khadi Mark by KVIC state/divisional offices by August 2016 (Second Tranche) 2.4. KVIC shall have adopted the procedures and assigned its Khadi directorate to grant usage of Khadi mark to Khadi institutions and other entities by August 2016 (Second Tranche) 2.5. KVIC through its Khadi directorate shall have ensured that the Khadi institutions registered at either KVIC or KVIB adopt the Khadi Mark by August 2016 (Second Tranche) 2.6. KVIC through its Khadi directorate shall have prepared and maintained a list of Khadi institutions and other entities authorized to use Khadi Mark and publish this in its website by August 2016 (Second Tranche) 2.7. KVIC shall have continued to conduct random spot audits of Khadi institutions regarding the adherence to licensing requirements for the use of Khadi mark by May 2017 (Third Tranche) 2.8. KVIC shall have created the basic testing infrastructure for the Khadi Mark by September 2016 (Third Tranche) 3. Reforms in marketing of Khadi 3.1. KVIC shall have commissioned a product specific market survey of Khadi and Village Industries products through a specialist firm by August 2016 (Second Tranche) 3.2. The KVIC shall have prepared a product catalogue and set up the market information system by February 2017 (Third Tranche) 3.3. Based on the outcome of the survey, KVIC shall have identified products for both domestic and international markets and develop marketing strategies for all Khadi related institutions and products by January 2017 (Third Tranche) 4. Reforms in financial management of Khadi 4.1. KVIC shall have notified the benefit chart to the Khadi institutions by August 2016 (Second Tranche) 4.2. KVIC shall have appointed a focal person to engage with the bankers to enhance access of the Khadi institutions to working capital by August 2016 (Second Tranche) Inputs $0.9 million $ 0.5 million $ 0.2 million

27 Activities with milestones (Second and Third Tranche) 4.3. KVIC shall have reassessed working capital requirement for Khadi production by August 2016 (Second Tranche) 4.4. KVIC shall have formulated the production incentive plan and provides production incentive to all Khadi products by August 2016 (Second Tranche) 4.5. KVIC shall have formulated the benefit chart by August 2016 (Second Tranche) 4.6. KVIC shall have issued a notification to allow Khadi institutions to set market linked prices by August 2016 (Second Tranche) 4.7. KVIC shall have continued the phasing out of production incentives on other by categories of products and assess the impact on sales as a result of this by October 2017 (Third Tranche) 4.8. KVIC shall have monitored and assessed the effectiveness of the implementation of the benefit chart by May 2017 (Third Tranche) 5. Institutional Strengthening of the Khadi 5.1. KVIC shall have examined and reviewed the role and relevance of the central certification committee in the certification process of the Khadi institutions by August 2016 (Second Tranche) 5.2. KVIC shall have periodically published in its website the training calendar by August 2016 (Second Tranche) 5.3. KVIC shall have implemented the comprehensive capacity building plan by August 2016 (Second Tranche) 5.4. KVIC shall have completed (a) the assessment of existing training arrangements (infrastructure, capacity of trainers, curriculum, and demand for training); and (b) based on the assessment, the comprehensive plan for (i) demand driven training delivery, (ii) the creation of linkages with external training program, (iii) the upgrading of physical infrastructure, and (iv) the enhancement of the skills of training staff by August 2016 (Second Tranche) 5.5. The Borrower through the Program Executing Agency shall have reviewed the functions of the marketing directorate of KVIC by August 2016 (Second Tranche) 5.6. KVIC shall have (a) reviewed the existing structures and processes for the certification of the Khadi institutions; and (b) issued appropriate guidelines to empower a committee within the directorates of KVIC with the authority for the certification of Khadi institutions, under the guidance and advice of the central certification committee by August 2016 (Second Tranche) 5.7. KVIC shall have (a) restructured its Khadi directorates, village industry directorates, science and technology directorates, and economic research directorates; (b) strengthened the human resource and administration directorates; (c) realigned reporting relationships for efficiency; and (d) devolved power to zonal offices by August 2016 (Second Tranche) 5.8. KVIC shall have conducted training for the three hundred (300) eligible Khadi institutions on quality testing of raw materials by August 2016 (Second Tranche) 6. IT reforms in Khadi 6.1. KVIC shall have developed IT/e-governance roadmap, infrastructure requirements, and linkage of IT/IS strategy to the Khadi Reform Package by August 2016 (Second Tranche) 6.2. KVIC shall have developed an integrated management information system and roll out in 100 KIs by August 2016 (Second Tranche) 6.3. KVIC shall have implemented the integrated application system by October 2017 (Third Tranche) 6.4. KVIC shall have implemented the management information system in 400 KIs by January 2017 (Third Tranche) Inputs $ 4.6 million $ 9.7 million $ 0.0 million

28 Activities with milestones (Second and Third Tranche) 7. Development of new ventures under Khadi 7.1. KVIC shall have developed the framework for producer company model and enterprise for new ventures in Khadi by August 2016 (Second Tranche) 8. Develop synergies through traditional village industries 8.1. KVIC shall have formulated the cluster development strategy for the identified village industries by August 2016 (Second Tranche) 8.2. KVIC shall have identified five thrust traditional village industry clusters based on market assessment study by August 2016 (Second Tranche) 8.3. KVIC shall have ensured the establishment of one (1) cluster for each of the identified village industry by December 2016 (Third Tranche) 8.4. KVIC shall have ensured the implementation of the comprehensive capacity building plan in the identified clusters by December 2016 (Third Tranche) 8.5. KVIC shall have monitored the performance of the clusters by September 2017 (Third Tranche) Program Inputs Inputs $ 2.3 million ADB Program Loan $105 million (OCR) ADTA Grant (JSF) $2,000,000 Government of India counterpart funding $500,000 equivalent ADB Review Missions MMSME and KVIC a. Counterpart Staff b. Office Accommodation c. Obtaining required information d. Participation in meetings Assumptions for Partner Financing None ADB = Asian Development Bank, ADTA = Advisory technical assistance, CSP = Central Sliver Plant, EA = Executing Agency, ISEC = Interest Subsidy Eligibility Certificate, IT = Information Technology, IS = Information System, JSF = Japan Special Fund, KVI = Khadi and Village Industries, KVIB = Khadi and Village Industries Board, KVIC = Khadi and Village Industry Commission, MIS = Management Information System, MMSME = Ministry of Micro, Small and Medium Enterprises, MOU = Memorandum of Understanding, OCR = Ordinary Capital Resource, RNS = Rural Nonfarm Sector.

29 B. Monitoring 49. The restructured loan will be released in three tranches till 2017. The first tranche of $20 million has been released on 17 February 2010. The second tranche and third tranche shall be of $40 million and $45 respectively; and shall be released subject to compliance with their respective tranche release conditions. 50. The Government and ADB will conduct semiannual reviews throughout program implementation to identify actions required for the continued development of the khadi sector. The midterm review will be undertaken on a regular basis on (i) compliance status of the next tranche conditions, (ii) status and implementation of policies, (iii) status and implementation of reforms, (iv) initial lessons, and (v) progress in achieving the indicators in the design and monitoring framework. 51. The KVIC through RID will design, develop and implement a program performance monitoring system (PPMS) for monitoring the program reform, building up socio-economic data and evaluation of the Program during implementation. RID will be assisted by Program Monitoring Specialist and MIS Specialist through associated TA. The RID and RMU are expected to closely monitor the progress, both at the policy level and the institutional level, towards meeting program objectives. C. Evaluation 52. Based on information provided both by the RID and RMU through independent evaluation, the RIMC will undertake semi-annual reviews during the implementation. This will provide RIMC the opportunity to fine tune policy initiatives in light of changes in the external environment. 53. Program implementation and management will be guided by PPMS, which will be established to track reform in the RID. The PPMS will generate a biannual report which will be prepared by RID and submitted to MMSME. The PPMS will track implementation of the policy matrix in the KRDP including all activities described under the policy framework and actions. In addition, PPMS will also provide information on the impact the reform agenda is having on the performance of the khadi institutions and artisans. In this, PPMS will track financial and operation performance using indicators for asset performance, transaction costs, outreach, etc. The PPMS will include: (i) (ii) (iii) Performance monitoring, impact assessment and reporting arrangement for program monitoring. Development of special data collection protocols and publications to track performance of the reforms for enabling monitoring aspects. Baseline indicators and initial survey to provide a basis to assess the socioeconomic and poverty impacts of Khadi Reform Package includes at least but not limited to the information as:

30 (a) Increased rural nonfarm per capita income, (b) increase in employment growth rates in the RNS, (c) number of artisan employed by khadi institutions, (d) prevailing earnings of khadi artisans, (e) Increase in sales fo Khdi products, (f) reduction in raw material (sliver) production cost, (g) The status of comprehensive reform plan to be implemented for 400 eligible khadi institutions, (h) developments in IT and e-governance systems and practices of KVIC, (i) status of five traditional village industries implementation the cluster development strategy. D. Reporting 54. KVIC through RID will prepare quarterly progress reports and submit them to ADB within 20 days of the end of the applicable period. The reports will be prepared in a format acceptable to ADB and include (i) Program progress in each state and component, (ii) the status of institutional development activities, (iii) delays and problems encountered and actions taken to resolve them, (iv) compliance with loan covenants, and (v) expected progress during the next 3 months. PAI 5.01 describes the details of the requirement for preparing the progress report by EA. The suggested format and contents of the progress report is provided in Appendix 9. Within 3 months of program completion, KVIC will prepare and submit to ADB, through MMSME, a Program completion report including costs and compliance with loan covenants. VIII. ANTICORRUPTION POLICY 55. The Program directly addresses governance issues related to KVIC and khadi institutions by (i) conducting independent audits of khadi institutions eligible for the comprehensive reform plan, (ii) reforming the governance structure of khadi institutions for artisans autonomy and empowerment by modifying the categorization norms and introducing a new khadi venture model, (iii) establishing new rules for usage and authority of the Khadi Mark and conducting random spot audits for khadi institutions on the licensing requirement for the Khadi Mark, and (iv) implementing institutional reforms for KVIC. Independent audit of khadi institutions will reduce the vulnerability to corruption. Modifying the categorization norm of khadi institutions and institutional reform of KVIC will ensure (i) enhanced corporate governance, (ii) compliance with transparency and disclosure requirements, and (iii) adequate monitoring mechanisms. A governance and anticorruption risk assessment is in Appendix 10 of the RRP. 56. In addition, ADB's Anticorruption Policy (1998, as amended to date) and the Second Governance and Anticorruption Action Plan 10 was explained to and discussed with the executing agency and implementing agency. Consistent with its commitment to good governance, accountability, and transparency, implementation of the Program shall adhere to ADB's Anticorruption Policy (1998, as amended to date). ADB reserves the right to review and examine, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating the Program. In this regard, investigation of government officials, if any, would be requested by ADB to be undertaken by the Government. In this context, a financial management assessment was also undertaken by the Executing Agency (Supplementary Appendix K of the RRP) to provide assurance that ADB loan funds will be used for their intended purpose. ADB will regularly review the financial reports of the audit authorities to 10 ADB. 2006. Second Governance and Anticorruption Action Plan (GACAP II). Manila.

assess any potential financial and administrative irregularities. During regular review missions, the financial management, and governance and anticorruption risk assessments will be updated to ensure that their provisions remain valid and are helping the reforms to succeed. 31

32 Appendix 1 TERMS OF REFERENCE FOR THE REFORM IMPLEMENTATION AND MONITORING COMMITTEE 1. Composition of Reform Implementation and Monitoring Committee (RIMC). RIMC will function as a program steering committee and will be chaired by Secretary, Ministry of Micro, Small and Medium Enterprise (MMSME) and will include Joint Secretary, MMSME; Additional Secretary & Financial Adviser, MMSME; Joint Secretary (ADB & INFRA), Department of Economic Affairs, Ministry of Finance; Joint Secretary, Ministry of Textile; Chief Executive Officer, Khadi and Village Industries; A Marketing Expert to be nominated by Confederation of Indian Industries; Financial Expert from the Banking Sector to be nominated by Secretary (Financial Services), Ministry of Finance; Senior Adviser / Principal Adviser, VSE division, Planning Commission; Financial Adviser, Khadi and Village Industries Commission. RIMC will be mainly responsible to providing policy and management guidance to the Khadi Reform and Development Program and is to meet at least quarterly. MMSME, the Executing Agency functions as the secretariat for RIMC. 2. Terms of Reference for Steering Committee. The RIMC will ensure that program objectives are met through the smooth implementation. With this objective the RIMC shall: (i) (ii) (iii) (iv) (v) (vi) Provide review policy initiatives and provide policy and management guidance for the achievement of program objectives; Monitor performance of implementation arrangements and progress towards meeting tranche release conditions; Review performance of Reform Implementation Division (RID) and Reform Management Units (RMU) and provide technical inputs where required; Ensure RID and RMUs maintain separate accounts and to be audited following acceptable accounting principles; Ensure effective Program coordination and Approve the appointment of the RID Director in case of a change in the Director. 3. Meeting of the RIMC. The RID, in coordination with the Committee chairperson, shall organize the committee meetings as follows: (i) (ii) (iii) (iv) (v) Regular RIMC meeting shall be convened at least quarterly by notice to the member by the chairperson; The chairperson at his/her discretion may convene a meeting of RIMC to discuss any extraordinary issues that may arise on a date specified in the request; The chairperson shall preside at each meeting of RIMC. The quorum necessary for transacting business at a meeting of RIMC shall be six members present at any meeting of the RIMC; The minutes of the RIMC meetings shall be recorded by MMSME and confirmed by all the members present at the meetings; and The decisions of RIMC shall be by majority vote.

Appendix 3 33 REFORM IMPLEMENTATION DIVISION RESPONSIBILITIES AND ACTIONS Prior to loan effectiveness, KVIC will establish the RID, which will be responsible for (i) coordinating actions under the Program in accordance with the implementation schedule, and (ii) monitoring overall program progress. The RID will be headed by a KVIC director with sufficient knowledge and experience in KVI related programs, who will report to KVIC s chief executive officer. The RID will comprise four subdivisions: (i) promotion and marketing, (ii) raw material procurement and production, (iii) institutional reform, and (iv) program coordination and administration. KVIC will assign about 13 of its officers to the RID and about 7 administrative staff. Consultants will be hired to provide specialist support. Responsibilities Required Actions Reference 1. Tranche Condition Compliance Prepare and update the overall implementation plan and schedule for the program. Coordinate actions for implementing tranche conditions under the program. Monitor the status of the implementation. Coordinate with RMUs for implementing the policy actions. 2. Monitoring Identify necessary data available for the performance target Prepare data formats and request RMUs and other sources for data on program implementation Collect all data and process for reporting. 3. Evaluation Process the data collected for the program and prepare an evaluation report to be submitted to MMSME and RIMC Establish the program performance and monitoring system 4. Procurement Prepare the guidance, as required for the procurement issues such as for hardware and software requirements in accordance with the rules of the Government of India. 5. Contract Awards 6. Disbursement Arrangements Prepare a procurement plan for implementing the program and implement. Prepare guidance, as required for contract award in accordance with the rules of the Government of India Prepare a report on tranche release condition compliance of the program components and submit to ADB at least two month before scheduled tranche. In case of possible noncompliance report to ADB to facilitate remedial measures. RRP Loan Agreement, Program Agreement, PAM Policy Matrix; PAM (Program) / RRP PAM (Program) / RRP Loan Agreement, Program Agreement Guideline of Government of India Loan Agreement, Program agreement Guideline of Government of India Loan Agreement Program agreement PAM (Program)

34 Appendix 2 7. Reporting Prepare quarterly progress report and submit to ADB within 20 days of the end of the applicable period. Loan Agreement Program agreement PAM (Program) 8. Accounting and auditing 8. Liaising with RMUs 9. Support for ADB Missions Maintain the records, accounts and financial statements on the use of the counterpart funds following sound accounting principles Keep the accounts and financial statements audited annually by independent external auditors Coordinate necessary actions and reporting of the program implementation with RMUs Provide necessary support for implementation activities of RMUs Provide logistical support for regular ADB review missions. Prepare midterm review and Program completion reports on program progress Loan Agreement Program agreement PAM (Program Loan Agreement Program agreement PAM (Program) Loan Agreement Program agreement PAM (Program) ADB = Asian Development Bank, IA = implementing agency, NIMC = National Implementation and Monitoring Committee, PACS = primary agricultural credit society, PAM = Program administration memorandum, RMU = reform management unit, RRP = Report and Recommendation of the President, TA = technical assistance.

Appendix 3 35 REFORM MANAGEMENT UNIT'S RESPONSIBILITIES AND ACTIONS Within one month of loan effectiveness, KVIC will establish an RMU at each of its state and divisional offices to manage and monitor program implementation at khadi institutions. Each RMU will be headed by a KVIC assistant director or an official of similar rank, and at least one officer will be assigned to support the head. The RMUs will coordinate with khadi institutions and facilitate monitoring and implementation of the reforms under the Program. Reform Management Units (RMUs) (RMU Structure at State / Divisional Offices KVIC) Dy. CEO (RID / Khadi /Ec.R) State / Divisional Director Reform Management Officer (RMO) Programme Implementing Officer (PIO) * Dev. Officer/ADO (K) Programme Research Officer (PRO) ** Eco. Officer / Eco. Investigator Programme Implementing Institutions (PII) PII PII PII PII Reform Implementing Officer (RIO) One each at Institution s level * PIO is responsible for Institutional Reform and Capacity Building ** PRO is responsible for Information, Monitoring and Reporting

36 Appendix 4 DEVELOPMENT POLICY LETTER

Appendix 4 37

38 Appendix 4

Appendix 4 39

40 Appendix 4

Appendix 4 41

42 Appendix 4

Appendix 4 43

44 Appendix 4