Although the water supply and sanitation sector of the state of Karnataka in India has made significant progress in terms of area coverage and, to some extent, meeting consumption targets, two tasks, i.e. fulfilling the unmet backlog demand and meeting the water needs of future population, continue to remain as its major challenges. Based on an analysis of the data and information pertaining to the sector during 1999–2001, this paper aims to assess the financial capacity and reform commitment of the state to meet these sectoral challenges successfully. Towards this end, this paper (a) describes the current status and recent performance of the sector, (b) reviews the financial health of the sector including an estimation of the magnitude of budgetary subsidy, (c) discusses the causes for and consequences of subsidy growth; (d) the issues and strategies for sectoral reforms including an evaluation of some recent reform initiatives and (e) concludes by highlighting the major implications for sectoral policy in the state in particular and India and other developing countries in general.

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