India - Agricultural Credit Projects

RESTRICTED Report No. P-941 ILE c py This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE TAMIL NADU AGRICULTURAL CREDIT PROJECT AND THE HARYANA AGRICULTURAL CREDIT PROJECT May 17, 1971  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMiIENDATION OF HE PRESIDENT TO THE EXECUTIVE DIRECTORS ON PROPOSED CREDITS TO THE GOVERNMENT OF INDIA FOR THE TAMIL NADU AGRICULTURAL CREDIT PROJECT AND THE HARYANA AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on two proposed Credits in amounts in various currencies equivalent to US$35.0 million for the Tamil Nadu Project and to US$25.0 million for the Haryana Project. These projects have the same broad common objective - the provision of medium to long-term credit to farmers in India for investment mainly in minor irrigation and mechanization as a means of increasing agricultural production and furthering the adoption of new production techniques. They are accordingly discussed in this single report in order to avoid unnecessary repetition, and to provide a comparative statement of agricultural credit programs of two States in India separated by over a thousand miles and differing considerably in climatic and physical conditions. PART I - HISTCOiICAL 2. Since 1949 the Bank has made 39 loans amounting to US$1,051 million and the Association 32 credits amounting to US$1,447 million (both net of cancellations) to India. Of these,fifteen loans and credits totalling some US$237 million were for agricultural projects in India. Three recent IDA operations were to finance agricultural credit projects in the States of Gujarat, Punjab and Andhra Pradesh, and Credits now proposed would be two more in this series. 3. The proposed Credits would assist in financing on-farm investments in minor irrigation, farm mechanization and of certain equipment required for project implementation (both projects) and, additionally, in Tamil Nadu of land levelling and drainage and of some consultancy services. They result from project preparation efforts which began with a reconnaissance mission in which the IBRD/FAO Cooperative Program participated in November and December 1968 directed towards increasing the range and amount of institutional credit available to farmers. Appraisal reports are now being prepared for two similar projects in the States of Maharashtra and Mysore, and additional projects are contemplated for appraisal next year in other States. 4. The Tamil Nadu and Haryana Projects were both appraised in September/October 1970. Negotiations were conducted in Washington during the two weeks ending May 7, 1971. The Borrower was represented  - 2 - by Mr. M. A. Quraishi (Additional Secretary, Ministry of Agriculture and Food) and Mr. S. Guhan (Director, Department of Economic Affairs, Ministry of Finance). The Agricultural Refinance Corporation (ARC) was represented by its Chairman, Mr. P. N. Damry. Mr. S. Venkitaramanan (Finance Secretary) and Mr. Reddy (Joint Director, Agricultural Engineering Services) represented the State of Tamil Nadu. Mr. M. Shanmughan (Member, Legislative Assembly) represented the Tamil Nadu State Land Development Bank (LDB), of which he is Chairman. The State of Haryana was represented by Mr. Sher Jang Singh (Secretary, Agriculture Department). The Haryana State Cooperative Land Mortgage Bank (LMB) was represented by Mr. G. L. Bailur (Registrar, Cooperative Societies) and the Haryana Agro-Industries Corporation (HAIC) was represented by its Managing Director, Mr. A. K. Sinha. 5. Of the 39 loans and 32 credits to India, seven loans and eleven credits are not yet fully disbursed. A summary statement of these loans and credits as at April 30, 1971, is contained in Attachment III. 6. There have been delays in disbursing against some of these projects. Disbursement under Loan No. 307-IN (Collieries Project) to the Indian Iron and Steel Company have been delayed due to technical and management difficulties faced by the Company in executing the project, including the change from the originally contemplated open pit method of coal excavation to shaft drilling, delays in land acquisition, and more recently mining problems resulting from the unusual geological nature of the area; revised mining plans and a new schedule for the execution of the project should now permit its completion by June 30, 1974, the revised Closing Date. A more detailed description of the difficulties encountered in this project is set out in my memorandum of July 9, 1970, to the Executive Directors (R 70-135); since then, in December 1970, a review mission (including a consultant) found that management of the project had improved. However, the consultant's report indicates that the rate of shaft drilling is somewhat behind the revised schedule; a letter has been sent to the Company outlining the consultant's findings and urging that greater effort be made to adhere to the agreed schedule. 7. The Closing Date for Loan No. 414-IN has been postponed by one year (to June 30, 1972) and that of Loan No. 515-IN may require post- ponement. Both these loans are to ICICI. The postponements are due to the slow rate of withdrawals by sub-borrowers who slowed up investment during the 1966-68 recession. However, commitments have been made for the full amounts of both loans and under the most recent loan to ICICI (Loan No. 683-IN), and a mission to appraise a ninth loan to the Company is scheduled for July. Delays in delivery of some major pieces of equipment have adversely affected the pace of construction work on the Beas Project (Credit No. 89-DI). A mission reviewed this project in December 1970, and agreed upon a revised disbursement schedule, calling for completion in 1974 which could involve a two-year extension of the original Closing Date. Disbursement under the Sixth Industrial Imports  - 3 - Credit (Credit No. 182-IN) has been unexpecbedly slow. At the time the Credit was signed in April 1970, it wqas expected that full disburse- ment would have taken place by March 31, 1971 but GOI has issued import licenses sparingly and only to those priority industries which were unable to use bilateral aid. Furthermore, although production has recovered somewhat from the 1966-68 recession, neither production nor import requirements have grown as fast as GOI expected a year ago. Import licenses against the full amount of the Credit have been issued several months back, and full disbursement is now expected before the end of 1971. Tenders for major items of expenditure under Tarai Seeds (Loan No. 614-IN) and Punjab Agricultural Credit (Credit No. 203-IN) have recently been approved. A mission has recently returned from India after reviewing progress on the Tenth Railways Project (Credit No. 162-IN) and forecasts full disbursement of the Credit by the Closing Date of September 30, 1971, or very shortly thereafter. 8. In the case of the Third Telecommunications Project (Loan No. 615-IN and Credit No. 153-IN), which was approved in June 1969, only about US$14 million have been disbursed so far, but procurement action has been taken for the full amount; it is expected that dis- bursements will have reached US$50 million by March 1972 and will be completed before the Closing Date (December 31, 1972). 9. Since 1957, IFC has made 13 commitments in India totalling US$42.3 million of which US$2.8 miUion has been repaid, US$5.8 million sold and US$6.3 million cancelled. Of the balance of US$27.4 million, US$19.1 million represents loans and US$8.3 million equity. As of April 30, 1971, US$24.1 million of this total has been disbursed, leaving US$12.0 million undisbursed. The largest commitment was a total of US$18.9 million to Zuari Agro-Chemicals for a fertilizer plant in Goa. 10. Negotiations have recently been completed for proposed Credits for the Cochin II Fertilizer Project and for the Pochampad Irrigation Project. Other projects in an advanced stage of consideration are Railway XI, Ships and Bombay Water Supply. 11. Credit Summaries of both Projects and a Basic Data Sheet are attached together with the Summary Statement of Loans and Credits. PART II - THE PROJECTS 12. The appraisal reports entitled "Tamil Nadu Agricultural Credit Project - India" (PA-81a) and "Haryana Agricultural Credit Project - India" (PA--80a) are attached.  13. Both Projects follow broadly the pattern of the earlier approved agricultural credit projects for Gujarat, Punjab and Andhra Pradesh, although variations are incorporated to meet differences in local circumstances. The Projects are designed to support the Government of India's policy of increasing the developmental efforts directed towards agriculture,of accelerating the rate at which farmers adopt technological improvements, and of widening the involvement of farmers in the benefits to be derived from this process. In spite of the success which has already been achieved in obtaining considerable increases in food production, it is desirable to enable more farmers to adopt the new agricultural strategy by providing medium to long-term credit which they need to finance the necessary on-farm investments. Tamil Nadu 14. The Project in Tamil Nadu would finance part of a lending program by banks in the State to help finance investment in minor irrigation, land levelling, land drainage and improvement and farm mechanization. It would increase minor irrigation facilities in the State by the development of some 7,000 filter points and 4,500 tubewgells as well as the installation of some 4,000 pumpsets to energize existing filter points. It would also include an element for invest- ment in dugwells and dugwell improvements (including energization). Investments in levelling about 10,000 ha would be financed together with some drainage, and the Project would include the financing of 12 rotary rigs and other equipment for well-drilling plus some land shaping machinery. In addition, financing would be provided for about 1,500 general purpose tractors in the 25 to 60 hp range. Provision is also made for consultancy services to the State Groundwater Directorate and for an aerial survey of the crystalline areas of Tamil Nadu and neighbouring States. 15. The total project cost is estimated to be US$62 million, of which the proposed Credit would finance about 56 percent (including an estimated foreign exchange cost of US$12.9 million, and approximately US$22.1 million equivalent of local expenditures). 16. Benefits from the Project, which would reach approximately 50,000 Tamil Nadu farmers, would arise from an increase of about 60,000 ha in the crop areas (a further 150,000 ha would benefit from improved farming conditions), a higher cropping intensity and higher yields from the application of irrigation, mechanization and timely cultivation practices. Food crop production, mainly rice and maize, should increase by about 280,000 tons, and there would be production gains in certain commercial crops. Taking account of both import substitution and some export earnings increased crop production estimated at US$29 million equivalent annually would bring considerable benefit to India's foreign exchange position. The economic rate of return is estimated to be at least 17 percent, and the financial rate  of return to the farmers should range from roughly 34 percent or more (for land levelling) to 15 percent (for farm mechanizat_on). Haryana 17. The Haryana Project would help finance the construction of about 11,000 shallow tubewells, the installation of 75 sprinkler irrigation sets, and the import of about 6,000 tractors together with spare parts. About 20 self-propelled harvesting combines and about 100 tractor-drawn harvesters would also be procured. 18. UJnder the Project, about 69,000 ha would be irrigated, which would enable farmers to increase their cropping intensity and obtain more reliable yields from areas which presently depend on uncertain rainfall. Tractors supplied under the Project would increase cropping intensity on about 120,000 ha. 19. The total project cost is estimated to be US$44.5 million of which the proposed Credit would finance about 56 percent,(including an estimated foreign exchange cost of US$21.2 million, and approximately US$3.8 million of local expenditures). Under the Project the counterpart funds resulting from the sale of spare parts for tractors, self-propelled combines and tractor-drawm harvesters, (i.e. US$ 2.7 million equivalent) would be relent for investment in minor irrigation. 20. The Project would benefit at least 20,000 Haryana farmers investing in minor irrigation and farm mechanization,including many small farmers who would be able to take advantage of tractor rental services and tubewell facilities. Benefits to the Indian economy would be a higher cropping intensity, facilitating a shift in cropping patterns toward more valuable and labor intensive crops and higher yields through reliable irrigation facilities and timely cultivation practices. The overall rate of return to the economy would be at least 15 percent. In calculating this rate of return, secondary benefits such as the domestic value added by processing project products have not been taken into account. Rates of return for farmers would range from 17 percent to 35 percent. Administrative Arrangements 21. As was the case in earlier similar projects, funds for both Projects will be channelled by the Borrower through the Agricultural Refinance Corporation of India (ARC), for refinancing the lending activities within the project areas of the LDB, the LMB and their Primary Banks, and of those commercial banks which may participate.  - 6 - 22. It will be noted that the combined Projects involve substantial financing of local costs. This is necessary if the Bank Group is to make an effective contribution to agricultural develop- ment in India which, characteristically, involves a comparatively small foreign exchange component. The more general case for local expenditure financing has been discussed in recent economic reports, including Chapter X of the latest report (SA-25a) which is just being distributed to the Executive Directors. 23. For both Projects the procurement of tractors, together with initial spares would follow the pattern established in the three preceding agriculture credit projects in Gujarat, Punjab and Andhra Pradesh. In Tamil Nadu, the State Department of Agriculture and in Haryana, HAIC will act as procurement executing agencies. Farmers would be allowed their choice of tractors from among those for which quotations were offered by Bank member country suppliers which have manufacturing facilities in India or which have received the Government's approval to establish such facilities. Drilling rigs and earth-moving machinery for the Tamil Nadu Project and harvesters for the Haryana Project are to be procured under the usual arrangements for international competitive bidding with Indian suppliers receiving a margin of preference of 15 percent or the existing level of import duties, whichever is the less. The prevailing customs duty is 27.5 percent for drilling rigs and zero for harvesters and for earth- moving machinery for agricultural purposes. Tractor implements including hard steel components have been reserved for local procure- ment. A suggestion that the Association should finance the import of sufficient hard steel for certain components wias not pursued since satisfactory administrative arrangements were not practicable. The Borrower has, however, given assurances that sufficient hard steel, which is in short supply in India, will be made available to local manufacturers of the implements required for these Projects. 24. The banking arrangements for the Tamil Nadu Project are of particular interest. During the year preceeding appraisal of this Project a rapid proliferation of LDB Primary Banks in the State raised questions about the efficiency and financial soundness of the apex bank; it was feared that many of the new banks would not be suitable institutions for the channelling of credit. The situation has, however, stabilized and improved in the last few months. The expansion of the LDB system has ceased, and a recent survey of such banks in the project area by ARC reveals that, while some of the LDB Primaries are unsatisfactory at present,most of these can be improved and it should be possible for the LDB system to carry out project lending in most areas. It is recognized by the State Government that ARC will only refinance Primary Banks meeting agreed criteria and that shortfalls in the LDB system would be met by channelling funds through selected commercial banks which are well represented in the project areas. The preliminary findings of a survey being carried out by ARC indicates that there wfMllbe sufficient banking facilities to enEure full execution of the Project. The  - 7 - criteria to be used by ARC in working out arrangements for the distribution and organization of the Primary LDB's for project lending, in nominating the Primary LDBs and commercial banks to be responsible for project lending and in determining the scope and timing of their participation have been agreed upon during negotiations and set out in a Supplemental Letter which is being distributed with the other legal documents. Although the fulfillment of the several requirements contained in the Credit documents in this respect becomes a prime responsibility of ARC, the Association reserves the right in Section 8.01 (g) and (h) of the Development Credit Agreement, as a condition of effectiveness, to be satisfied that ARC's arrangements are such as to ensure sound management, supervision and financial independence of the LDB system in the State and that the nominations of banks and the decisions taken by ARC concerning the scope of their participation have been taken in accordance with the application of the agreed criteria. The same situation does not apply in Haryana State where the LMB is a more effective and experienced institution which has not been subjected to similar changes. 25. Considerable differences in the treatment of minor irrigation investments are also necessary, since Haryana need not apply constraints that are essential in Tamil Nadu where over-exploitation is a real danger. In Tamil Nadu, where there is no controlling legislation, safeguards against the over-exploitation of groundwater resources will be through the criteria laid down in the Project Agreement relating to spacing and specifications of wells and also through limitations imposed on lending by the banks, both inside and outside the project area. Such restrictions cannot be a full substitute for effective legislation (which is being discussed for India generally but will necessarily require some time before being adopted even in individual States such as Tamil Nadu), but they go a considerable way to achieving the objectives shared by the State Government and the Association in this regard. In Haryana, the only measure deemed necessary to safeguard the investment in minor irrigation is an increase in technical expertise. During negotiations assurances have been obtained that sufficient qualified staff will be available in the Haryana Department of Agriculture, to permit the efficient carrying out of the minor irriga- tion component of the Project. The appointment by LMB of an agricultural economist and a chief inspecting officer(who, tgether with the two inspecting officers already at post, would be responsible for the overall guidance, control and training of Land Valuation officers) has been made a condition of effectiveness, to be found in Section 8.01 (e) of the Development Credit Agreement. 26. For small farmer beneficiaries of both Projects, terms and conditiomsof lending for minor irrigation and land levelling are simi- larlydifferentiated as they were in the Andhra Pradesh Agricultural Credit Project, i.e., smaller down payment terms and longer maturity periods. As an inducement to the formation of groups for the exploita- tion of wells and to promote the proper use of distribution channels  - 8 - both on and between farms it has also been agreed that Tamil Nadu may continue to provide Rs. 500 subsidy per well to groups of small farmers. This subsidy takes the form of a reduction of the beneficiariest LDB loans, the LDB being reimbursed for that amount directly by the State Government. 27. GOI is aware of the Association's concern that an uneconomic diversion of investment may be caused by the relatively low price of imported tractors in India. Negotiations under the GATT are being pursued in order that India may be released from its obligation to keep tractors on the "zero tariff" list. Once these negotiations have been concluded IDA expects to enter into discussions with the Government of India regarding appropriate measures for achieving an acceptable increase in the rupee price to be paid by farmers for imported tractors. 28. The effect of mechanization on rural employment continues to receive the Association's attention. It is not possible to quantify the net effect of mechanization on total labor use on the basis of the evidence available at present. Howiever, there are good indications that the increased cropping intensity and the probable shift to higher valued crops in Haryana and Tamil Nadu will create new job opportuni- ties so that the immediate effect of mechanization will certainly not be to lessen employment. Furthermore, most of the farm labor force in the State of Haryana presently owns land (or has some form of tenancy arrangement), and during peak cultivation and harvest periods an acute shortage of labor is experienced. These conclusions are based on a careful assessment of the information presently available. However, in order to improve the Association's knowledge on the effects of farm mechanization and in particular regarding the short- and long-run effects of mechanization on rural unemployment, the Association and the Government of India have agreed to commission,in the very near future, a comprehensive study on this subject in two States, Gujarat and Punjab. This study should provide a more thorough analysis and fuller information regarding the employment effects of mechanization in agriculture. 29. The diversity of agricultural needs and ccnditions in India is well illustrated by these similar yet contrasting Projects. Both require measures tailored to their particular circumstances, and what is appropriate in the one is not necessarily applicable in the other. Because of ecological variations and institutional differences no two agricultural credit projects in different geographical areas can be identical. Some standardization has been achieved where possible, but however complex the lending mechanism may become in order to cater for local circumstances, the provision of a comprehensive and integrated approach to agricultural development remains the central featureof such projects.  - 9 - PART III - LEGAL INSTRUIMTS AND AUTHORITY 30. The draft Development Credit Agreements between India and the Association, the draft Project Agreements among the Association and ARC, LDB, LMB, HAIC and the State of Tamil Nadu acting for its Agriculture Department, the Agreements between the Association and the States of Tamil Nadu and Haryana, the draft Supplemental Letter concerning criteria agreed between the Association and ARC to be applied in determining the banking structure in Tamil Nadu, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement and the text of a Resolution approving the proposed Development Credits are being distributed to the Executive Directors separately. 31. The draft Agreements incorporate the relending terms and procure- ment provisions explained in Part II and paragraph 23 above. The specific obligations of India regarding the importation of tractors and other equipment for the Projects are included in Section 3.01 of both the draft Tamil Nadu Development Credit Agreement and the Haryana Development Credit Agreement. 32. In addition to the Conditions of Effectiveness referred to in paragraph 24, the Taidl Nadu Development Credit Agreement, in Section 8.01 (d), (e) and (f), contain three other Conditions of Effectiveness, namely, that direct subsidies for wells shall be withdrawn, that economic rates are established for mechanized land levelling services and that the initial staffing of the State Groundwater Directorate shaU be acceptable to the Association. PART rV - THE ECCNOMY 33. The latest economic report entitled "Economic Situation and Prospects of India" (SA-25) is boing distributed this week. It reports the continuation of many of the encouraging trends observed in the 1970 report - in particular the further growth of exports and of agricul- tural production. The report also notes that net aid receipts have fallen to a level lower than at any time in the past decade, and are less than one-third of the peak reached five years ago. The resulting shortage of resources has been reflected in a shortfall of investment from the planned level, which seems to be the bare minimum required if India is to achieve a tolerable rate of growth. India continues to need substantial aid on concessionary terms.  - 10 - PART V - COMPLIANCE WITH ARTICLES OF AGREPEMNT 34. I am satisfied that the proposed Credits would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 35. I reconmmend that the Executive Directors approve the proposed Credits. Robert S. McNamara President by J. Burke Knapp Attachments M a y 17, 1971  Attachment I INDIA BASIC DATA Total2 Percent Area: in km Cultivated 3,268,580 43.0 Density2 Population: Total per km (Preliminary 1971 Census estimate) 547 million 167 Annual Rate of Growth, current estimate: 2.25 percent Political Status: Member of U.N., Commonwealth Gross National Product at Market Prices, 1970/711/: Rs. 383 billion Rate of growth 1955/56 - 1968/69: 3.4% p.a. at constant 1965/66: -5.2% prices 1966/67: 1.3% 1967/68: 8.9% 1968/691/ 2.2% 1969/701/ 5-5.5% 1970/711/ 4.5-5% Per capita, 1970/71: US$90 Gross Domestic Product at Current Prices, 1970/711/: Rs. 386 billion Percentage breakdown: Agriculture 49 (for 1968/69) Mining 1 Manufacturing 19 Commerce and Transport 16 Government and Other Services 15 Percent of National Income at Market Prices: 1965/66 i966/672/ 1967/68Z/ 1968/69i/ 1969/70S/ Net domestic investment 13.3 12.1 11.3 11.3 12.0 Net domestic saving 10.6 8.2 7.8 8.8 9.9 Current account balance -2.7 -3.9 -3.5 -2.5 -2.5  Attachment I (page 2) 1966/67-1969/70 March 1970 Average Rate of Money and Credit (Rs. billion): (Last Friday) Increase (%) Total money supply 63.85 9.0 Net bank credit to govlt sector L7.26 5.5 Net bank credit to commercial sector 18.36 15.0 1969/70