India - Himachal Pradesh Apple Processing and Marketing Project

pyEREPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1356-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE HIMACHAL PRADESH APPLE PROCESSING AND MARKETING PROJECT December 21, 1973 South Asia Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  WJRRENCY EQUIVALENTS (As at November 30, 1973) US$ 1.00 Rs 8.05 Rs 1.00 US$ 0.124 Rs 1 million US$ 124,000 The Rupee is officially valued at a fixed Pound Sterling rate. As the Pound is now floating relative to the US Dollar, the US Dollar/Rapee exchange rate is subject to change. Conversions in the appraisal report and in this report have been retained at US$1 = Rs 7.5 which was the rate prevailing at the time of appraisal, in September/ October 1972 . FISCAL YEAR April 1 - March 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMET OF INDIA FOR THE HIKACHAL PRADESH APPLE PROCESSING AND MARKETING PROJECT 1. I submit the following report and recommendation on a proposed development credit to India for the equivalent of US$13 million on standard IDA terms to help finance a project for providing apple-processing facili- ties and developing an integrated apple-marketing system in the State of Himachal Pradesh (HP). The proceeds of the credit would be channelled in two ways. For processing and marketing facilities and cableways, funds would be channelled through the Government of India to the Agricultural Refinance Corporation (ARC) on terms of 15 years, including two to three years grace, at 6.0 percent annual interest; the ARC would in turn on-lend the funds to participating commercial banks for up to 15 years, including two to three years grace, at 7 percent annual interest; the commercial banks would then relend the funds to the Horticultural Produce Processing and Marketing Corporation (HPMC) at 9.5 percent per annum for a term of up to 15 years with two to three years grace. For road works, road maintenance equipment, technical assistance, training and a project evaluation study, IDA funds would be channelled through the Government of India to the Government of Himachal Pradesh according to established government policy on terms prevaaiLing at the time. PART I - THE ECONOMY 2. An economic report, "Economic Situation and Prospects of India" (156-IN, dated May 8, 1973), was distributed to the Executive Directors on May 24, 1973 (R73-113). A country data sheet is attached as Annex I. 3. India is exceptional among the Bank Group's member countries for its size, diversity, and extreme difficulty of its economic conditions. India's economic policies and performance can be criticized on many counts. Some of the shortcomings have their origins in the open political system, where the reconciliation of conflicting political views tendsto favor less than optimal economic solutions; others are due to the sheer magnitude of the task facing the Government. Governing a country divided into more than 20 States with a population of 577 million and over 60 major languages is an extraordinary responsibility. The country's poverty and poor natural resource endowment, supplemented by a net transfer of external resources averaging in recent years well below US$1 per head per annum, have imposed sharp limitations on the rate of growth. Any judgment of India's economic performance must take these underlying circumstances into account. So, also, must account be taken of two massive uncertainties which overhang India. The first is the ava-lability of water. A bad monsoon, which is  -2- inevitable from time to time, has a pervasive influence over the entire economy and wipes out the results of years of effort. The second uncer- tainty is the availability of external assistance. The vast majority of bilateral aid is committed annually, usually several months after the start of the fiscal year, and has often proved vulnerable to the political exigencies of the donor. Any delay in IDA replenishment has an enormous impact on aid flaws. Together, these considerations severely complicate planning and force a high degree of caution in foreign exchange management. 4. In this perspective, the performance of the econcoy has been far from bad. Since the inception of economic development planning in 1950/51, national income has grown at nearly 4 percent per annum, which compares very favorably with the average annual growth rate of less than one percent during the preceding 50 years. Population has also grown faster in the past two decades than previously, but per capita income has nevertheless risen from a more or less stagnant level in the first half of this century to achieve an average growth of roughly one percent a year since indepen- dence. 5. Progress has been impressive on many fronts but disappointing on others and has all too often fallen short of India's massive needs. The growth of the socio-economic infrastructure (transport, education, health services, etc.) has been spectacular, but has often been achieved at high cost and has yielded results cf variable quality; many industrial and agricultural investment schemes have been highly successful, but others have taken excessively long to be completed and have operated well below full capacity; in some regions of the country growth and structural change have been rapid and compare favorably with developments in many other parts of the world, but in other regions there has been stagnation and possibly even decline. Despite these improvements and although the distribution of income in India is relatively even by comparison with many other cawatries, there has been little impact upon the living standards of the vast masses of the urban and rural population. The Government has become increasingly concerned about the plight of the lower income strata, which, conservatively measured, consist of some 200 million people with incomes of less than US$60 per head per year. As indicated in its preliminary proposals for the Fifth Five-Year Plan (1974/75-1978/79) GOI is planning to intensify its efforts to alleviate their poverty. 6. In broad terms, the structure of the economy has been slow to change. Agriculture remains the dominant sector, accounting for some 42 percent of national product in the early 1970s compared with around 49 percent twenty years previously. The share of output contributed by the industrial sector has increased only slowly and, partly due to the generally good performance in agriculture, since the late 1960s has remained approximately constant at a level of 23 percent. There has, however, been a shift in the composition of industrial production, with consumer, intermediate, and capital goods now contributing about one-third each compared with an overwhelming preponderance of consumer goods pro- duction 25 years ago.  -3- 7. Undoubtedly, one of India's most impressive achievements since the mid-1960s has been the doubling of the average growth rate of pro- ductivity in foodgrain production. This has been achieved primarily through the introduction of new, high-yielding seed varieties and through complementary improvements in farming practices. Nevertheless, much remains to be done to consolidate the production growth in the wheat belt and to extend it both to other areas and to other foodgrain crops, most particularly rice. Other crops have, in most cases, shown a slow but fairly constant rate of productivity increase. Irrigation has played a major part in agricultural growth and, by reducing dependence on the monsoon, has reduced variability in performance. For instance, the drought-induced decline in foodgrain output in 1972/73 was only some 6 percent, compared with a fall of almost 20 percent due to the drought in the mid-1960s. At present only about half the potentially irrigable area has been developed. Fuller utilization of the existing irrigation system and the extension of the irrigated area are, therefore, matters of the highest priority in order to meet India's rising food needs and to protect the economy against the vagaries of the weather. Land which cannot be irrigated accounts for about 50 percent of the cultivable area; output from non-irrigated land will thus remain important and substantial benefits remain to be realized through technical change and investment. 8. Performance of the industrial sector has been variable and to some extent disappointing. Industrial growth averaged about 7 percent a year in the 1950s, rose to 9 percent in the first half of the 1960s, but has declined to some 5 percent through the early 1970s. The slower growth of recent years is especially worrying. To a large extent it was precipi- tated by the severe drought of 1966 and 1967 and the accompanying general recession. But it has also been the result of many other factors: the relatively limited opportunities for further import substitution which had from the outset been at the center of the industrialization strategy; the recurring bottlenecks in the production of a number of key intermediate goods such as steel and cement; shortages of imported raw materials; and cumbersome administrative procedures. The improvement in output which occurred in 1972, combined with recent measures to simplify administrative controls, should lead to better utilization of India's industrial capacity and a higher rate of reinvestment. 9. The gross domestic savings rate has been in the region of 14 percent for the past decade. While this compares favorably with other countries having similarly low income levels, it has fallen far short of India's resource needs. And although external assistance has been sub- stantial in absolute terms, in relation to naticnal income it has been small, so that the gross investment rate has reached as high as 17 percent in only a few years. More recently, as a result of the recession and a decline in foreign assistance, the gross investment rate has been only about 14-15 percent.  -h - 10. An outstandi.ng feature of the budgetary situation over the past decade has been a sharp increase in the tax burden. Overall tax revenues w-hich represented around 10 percent of national income in 1960/61 rose to nearly 15' percent in 1971/72. Although several important sectors, notably agriculture, are still only lightly taxed, the Government has shown itself capable of swift and difficult decisions in mobilizing extra revenues. There was a large additional tax effort in response to the crisis of 1971; more recently, early in November 1973 the Government doubled the excise duty on gasoline (raising prices to the consumxer by 64 percent) and imposed heavy increases on other petroleum products. Despite a near doubling of tax revenues in the last decade, however, there has been a deterioration in the savings performance of the public sector, largely due to a sharp fall in the Central Government's current account savings. A disturbing feature of the budgetary situation has been the expansion of the States' expenditures far in excess of the growth of their own revenues. The Central Government has had to meet the resulting deficits through budget transfers. This, combined with several other factors (the military events and refugee relief of 1971 and 1972, drought relief in 1972 and 1973, and a sharp drop in net foreign aid in 1972), has forced a massive rise in total deficit financing. As a result of this and also of the shortages of food and other commodities, there has been a sharp increase in the rate of inflation in the past 18 months as has been the case in so many other countries of the world. In the past year, wholesale prices have risen by some 20 percent, campared with an average 4-5 percent in the previcus three years. The budget for 1973/74 introduced measures to help curb inflation and there have been further budget cuts in the past few months, while the Reserve Bank of India has also been intervening to control the expansion of money supply . 1 * Ever since the balance of payments crisis of 1956/57, a shortage of foreign exchange has constituted one of the most critical constraints to the development of the econony. This has manifested itself in various ways. The auuhorities have necessarily acted with extreme caution in their foreign exchange management and have been left with little flexibility or margin to accommodate special and emergency needs. The exchange control and also, in large part, the import and industrial licensing procedures have thus been the result of the acute foreign exchange situation. Even though the external sector is small in relation to the national economy, the continuing shortage of foreign exchange together with these controls have relarded and distorted investment and the rate of utilization of existing capacity. This is most clearly seen in the stagnation of non-food imports: for instance, despite expansion of the economy at almost 4 percent per annum, even at current prices the present level of non-food imports is approximately the same as that of the early 1960s, and there has been a ccntinuing shortage of imported raw materials, spares, and components. While exports have expanded somewhat since 1960 and have done especially well in the past two years, they have never achieved a sustained grawth sufficient to have an appreciable effect on the foreign exchange problem. Traditional items such as jute, tea, cashew, and textiles, which are all beset with supply difficulties at home and highly competitive or  -5- shrinking markets abroad, still constitute the most important component of exports. And despite a rapid expansion in the 1960s, non-traditional items such as engineering goods and chemicals still form only a small share of total exports. 12. Extemnal assistance has played an important role in assisting India's development effort, especially from the late i950s to the end of the 1960s. Nevertheless, net aid has always been only a small component of domestic product and has been amongst the lowest for all developing countries, having averaged well below US$1 per head per annum. Moreover, with rising debt service payments and more recently a decline in gross aid, the contribution of net aid has declined, both as a supplement to domestic investment and as a means of financing imports. However, aid remains a vital supplement to domestic resources and there are now encouraging sigas that net aid may rise somewhat in the future above its currently extremely low level. 13. As a result of substantial past borrowings, India's external public debt stood at US$8.5 billion on March 31, 1972. Annual debt service payments are currently running at a level of around US$725 million (before debt relief), equivalent to around 26 percent of merchandise and invisible export receipts. This compares with a level of debt service of about US$200 million in the mid-1960s. In order to mitigate the negative effects on grawth of such a high burden of exteroal debt and to forestall any danger of a foreign exchange crisis, the India Consortium from 1968/69 onwards has extended debt relief to India. In 1972/73, the most recent year in which the Consortium has taken this action, the amount of debt relief was about us$150 million. Debt service is projected to grow some- what more slowly over the rest of this decade than it did during the 1960s, and the debt service ratio is projected to decline to some 21' percent by 1980. Starting in the mid-1960s there has been some softening in the financial terms of official assistance offered by several major creditors, and also an increase in the proportion of program to project aid. These changes are welcome in helping India to meet her more urgent import requirements, but they are still modest in relation to the countryt's basic needs. 14h. The Government is at present preparing the detailed sectoral programs to be implemented in the Fifth Plan. It is also re-examining the overall intemal and external resources position as well as devising the appropriate policies to achieve the Plan objectives. A first draft of the ccmplete Plan has been completed with the final document expected to be published in March 1974.  -6- PART II - BANK GROUP OPERATIONS IN INDIA 15. Since 1949, the Bank Group has made 41 loans and 57 development credits to India totalling US$1 ,178 million and US$2,480 million (both net of cancellation), respectively. Of these amounts, US$605 million has been repaid, and US$1,,O58 million is still undisbursed. Annex II contains a summary statement of disbursements as of November 30, 1973, and notes on the execution of ongoing projects. 16. Sinoe 1957, ISC has made 13 commitments in India totalling US$42.3 million, of which US$5.9 million has been repaid, US$7.4 million sold and US$6.3 mirllion cancelled. Of the balance of US$22.7 million, US$15.4 million represents loans and US$7.3 million equity. A summary statement of IE3 operations as of November 30, 1973, is also included in Annex II (Page 2). 17. The emphasis of Bank Group assistance to India in recent years has been on agriculture and agriculture-related projects. This reflects the importance of agriculture and the investment priorities of the Government. Agricultural projects will continue to form an important part of the Bank Groupts program of assistance to India. Projects designed to foster agricultural production through the provision of essential inputs, such as credit for on-farm investment, command area development of existing irrigation projects, or domestic fertilizer production, form an important aspect of the program for this fiscal year. Lending for investment in processing facilities for special crops such as the project described in this report, and for livestock development would contribute to diversifica- tion of agricultural production. Special emphasis is being given to projects benefiting small farmers; examples are the special provisions for small farmers in IDA-supported agricultural credit schemes, and a project being developed in support of the Government's drought-prone areas program. 18. The industrial sector and investments in infrastructure develop- ment have received substantial amounts of Bank Group assistance, essentially to cover the substantial foreign exchange expenditures associated with investments in these fields. Apart from IDA credits for a number of fertilizer projects, lending to industry in recent years has been principally through the medium of development finance corporations. In addition, industrial production has been helped through a series of industrial imports credits. Assistance to infrastructure development has been concentrated in the power, telecommunications and railways sectors. Documents for the Twelfth Railways project have just been circulated to the Executive Directors for consideration. Credits in support of the Government' s power transmission and telecommunications program were extended last year and a rural electri- fication project is being prepared. India's cities require major investments, especially in water supply to keep up with the growth of their population, and water supply projects in Madras and Uttar Pradesh are under consideration.  -7- 19. The urgent need for a substantial net transfer of external resources in support of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Exphasis on lending for such critical sectors as agricultural or urban development inevitably leads to a relatively slow transfer of IDA resources. In order to balance its program, Bank Group lending includes more rapidly disbursing credits, such as for teleczmmunications, railway and industrial imports. Because of the capacity of the capital goods sector of the Indian economy, India imports relatively few capital goods. As in the case of the credit now proposed, the Association should, therefore, be prepared to help finance the local cost of high priority projects in support of India's efforts to sustain a satisfactory rate of growth. 20. The Bank Group has come to ccntribute sigaificantly towards the provision of external assistance to India. In the three years 1966/67-- 1968/69 the Bank Group accounted for some 17 percent of total new commitments of external assistance; in the three years 1970/71--1972/73 this had risen to 34 percent. Because of disbursement lags, however, the Bank Group's share in total disbursements has risen more slowly from 14 percent in 1966/67--1968/69 to 16 percent in 1970/71--1972/73, but it is expected to accelerate in the future. As of March 31, 1972, the Bank Group's share in India's outstanding external public debt was 19 percent. If current trends continue as expected, the Bank Group's share in the total amount outstanding will rise to approximately 30 percent by 1979. Debt service payments to the Bank Group during the year ended March 31, 1972 were 13 percent of total debt service payments made by India. By 1979, the Bank Group's share of total debt service is expected to be around 16 percent. PART III - THE STATE OF HIMACHAL PRADESH ANiD THE APPLE INDUSTRY 21. This project in BP will contribute to the development of the Indian agricultural sector, which accounts for about 40 percent of Indian GNP and employs 70 percent of the total work force. An annual growth rate of 4.7 percent in agricultural production over the next five years is a goal of the Fifth Plan. Accordingly, the Government of India is givinag great emphasis to agricultural development and allocating substantial resources to agricultural investments. The main thrust of the Government's effort is to increase output of foodgrains through increasing the availabi- lity of improved inputs such as high-yielding varieties of seeds, fertilizers, agricultural credit and irrigation. Although the primary focus is on foodgrains, the Government is also aware of the need to achieve a better regional and commodity balance in agricultural development. This project contributes to achieving that balance, representing the first Bank Group project in India aimed at improving the processing and marketing of a perishable horticultural crop, and the first Bank Group project in this depressed, mountainous region of India.  -8- 22. HP, in the foothills of the Himalaya mountains, lies between Tibet and the Punjab. The pursuit of agriculture is the dominant occupation of the 3.5 million people of HP and 94 percent derive their livelihood from cultivating the land. Due to the rocky, mountainous terrain, however, only about 10 percent of the area of HP is cultivated and there is little scope for increasing agricultural production by extending the cropped area. Increased standards of living can come mainly through improved practices, and by concentration on cash crops such as apples and seed potatoes. 23. Apples have beccme the State's main cash crop and have provided an opportunity for thousands of farmers to move beyond subsistence level. An average grower has about 1 ha of apples, and these constitute his sole source of cash income. The apple industry has also contributed to reducing unemployment as growers generally require additional labor in orchard operations for about four to five months during the growing and harvesting season. HP currently accounts for over a quarter of total Indian apple output, derived from land which is poorly suited to other types of culti- vation. Areas under apples increased from 3,000 ha in 1960 to 26,000 ha in 1970, output rose from 10,000 to 76,000 tons, and farmers involved from 7,000 to 30,000. By 1978, apple production in the State is expected to reach 250,000 tons and farmers involved 40,000 to 50,000. 24. Apple processing, transport, and marketing facilities in HP are not adequate to handle efficiently the quantities of apples being produced. Given the expected increases in production, the need for improvement is urgent. There are many problems which need to be addressed in order to effect needed change. Marketing in HP is unregulated. Commission agents play a dual role, often acting as speculative buyers, thus leaving scope for malpractices at the expense of the growers. There is no uniform grading system and the quality of fruit marketed varies widely, a practice which causes inordinate delays in marketing while apples are unpacked from crates to allow for inspection by prospective wholesale buyers and then repacked. Apples are seldom cold stored which means they must be marketed immediately irrespective of prevailing market conditions and prices. Only an insignificant portion ofcull apples are processed into juice or other products, most being left to rot in the fields. The road network serving the industry is inadequate for efficient transport and marketing of apples. The project described in this report is designed to alleviate these problems.  -9- PART IV - THE PROJECT 25. In 1970, the Government of India requested Bank Group assistance for a project in support of the apple industry in HP An IDA reconnaissance mission in February 1971 was followed by FAO/IBRD Cooperative Program preparation missions in September 1971 and May 1972. The project was appraised in September/October 1972. Following an extended period for additional preparation of the road component of the project, negotiations were held in Washington from November 8 to November 14., 1973. The Borrawer was represented by Mr. M. K. Mukherji, Joint Secretary, Ministry of Agri- culture and Mr. S. N. Saigal, Director, Department of Economic Affairs. ARC was represented by Mr. M. A. Chidambaram, Managing Director. The State of Himachal Pradesh and the Agro-Industries Corporation (AIC) were repre- sented by Mr. K. C. Pandeya, Agricultural Production Commissioner, Mr. Harbans Singh, Director of Horticulture, and Mr. H. C. Malhotra, Chief Engineer, Public Works Division. A report entitled "Appraisal of Himachal Pradesh Apple Processing and Marketing Project" (Report No. 262-IN, dated December 14, 1973) is being circulated to the Excecutive Directors separately. A credit and project summary is attached as Annex III. Project Description 26. The project provides for a commercially-oriented marketing orga- nization, technological innovations in fresh fruit and juice processing, and infrastructure improvements. It would establish new market outlets for about one quarter of HP's estimated 1978 production by providing alternative, more integrated and more efficient processing and marketing services. This would improve producer prices, double the present marketing period, reduce grower's dependence on existing wholesaler/commission agents, and utilize some currently wasted culls. The project would help prevent the seasonal apple gluts anticipated within the next 5 to 10 years because of rapidly increasing production, and lagging processing and marketing facilities. 27. The marketing organization to be created under the project, the Horticultural Produce Processing and Marketing Corporation (HPMC), would enter competitively into the apple processing and marketing industry of HP. The project would provide HPMC with a network of twelve packing houses, three collection stations, five cold storages, a juice concentrate plant, a transshipment center, and a system of aerial cableways in selected production areas. The packing houses and collection stations would be constructed over a four-year period in HP's four major apple production districts. The collection stations would be built to be easily converted into packing stations when production in the area warranted. During the off season, the packing houses and collection stations would be used to store and distribute farm inputs. The new transshipment center would help in achieving transport cost savings through collective, large volume shipping arrangements. Three cold storage units would be built in New Delhi and one in Calcutta; and an existing cold storage in Bombay would be taken over by HPMCo ADples would be held in cold storage for marketing at premium prices after the regular seasons During the off season the units would be used to store other perishables. The juice concentrate plant would process apples not marketable as fresh fruit. During the off season other fruits from the area would be  -1 0- processed. About 40 km of cableways would be installed for collection of apples from orchards on steep slopes for direct transport to nearby collection stations, packing houses and roadsides. 28. HPMC would offer a wide range of services to growers, including credit, standardized packing, transportation/forwarding, and wholesale selling services at fees lower than the present alternatives. When the project is completed, HPMC would handle about 55,000 tons of apples (25 percent of HP's production at the time). HPMC would service the apple growers by providing packing and forwarding services for 40,000 tons of apples by 1977. It would handle about 20,000 tons on a fee basis for growers who chose to continue selling apples through commission agents on consignment. HPMC would pack, forward and market a further 10,000 tons on a commission basis. It would purchase and pack still another 10,000 tons on its own account, to be sent to its cold storage units in Calcutta, Bombay, and New Delhi. Eleven thousand tons of cull apples would be bought from growers for processing at the juice concentrate plant. 29. In addition, the project includes construction of about 100 km of new roads and improvements to about 300 km of existing roads to provide sufficient all-weather connections between orchards and collection stations and packing houses, and the necessary links from them to existing highways. Also included are training and technical assistance to help ensure success- ful project implementation and an evaluation study to assess the project's impact and the possibility of further assistance to the industry. Project Implementation 30. Crucial to the project success is the establishment and proper functioning of the HPMC. It would be established as a subsidiary of the HP Agro-Industries Corporation (AIC) and staffed with qualified management and operational personnel. The establishment of HPMO would be a condition of credit effectiveness. HPM Is finances would come from the Government of HP, which would provide the equity capital of about US$2.7 million, and from long-term loans of about US$6.0 million obtained from the participating conmercial banks. The commercial banks would be selected and supervised by ARC and would be required to appraise the financial viability of loan requests from BPM . At full project development, HPMC's estimated annual operating profit would be about US$1.8 million and net profit (after interest, tax and depreciation) over US$0.3 million from the second opera- tional year onwards. HPMC's estimated financial rate of return would be 14 percent, its debt/equity ratio 2.5$ 310 To ensure that HPMC gets off to a successful start, engineering consultants, technical assistance and training have been provided for in the project. Recruitment of engineering consulting firms and technical specialists would be a condition of effectiveness. The engineering consul- tants would assist HPMC, PWD, and the HP State Department of Horticul- ture (SDH) in selecting sites; drawing up tender documents, detailed drawings, construction and equipment purchase contracts; and evaluating bids for the cold storage units and the juice concentrate plant. Technical experts including a senior packing plant manager, an apple  -11 - quality control expert, a senior marketing specialist, a food technologist and a food processing microbiologist would be recruited to assist in initial operations and training of project personnel. Training needs of HPMC and HP staff would be met through a program of local training as well as sending some staff overseas for special courses. 32. Planning and construction of the processing and marketing facilities would be phased over a four-year period to coincide with the expected increase in production in specific locations and the development of the necessary management and operational expertise. The road improve- ments and ccnstruction program would be coordinated with the construction of packing houses and collection stations. The juice concentrate plant would be built in the second year and the cold storage units in the second and third years, in accordance with expected volumes to be handled by HPMC. The buildings for the facilities would be constructed by local contractors. PWD would conduct about 70 percent of the road works on force account with manual labor and use local contractors for the balance. 33. The coordination of inter-agency activity for the project would be the responsibility of a Central Project Committee. It would oversee HPM Is operations and the implementation of the project. The Committee would be located in SDH. Membership would include the Agricultural Pro- duction Commissioner, the Secretaries of Finance and Transportation, representatives of ARC, Public Works Department (PWD) and SDH, the managing directors of the Agro-Industries Corporation (AIC) and HPMC, a representa- tive of apple growers in HP and two representatives of GOI. The estab- lishment of the Committee would be a condition of credit effectiveness. Project Cost and Financing 34. The total project cost is about US$21.7 million equivalent including duties and taxes of which the foreign exchange component is about 36 percent or US$7.8 million. A detailed breakdown of the cost components is in Annex III. 35. The proposed IDA credit of US$13 million equivalent would cover 60 percent of total project costs. The remaining 40 percent would be financed by HP Government (34 percent), ARC (3 percent) and participating commercial banks (3 percent). IDA funds of US$6.0 million would be channelled through GOI to the Government of HP for road works, road maintenance equipment, technical assistance and training. GOI would on-lend IDA funds for these items to the Government of HP according to established GOI policy on terms prevailing at the time. (At the present time, these are 4.75 percent interest per year over 15 years). 36. For processing and marketing facilities and cableways, GOI would make IDA proceeds of US$7.0 million available to the Agricultural Refinance Corporation (ARC) repayable over 15 years including two to three years grace at 6.0 percent annual interest. GOI would bear the exchange risk. To finance these diverse and geographically dispersed facilities, ARC would in turn on-lend the funds to a number of participating commercial banks at an annual interest rate of 7 percent. The commercial banks would lend to HPMC at 9.5 percent per annum on terms of up to 15 years with two to three years grace. This interest rate is in line with prevailing interest rates and  -12- neasonable in relation to the risk element involved, the need for a1jpraisa1 and supervision of individual loans. The banks would repay Ah in installments to coincide with collections from HPMC. It would be a condition of effectiveness that a Subsidiary Loan Agreement satis- facltory to IDA betwieen GOI and ARC had been executed. Procurement and Disbursement 37. Materials and equipment valued at US$3.2 million or 15 percent of total project costs, would be procured on the basis of international competitive bidding in accordance with the Association's Guidelines. Domestic suppliers would be accorded the usual preference of 15 percent or the rate of customs duty, whichever is lower. Other materials and equipment items valued at US$0.9 million would be procured locally. This latter category represents items which are not suited for international competitive bidding because of small amounts involved and the need to maintain standardization with existing items. 38. Civil works for the construction of processing and marketing facilities, costing about US$2.2 million are widely distributed geographi- cally and in time. Bulking of contracts would not be practical. As such contracts would not be attractive to expatriate firms, international com- petitive bidding would not be suitable. Local ccntractors are capable of carrying out the works, which HPMC would put out to local tender. 39. Due to a relatively short construction season because of the weather and the steep and difficult terrain, the State has difficulty in attracting contractors to do road work. As a result, it executes about 70 percent of its road development by force account, with local contractors undertaking the balance. Accordingly, this method, which has been used successfully by PWD in the past, would be used for the project road works (valued at about US$6.0 million). 40. The proceeds of the IDA credit would be disbursed against the full c.i.f. costs of imported equipment and materials and the ex-factory cost of local equipment bid internationally; against the foreign exchange component (estimated at 70 percent of local costs) of locally manufactured equipment and materials not procured by international competitive bidding; against 60 percent of civil works expenditures; and against the foreign exchange expenditures on consultant services, technical assistance and training. The credit is expected to be disbursed over four years. Any savings would be reallocated by increasing the percentage disbursement for road works. Economic Benefits 41. The project would provide important economic and social benefits. By extending the marketing area and period, it would reduce seasonal gluts and by processing cull apples, reducing transport costs, enhancing trade efficiency and reducing produce losses, it would provide some 10,000 farmers, whose average holding is less than 1 hectare, with an increase in income on  -13- the average of at least 10 percent. Growth and employment in the industry would be assisted by the project and orderly development of agricultural produce marketing, both physical and institutional would be encouraged. HPMC's competition would tend to reduce malpractices by commission agents against growers. Project roads and maintenance equipment would reduce losses and provide the social advantages of an expanded transport system. Quantifiable benefits, including HPMC surpluses, income increments for apple growers, increased production, cost reductions in apple transport, and other road users savings, result in an estimated economic rate of return of 23 percent. PART V - LEGAL INSTRJMENT AND AUTHORITY 42. The draft Development Credit Agreement between India and the International Development Association, the draft Project Agreement between the Association, the Agricultural Refinance Corporation and the Himachal Pradesh Agro-Industries Corporation Private Limited, the draft Agreement between the Association and the State of Himachal Pradesh, the Recommenda- tion of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement and the text of a draft Resolution approving the proposed Development Credit are being distributed to the Executive Directors separately. 43. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECQH2,MDATION 44. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments December 21, 1973   AN'NEX I Page I COUNTRY DATA - IRIDIA ARLA POPUiATIOR D&NSITY 2 17-pr m2 3,268,5rG km 577 aillion (aid-1973) 177 per km Rate of growths 2.23% (from 1961 to 1971) 350 per km of arable land PCPJLATIOI; CrACTEMISICS (1971) HEALTH Crade birtn Rate (per 1,000) 38 (eat) Population per physician (1971) 4,000 (est) Crude Deatn Rate (per 1,000) 16 (eat) Population per hospital bed (1968/69) 1,826 Irvfant lhurtalaty (per 1,000 live births) 120-140 (eat) INCOME IDISTRIBUTIu1 (1967/68) DISTRIBUTION 0O LAND OWNERSHIP (1194/5-) ; of consumption, lowest quintile rural 8,4 (eat) urban 7% (eat) 9) owned by top 7% owners 52- ,eat) of consumptlon, highest quintile rural 41%, (et) urban 44% (eat) b) owned by emalleet 25% of owners 1%z (eat) ACXES= TO PIPED WATER (1971) ACCESS TO ELECTRICITY (1971) 7c of population _ urban 70A9 (est) 9) of population - uroan 100 (eot) % of population - rural 59) (eat) % of population - rural 25 (est) NIjThITIOII (1960 _ 69) EDUCATION Calorao :ntake as )a of requirements 83 (eAt) Adult literacy rate 5) (1971) 56 Per capita protein intake (gr. per day) 55 (eat) Primary school enrollment % (1969/70) 79 GNP PMR CAPITA IN 1970 a 135 110 GROSS .ATIONAL PROWCT 1N 1972/73 ANNUAL RATE OF GROATH (., constant price) US j Bln. s) 2961/62-1965/66 1965/66-1969/70 1970/71-1972/73 G011'a ie amKet 1icels b5.6 100.0 3.3 4O7 2.0 Iross Domestic Investment 9.3 14.6 Crocs National Saving 8.6 13.5 Current Account Balance 0.7 1.1 Resource Gap 0.5 0.8 OJTPUT. LABOR FORCE ARD PRODUCTIVITY LNi 1971 Value Added (at factor cost) Labor Force V.A. Per Worker US I Bin,.hiln b _l or cetionalAvere Agriculture 19.4 42.6 129.9 72.0 149 47 Industry 13.3 23.3 20.2 11.2 658 208 Services 24.3 34.1 30.2 16.8 805 255 Total/average 57.0 0.0.3 100.0 -1 - GOVIItAN3IT FINANCE A/ General Government Central Government (Rs dln6) Sof GDP (Re. % Iof GDFP 1971/72 1971/72 1968-71 1971/72 1971/72 19682-1 -urrent Receipts 70.30 16.4 14.9 40.28 9.4 8.5 Current Expenditures 71.64 16.7 14.6 4128 9.6 8.1 Current Surplus/Deficat - 1.34 - 0.3 0-3 - 1.00 - 0.2 0.4 Capital Expenditures 35.66 8.3 7.8 29.23 6.8 6.o Eternal Assistance (net) 3.25 0.8 1.1 3.25 0.8 1.1 A/ Population of 10 years and over; extracted from 1,a sample data of the 1971 Census. 9/ Offc-.a1 estimate, proaably overestimates actual enrollment of age group 6 - 11 by one-fifth. c, 2ie per capita 5INP estmate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. g; entLmates. - Iransfer- seLween Center and States have been netted out.  U * | 9> j ii *^ 821321 j& ~~~~ ". W.V 0