India - Bombay Water Supply and Sewerage Project

CIRCULATING -COPY TO -BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use ,, 7 E Report No. P-1242-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE BOMBAY WATER SUPPLY AND SEWERAGE PROJECT May 3, 1973 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 It may not be published, quoted or cited without Bank Group authorization.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.  CURRENCY EQUIVALENTS (as at April 13, 1973) Currency Unit - Rupee (Rs.) $1.00 Rs. 7.65 Rs. 1.00 $0.13 Rs. 1 million = $130.000. India has not declared a new par value follow- ing the devaluation of the dollar. The Rupee is officially valued at a fixed Pound Sterling rate; and, as the Pound is now floating relative to the US Dollar, the US Dollar/Rupee exchange rate is subject'to change. The Appraisal Report and the data in this draft have been based on an exchange rate of US$1 to Rs 7.65. 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 GOVERNMENT OF INDIA FOR THE BOMBAY WATER SUPPLY AND SEWERAGE PROJECT 1. I submit the following report and recommendation on a proposed development credit to India for the equivalent of $55 million on standard IDA terms to help finance the Bombay Water Supply and Sewerage Project. India would allocate the proceeds of the credit to the Government of Maha- rashtra (GOM) as part of central grant and loan assistance to the State for development purposes, and GOM would relend the proceeds of the credit to the Bombay Municipal Corporation (BMC) for 25 years, including four years of grace, at 6.25 percent per annum. PART I - THE ECONOMY 2. The most recent economic report, "Economic Situation and Prospects of India" (SA-32a, dated May 10, -1972), was distributed to the Executive Directors on June 2, 1 972. A new report commenting on recent developments is to be circulated shortly. 3. In the Indian fiscal years 1969/70 and 1970/71, the economy grew at an average rate of about 5 percent per annum, largely due to favorable weather conditions and good performance in the agricultural sector. But economic growth fell to somewhat less than 4 percent in 1971/72 and to around 2 percent in 1972/73. A principal factor affecting economic growth particulary in the past year has been the serious failure of the monsoon. Although export per- formance has been exceptionally good in 1972/73, the foreign exchange position remains tight especially because of the sharp decline in net foreign aid. 4. Until the beginning of 1972, performance in the industrial sector had been especially disappointing, with a downward trend frcoi a growth rate of 7.1 percent in 1969 to 4.5 percent in 1971. However, more recently there has been some improvement and industrial production is expected to have in- creased by about 7 percent in 1972. But this improvement has to be qualified because much of it was confined to industries which recovered from the effects of severe domestic shortages of raw materials. Performance continues to be affected by shortage of imported raw materials, labor unrest,and power shortages, as well as bottlenecks in the domestic production of a number of key industrial commodities such as steel and cement. Cumbersome administrative procedures in applying industrial policy have also aggravated the situation. These factors have been present in varying degrees almost continuously over the past decade, with the result that India's industrial potential has yet to be fully realized. The Government of India (GOI) recognizes that fresh initiatives must be taken through industrial policy measures. Revisions of the industrial licensing policy have been announced recently but it is as yet too early to evaluate their effects.  5. Foodgrain production reached the record level of 108 million tons in 1970/71. In 1971/72 foodgrain production was affected by poor monsoons with the result that only an estimated 106 million tons were produced. Weather conditions in 1972 were disastrous with a failure of the monsoon in both the west and east sides of the country, an unusual occurrence. Precise estimates have still to be made but clear:Ly production of summer foodgrains in 1972 was substantially below the 1971 level, with the result that India is enduring very serious food shortages over large parts of the country. The Government had hoped that large foodgrain stocks built up between 1968 and 1970 would be adequate to meet requirements in bad years. But the combined effect of supplying foodgrain to Bangladesh and the severity of the drought this year has led to tho reduction of foodgrain stocks by about half, to 3-4 million tons at the end of 1972. The Government decided to import about two million tons of foodgrains and further imports may be required although there are indications that the winter crop will turn out reasonably well and make up for part of the shortfall of the kharif crop. Other crops have also been affected by last year's drought. Jute and, to a lesser extent, cotton pro- duction are expected to be lower, while the shortage of oilseeds could be quite severe with a resulting need for higher imports. 6. In the present situation, the generally favorable trend in agricultural production over the past several years should not be overlooked. Even if this year's foodgrain crop should be between 95 and 100 million tons, it would still be significantly above that obtainad in thc last serious drought year, 1965/66, when production reached only 72 million tons. This indicates that the considerable investments in irrigation facilities, ferti- lizer, and other agricultural inputs have had the effect of reducing the impact of droughts. If yields this year remain high on irrigated land in spite of adverse weather conditions, and reports of good crops in Punjab and Haryana are favorable indications, this will confirm the success of the new technology and highlight the need to extend '.ts use to other crops and to other areas. 7. The wholesale price index increased at an annual rate of 6.5 percent between July 1972 and December 1972. An important factor has been the rapid increase of food prices, which went up at the same rate over this period, reflecting exuected foodgrain shortages. In an effort to control inflaticn, the Goverrnment has limited the overdraft facilities available to State govern.ments, previously a sourco~ of deficit spending, and is considering measures to control morn effectively the level of foodgrain prices.  -3- 8. India's net reserves position at the end of March 1973 was $1,231 million or the equivalent of 39 percent of annual imports, plus debt service payments. Reserves have fallen about $33 million since March t972, and there wll undoubtedly be continuing pressure on the country's reserves from mainten- ance and capital goods imports needed to sustain the development program and perhaps also from further foodgrain imports. On the export side, current estimates irdicate a 10 percent increase in exports in 1972/73, after excluding exports to Bangladesh which have been financed mostly through Indian assistance. But overall, the rate of growth of exports in the past has been considerably slower than this, while uncertainty surrounds future levels of net aid. In the circumstances, India should clearly continue to receive substantial aid from IDA. 9. In a paper entitled "Approach to the Fifth Five Year Plan", published in January 1973, GOI set out in broad terms the objectives and preliminary estimates of the financial and physical magnitudes (but not yet the policy imDlications) for the Plan period 1974/75 to 1978/79. Removal of poverty and attainment of self-reliance were stated as two major objectives. The target for overall economic growth is put at 5.5 percent per annum. It is planned that per capita consumption of the lowest 30 percent of the urban and rural population should increase over the plan period by 50 and 60 percent respectively. Con- versely a decline in per capita consumption of about 5 percent is projected for the wealthier 30 percent of population. 10. So far as self-reliance is concerned, the Approach paper suggests that on the basis of preliminary estimates it should be possible to achieve the objective of a zero net transfer of concessional foreign assistance-by 1978/79, provided (a) exports grow at 7 percent per annum, (b) satisfactory progress is made in the program of import substitution, and (c) there is a redistribution of consumption as indicated above, with its favorable impact on the balance of payments. 11. The Government is at present n the process of preparing the detailed sectoral programs to be implemented in the Plan. It is also re-examining the overall internal and external resource position as preliminarily estimated in the Approach paper, as well as devising the appropriate policies to achieve the Plan objectives. A first draft of the complete Plan is expected to be completed later this year, with the final document being published in March 1974. 12. A country data sheet is attached as Annex I. PART II - BAN( GROUP OPERATIONS IN INDIA 13. Since 1949, the Bank has made 40 loans and 50 development credits to India totalling $1,110 million and $2,107 million (both net of cancellations), respectively. Of these amounts, $569 million has been repaid and $821 million is still undisbursed. Annex II contains a summary statement  of Bank loans and IDA credits as of March 31, 1973 and notes on the status of currently active loans and credits. 14. Since 1957, IFC has made 13 commitments in India totalling $42.3 million, of which $5.1 million has been repaid, $7.2 million.sold and $6.3 million cancelled. Of the balance of $23.7 million, $16.3 million represents loans and $7.4 minllion equity. A sumary statement of IFC opera- tions as of March 31, 1973 is also included in Annex II (page 2). 15. The emphasis of Bank Group assistance to India in recent years has been on agriculture and agriculture-related projects. This reflects the import- ance of agriculture, which contributes about 50 percent of India's GNP, and the corresponding investment priorities of the Government. Agricultural projects will continue to form an important part of the Bank Group's program of assis- tance to India. Projects designed to foster agricultural production through the provision of essential inputs, such as credit for on-farm investment, irrigation or domestic fertilizer production, form an important aspect of the program for this and the next fiscal year. In addition, there are projects reflecting the needs of techno-logically advanced and diversified agricultural production, such as support of agricultural education and marketing. Lending for investments in processing facilities for special crops and for livestock development would contribute to diversification of agricultural production. Special emphasis is being given to projects benefiting India's small farmers; examples are the special provisions for small farmers in IDA-supported agri- cultural credit schemes and a project being developed in support of the Government's drought-prone areEas program. 16. The industrial sector and investments in infrastructure development have received substantial amounts of Bank Group assistance over time, essentially to cover the substantial foreign exchange expenditures associated with invest- ments in these fields. Apart from IDA credits for a number of fertilizer projects, lending to industry in recent years has been prTrcipa'!ly through the medium of development finance companies. A credit to the Industrial Develop- ment Bank of India was signed earlier this year, and a tenth loan to the Industrial Credit and Investment Corporation of India is expected to be ready for consideration before the end of this fiscal year. In addition, industrial production has been helped through a series of industrial imports credits; an agreement for an eighthindustrial imports credit is expected to be negotiated shortly. Assistance to infrastructure development is concentrated in the power, telecommunications and railways sectors. A credit for a power trans- miss!:Dn project was recently approved and a credit in support of the Govern- ment's telecommunications investment program is expected to be ready for consideration before the end of this fiscal year; a twelfth railway project is scheduled in the next year program. India's large cities, particularly Bombay and Calcutta, require major investments in public services to keep up with the growth of their populations; in addition to the Bombay Water Supply and Sewerage project, the subject of this report, a project in support of Calcutta's urban development program is expected to be ready for consideration shortly.  17. The urgent need for a substantial net transfer of external re- sources in support of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Emphasis on lending for such critical sectors as agriculture or urban development results in a relatively slow transfer of IDA's resources. To compensate for this, the Association also lends for more rapidly disbursing projects, such as power transmission, telecommunications and industrial imports. Such a balance is reflected in the program of the current fiscal year. Because of the capacity of the capital goods sector of the Indian economy, India imports relatively few capital goods. The Association should, therefore, be prepared to help finance the local costs of high priority projects in support of India's efforts to secure a transfer of resources adequate to sustain a satisfactory rate of growth. PART III - WATER SUPPLY AND SEWERAGE IN INDIA 18. Responsibility for the development of the water supply and sewerage sector is divided among the Government of India, the States and local government authorities. GOI prepares the national investment plan for water supply, sewerage and pollution control. Investment resources are allo- cated as part of the grant and loan assistance by the Center to the States for implementation of the Five-Year Plans. The State Governments are res- ponsible for the planning and funding of specific water supply and sewerage schemes. They rely on their own departments for detailed design, construction, operation and maintenance. In large urban areas, project implementation, operation and maintenance are functions of municipal bodies and Town Committees, which also contribute to the financing of investment schemes out of their own revenues. 19. GOI statistics and the 1971 census reveal that in India's 570,000 towns and villages, there are 21 ,000 water supply Systems providing 104 million people (19% of population) with piped water supply or access to safe water. Approximately 450 million continue to use unsafe water sources, and a greater number are not served by sewage collection and disposal systems. Provisional estimates by GOI show requirements of Rs 7,000 crores ($ 9 billion) at 1971 prices to provide minimum acceptable water and sanitary facilities for the entire present population. The pattern of actual investments since the inception of the Five-Year Plans in India reflects the GOI's growing concern for the sector; its annual investments 1951 through 1969 rose from the equivalent of $4 million to $20 million. In the present Fourth Five Year Plan the Government has allocated $521 million equivalent to water supply and sewerage development. According to the "Approach to the Fifth Five-Year Plan 1974-79", referred to in paragraph 8, allocations for the sector could be about $1 billion equivalent for that plan period.  - 6 - 2 0. In Maharashtra, with a total population of 50.3 million including over 6 million people in the Greater Bombay area, partial piped water systems exist in the four municipal corporations - Bombay, Poona, Nagpur and Sholapur - and in 134 of 167 smaller towns. But in Bombay and other towns, the situation is aggravated by the influx of thousands of farmers with their families, flee- ing the drought that has hit several districts in Maharashtra. The vast majority of the rural population does not have adequate water supplies; only 640 villages with a population of 0.7 million out of the 35,850 villages in the State are provided with piped water. Sewage treatment and disposal facilities are more inadequate still. Only the four municipalities have limited sewerage systems; in all other towns and villages sewage is mostly untreated and dis- posed of in ways which present health hazards. 21. Considering the magnitude and importance of the investment program for water supply and sewerage in India, there has been very little foreign assistance so far. UNDP has financed water supply and sewerage studies for the Calcutta metropolitan area and groundwater studies in the States of Tamil Nadu, Rajasthan and Gujarat. The financing of further studies as well as certain technical assistance is under discussion with the GOI. UNICEF has for many years funded small rural water supply schemes, mainly in drought-prone areas or arid zones. I'he Bank/IDA have previously considered water supply and sewerage projects for Bangalore and Calcutta, but these proposals have not yet resulted in any lending. The GOI and the IBRD/WHO Cooperative Program will be carrying out shortly a survey of the water supply and sewerage sector in Uttar Pradesh; this is expected to result in further Bank Group assistance for water supply and sewerage projects. PART IV - THE PROJECT 22. The project, which would be the Bank Group's first lending for this sector in India, was appraised in June/July 1972 and the appraisal was updated in November/December 1972. Negotiations took place in Washington between March 26 and April 5, 1973. The Borrower was represented by Mr. G. Venkataramanan, Deputy Secretary, Department of Economic Affairs, Ministry of Finance, and Mr. P. Prabhakar Rao, Joint Secretary, Ministry of Works, Housing and Urban Development. GOM was represented by its Finance Secretary, Mr. P.D. Kasbekar. Mr. M.W. Desai, Municipal Commissioner, Mr. V.D. Desai, Deputy Municipal Commissioner, Mr. B.R. Gole, Deputy Project Engineer and Mr. A.B. Maduskar, Deputy Chief Accountant, represented BMC. A report entitled "Appraisal of the Bombay Water and Sewerage Projecti' (88a-IN, dated April 30, 1973), is being circulated to Executive Directors separately. A project sumimiary is in Annex III to this report. Background 23. The Bank Group's involvement in the development of a Bombay Water Supply project commenced in 196h. The proposal then considered was the ivelopment of additional water sources for Bombay, but when feasibility studies were completed in 1968, GOM decided to firance the investment from  "**==>This document did not complete OCR process. <==**"