India - West Bengal Agricultural Development Project

FILE COPY CIRCULATING XRETURl,NED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1605-IN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE WEST BENGAL AGRICULTURAL DEVELOPMENT PROJECT April 10, 1975 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 It may not be published, quoted or cited without Bank Group authorization.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.  CJRRENCY EQUIVALENTS (As at March 18, 1975) US$1.00 = Rs. 7.84 Rs. 1.00 = US$0.128 Rs. 1 million = US$127,585 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/Rupee exchange rate is subject to change. Conversions in the appraisal report and in this report have been retained at US$1 = Rs. 8.0 which is the short term average exchange rate. FISCAL YEAR April 1 - March 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO TlIE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE WEST BENGAL AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed development credit to India for the equivalent of US$34 million on standard IDA terms to help finance a project designed to assist agricultural develop- ment in the State of West Bengal. The major portion of the proceeds of the credit would be channelled through the Government of India to the Agricultural Refinance Corporation (ARC). ARC would on-lend the funds to participating commercial banks and the State Cooperative Land Development Bank (LDB) for relending to farmers for investment in tubewells and to tihe West Bengal State Minor Irrigation Corporation (MIC) for the construction of deep tube- wells. Funds would also be provided for relending to Market Committees (MC) for the construction of regulated markets and to private individuals for investment in agro-service centers. The remaining funds would be channelled through the Government of India to the Government of West Bengal to help finance the completion of existing state owned river lift and deep tubewell schemes and to provide equipment, technical assistance and staff training. PART I - TIE ECONOMY 2. An economic report, "Economic Situation and Prospects of India" (402-IN, dated M4ay 7, 1974) was distributed to the Executive Directors on May 20, 1974. 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 the difficulty of its economic conditions. India's economic policies and performance have their shortcomings, many of which are attributable to the open political system, where the reconciliation of conflicting political views tends to inhibit optimal economic Lsolutions; othiers are due to the sheer magnitude of the task facing tile Government. Governing a country divided into more than 20 states with a population of some 580 million and over 60 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, nave imposed sharp limitations on the rate of growth. Any judgment of lndia's economic performance must take these underlying cir- cumstances into account. So, also, must account be taken of the uncertainties imposed by the erratic availability of water. A bad monsoon, which is in- evitable from time to time, has a pervasive influence over the entire economy and wipes out the results of years of effort.  - 2 - 4. In the past 25 years, national income has grown at nearly 4% per annum, which compares very favorably with the average annual growth rate of less than 1% during the preceding 50 years. Population has also grown faster in the past two decades than previously, but per capita income has neverthe- less risen from a more or less stagnant level in the first half of this cen- tury to achieve an average growth of roughly 1% a year since independence. 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 of variable quality. Many industrial and agri- cultural 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 countries, 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 consist of some 200 million people with incomes of less than US$60 per head per year, and has initiated in recent years a variety of programs specifically designed to alleviate poverty. 6. The structure of the economy has been slow to change. Agriculture remains the dominant sector, accounting for some 45% of national product in the early 1970s compared with around 49% twenty years previously. The share of output contributed by the industrial sector has increased only slowly and since the late 1960s has remained approximately constant at a level of 23%e 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 preponderence of consumer goods production 25 years ago. 7. The economic report of May 1974 contained a review of the immense difficulties confronting the Indian economy as the Fourth Plan period drew to a close. The final year of the Plan, 1973/74, witnessed a severe deteriora- tion in India's terms of trade which was led by, but by no means restricted to, the dramatic increase in oil prices. The resulting balance of payments difficulties were compounded by the need for food imports following the drought of 1972/73, in order to sustain the public distribution system on which the poorest section of society is particularly dependent. Given India's pervasively agricultural economy, the drought also had the effect of slowing down economic activity which was further aggravated by infrastructure constraints, particularly widespread power shortages and labor problems of Indian Railways. Food shortages and other scarcities touched off an un- precedented inflationary spiral fueled by large budgetary deficits which were at least partly attributable to mounting expenditures for drought relief. The inflation in turn contributed to labor unrest while efforts to cope with  -3- it through budgetary cuts affected, among other things, the level of real expenditures for development programs. 8. Thus, at the commencement of the Fifth Plan period (1974/75-1978/79) the most urgent tasks facing policy makers were: to get agricultural pro- duction moving again; to bring inflation under control; to reduce India's dependence on oil imports by compressing energy consumption and by formulating and implementing programs to develop domestic energy sources; to boost export earnings and to tap additional sources of aid in order to sustain imports; and, finally, to maintain a minimum investment program so as to avoid economic standstill in the longer run. Even in the best of times, it would have been extremely difficult to pursue simultaneously such a variety of potentially inconsistent objectives. 9. Events since the preparation of the last economic report provide little encouragement. For the second time in the last three years, the weather has let down India's farmers with the result that the kharif (fall) crop recently harvested is believed to be considerably below last year's (about 60 million tons as compared with 67 million tons). The outlook for the present rabi (spring) crop is quite encouraging despite continuing shortages of power for irrigation pumps and possible fertilizer shortages. However the reduced availability of foodgrains and the depletion of official food stocks during the course of 1974, and frequent changes in the Government's food procurement policy have led to hoarding for both speculative and insurance purposes thus making procurement for public distribution extremely difficult. 10. The balance of payments situation is likely to remain difficult in the current year as there will be a continued need for foodgrain imports, hopefully at a somewhat lower level than the 6-7 million tons required last year, and because there is little evidence of a major break in the prices of other commodities imported in substantial quantities by India (e.g. oil, fertilizers, steel, non-ferrous metals, rock phosphate). One of the few bright spots in the balance of payments picture has been the growth of export earnings. Export earnings recorded an unprecedented increase of about 22% in 1973/74 and are expected to rise again by 29% in 1974/75. While these increases - particularly that in 1973/74 - are primarily attributable to unit value increases caused by worldwide inflation, there is greater willing- ness to take advantage of export opportunities, as illustrated most dra- matically by the recent diversion of sugar from domestic consumption to exports. 11. Nevertheless, despite the increase in export earnings, India is expected to run a massive trade deficit this year - probably of the order of US$1,800 million as compared with US$560 million in 1973/74 and a negli- gible one the previous year. Moreover, despite the magnitude of the current deficit, it is unlikely that India's imports, excluding foodgrains, will be as large in volume as in 1972/73. In addition to financing a trade deficit of this order, India will have to meet debt service payments of about US$730 million. These financing requirements will be partly offset through  - 4 - Consortium assistance and non-Consortium aid (including assistance from oil producing countries), which are together expected to reach disbursement levels of about US$1,750 million in 1974/75 compared with about US$1,775 in 1973/74. Nevertheless, these various sources of financing hardly measure up to India's current requirements. India will have to draw on her foreign exchange reserves, which, at about US$1,400 million, are currently equivalent to less than three months of imports. During FY1974/75 India has drawn down her first credit tranche in the IMF for US$282 million, as well as her gold tranche for US$91 million. The Government has also taken advantage of the Oil Facility from which US$240 million was drawn in October. 12. On the domestic front, the Government's present efforts are con- centrated primarily on maximizing production in key sectors through a system of priorities in the allocation of scarce resources and through careful monitoring of developments and performance. In agriculture this entails provision of power on a priority basis for minor irrigation and fertilizer production and allocation of adequate foreign exchange for as much fertilizer as can be imported from the limited world supplies. Similarly, efforts are made to identify production bottlenecks in such sectors as fertilizer pro- duction, coal mining and power generation; and special arrangements exist for meeting expeditiously the foreign exchange requirements of these sectors for such items as captive power units where appropriate, spares and replace- ment parts. The railways are also tied into this system and accord priority to the movement of goods required by these sectors. In the fertilizer, coal and power sectors, senior officials are provided on a continuing basis with detailed production figures along with explanations for production shortfalls. Attempts are also being made to rationalize the administrative machinery of the Government in these sectors, as evidenced by the October 1974 decision to bring irrigation under the wing of the Food and Agriculture Ministry and to regroup power generation and coal mining under an Energy Ministry. 13. The recent discovery of new oil reserves offshore in the Bombay High structure has considerably improved prospects for domestic oil pro- duction, which presently accounts for about 7 to 8 million tons or one third of India's consumption. It is still too early to give a firm estimate of the overall level of extractable reserves concentrated there, but it is possible that in the early 1980s output from this field could double the present domestic production. So, even after allowing for some increase in demand, it is possible that Bombay High production could reduce India's future oil import needs considerably. However, the feasibility of the program to extract Bombay High oil will depend upon the availability of expertise, finance and equipment, and while the Government of India may be able to overcome the first two constraints, the international scarcity of offshore oil extraction equipment may delay exploitation. 14. In the short term, however, there are limits to the extent to which India's dependence on oil imports can be reduced and production of domestic sources of energy can be stepped up. Insofar as the compression of demand for oil products is concerned, these limits are determined, on the one hand, by the relatively small proportion of oil products used for private con-  -5- sumption (possibly one-sixth) and, on the other hand, by the limited avail- ability of domestic substitutes (i.e. coal and power). The 13 million tons of crude oil plus 3 million tons of product imports planned for the current year probably represent the lower limit beyond which these imports cannot be curbed without serious repercussions on domestic production. Had consumption been allowed to grow in line with recent trends, the present level of crude and product imports taken together would probably be of the order of at least 18 million tons. 15. A major effort is being made to use existing capacity as fully as possible throughout the economy. To this end, despite the serious balance of payments problem described above, the Government is pursuing a relatively liberal policy toward imports of raw materials required by industry. Never- theless, it is hard to get away from the current infrastructure constraints and particularly the shortage and unreliability of power supplies which, though somewhat eased, continue to affect production. Fiscal and monetary policies, including the cutback in budgetary expenditures and limitations on bank credit, are also restraining industrial output; and there is some evidence that, due to rapidly rising food prices and the consequent erosion of real purchasing power, the demand for some consumer items and industrial projects is being affected. Given the various constraints, there is likely to be little or no industrial growth in the current year which, in combina- tion with the current agricultural situation, makes it unlikely that there will be any GNP growth either. In regard to inflation, the Government has made impressive efforts to curb budgetary expenditures and to tap additional sources of revenue. In spite of continuing food shortages and other scarcities, these actions appear now to have achieved some results as the rate of inflation had declined to 23% by the end of November 1974. 16. In present circumstances the Draft Fifth Plan, published in late 1973, has not been finalized. In real terms investment in the current Annual Plan is about 30% below the annual level implicit in the Draft Fifth Plan, and even this is unlikely to be reached. To adjust to reduced resource availability a number of investments are being postponed. Expenditures on some of the social sectors such as education and family planning are unfor- tunately also affected. The focus once again is primarily on investments in key sectors such as fertilizer, coal, power, and steel, and quite rightly within these sectors the emphasis is on completing ongoing investments before committing resources to new schemes. 17. In the long run, given her groundwater, coal, hydroelectric, iron ore, non-ferrous metals and human resources, India undoubtedly has the capa- bility to overcome her present difficulties. It is, however, clear that to overcome them and to resume the interrupted process of economic development, India will require substantially larger capital inflows than foreseen by the authors of the Draft Fifth Plan. It is equally clear that as large as possi- ble a proportion of these requirements should be provided on concessional terms. However, even on very optimistic assumptions regarding India's success in narrowing her resource gap and the response of both Consortium and other donors, a gap will remain between external financing requirements and the availability of concessional aid.  -6- 18. India's external public debt outstanding on March 31, 1973, stood at US$9.9 billion. As a consequence of world-wide inflation and its effects on India's export earnings, service payments of about US$730 million due on this debt in 1974/75 are expected to be equivalent to about 17% of merchandise exports as compared with about 26% in 1972/73. However, substantial addi- tional debt will have to be incurred as a result of increases in the prices of India's imports. In the future, therefore, the debt service ratio is likely to rise, given the magnitude of India's requirements and the un- avoidability of having to finance part of these on non-concessional terms. PART II - BANK GROUP OPERATIONS IN INDIA 19. Since 1949, the Bank Group has made 43 loans and 68 development credits to India totalling US$1,338 million and US$3,295 million (both net of cancellation), respectively. Of these amounts, US$679 million has been repaid, and US$1,319 million was still undisbursed as of February 28, 1975. Annex II contains a summary statement of disbursements as of February 28, 1975, and notes on the execution of ongoing projects. 20. Since 1957, IFC has made 14 commitments in India totalling US$51.8 million, of which US$8.0 million has been repaid, US$7.6 million sold and US$6.3 million cancelled. Of the balance of US$29.9 million, US$22.8 million represents loans and US$7.1 million equity. A summary statement of IFC operations as of February 28, 1975 is also included in Annex II (page 2). 21. In recent years, the emphasis of Bank Group lending has been on agriculture. The Bank Group has been particularly active in supporting minor irrigation and other on farm investments through agricultural credit operations. Major irrigation, marketing, seed development, and dairying are other agricultural activities supported by the Bank Group. Also, the Bank Group has been active in financing the expansion of output in the fertilizer sector and through its sizeable assistance to development finance institu- tions, in a wide range of geographically scattered medium- and small-scale industrial enterprises. IDA financing of industrial raw materials and com- ponents for selected priority sectors has been instrumental in facilitating better capacity utilization in industry. The Bank Group has also been active in supporting infrastructure development for power, telecommunications, and railways. Family planning, education, water supply development, and related urban investments have also received Bank Group support in recent years. 22. The direction of assistance under the Bank/IDA program has been consistent with India's needs and the Government's priorities. The emphasis of the program on agriculture, industry, power, and transport remains highly relevant. The priority of the agricultural sector lhas been further enhanced by the present world cotimmodity situation. Thus, projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, command area development of existing irriga- tion schemes, and seed production form an important aspect of the Bank Group's  -7- program for the next years. Special emphasis will be given to projects bene- fitting small farmers and landless laborers. Lending in support of infra- structure and industrial investments will focus on energy-related projects. Repeater credits for power and railways have high priority in this context, and discussions are under way with the Government in an effort to identify and prepare projects specifically designed to facilitate coal production and coal transport. Lending for fertilizer projects, which has been an im- portant feature in recent years, is expected to occupy an even more prominent place in the future program; the use of coal-based technology will receive particular attention. 23. The 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. The need for readily usable foreign exchange assistance is especially pressing at a time when output and investment have to be adjusted to a radically different price situation. Consequently, Bank Group lending for critical industrial raw materials and components continues to be an essential element within the overall program of assistance. As in the past, Bank Group assistance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity of the domestic capital goods industry. The import component of projects tends to be especially low in such high-priority areas as agricul- ture, education, and family planning. For the Bank Group to be able to make an appropriate contribution to the financing of projects in these sectors, it is important to cover a proportion of local expenditures. 24. Of the external assistance received by India, the proportion contri- buted by the Bank Group has grown significantly. In 1969/70 the Bank Group accounted for 34% of total commitments, 13% of gross disbursements, and 12% of net disbursements as compared with an estimated 35%, 28% and 42%, respec- tively, in 1973/74, and the contribution of the Bank Group is expected to continue growing. W4hereas on March 31, 1973, the Bank Group's share of India's outstanding external public debt was 21%, by 1979 it is likely to account for about 25%. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1972/73 about 13% of India's total debt service payments were to the Bank Group. PART III - AGRICULTURE IN INDIA AND WEST BENGAL 25. Agriculture is the most important sector in India; it engages 70% of the labor force, contributes presently about 45% of GNP, and accounts for a major share of exports. GOI's emphasis in the agricultural sector in recent years has been to increase the output of foodgrain through increasing  - 8 - the availability of inputs, including seed, fertilizer, agricultural credit and irrigation. Even so, due to drought and the lack of fertilizer and other inputs, India is still not able to produce all the food needed to be self sufficient and has to import substantial amounts of foodgrains, resulting in a large drain on foreign exchange reserves. Consequently, investments to encourage foodgrain production have been given top priority by the Government, and deserve continued emphasis over the next five years. 26. Since independence, the overall growth of agricultural production has averaged about 3% per annum. This low overall rate of growth in the agriculture sector obscures considerable variations over shorter periods, between crops and between regions. The overall rate has been very much affected by the serious droughts in 1965 and 1966 and again in 1972. Never- theless, the success of high yielding varieties of wheat produced increases in wheat production of about 20% p.a. between 1967 and 1971. Other food- grain crops, notably rice, have not enjoyed anything like the same success, as the introduction of high yielding varieties has encountered difficulties arising from local climatic and ecological conditions. The effects of the green revolution, which primarily affected wheat, have been concentrated in north western India, very largely on account of the advanced state of agri- culture in that area and the availability of irrigation. It is necessary to spread this technology to other regions, especially to north eastern India. The project would contribute to a better regional balance of agricultural growth by helping to disseminate the new agricultural technology in the relatively depressed rural areas of West Bengal, and by supporting their transformation from a subsistence to a more market-oriented economy by improving the marketing infrastructure and the necessary institutional mechanisms. 27. The State of ;Jest Bengal presents a difficult agricultural develop- ment problem. It is the fourthi largest state in population with 44 million people but only the fourteenth in size; thus it is the second most densely populated State in India witih about 600 persons per square kilometer conmpared to an all-India average of 182. Despite its relativelv small size, it is an important contributor to India's agricultural production ranking fourth among the States in foodgrain production and accounting for 60% of India's jute and 25% of its tea. Even so, nearly two million tons of grain have to be imported into the State each year (mainly to feed the 8 million inhqbit-- ants of Calcutta). The production of rainfed crops fluctuates widely due to erratic rainfall, uncontrolled flooding and occasional cyclones. 28. There is no cultivable waste land available in West Bengal so that increased production must be derived from intensified cropping, yet most land lies fallowv during the dry season for want of irrigation. Farms are small and fragmented; 86% of lholdings comprising 45% of the cultivable area are less than 2 ha and each holding on the average is divided into eight fragments. Forty percent of farm operators are share-croppers and thuere is heavy un- emplovment and underemployment in the sector. Between 1967 and 1972, grain  - 9 - production grew at 6% a year, while fertilizer consumption increased at 20% a year, compared with 13% for all India. This growth coincided with a GOWB drive to expand minor irrigation and introduce high yielding rice and wheat varieties. Increased grain production came mainly from irrigated rabi crops, while rainfed crop production (kharif rice, jute pulses, oilseeds) remained static. Over the last two years both rainfed and irrigation production has fallen because of unfavorable weather and power, fertilizer and wheat seed shortages. Power and fertilizer supplies have improved and GOWB will take measures to ensure adequate wheat seed supplies in future. Rainfed pro- duction is likely to remain static for some time and the quickest way to increase food production is to accelerate exploitation of the ample minor irrigation potential. Since only a small part of the irrigation potential has been tapped to date, there is ample potential for further sustained production growth by expanding irrigation facilities. 29. This would be the first Bank Group agricultural project in West Bengal. However, it is similar in many respects to ongoing projects in other parts of India. These projects include ten in agricultural credit and two in rural markets development which, together with the proposed credit, would bring the Association's total lending for these purposes to US$372 million. The agricultural credit projects are similar in structure to the credit component of the proposed project; they are designed to provide medium and long-term credit to farmers for on-farm investment, mainly in minor irriga- tion and, as in the proposed project, contain special provision for lending to small farmers. Terms and conditions of on-lending and standards of performance and viabilitv to be achieved by lending institutions are similar to the previous projects, as are the technical criteria to be applied to groundwater exploitation. The current market projects are the prototypes on which the trial market component of the proposed credit is structured. In all these credits, the main lending channel and supervisory agencv is ARC. An ARC credit project, scheduled to be presented to the Executive Directors on April 15, provides resources to ARC for appraising and financing minor irrigation and other types of on-farm investment credit schemes with which ARC has gained experience. However, the present West Bengal project was initially planned and prepared prior to the ARC project, and contains several components which would not fall within the purview of that project. These include financing of farmers' groups for construction of deep tube- wells, financing wholesale markets and agroservice centers, and financial assistance for MIC and State Government agencies. For these reasons, the West Bengal project has been retained as a separate project. PART IV - THE PROJECT 30. In 1972, the Government of India requested Bank Group assistance to cover the first phase of a wide-ranging agricultural and rural develop- ment project in West Bengal concentrated on the development of markets.  - 10 - Because it was difficult to demonstrate the benefits of such development on the scale proposed, a modified project was prepared with major emphasis on minor irrigation, but retaining some market and other rural institutional development aspects. An appraisal report was prepared on the basis of a December, 1973 mission but, shortly before scheduled negotiations, GOI asked on behalf of GOWB that the number of deep tubewells and riverlift installations be increased. In October, 1974, the earlier appraisal was reexamined in the light of GOI's request. The mission found that an expansion of the deep tubewell and river lift irrigation components would not be justified because of inadequate utilization of the existing 4,000 facilities. GOWB agreed with the mission that in the present project the emphasis should not be on the construction of new facilities but rather on the completion of existing schemes and the development of institutions, especially those providing extension services, to improve returns from minor irrigation investments. 31. Negotiations were held in Waslhington from February 12 to February 21, 1975. The Borrower was represented by Messrs. A.K. Dutt, Joint Secretary, Banking; M.K. Mukharji, Joint Secretary, Rural Development; S.K. Banerjee, Joint Secretary, Agriculture; and I). Basu, Under Secretary, Department of Economic Affairs. The State of West Bengal .;as represented by Messrs. B.R. Gupta, Chief Secretary, K.P.A. Menon, Agricultural I'roduction Commissioner; and D.M. Mukherji, Chief Engineer, Agriculture; and ARC by Mr. M.A. CGidambaram, ,lanaging Director. A report entitled "Appraisal of West Bengal Agricultural Development Project" (Report No. 463a-IN dated April 4, 1975) is being circulated to the Executive Directors separately. A credit and project summary is attached as Annex III. Project Description 32. The project supports a four year agricultural development schieme in six districts of West Bengal aimed primarily at the development of minor irrigation1. The project provides investment credit for construction of about i,00() shiallow tubewells for farmers and a smaller program of 300 deep tubewells for farmers' cooperatives and the est Bengal Minor Irriga- tion Corporation (MiIIC). The credit component would also provide finance for about 200 agro-service centers to improve distribution of inputs and for the construction of three agricultural wholesale markets. Thie project would focus on improving capacity utilization of minor irrigation investments in the state, particularly of state owned river lift and deep tubewells schemes, by financing the completion of about 600 existing state facilities and providing equipment, technical assistance and training for relevant agencies in the state government and for MIC. Financing would also be provided to assist in the preparation of a second stage project. 33. The project would be in an area comprising most of the non-saline alluvial area in the State. The area was selected because of the ample availability of water and potential for market development. A major portion of the credit (about US$15.5 million) would support farmers' investments  - 11 - in the development of 18,000 shallow tubewells to be powered by either diesel or electrically operated pumps by making credit facilities available to the farmers. A smaller portion (about US$5 million) would be on-lent to MIC for the construction of 100 deep tubewells, to farmers' groups for 200 deep tubewells, to Regulated Market Committees (RMC) for developing 3 markets, and to private borrowers for developing 200 agro-service centers. 34. With regard to deep tubewell construction, MIC is still a small and newly established institution and its work program under the project would be modest to allow sufficient time for MIC to develop its staff and program. The main purpose of the 100 deep tubewells to be developed by MIC would be to deliver irrigation water to the poorest farmers who find it dif- ficult to obtain institutional credit. The other 200 deep tubewells to be financed by the project would serve as a trial to see whether irrigation cooperatives can successfully own and operate the wells. This part of the project is important because experience elsewhere in India suggests that state ownership and operation of large numbers of minor irrigation instal- lations usually becomes unsatisfactory as the scale of operation grows. Difficulties in collecting water charges create problems for the operating agency, leading to a decline in the quality of services. Frequently, also, as is the case in West Bengal today, state tubewells are not fully utilized. Cooperative ownership may be a better solution. Provisions are being made under the project to provide the necessary inducements, including a GOWB capital grant of 50%, to farmers' groups to encourage them to participate in deep tubewell schemes as such schemes would be new to the state and would compete with subsidized state owned facilities. Success of this trial should lay the foundation for a more sound and lasting alternative to the traditional state tubewell organizations. The total amount of the credit available for deep tubewells would be about US$3.0 million. 35. The project also provides for the development of three rural wholesale markets, each of which would handle a different product mix. The credit would help finance surveys and land development, access roads, auction platforms, offices, shops, warehouses, internal roads, parking areas, utilities equipment and market staff training. Economic evaluation to analyze the impact of the proposed markets on agricultural development, particularly on farmers' benefits, and studies to prepare for the establishment of more markets, would be carried out by a qualified research institute or by con- sultants. About US$1 million has been provided under the credit to support the markets development component. 36. The 200 agro-service centers to be established under the project would sell inputs, provide custom services and some technical assistance to farmers in the project area. The West Bengal Agro-Industries Corporation (AIC) selects and trains unemployed agriculture graduates and helps them set up these centers by arranging bank loans and acting as a wholesale supplier of seeds, fertilizer and a range of machinery. The centers would expand distribution facilities for inputs and improve tubewell maintenance services. The 250 centers established to date have found demand for their services to be strong and are proving commercially viable. About US$1 million of the credit would be in support of agro-service centers.  - 12 - 37. The project would provide funds to GOWB for the completion of some 600 existing river lift and deep tubewells irrigation schemes. There are presently about 2,000 such schemes in West Bengal, however, only about 800 are working and irrigation coverage is only about 20% of the feasible command areas. Therefore, instead of financing any new state river lift and deep tubewell schemes under the project, attention would be focussed on completing existing ones and improving their efficiency and coverage. Six hundred represents an estimate of the number of river lift and deep tubewell schemes which GOWB could complete over the project period. About US$9.1 million of the credit amount would be for completion of existing schemes. 38. Assistance would be provided to the Engineering Directorate of the Department of Agriculture to finance improvements for six district workshops and to obtain vehicles and equipment for mobile workshops to ensure good maintenance and speedy repairs for tubewells and river lifts. SWB would receive assistance for financing groundwater equipment, consultants to advise in long range water exploration and planning, and further training for some key staff. The credit would provide about US$2.0 million for these purposes. 39. To improve water utilization, tne agricultural extension services in the project area would be reorganized and additional extension workers, transport, equipment, staff training, and materials for field demonstrations would be provided. The amount of the credit allocated for improvement of agricultural extension services is about US$2.4 million. Project Implementation 40. Project management would be in the hands of a sub-committee of the State Level Coordinating Committee. The sub-committee would keep under continuous review the overall progress of the project and recommend measures for the elimination of deficiencies and for effecting improvements. In addition to representatives from relevant state agencies, the sub- committee would also include a representative from ARC and from the Agriculture Credit Department of the Reserve Bank of India (RBI). See Section 2.04 of the West Bengal Agreement. 41. About sixty percent of the proceeds of the credit would be onlent by ARC to banks for financing loans to farmers for shallow tubewells, to MIC and farmers' groups for deep tubewells, to individuals for the establishment of agro-service centers and to RMCs for the construction of wholesale agri- cultural markets. In addition to being the channel for the credit component, ARC would supervise credit operations as it already does for the 12 on- going IDA assisted credit and market projects in India. There is a well developed commercial banking network in the State which has experience ith agricultural lending, through which at least 70% of the lending under the project will be made. By contrast, the LDB is one of the least devel- oped in India and some rehabilitation and strengthening will be necessary before it can carry a significant part of the lending. A plan to improve LDB as well as to expand rural banking activities in West Bengal generally has been prepared by ARC and the State Government in consultation with the Association.  - 13 - 42. MIC is a recently created State Government owned Corporation staffed by transfers from the Department of Agriculture. Its main purpose is eventually to take over, operate and maintain the 2,000 existing State owned deep tubewells and 2,000 river lifts and to continue to implement the State Government's program of deep well and river lift construction. However, under the project, MIC's responsibilities would be limited to supervising construction of the 300 deep tubewells, of which it would own and operate 100. MIC requires time to gain experience and develop its staff and program. To ensure that MIC can implement its part of the project, a work program, staffing plan and financing plan acceptable to IDA would be prepared by MIC as a condition of disbursement under the relevant category. See Section 2.04 of the West Bengal Agreement. 43. All investments in tubewells and lift irrigation under the project would be in accordance withi technical criteria established by SWB. See Section 2.04c of the Project Agreement, Section 2.09 of the West Bengal Agreement, and Schedule 1.4(b) of the Development Credit Agreement. The SWB was formed last year by the transfer to it of the staff of the Ground- water and Surface Water Investigation Unit of the Agricultural Department. Its functions are to assess surface water resources, to collect and interpret groundwater data, to conduct groundwater studies and to advise the State Gov- ernment on the nature and limits of minor irrigation development. ilowever, its Board has not met since its establishment and its activities have been hampered by lack of a full-time executive chairman. A suitably qualified full time executive chairman has now been appointed and technical staff seconded from the Engineering Directorate of the Department of Agriculture. SWB staffing is now satisfactory to begin project implementation. 44. West Bengal has the potential for a substantial increase in minor irrigation development. Even with the addition of the wells contemplated under the proposed project, it is estimated that only half of the conserva- tively calculated recharge of groundwater in the project area would be extracted. The project would provide for disciplined exploitation by con- trolling the spacing of individual wells. See Section 2.Ohc and Schedule 2 of the Project Agreement. 45. Funds available to the West Bengal State Electricity Board (SEB) from the Rural Electrification Corporation of India (REC) would meet about 30% of the cost of connecting tubewells to the rural transmission network. To ensure prompt connection of wells, the project would finance the balance. Connection costs would form part of the loan to farmers for tubewells. The SLB would, however, repay capital and interest on the portion of the loan for connection charges, in excess of a small non returnable deposit payable by applicants for power. To ensure adequate technical and financial cri- teria for this project component, GOWB agreed to make arrangements, satis- factory to IDA, for appraising electrical connection schemes for project tubewells. See Section 2.14 of the West Bengal Agreement. Additionally, financial losses, common with rural electrification schemes in India, en- danger essential investment programs of electricity boards. In this con- nection, GOWB had agreed, under the Second Power Tranmission Credit (242-IN  - 14 - dated May 3, 1971), on specified rate of return targets for the SEB; 8.5% by 1973 and 9.5% from 1975 onward. The target was met in 1973; however, since that time performance has declined, due largely to the burden of rural electrification operations. To avoid this problem, GOWB would, to the extent that the SEB fails to achieve agreed rates of return, provide tne SEB with annual funds to cover the operating deficit of rural elec- trification schemes in the project area. See Section 2.14 of the West Bengal Agreement. 46. Until 1972, markets in West Bengal were administered by the State Department of Agriculture. However, the Agricultural Produce Marketing (Regulation) Act enacted in 1972 provided for the establishment of RK-Cs and the West Bengal State Marketing Board (SMB). The legislation also provides for licensing of traders and levying of market charges. The State Govern- ment's responsibility is now only supervisory. Under the project, the establishment of markets would be in accordance with the Act. It would be a condition of disbursement of the proceeds of the credit allocated to market development that SMB had been suitably established. See Schedule 1.4d of the Development Credit Agreement. RICs would be appointed by the State Goven ment to operate the markets to be financed under the project. Project Cost and Financing 47. The total project cost is US$67 million equivalent, including duties and taxes, of which the foreign exchange component is about US$7.3 million. A detailed breakdown of the cost components is at Annex III. 48. The proposed IDA credit of US$34 million would cover the foreign exchange cost and 40% of the local cost; a total of about 51% of total project cost. The remaining 49% would be financed by State Government and ARC (38%), participating banks (7%) and individual borrowers (4%). IDA funds of US$13.0 million would be channeled through the Government of India to the State Government of West Bengal for completion of river lift schemes, maintenance equipment for Department of Agriculture and MIC, groundwater ex- ploration equipment and training for S14B, consultant's services for further project preparation, and improvement of state extension services. The Gov- ernment of India would on-lend these funds to the State according to estab- lished policy on terms prevailing at the time. 49. For shallow tubewells, deep tubewells, market development and agro-service centers, the Government of India would make IDA proceeds of US$21 million available to ARC repayable partly over 9 and partly 15 years at interest rates of 6.5% and 7.0% respectively. The Government of India would bear the exchange risk. ARC would on-lend the funds to LDB and participating commercial banks at an annual interest rate of not less than 7.5%. The banks, in turn would lend to individual farmers, MIC, RIUCs and agro-service centers operators, at a minimum annual interest rate of 10.5% for minor irrigation and 11% for other types of investment for periods up to 15 years. The ultimate interest rate is in line with  - 15 - prevailing interest rates and the spread reasonable in relation to the risk element invoived and the cost of appraisal and supervision of individual loans. Small farmers would qualify for preferential borrowing terms pro- vided that their anticipated income was adequate to repay the loan over a prescribed period. The project would introduce a definition of small farmer based upon predevelopmental income. A farm family earning Rs 2000 or less per year (or about US$50 per capita) would be entitled to partici- pate in the project under less rigid terms for down payment and repayment period. It would be a condition of effectiveness that a Subsidiary Loan Agreement between the Government of India and ARC, satisfactory to the Association, had been executed. See Section 5.01c of the Development Credit Agreement. Procurement and Disbursement 50. Execution of the shallow tubewell program would involve small investments of about Rs 8,000 (US$1,000) and operations on many individual farms over a period of four years. Since it would not be practicable to procure such requirements centrally and since an adequate choice of pumpsets is locally available at competitive prices, procurement would be by the borrower through normal commercial channels as is the case with all other current IDA credit projects in India involving minor irrigation. Similarly, each agro-service center would require a package of varying equipment approved by tne lending banks and based on the needs of the specific area in which the owner intended operating his business. Centralized procurement would not be possible and procurement would, therefore, be done by the borrower through normal trade channels. 51. Construction of deep tubewells would be dependent on the number of irrigation cooperatives formed and the uncertain timing of their estab- lishment. The annual program would be small and scattered and would not be suitable for international competitive bidding. Drilling, procurement of equipment and construction of minor civil works would, therefore, be subject to local competitive bidding advertised locally and in accordance with local procedures which are satisfactory. There are numerous competent local contractors already prequalified by the State Government and the adequacy of local equipment has been amply demonstrated. Completion of river lift schemes would also consist of minor civil works spread over a wide area over several years and would also be subject to local competitive bidding. 52. About 80 motor vehicles of various types would be required. They would be purchased in small quantities over four years. It would be difficult to ensure adequate maintenance and spares for a small number and a variety of imported vehicles. Scientific equipment and maintenance equipment for SWB and MIC would involve many small contracts, sometimes from few suppliers for specialized items. It would not, therefore, be practical to procure these items under international competitive bidding procedures. They would be obtained under the State Government's normal procurement procedures which are satisfactory, utilizing local competitive bidding wherever possible.  - 16 - 53. The development of each market would be the responsibility of the R"C concerned. The markets would differ in size, commodities handled and timing of construction. The works involved, consisting of simple brick and concrete structures and minor earthworks, are not suitable for interna- tional competitive bidding and would be let on the basis of local competi- tive bidding. RMCs would be responsible for preparation of tender documents, detailed drawings and specifications and for supervising construction with the guidance and assistance of the State Government. Plans, drawings and contracts would be subject to SMB approval. 54. The proceeds of the credit would be disbursed at the rate of 55% against ARC's refinance of loans for minor irrigation, agro-service centers and markets; against 55% of local equipment, civil works and extension service improvements and against 100% of imported equipment and technical assistance costs. The credit is expected to be disbursed over four years. Economic and Financial Benefits 55. The main benefit to the Indian economy would be the annual incre- mental production of about 310,000 tons of foodgrain per year, worth Rs 400 million (US$50 million) at 1980 projected grain prices, coming mainly from land at present fallow during the dry season. This would help GOI and GOWB achieve their target of food self-sufficiency, and represent a sizeable saving of foreign exchange for food imports. Reliable irrigation in the most favorable cropping season would assure a high level of crop production every year, and would decrease year-to-year grain supply fluctuations. The project's impact on employment would be particularly important to West Bengal, which is plagued by overpopulation and unemployment. The incremental farm labor requirement of the project would be about 100,000 man-years. Most of this labor would be needed during the dry season which includes tthe montlis of labor surplus in rural areas, since without irrigation most land other- wise remains fallow. 56. Since the project would involve mainly small farmers, its benefits would be widely distributed. Shallow tubewells would be mainly owned by farmers wit;i holdings around 2 ha, but because of land fragmentation these farmers would need to sell water to neighbors to supply water to their own fragments. In addition, it is expected that many wells would be operated by farmer groups, a type of operation gaining acceptance in West Bengal. Tne main beneficiaries from deep tubewells and river lift schemes would be the poorest farmers (including sharecroppers), since 80% of farmers in existing schemes irrigate less than 0.5 ha each. 57. The estimated economic rates of return range from 33% from a deep tubewell on loam soil to over 50% for most of the other types of investments. Th1e sensitivity of the rates of return to each of the major parameters used in estimating them has been tested and shows the following pattern: a 15% reduction in gross product value (resulting from either lower prices or vields or both) would lower the returns from the various investments to the range of 21% to 51%; a 15% increase in recurrent costs would lower the re- turns to the range of 25% to over 50%; finally, a yield decline due to a  - 17 - reduction in fertilizer use by one-third would lower the returns to the range of 23% to over 50%. 58. A number of important benefits are expected from markets develop- ment, principally from improved facilities to handle the expected larger volume of produce, from reduction in high transport costs as a result of faster truck turn round, and from a reduction in product losses from in- adequate storage facilities. The economic rate of return for this com- ponent has been estimated at 12%. 59. Non-quantifiable benefits include the strengthening of the credit system in the project area, the contribution the project should make to water resource management and the potential benefits to be derived from the experimental irrigation cooperatives component for promoting a more effective organization for large-scale minor irrigation development. PAKr V - LEGAL INSTRUMENTS AND AUTHORITY 60. The draft Development Credit Agreement between India and thc International Development Association, the draft West Bengal Agreement between the State of West Bengal and the Association, the draft Project Agreement between the Association and ARC and the Recommendation of the Committee provided for in Article V, Section l(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. 61. Features of the draft Agreements of special interest are referred to in paragraplhs 40 through 49 of this report. 62. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 63. 1 recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments April 10, 1975  D0900R! DATA - il.'l/A Page 1 AREA POPULATION IZEsin 3 ,2e0,L&7E23.0milo (mid-1973) - ~P.e balf arbi .ln SOCLAL fl(ItCATDRS Iisfe-nn Cooniris ON? MR CAPITA US3 (ATLAS BASIS) a .1101 noL. 21 ,6CC PIEDOMAP'tlC OroM bith eats (par stot.i.a.d) 31 /i 385 A 1 IIA 1.~ Odm dth Tit petosn) 13 16 /o.d 19I a 7 4 11.0 1 nmt mortwiyIrts(Pine t-ouao II.. binth.) 139 5 12-LO c . 13.1 LiE spotao-y at birth (pers ... Li 12h ..7 Grss-pnduotis 0005 Z2 2.7 ,.J 2.9 ?22 . Popalatton growth eats 22.3 2 .3 ~ 1.C 1 u.S AC. -_ (P.--)~~~~~~~~~~~~~ 0S Psnmio rut as rs 562