India - Second Industrial Development Bank of India Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-1837-IN REPORT AND RECOMMENDATIONS OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR A SECOND LINE OF CREDIT TO THE INDUSTRIAL DEVELOPMENT BANK OF INDIA FOR THE STATE FINANCIAL CORPORATIONS May 6, 1976 This document bas a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as at May 4, 1976) Rs 1.00 = Paise 100 US$1.00 = Rs 8.97 Rs 1.00 = US$0.1115 Rs 1 million = US$111,500 (Prior to September 24, 1975, the Rupee was officially valued at a fixed Pound Sterling rate. Since then, it has been fixed relative to a "basket" of currencies. As these currencies are now floating, the U.S. Dollar/ Rupee exchange rate is subject to change. Conversions in the appraisal report were made at US$1 to Rs 8, which was the short-term average at the time of appraisal.) UNUSUAL ABBREVIATIONS AND ACRONYMS GOI - Government of India ICICI - Industrial Credit and Investment Corporation of India IDBI - Industrial'Development Bank of India IFCI - Industrial Finance Corporation of India IFD - Industrial Finance Department IIG - Inter-Institutional Group NCAER - National Council of Applied Economic Research NSIC - National Small Industries Corporation RBI - Reserve Bank of India SFC - State Financial Corporation SIDA - Swedish International Development Authority SSIC - Small-Scale Industrial Corporation FISCAL YEAR April 1 - March 31  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INDIA FOR A SECOND LINE OF CREDIT TO THE INDUSTRIAL DEVELOPMENT BANK OF INDIA FOR THE STATE FINANCIAL CORPORATIONS 1. I submit the following report and recommendation on a proposed loan to India in an amount equivalent to US$40 million, to help finance projects of the small-and medium-scale industrial sector. The terms of the loan would be an interest rate of 8-1/2% per annum and repayment over 15 years, commencing after 3 years of grace. The Government of India (GOI) would relend the proceeds of the loan to the Industrial Development Bank of India (IDBI) at 7-3/4% annual interest, less 1/4% for prompt repayment, to be repaid within a period of 15 years (after a grace period of 3 years). The funds would be relent by IDBI to the State Financial Corporations (SFCs) at not less than 8% and 8-3/4%, depending on the type of borrower, and lent to SFC borrowers at not less than 11-1/2% and 12%, respectively. PART I - THE ECONOMY 2. An economic report, "Economic Situation and Prospects of India" (1073-IN dated March 29, 1976), was distributed to the Executive Directors on April 2, 1976. Country data sheets are attached as Annex I. Background 3. India is exceptional among the Bank Group's member countries for its size and diversity; the country is divided into more than 20 states with a population of some 600 million and over 60 languages. The country's poverty and inadequate domestic savings, together with a net transfer of external resources averaging over the past five years only about US$1.20 per person per annum, have imposed sharp limitations on the rate of growth. Account must be taken, also, of the uncertainties imposed by the erratic availability of water. A bad monsoon, which is likely to occur almost two years out of every five, has a pervasive influence over the entire economy and can wipe out the results of years of efforts. Thus, the annual growth of national income over the last five years (1971/72 - 1975/76), which included two consecutive mon- soon failures, has averaged only 2% per annum, less than the rate of popula- tion increase. 4. Since independence, progress has been impressive on many fronts, but disappointing on others, and generally has fallen short of India's mas- sive needs. The growth of the socio-economic infrastructure (transport, education, health services, etc.) has been impressive, but has often been achieved at high cost and has yielded results of 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 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  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. Although national income has increased in most years, there has been in general little impact upon the living standards of the vast masses of the urban and rural population. In recent years, the Government has initiated a variety of programs specifically directed toward helping the lower income strata, which - conservatively measured - consist of some 200 million people with incomes of less than US$60 per head per year. 5. The structure of the economy has been slow to change. Agriculture remains the dominant sector, with its share of national product declining only gradually from about 50% to 42% over the last twenty years. The share of industry has increased only slowly and, since the late 1960s, has remained approximately constant at about 23%. 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 25 years ago. Recent Trends 6. India entered 1975/76 having been through one of the most difficult periods since Independence. Progress in dealing with long-term development problems had been limited by poor crops, the dramatic shifts against India in the terms of trade, and inflation. Adjustments to these immediate difficul- ties thus became the principal preoccupation in economic management. However, with the support of favorable weather and additional foreign assistance, it now appears that India has successfully weathered the problems of the recent past; once again there is hope for an upturn in the growth rate of the economy. 7. Most important among the favorable factors in 1975/76 was a bumper harvest which followed years of poor or modest agricultural output. Food- grain production last year, estimated at around 114 million tons, exceeded the previous record of 1970/71 by 6%. Oilseeds, sugarcane and cotton also reached new production peaks and provided ample supplies for the agro- industries. Secondly, deficiencies in the supply of basic commodities and of infrastructural inputs such as energy and transport, which had been prevalent in the past, have been eased. Electricity generation and domestic production of coal, oil, cement and steel all increased by over 10% during 1975/76. Finally, the increased supply of agricultural and industrial products and of services, together with the demand restraint imposed by the Government since mid-1974, put a stop to inflation. In 1974/75 the Wholesale Price Index had risen by 23%; in 1975/76 it remained unchanged. 8. On the balance of payments front in 1975/76, some of the basic problems of the previous two years remained. In particular, the terms of trade, which had deteriorated significantly over the previous two years, did not improve and most probably moved even further against India. Nevertheless, there were a number of encouraging developments. Firstly, the build-up of foodgrain stocks during the year will provide a buffer against the impact of  - 3 - a future crop failure on the balance of payments. Secondly, although export earnings rose only 6%, with high volume growth being offset by falling prices, import growth was also less than expected. The value of petroleum imports was stabilized despite price increases during the year, and steel imports were substantially reduced due to increased domestic production. As a result, the value of India's imports rose only 2% during 1975/76 and the trade deficit was reduced to US$1.45 billion, US$150 million less than in 1974/75. Thirdly, the net transfer of aid was 20% higher than in 1974/75 and India also received substantial inflows of private remittances from abroad. As a result of these favorable developments, India was able to add over $870 million to foreign exchange reserves. These reserves will give India added flexibility in ad- justing to a higher rate of economic growth during 1976/77. Development Prospects 9. While many of the most acute problems were eased during 1975/76, longer-term constraints to growth remain. Many of these have existed for some time, but their importance had been temporarily overshadowed by the more overwhelming limitations imposed by supply shortages and balance of payments problems. One such constraint is the deficiency of demand for a large seg- ment of the manufacturing industry. Consequently, in the midst of adequate supplies during 1975/76, the use of manufacturing capacity - especially for consumer durables - remained low. In the short and medium term, the two most promising ways of stimulating demand are to boost public investment and ex- pand exports. Both avenues are currently being pursued by the Government. During 1975/76, real Plan outlay rose by 18-20%, after having fallen during each of the previous two years. The-1976/77 Budget proposes a further in- crease of 16% in real terms and introduces new measures to stimulate invest- ment in the private sector. Investment priorities remain the same as last year, namely agricultural development and increased production of critical industrial inputs, such as power, coal, oil, and iron and steel. The Budget also stresses the importance of exports as an essential condition for sus- tained stability in the balance of payments. 10. In agriculture, the basic problem remains that, despite the record foodgrain crop in 1975/76, the long-term growth rate of foodgrain production in India has been unacceptably low, at about 2.3% per annum over the last 15 years. This is about the same as the rate of population increase. Starting from a situation of deficit, this has meant that only in good years has there been a significant margin of production to cater to any per capita growth in consumption, and even in normal years it has been necessary to rely on stocks or imports to meet any growth in demand. With a major effort to expand the irrigated area and provide complementary inputs, the average growth rate of foodgrain production could be substantially increased. This is essential, not only because of the necessity to meet food requirements without unmanage- able consequences for the balance of payments but also because of the strong influence of agriculture on the levels of activity in other sectors of the economy. Even with a higher growth rate of foodgrain production, imports will still be required. However, in relation to India's total consumption of foodgrains, the dependence on imports has been and will remain small. In the  - 4 - past, domestic production has accounted for almost 100% of supplies in good weather years and about 90% when harvests were poor. 11. The energy sector in India was headed for its own crisis before the international oil crisis developed. The dramatic hike in oil prices, coinciding as it did with the accentuation of electric power shortages - caused in part by low hydroelectric generation due to poor monsoons - led to an acceleration of measures to improve performance of existing facilities and to a much higher priority for investments in the energy sector. The effects of these measures, aided by the good monsoon, are now starting to be felt. Coal production has increased by 10% or more in each of the last two years, and, partly as a result of this, power shortages and restrictions have been greatly reduced. The medium-term prospects for oil and natural gas have improved with the delineation of the offshore Bombay High field. Crude pro- duction from this field is expected to be 1 million tons in 1976/77 and to reach 6 million tons by the end of the Plan period. On this basis, petro- leum imports are projected to start declining in 1978/79, as increased crude production and expanded refinery output more than offset increases in demand. 12. In the past, export growth was affected in varying degrees by in- adequate profitability, lack of access to imported inputs, poor quality, instability of the policy environment and vulnerability to ad hoc decisions. In addition, for agricultural commodities export taxes were significant. For some homogeneous commodities, such as iron ore and tea, inadequate sup- plies or limited world demand have been important constraints. In recent years, mainly because of the large trade deficit, the Government's emphasis on export promotion has intensified. As a result, although the fundamental orientation of India's industrial and trade policy and the specific instru- ments of the export regime have, by and large, remained the same, a signi- ficant shift in emphasis and in the way these policies are operated has occurred. These are important both because they are likely to lead to a better utilization of current export potential and as an indication of the willingness to make policy adjustments, when necessary, to expand exports. 13. While it is difficult to assess the impact of the new measures in an area where policy is already very complex, some improvement has already taken place and further improvement in medium-term performance seems likely. An annual real export growth rate of about 7% should be feasible, compared to an average of 5% over the last five years. However, to achieve a higher export growth over the long run, more far-reaching policy measures will be required, including the introduction of a more uniform and more stable sys- tem of export incentives. Even so, the export drive might be impeded by controls in some developed markets. 14. India's balance of payments problems should be manageable over the next few years, even with the repayment obligations resulting from re- cent short-term OPEC and IMF borrowings. The worldwide inflation has bene- fitted India by reducing the proportion of export earnings that have to be devoted to debt service. India's debt service ratio has come down from 31% in 1970/71 to 19% in 1975/76. Provided the real growth of exports remains at  about 7% per annum, the debt service ratio is unlikely to rise much above 20% in the foreseeable future. On the import side, given the adequate level of stocks on hand at the end of 1975/76 and assuming normal weather condi- tions, annual foodgrain imports could be kept to 5-6 million tons during the next three years. Within the general category of non-food imports, India has substantial medium-term import substitution opportunities for three major items -- petroleum, fertilizer and steel -- which constituted more than 60% of imports last year. If the medium-term targets for production in these areas are achieved, the total expenditure on these three import items in 1978/79 need not be any higher than in 1975/76 and could quite conceiva- bly be less. Provided the Government is willing to liberalize imports and donors continue to respond to India's needs, the easing in the external payments situation presents an opportunity to raise the level of investment (complemented by larger imports of capital goods, components, and raw materials), and consequently, reach a more satisfactory level of long-term growth. PART II - BANK GROUP OPERATIONS IN INDIA 15. Since 1949, the Bank Group has made 44 loans and 80 development credits to India totalling US$1,436 million and US$4,112 million (both net of cancellations), respectively. Of these amounts, US$743 million has been repaid, and US$1,825.9 million was still undisbursed as of March 31, 1976. Annex II contains a summary statement of disbursements as of March 31, 1976, and notes on the execution of ongoing projects. 16. Since 1957, IFC has made 14 commitments in India totaling US$51.8 million, of which US$10.2 million has been repaid, US$7.6 million sold and US$6.9 million cancelled. Of the balance of US$27.1 million, US$20.6 million represents loans and US$6.5 million equity. A summary statement of IFC opera- tions as of March 31, 1976 is also included in Annex II (page 2). 17. 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 opera- tions. 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, telecommunica- tions, and railways. Family planning, education, water supply development, and urban investments have also received Bank Group support in recent years.  - 6 - 18. 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. Projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, com- mand area development of existing irrigation schemes, and seed production form an important aspect of the Bank Group's program for the next years. Special emphasis will be given to projects benefiting small farmers. Lend- ing in support of infrastructure and industrial investments will focus on energy-related projects. Credits for power and railways have high priority in this context. 19. The need for a substantial net transfer of external resources in support of India's economy has been a recurrent theme of Bank economic re- ports 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 com- ponent of projects tends to be especially low in such high-priority areas as agriculture, 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. 20. It is clear from the review of the Indian economy that as much as possible of India's external capital requirements should be provided on concessionary terms. Accordingly, the bulk of the Bank Group assistance to India has been, and should continue to be, provided from IDA. However, the amount of IDA funds that can reasonably be allocated to India remains small in relation to India's needs for external support, and some Bank lending to India, for which the country is creditworthy, is appropriate. As of March 31, 1976, the loans to India held by the Bank totaled US$711 million, of which US$275 million remained to be disbursed, thus leaving a net amount outstanding of US$436 million. 21. Of the external assistance received by India, the proportion con- tributed 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 41%, 24% and 30%, respectively, in 1974/75, and the contribution of the Bank Group is expected to continue growing. On March 31, 1975, India's outstanding and disbursed external public debt was US$11.8 billion, of which the Bank Group's share was 24%. It is likely to grow, but not very rapidly. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will also rise slowly. In 1974/75, about 14% of India's total debt service payments were to the Bank Group.  - 7 - PART III - THE INDUSTRIAL SECTOR Historical Performance 22. India's industrial output has grown on average by little more than 3% per annum since 1965, which is almost the same growth as that of the net national product. Both demand and supply factors have constrained the sector's expansion. Of the four possible engines of growth on the side of demand -- namely exports, import substitution, derived demand from the growth of other major sectors, and government investment -- all have been weak. Import substitution, where reasonably simple, was virtually complete by the middle 60's; exports have not yet been a major factor; the relatively slow trend growth rate of agriculture of little more than 2% per annum has restricted growth in demand for consumer goods; and, finally, government real investment has remained stagnant. Industrial growth has also been periodically constrained by transport bottlenecks and by shortages of power, which were especially severe in 1973 and 1974, and of raw materials such as steel, other metals, and agricultural inputs like cotton. Since these raw materials are tradeable goods, the latter shortages are merely a specific manifestation of the scarcity of foreign exchange. 23. The Government dominates production in steel, heavy plant and machinery, mining, power generation, and increasingly in aluminum, ferro- alloys, machine tools, fertilizers, and other "basic" industries. Conse- quently, according to the 1970 Annual Survey of Industry, the public sector accounted for 60% of productive capacity. However, it generated only 22% of value added. This relationship is largely the result of low capacity utili- zation, itself partly caused by poor management. However, low capacity utilization has also been a problem in the private sector, resulting mainly from supply shortages and to a certain extent from lack of demand, especial- ly for capital goods. 24. There have been shifts in the structure of industrial production, in accordance with the aims of industrial strategy. In 1960, 40% of output was of textiles and processed foods. This had fallen to 25% by 1970. Instead "basic industries", engineering goods and chemicals, had risen to 40%. However, since 1965 the structural change has been quite slow, and there has even been a decline in the share of capital goods in industrial production. Industrial Policy 25. The Government has placed emphasis on rapid industrialization as the key to development. Its goals in industrial policy have included both greater equality in asset-holding and national self-sufficiency. The aim of inhibiting concentration of economic power has been approached through expanded public ownership, restrictions on the growth of "large houses" and "dominant undertakings", reservation of many products to the small-scale sector as well as special assistance to it, and support for development in backward regions. The aim of self-sufficiency has largely manifested itself  - 8 - in the pursuit of import substitution, as well as restrictions on foreign- owned firms and other forms of foreign involvement In industry. 26. The last decade must be regarded as a disappointment, as far as the achievement of the key aim of rapid growth is concerned. While there has been some progress towards the other goals, It is far from evident that, in a wider context, such progress has been beneficial to the economy. Import sub- stitution was clearly a major and successful spur to growth until the middle 1960s, but since then the high-cost, inefficient industries that have been created have acted as a major impediment to an expansion of exports. Since the latter offers one of the few means of accelerating growth, this is a significant cost. The emphasis on independence from outside technology, when combined with fragmentation of industry and consequent limitations on domestic product development, has frequently resulted in the production of outmoded industrial goods. Although such goods may often be appropriate for Indian circumstances, they are difficult to export. Furthermore, it is not clear that the control of large houses and the encouragement of the small-scale sector have had the intended favorable effects on income distribution. 27. The main instruments of industrial policy have been central licen- sing of investment and imports, as well as physical allocation of "scarce" domestically produced raw materials, and controls on industrial prices. This system has itself tended to conflict with other aims, especially that of curbs on economic concentration, since large firms are much better able to bear the overhead costs of dealing with a centralized bureaucracy. Con- trols have also restricted the ability of firms to respond to changed oppor- tunities, especially in overseas markets, and thus hampered exports. The extent of excess capacity indicates that the planning supposed to underlie the industrial licensing system has been far from fully successful. Finally, price controls appear to have had a harmful effect on investment and moderni- zation in such crucial industries as cotton textiles, sugar, and cement. Recent Performance 28. In 1973/74 industry grew by 1%, and in 1974/75 growth was 2.5%. Through these years, major constraints appear to have been power and raw material supplies. However, the situation changed rather dramatically during 1975, and lack of demand is currently the more serious problem. The improvement in supply of inputs has been partly the result of large increases in the output of key public industries, especially steel and coal. Output of finished steel rose from 4.5 million tons in 1973/74 to 4.9 million tons, or by 10%, in 1974/75 and is expected to rise by at least a further 1 million tons in 1975/ 76. After years of stagnation, coal output rose by 13.5% in 1974/75, or by about 10 million tons, and is expected to rise by a further 10 million tons in 1975/76. (This improvement in performance has, in fact, been a feature of quite a large number of public sector enterprises.) The rise in production of coal, combined with good rains, has led to increases in power generation, which are expected to be of the order of 20% in 1975/76. Finally, increased aid disbursements, as well as improved export performance have been the main factors in reducing the foreign exchange constraint, as perceived by the Government, and have allowed a marked liberalization of import controls.  - 9 - 29. Thus, major constraints on supply have been reduced or removed, and industrial growth for 1975/76 should reach 4 to 5%. While a major ex- pansion of intermediate output has occurred, there has been a fall in the domestic demand for many industrial goods. However, this conjunction has at least had a positive effect on exports, especially of steel, which will be about one million tons. The weak domestic demand has been partly the result of a tight credit policy motivated by the overwhelming desire to curb infla- tion. Commercial credit during the first part of 1975/76 grew by only 2%. In addition, the very success of the counter-inflationary policy has increased enormously the real cost of holding inventories and this, in combination with action against "smugglers, hoarders, and black-marketeers", appears to have led to a marked fall in holding of stocks. At the same time, there has been a lag between increased agricultural income and a rise in consumer demand. Export demand has been weak and in some sectors, such as jute and cotton tex- tiles, disastrously so. Finally, increased real public sector development expenditures have not yet significantly affected the capital goods sector, and private investment demand continues to be in the doldrums. In 1976/77 increased consumer demand, largely the delayed result of increased agricul- tural incomes of the previous year, but also spurred by tax reductions in the budget, and increased public development expenditure, combined with the easy availability of raw materials, should lead to accelerated growth. Recent Changes in Policy and Procedures 30. In the face of poor industrial performance and much underutilized or inefficiently utilized capacity, the Government has been reconsidering parts of its strategy. It is increasingly acknowledged that existing capa- city must be utilized more efficiently; that public sector enterprises should be expected to meet more commercially oriented criteria for output, price, and profitability; and that with the slow growth of the domestic eco- nomy, industry can only expand at a reasonable rate through exporting. 31. The process of revising policy has been taking place for some time, but the first discernible signs emerged in 1972. Subsequently, the Government has introduced measures to simplify procedures and to introduce more flexibility. By now, licensing of new capacity and of expansion for exports is freely available; in the case of enterprises belonging to large industrial houses and foreign majority companies, export obligations are set. For the domestic market, licenses are also freely available, except for industries reserved for the small-scale sector, and except for the large industrial houses and foreign majority companies which are confined to a priority list of industries, which has, in fact, been fairly broadly defined. Processing time for licenses has been very much reduced so that the obstacle posed by licensing procedures has been virtually eliminated for all except the large houses and foreign majority companies, and even for them there are fewer hurdles. By the beginning of 1975, price control had been lifted from all finished manufactures. Certain intermediate products are still subject to formal price controls largely as a result of the fact that the Government is the main producer. Distribution control on industrial materials has been lifted for almost all items.  - 10 - 32. These various changes mark a significant effort on the part of the Government, but the major problems of the sector remain. In summary, many public sector undertakings still have a long way to go before they become efficient producers. The private sector will be the main source of exports. Thus, changes to improve competitiveness will be vital. These may require adjustment in policies that lead to industrial fragmentation and inadequate expansion of efficient firms. The dilemma before the Government is to for- mulate its strategy in a way that is consistent with its social goals. The Role of the Small-Scale Sector 33. GOI has placed considerable emphasis on promoting the small-scale sector 1/, to increase employment 2/, income distribution, and regional development. 34. The small-scale industrial sector in India was the subject of a Bank study in 1971 in cooperation with the Swedish International Development Authority (SIDA) and the National Council of Applied Economic Research (NCAER) of India. Report No. SA-33a, entitled "Small Scale Industry in India" and dated May 22, 1972, summarized the study's findings. This report described the sector and its sources of financing, made an assessment of its economic importance in relation to the total industrial sector and attempted to eva- luate the policy framework for the small-scale sector. Most of the data pertaining to small-scale industries are based on the Annual Survey of Industry (1970), which is now considered to be unreliable. 35. GOI is presently conducting a census of the small-scale sector, the results of which should be available in the middle of 1976. This is of cri- tical importance since the information available at present on the size, structure, growth and economic efficiency of the small-scale sector is insuf- ficient to evaluate GOI's policies in this sector in a meaningful way. Spe- cifically, small-scale units have been granted a variety of incentives, including lower rates of interest and security margin on loans, government procurement of the small-scale sector's output at favorable prices, simpli- fied licensing procedures, and the availability of a Credit Guarantee Scheme. In addition, GOI has reserved a list of 124 manufactured items exclusively for the small-scale sector. It is possible that GOI's overall incentive scheme has been over-generous. To explore this question further, GOI will execute, within a year, a study of the financial and economic efficiency of the small-scale sector in selected subsectors, and relate this to the level 1/ The use of the terms Small-Scale Sector and Small-Scale Industry follows GOI's official definition: In June 1975, GOI amended its definition of small-scale industry to include units with investment in plant and machinery of less than Rs 1 million (excluding cottage industries) and Rs 1.5 million for ancillaries. The "old" definition of Rs 750,000 and Rs 1 million, respectively, are used in the statistical references throughout the report. 2/ It is estimated that small-scale industry employs about 4 million people.  - 11 - of incentives the small-scale sector presently receives. GOI has also launched a "Program of Modernization for Selected Small Scale Industries" with the objective of improving the productivity of small-scale enterprises (including quality improvement and cost reductions) to contribute to a better export performance. The total cost of the program would be Rs 4.9 billion over 5 years to finance the purchase of equipment, raw materials and tech- nical assistance. 36. Investment cannot, and should not, come to a standstill while studies are conducted to assess and evaluate the impact of Government poli- cies. To the extent that there are questions and doubts about policies, it is important to ensure that new investments are directed to activities which are economically sound and financially viable. The experience under the first IDBI/SFC project (Credit 356-IN of February 9, 1973 of US$25 million) demonstrated that such projects exist in the small-scale sector and that properly strengthened State Financial Corporations (SFCs) can be instrumental in identifying and appraising these projects. Ultimately, of course, the experience of the SFCs (their failures as well as their successes) will provide valuable data by which to assess the effectiveness of the policy framework. Indeed, the study referred to (para 35) should make considerable use of the data already accumulated by the SFCs. Small- and Medium-Scale Industry Financing 37. A number of institutions provide financial assistance to small- and medium-scale industry. The State Financial Corporations (SFCs) have been the most important source of term loans; they are discussed below. The commercial banks have also become active in lending to the industry, In particular since their nationalization in 1969, when they became a more direct instrument of Government industrial policy. As of June 1974, the scheduled commercial banks had Rs 1.6 billion in term loans outstanding to the small-scale sector, which is about one half of the total outstanding financial assistance by the SFCs (Rs 2.8 billion in March 1975). Also, the Small-Scale Industrial Corporations (SSICs) and, on an all India basis, the National Small Industries Corporation (NSIC) provide some financial assistance to the small-scale sector through hire-purchase finance. 38. In addition to these organizations that lend directly to the enter- prises, a number of other financial institutions, both all-India and at the state level, are involved in assistance to either medium- and small-scale industries or both. These include State Industrial Development Corporations, Small Industries Service Institutes, the Industrial Credit and Investment Corporation of India (ICICI) - with which the Bank has been closely asso- ciated through a series of eleven loans totalling US$426 million - IDBI, the Industrial Finance Corporation of India, the Life Insurance Corporation, and the Unit Trust of India. In addition, the Industrial Finance Department (IFD), until recently part of the Reserve Bank of India, but now transferred to and integrated into IDBI, administered GOI's Credit Guarantee Scheme for small-scale industries, serving all industries except transport and electric power with 75% coverage of credit risks related to working capital and term loans, letters of credit, and guarantees. This previous function of IFD has  - 12 - been retained in the Reserve Bank. The number of institutions involved in catering to the small- and medium-scale sector is large and perhaps excessive with major overlaps in roles and responsibilities. As a first step towards coordination and streamlining, GOI and IDBI plan to revive Inter-Institutional Group (IIG) meetings in those States where they had become dormant. Secondly, mechanisms for coordination at the small-scale level will be propagated, including cross-representation on Boards of Directors and periodic reviews of joint financing proposals and of clients in arrears. PART IV - THE PROJECT 39. The main purpose of the loan would be to provide assistance in financing the relatively small industrial investments sponsored by the State Financial Corporations (SFCs) and to assist in the on-going process of upgrad- ing SFCs. A previous Credit of US$25 million for IDBI for the SFCs (Credit 356-IN of February 9, 1973) is expected to be fully committed by May/June 1976. The proposed loan would help finance the projected foreign exchange requirements of the SFCs for the two-year period beginning July 1, 1976. A third lending operation to IDBI is presently under consideration for helping to meet IDBI's foreign exchange requirement in providing financial assistance to medium-size public and joint sector enterprises. 40. The proposed project was appraised in May/June 1975. A loan and project summary is given in Annex III. A report entitled "India - Appraisal of a Loan to India for a Second Line of Credit to the Industrial Development Bank of India for the State Financial Corporations," dated May 1, 1976, Report No. 1158-IN, is being circulated separately to the Executive Directors. Nego- tiations were held in Washington from April 8 to 19, 1976. The Borrower and IDBI were represented by a delegation headed by Mr. Vineet Nayyar, Director, Government of India, Ministry of Finance, Department of Economic Affairs. Industrial Development Bank of India (IDBI) 41. The financial intermediaries involved in administering the pro- posed credit would be IDBI and 18 SFCs. IDBI, which would be responsible for the implementation of the proposed project, is the largest industrial develop- ment bank in India and also the apex institution for all other financial intermediaries. Established in 1964, it has been a fully owned subsidiary of the Reserve Bank of India (RBI) until recently. Under the provisions of legislation enacted in 1975 the ownership of IDBI has been transferred to GOI, making it a separate entity with a separate Board. The related organi- zational changes would further improve IDBI's qualification as an appropriate channel for Bank Group assistance. There are now three IDBI departments of special importance for the SFCs: the SFC Department, responsible for policy questions and inspections, the Refinance Department, covering domestic re- finance projects; and the Import Loans Department, in charge of all refinance in foreign currency. In addition, IDBI has decentralized its operations con- siderably and given more authority to its regional offices.  - 13 - 42. IDBI is now the largest single institutional source of industrial finance, accounting for approximately 5% of the annual total industrial investment in India. Its activities include direct loans, rediscounting com- mercial bills, refinancing loans made by the SFCs and commercial banks, pro- viding export finance, underwriting, equity investment and guarantee opera- tions. As of June 30, 1975, the total effective financial assistance sanc- tioned by IDBI was Rs 13.4 billion (US$1.68 billion). One third of the total (Rs 4.4 billion) was for direct financial assistance to develop industry. The balance consisted of rediscounting bills (28%), refinance (24%), export finance (11%), and subscription to shares and bonds of financial institutions (4%). IDBI's operations have expanded rapidly in recent years. Total annual assistance sanctioned reached Rs 3,514 million (US$439 million) in 1974/75 compared to Rs 1,331 million (US$166 million) in 1970/71. Direct loans accounted for Rs 672 million (US$84 million) or about 19% of the total assist- ance approved in 1974/75. IDBI's total assets as of June 30, 1975 were Rs 6.6 billion, its debt/equity ratio 5.7:1, and its profitability 1.6% on average total assets. Its financial position is satisfactory. 43. IDBI's interest rate structure and lending terms are complex and contain a variety of concessionary rates for disadvantaged enterprises (back- ward areas, technician-entrepreneurs, small-scale industries). This rate structure reflects GOI's economic and social priorities. IDBI's refinance lending rates have been revised upward in December 1975 and range from 6.0% to 9.0%. IDBI's interest rate for lending foreign exchange to be refinanced from the proceeds of the first credit (Credit 356-IN) has been 9.0% except in concessional cases where it has been 8.5%. Under the proposed loan, these rates would be reduced to not less than 8% and 8.75% per annum, respec- tively. This would allow satisfactory spreads for IDBI and the SFCs and suitable lending rates by the SFCs to the ultimate borrowers (see para 55 below). State Financial Corporations (SFCs) 44. At the State level, SFCs are responsible for providing medium and long term finance, underwriting facilities and guarantees to small-and medium- scale industrial units. Over the years, SFCs have become important sources of funds for the small-scale sector, and in FY1975 an estimated 54% of loans by amount and 90% by number went to the small-scale sector. As of March 31, 1975, they had total outstandings of Rs 2.8 billion. Their largest share- holder is normally the respective State Government with holdings ranging from 36% to 89%. IDBI is a shareholder in all SFCs, with holdings ranging from 4% in Himachal Pradesh to 43% in Gujarat. 45. On the whole, operational results of the SFCs have been favorable. Their annual loan sanctions grew from Rs 789 million in FY1973 to Rs 1,415 million in FY1975, or by 79% nominally. With minor exceptions, all SFCs recorded increases in their lending operations. Overall disbursements grew from Rs 449 million in FY1973 to Rs 738 million in FY1975. 46. A new feature of the SFCs is the creation of Special Capital, which would be contributed by the State Government together with IDBI. The proceeds  - 14 - of Special Capital issues, for which no dividend would be paid, would be used to assist risky ventures through equity financing, with preference to indus- tries in backward areas, to industries set up by technician-entrepreneurs or other artisans, and to sophisticated types of industries. After some delay, some SFCs have recently started to make use of the possibility to raise Special Capital. 47. At the time of the first credit, SFCs suffered from a number of weaknesses, including shortcomings in the quality of management and staff, inadequate procedures and appraisal standards, high arrears and insufficient provisions for possible losses. In order to provide for improvements, spe- cific upgrading programs were developed by IDBI with active cooperation of the Bank Group. Also, IDBI and the Industrial Finance Corporation of India (IFCI) have developeda practice of seconding experienced staff to management positions in SFCs. Since then, considerable progress has been made, partic- ularly in management, general operational procedures, and appraisal standards. However, certain areas such as the quality of portfolio (arrears) have shown little improvement, partly because of the general economic downturn in 1974. Given the upswing in 1975, however, with power cuts and raw material shortages largely overcome and entrepreneurs again in a position to service their debts, the SFC portfolios are expected to improve significantly. 48. In addition, over the past two years, the upgrading programs them- selves have been found to be insufficiently detailed and not broad enough in scope. As a result, revised upgrading programs were prepared by IDBI/IFD in March/April 1975 based on previous visits and recommendations by the Bank. Further, during the appraisal of the proposed project, separate evaluation reports have been prepared on each SFC with specific recommendations for improvements. An agreement between IDBI and each individual SFC on these revised upgrading programs and their implementation and on the debt service coverage limit (paras 49 and 50 below) would be a condition for refinancing of sub-loans made by the particular SFC under the proposed loan (Section 2.02(c) of the Project Agreement). This would form a sufficient base for further strengthening of the SFCs. The recent transfer of the Industrial Finance Department (IFD) from the Reserve Bank to IDBI will provide a more effective means to monitor the implementation of the SFC upgrading program. 49. The SFC Act limits the debt/equity ratio of all SFCs to 10:1. With an actual debt/equity ratio ranging from 2.5:1 to 8.2:1 at the end of FY1975, all SFCs remained within the limit. Under the first IDA credit, however, limits were also set for the debt service coverage ratio of the 18 SFCs, which was to be better than 1.25:1 as of April 1, 1975 and any year thereafter. The calculation was to be based on the combination of actuals from the past six months and estimates for the subsequent six months. The debt service coverage ratio limit would be retained at 1.25:1 under the proposed project, but would be calculated on the basis only of actual results for the preceeding twelve- month period (Section 2.02 (c)(iii) of the Project Agreement).  - 15 - 50. The SFCs tend to repay bond issues in lump sums without making sinking fund provisions over the lifetime of the bonds, so that on a specific date the debt service coverage ratio position appears unfavorable. In order to avoid false alarms induced by such harmless swings over short periods, the proposed loan provides that, while the debt service coverage ratio be retained at 1.25:1 as of April 1 each year, it will be calculated as if sinking fund provisions had been made for bond redemptions (Section 2.02(c)(B) of the Project Agreement), so that for the year of actual full repayment only a fraction of the total amount repaid would count. 51. Business prospects for the SFCs are favorable. The difficulties experienced by the industrial sector in India in 1973 and 1974, mainly at- tributable to raw material shortages, labor unrest, power cuts, transport bottlenecks and lack of demand, have been somewhat alleviated. Given GOI's priority emphasis on the small-scale sector and the current drive for a modernization program in this area, given further the SFCs' support by most State governments, the demand for financial assistance from the SFCs to small enterprises, including foreign exchange, should be substantial for the next two years. IDBI's Relationship with the SFCs 52. There continue to be significant variations and deficiencies among the SFCs in their capacities to appraise projects, in the quality of their staff, and in their profitability, operations and resources. The work of most SFCs needs to be upgraded, as outlined above. To make SFCs more effec- tive instruments for coping with the needs of small- and medium-scale enter- prises requires both closely coordinated and individual attention by an institution that is familiar with the SFCs' operations, procedures, resources, strengths and problems. 53. IDBI is such an institution. Moreover, it is in a unique position to deal with the problems of SFCs. As stated before, IDBI's relationship with the SFCs comprises ownership, Board representation, an influential role in appointment of management, and a leading role in setting interest rates, granting technical assistance and, most importantly, providing capital. IDBI is thus in a position to exercise an effective influence on the SFCs and continues to be an appropriate channel for Bank Group assistance to the SFCs and through them to the small- and medium-scale sector. IDBI would also be the channel for the SFCs' annual evaluation: IDBI would prepare annually and forward to the Association detailed evaluation reports for all SFCs. In addition, IDBI would forward to the Bank annual reviews of the small-and medium-scale industrial sector at the State level, to be prepared by each SFC with the assistance of other State level bodies. The Proposed Loan 54. The proposed loan would continue the pursuit of the objectives sought under the first credit of 1973: to finance the import component of sound, high-priority industrial projects in the small- and medium-scale  - 16 - sector and the upgrading of SFCs through specific programs. In the first instance, through project financing, it would contribute to the moderniza- tion of small-scale industries, the development of new entrepreneurs, backward districts, employment generation both in rural and urban areas, and to an increase in exports. Secondly, the proposed loan would provide the vehicle for the Bank's continued involvement in the upgrading of the SFCs. It is expected that the overall characteristics of the subloans to the enterprises would not significantly differ from those of the first 260 projects financed under the first credit, where 80% of all loans approved by number (63% by amount) involved assistance of less than Rs 1 million, and 59% by number (38% by amount) went to small-scale units. While the industrial distribution has been reasonably diversified, the regional distribution, as expected, showed a marked concentration on the SFCs in the most industrialized States, like Maharashtra and Tamil Nadu; nevertheless, the financial institutions in conjunction with the State authorities have conducted industrial potential surveys and have identified new industrial opportunities in less industria- lized States, a number of which have already been implemented. A sample of 68 sub-projects submitted for prior approval under the first credit showed that the financial rates of return were expected to be above 20% in 75% of all cases, with an (unweighted) average at 29%. The domestic resource cost per US dollar earned/saved was calculated at below Rs 6.00 in 25% of the cases and above Rs 9.00 in only 16%; the (unweighted) average was Rs 6.90. The average cost per job was US$10,700, but below US$5,000 in 29% of the cases. Based on another sample of 76 projects evaluated under the first line of credit, it is estimated that the total value of output per annum for these projects at full capacity will reach Rs 677 million with a net value added of Rs 162 million. Exports should reach Rs 37 million per annum. 55. The proposed loan of US$40 million would cover the estimated for- eign exchange required over the next two years for investment projects sponsored by SFCs. GOI would relend the proceeds of the Loan to IDBI under terms and conditions satisfactory to the Bank. GOI's proposed interest rate would be 7-3/4% per annum less 1/4% per annum for prompt repayment, and repayments would extend over 15 years after 3 years of grace. IDBI would relend the proceeds at not less than 8.0% and 8.75% p.a., the lower rate applying to loans for small-scale units, technician-entrepreneurs and units in backward areas. Repayment from the SFCs to IDBI and from IDBI to the Borrower would extend over 15 years and be scheduled to conform approximately to the amortization pattern of SFC subloans. SFCs would lend to enterprises at not less than 11.5% and 12% p.a., respectively. Thus, the SFCs would enjoy a higher spread (3.5% compared to 3.25%) on the more costly and riskier loans to small-scale units while at the same time charging a higher final rate (12%) on other loans. GOI would relend the proceeds of the loan to IDBI in Rupees, and thus the foreign exchange risk would be borne by GOI. If in- flation averages about 5-7% over the next five years, the SFC final lending rates will entail real positive rates of 5-7%. The SFC rates would be in line with ICICI's foreign currency rate of 11%, where the sub-borrower bears the exchange risk.  - 17 - 56. Loans by SFCs to medium and small enterprises would be eligible for refinancing if the project includes a requirement for imported goods or services. In view of the large number of such projects, it would not be practical to disburse the loan against identified import requirements. Instead, as under the first line of credit for IDBI, the beneficiaries would obtain foreign exchange through normal channels to cover their import re- quirement. In order to reduce the administrative workload on the SFCs and IDBI, as well as the Bank, the simplified disbursement procedure agreed under the first credit would continue to be applied under the proposed loan. The SFCs would receive appropriate documentation (judged satisfactory by the Bank) from their clients before disbursing to them. The SFCs would certify to IDBI that they had disbursed for eligible projects, and IDBI would refinance on the basis of that certification. IDBI in turn would from time to time certify to the Bank that it had disbursed a given sum to refinance eligible loans. Dis- bursements would be for 65% (the estimated average foreign exchange component) ol IDBI's disbursements to SFCs for eligible expenditures incurred not more than 180 days prior to receipt of applications. The free limit for project approval, Rs 1 million under the first credit, would be retained but would be raised to Rs 2.5 million on an individual SFC basis once two acceptable prior review cases per SFC would have been processed by the Bank/IDA (Section 2.02(b) of the Loan Agreement). PART V - LEGAL INSTRUMENTS AND AUTHORITY 57. The draft Loan Agreement between India and the Bank, the draft Pro- ject Agreement between the Bank and the Industrial Development Bank of India, the Report of the Committee provided for in Article III, Section 4(III) of the Articles of Agreement of the Bank and the text of a draft Resolution approving the proposed loan are being distributed to the Executive Directors separately. 58. Features of the draft Loan and Project Agreements of special interest are referred to in paragraphs 48, 49, 50 and 56 of this report. There are no special conditions of effectiveness of the Loan. 59. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 60. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 6, 1976   annex -. M n DAT - DX Page 1 3,280,483 kN2 TT'n -n. i i d - I 9 1 3)350 Per kiof wetal 1ar India gmP W mll WI (nra Wm)u 1 90 La. 220 /a 2,600 aL rrIselaper thousand 38 384s c84 J.5 ia i Oruft anth rate housand)13 16ad 19Id.8L L4.2.9 nfant mortality rate (Per thousand live births) 139 120-3.40 ..d 80 17.5 I Life aspectans at birth (years) 1,1 50 1,8 58 72 olos rwofati Pt 2.7 la" 12 .. Popul.ation growth r at 2.33 1- Peseaatlon growth rota - urban3 lk 54 05 5-64 56 57~ 53 5 S. 62.7 65 and s-er 3 3/3a 13 6a Age dependency retina4 0.8 0 0.9 5 0.9 0:6 EcOnOnIC dependency ratlo Q4 1.0 1.7 i.5j 1.5 . Urban population Oas percent of tots)l 18 /k 20 /aj 1k4 32 /b.- 78 ILa FLmily plenrueg: i om of acceptors comolatira (thorUs. 1oo . l17 / ,0 Nc. of usrer (% of married acwne) a.. . aw lfor (thousande) 189,0004 221,000 Zd,sg 10,100 /5 13,200v 25,700 /a Percentag employed in egricoatur 73 74 1 c62 56 3 Perontaep useuployad 3.2 c 3.6 . roan o Oa eel nne r.acevod by hishoet 58 72 r 25 . is Percent of notional income received by highreot 208 53 7r-s . 51,/c 397 Paroent of national Income receivsd by Iawost 20% 1 ~. ,c 6v Pecnt of national Inoose received by ionvet 1,% 3..1 msmiinnxo Or Lin ounmstw 1 yesed by top I1W of owners . g owned by eaallest 10% of owners... Thpu~alcnihper phsiciac 5,80 BO 1,80 27,381 / 2,I 13 90/c PopAlatior, per noosing person 5i1,'o /k ,n 6,2 1,0a 301 C., Ptpualtion per haospital bad 2,600 4v 1604~ ,,0 4 804g oj Par napita calorie supply as % of raquirenecte / 95 . 9 38 2 Per cepite protein sopply, total (grmos Per dayT4 935 93 iS 90 Of Which, animal and PA"s 19 44 1 ab 11. Ld 22. 57 D.eath sate 1-4, years a7 .16 T 0.7 31 ~d /8 pr -1 eho enrullaent ratio 4,2 9712 Id 1 Adjuated seodr colenrollment ratio I10 Yeare of s ooling provIded, firt and second level 12 12 12 20 13 Vocational enoliset as Gof e. school enrollmet I, Adult literacy rata 5 24lU 3 5 .LL 72Lal 9 NPM o. Of PeOsOse Per lo00 (urban) 2.6 /44AJk 2.0 /c.aJ.ak ...0.8 LLAil Percent of occupied units Withouat piped woter ..Ada iccees to electriolty (em 5 of total population) 2. :. 23 Percet Of foral population connected to electricity . .6 =d.L orcivers parv 1000 population 5 23 /a 1aL. 46 /j 672 A8 Pessengepr care per lOD poosulation 0.8 I4 2 mactrio posar consumption (khe p.c.) 461 5 4 .,7 S Newsprinkt consumption p. c. kg per year 0.2 10'.13 1. n.L28.Sc Ntote, Plonrfer either to the latest periods or to cosoat or "''Ir""taX.tertr,~ eila the latoot years. Intent periods refer in principle tn dietricuticoc by age ma Oma of nation,al popultates. the years 1956-60 or 1966-70, the latest yearn in pfln- /6. Protein standards (reqalrsem,nte) fur all ooontriae an eatab- ciple t-o 1960 end 1970. lihabd by IDOL Soonowdo Reesearch Service pro-ids for a elojnaum lbs Per Capita GNP ostitonteeoX natuaret p710e0 for allowance of 60 grens of tote). protein par day, rald 20 gr-aw of yoars otber than 1960, calculated by the tans convereicn anl alra Pulse protein, of whIclh 10 grams ehould be antea t-uc`u nois192Wrd Back Atlas. protein these standard are e"uha lower thenioes of 25 i avege nmecidaughters per ucmon oreodcie grm of total protein and 23 gree cfIt a protein as an age. average for the world, propoawh by TAO in the Third World Fend d4 Pepulation growth mien aurs for the decadeo endinig in Survey. 1960 and 1970. /3 Sons studies hvav muggested that orde death retes of children Oi atio of Population under 15 and 65 end over to popula- ages 1 through 4 say be used 08 a irst epproniaaticn indes of tion of agee 15-61. for age dependency ratio and Pto labor malnutrition. fror of eges 15-61 for econonic dependency ratio. L. Percentgag enrolled of soreeponding populatian Of edoh- age /.PAO reLference standords represent pbyaiological re- an defined for each sanomtry. quiretaat for normal activity end health, taking ( 1972; _A Eti-te atonneal avrerg fur 1963-64 based ont result. of the nationa anpi auvy, c17); I atiae Li 1965-70; If 1973; LA Evtic,ted annual avsemge for 195i-1 baedonanli ofdeenia census; 1 i~-Es mar Nate iso asctimate baued on births obtained by applicationoif "reverse 4ureivule method to reaUlts of 1951 and 1961 censusesa; 4 1960-72; /k Per the definition of urban seeo T - hij.~ ~. Yiachk j92, P. 151,; /11 Muicipalities, regency capitals end ether places with urban characteristics, emcdPg o h eiiino ra eve [UN 06a-rehlo Yearbook 1973. p. 127; /n Arean cloaified as urban for local governent purpoosm5, i.e. county horoughs, nunIcipal toroughe and urban districts; /a 1961,; & Incldtec .11 Individuals Who participate In any type of caconnuc artlsity; /4g AID estimate of labor force in age group 15-59. liBD report ghves a figur of 180.1, million b"asd en the 1921 population censue. The differencen is dtue to changs ic tbs definition of a,oorksr. In thy 1971 census, person wor clAasnified only on ths basis of their nain activities. This led to the rcluiuoon of aeveral catgoriOs, such as hoauewloes; ar households; /a 1967-68, at 1968; (A 1962; /p Prarsnnl in govererent serricee only; /. 1957; Lx 1969, & Including rural hospitals; a~ Governoent hospital establishments only; 4~1960-62; ZA8_1969-70; 4!6j Estimate which includes overage siudente; Led 1967; 4je tot including vocational short-tars courses; /_8f 1965; LAK 1961; /84 Population of 10 years and over based on onr percent ..apie data of 1921; /83 15 years and o-e; Os to refer In houasholde; /Ak Ost booe d on sapl tabulation of cno clren7 ; 784 Dslo refer to households in conventional desllings; /j imports only; 44m Reginterd appliranto Sine and populotmun mnke IndIDeSia a relevant referonos country, elthough It is in the per capita inccc grouP below 3ndia. Thelb [cited KIogdno has been selected heonues of the iftporrant role of public oscior enterpriseo and the highly developec aysteo of socialwrfae  Annex I ROONOMIC UVDMI ENIT DATA Page 2 GNP PB CAPITA IN 1973! 'US$120 GROSS NIATIONAL PRODUICT I 1g74175 AIAL RATE 0F GROWTE (s6. oonstant prioes) US BIn. j 1961/62-1964/65 1965/66-t969/70 1970/71-1973/74 GNP at Market Prices 87.4 100.0 3.4 3.7 1.9 Groes Domestic Invetmnent 14.8 16.9 Gross National Saving 12.8 14.6 Current Aceount Balanoe -2.0 -2.3 Resource Gap -1.8 -2.1 OUTPUT, LABOR FORCE AND PRODUCTIVITY I 1971 Value Added (at faotor cost) SaborForce V.A. Per Worker USS Bln. S6 M S6 o a Agriculture 24-5 46.6 130.0 72.1 188 64 Industry 11.8 22.3 20.2 11.2 582 199 Servioes 1. I1_ 16.7 512 186 Total/average 52.6 100.0 180.4 100.0 292 100 GOVERNMET FIliAliCESd General Government _ Centrl Governae nt (Re. Bin) 96 of GDP (Rs. Bin) it of G1XP 1974i75 1974/75 1972/73-1974/75 14/7/75 974/75 1 972/73-1974T75 Current Reoeipts 107.63 15.4 15.7 64.02 9.1 9.2 Current Expenditures 98.9 14.2 15.2 57.78 8.2 8.7 Current Surplus/Deficit 8.64 1.2 0.5 6.24 0.9 0-5 Capital Expenditures e/ 40.40 5.8 5.4 30.17 4.3 4.1 External Assistanoe (net) 10.17 1.4 1.0 10.17 1.4 1.0 MONEY, CEEDIT AND PRICES 1965/66 1970/71 1971/72 1972/75 197317 1974/75 August 1974 August 1975 (Billion Res outstanding at end of period) Money and Quasi Money 61.4 105.7 122.4 142.2 169.1 187.4 176.8 198.2 Bank Credit to Public Sector 40.8 56.9 69.0 82.5 92.9 102.0 98.8 115.3 Bank Credit to Private Seotor 28.1 56-7 64.4 76.0 90.1 100.5 90.0 104.7 (Percentage or Index Numbers) Januarr 1975 JanuarY 1976 Money and Quasi Money as % of GDP 24.0 24.4 26.3 27-9 27.2 25.5 Wholesale Price Index (1961/62 = 100) 131.6 181.1 188.4 207.1 254.2 313.0 316.0 290.5 Annual percentage changes ing Wholesale Prioe Index 7.7 5.5 4.0 9.9 22.7 23.1 -8.1 Bank Credit to Public Sector 12.9 8.6 21.3 19.6 12.6 9.8 4.8 / Bank Credit to Private Sector 12.8 17-4 13.6 18.0 18.5 11.5 22.9 i- a/ The per capita GNP estimate is at 1973 market prices, ealculated by the conversion tecbnique used in the 1975 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. / Quick Estimates. A/ Computed from trend line of GNP at factor cost series, including one observation before first year and one observation after last year of listed period. d/ Transfers between Center and States have been netted out. s/ All loans and advances to third parties have been netted out. *g Credit to Govornment. g/ Credit to Comercial Sector.  Annex I Page 3 BALANCE OF PAWETS 1972/7 M5 5 MHANDISE EXPORTS (Ay GAGE 1972/73-1974/75) Million MUS in. Exports of Gooda 2,558 3,239 4,143 4,300 Jute Yanufaotuiwru 329 10 Imports of Goods -2,682 -3,971 -5,739 -5,920 Tea 220 7 Trade Dalamoe - 124 - 732 -1,596 -1,620 Cotton Textilese 217 7 a3 (net) i/ - 146 n.a. n.a. n.a. Iron Ore 171 5 Engineering Goods 295 9 Resouros Gam - 270 n.a. n.a. n.a. Others 2.081 63 Interest Payments (not) - 237 - 233 - 260 - 261 Total 3,313 100 Other Factor Payments (net) - 8 n.a. n.a. n.a. Net Trensfers */ - 50 n.a. n.a. Balanoe on Current Account - 565 n.a. n.a. n.a. EXTERNAL DEBT, MARCH 31. 1975_h Offioial Aid US5 Min. Disbursements 955 1,249 1,766 2,210 Repayable in foreign currency 11,056 Amortization -445 -459 -519 -522 Repayable through export of goods 714 Transactions with IMF 75 530 130 Total Outstanding and Disbursed 11,770 All Other Items 89 205 41 500 DEBT SERVICE RATIO FOR 1975/76 19.0 percent Increase in Reserves (-) - 34 -105 38 -435 Grosa Reserves (end year) 1,311 1,416 1,378 1,813 Net Reserves (end year) 1,311 1,341 773 1,073 IRRD/ID lENDING, December 31. 197s (us5 W_n.) Fuel and Related Materials IDRD IDA Imports 265 720 1,451 1,450 Outstanding and Disbursed 445 2,827 of which: Petroleum 265 719 1,451 1,450 Undisbursed 284 1,157 Outstanding including 729 3,984 Exports 41 20 26 n.a. Undisbursed of whichs Petroleum 37 16 17 n.a. RATE OF EXCBANGE / Prior to mid-December 1971 , US$1.00 = Rs 7.5 After end June 1972 t Floating Rate Re 1.00 = US3o.133335 Spot Rate December 31, 1975 Mid-December 1971 to : USS.I00 = Re 7.27927 approx. US51.00 = Rs. 8.937 end June 1972 Re 1.00 = USSO.137376 approx. Rs 1.00 = USS 0.112 h/ Estimated. j/ For 1973j74 to 1975/76, included with 'All other Items'. k/ Aid and trade figures converted to US dollars using exchange rates and IMF trade conversion factors as indicated in inside front cover of this report or notes to individual tables. k/ Excluding garments. j/ Amortization and interest payments (excluding IIF transactions) as a percentage of merchandise exports.  NNXII Page 1 THE STATUS OF BANK 13OUP OPFKATlCKS IN lIOL A. STAZIT OF BANK lOANS AND IDA CUflITS Loan or (As of March 31, 1976) US$ 1illiAZ1 Credit No. ar Borroer _onse (Net of Canceluati.a) BMj IDA IJndlabre 38 Loans! 1,032.5 36 Credits fully disbursed 2Q051 .9 614-IN 1969 India Taral Seeds 13.0 - 7.0 176-IN 1970 India adana Irrigation - 35.0 0.3 203-IN 1970 TInia Punjab Agricultural Credit - 27.5 17.9 226-IN 1971 India Andhra Pradesh Agricultural Credit - 24.4 4.3 242-IN 1971 India Power Transiasion II - 75.0 40.5 249-IN 1971 India Harnna Agricultural Credit - 25.0 7.6 250-IN 1971 India Tamil Nadu Agricultural Credt - 35.0 9.8 2,64-IN 1971 India Cochin II Fertilizer - 20.0 2.5 267-IN 1971 India Wheat Storage - 5.0 3.8 268-IN 1971 India Pochapad Irrigation - 39.0 1.7 789-IN 1971 lCICI Industry DFC II 60.0 - .2 278-IN 1972 India lsore Agricultural Credit - L0.0 14.6 293-IN 1972 India Maharashtra Agricultural Credit - 30.0 2,6 294-IN 1972 India Bihar Agricultural Markets - 14.0 12.9 312-IN 1972 Ind.a Population - 21.2 13.L 342-IN 1972 India Education - 12.0 11.d 356-IN 1972 India IDBI - 25.0 19.2 357-IN 1973 India Nagafl Fertilizer Expeanion - 58.0 0.5 377-IN 1973 India Power Tramisnssion III - 85.0 73.9 378-IN 1973 India Mysore Agricultural Markets - 8.0 7.9 902-IN 1973 ICICI Industry DFC X 70.0 - 16.1 390-IN 1973 Indita Bombay Water Supply - 55.0 1i5.5 391-IN 1973 India Madhya Pradesh Agricultural Credit - 33.0 14.5 392-IN 1973 India Uttar Pradesh Agricl1tural Credit - 38.0 22.7 403-IN 1973 India Telecoinications V - 80.0 h4.2 427-IN 1973 India Calcutta Urban Developmet - 35.0 22.4 440-iN 1973 India Bihar Agrbcultural Credit - 32.0 23-1 456-IN 1974 Inada HP Apple Processing & marketing - 13.0 13.0 481-Im 1974 India Tromby IV - 50.0 43.4: 1011-IN 1974 India Chambal (RaJasthan) CAD 52.0 - 43.9 482,IN 1974 Irdia Karnataka Dairy - 30.0 30.0 502-IN 1974 India Rajasthan CAna CAD - 83.0 62 .1 520-IN 1974 India Sindri Fertilizer - 91.0 7'J 521-IN 1974 inda Rajthan Dairy - 27.7 27.6 522-IN 1974 India Madhya Pradeah Dairy - 16-4 -h., 526-IN 1975 India Drought Prone Areas - 35.0 3L.2 1079-IN 1975 India IFFOO Fertilizer 109.0 - 10 54 1097-IN 1975 India Industry DEC XI 100.0 - 95.? 5,32-17N t1975 India Godavari Barrage Irrigation - 145 C 2.G 54O-I?! 1975 India ARC Credit - 7$-