India - Haryana Irrigation Project

f;ILE COPY Document of "ltE }0p\, The World Bank FOR OFFICIAL USE ONLY Report No. P-2349-I REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE HARYANA IRRIGATION PROJECT July 19, 1978 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 EQUIVALENT (As of July 17, 1978) US$1.00 = Rs 8.10 Rs 1.00 = US$0.1235 Rs 1,000,000 US$123,500 (Since September 24, 1975, the Rupee has been fixed against a "basket" of currencies. As these currencies are floating, the US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were made at US$1.00 to Rs 8.60, which represents the projected exchange rate over the disbursement period.) FISCAL YEAR April 1 - March 31 ABBREVIATIONS ARDC - Agricultural Refinance and Development Corporation GOI - Government of India GOH - Government of Haryana HSAMB - Haryana State Agricultural Marketing Board HSEB - Raryana State Electricity Board HSMITC - Haryana State Minor Irrigation (Tubewells) Corporation ICB - International Competitive Bidding CADA - Command Area Development Authority LCB - Local Competitive Bidding MEAD - Monitoring, Evaluation and Applied Development O&M - Operation and Maintenance  FOR OFFICIAL USE ONLY INDIA HARYANA IRRIGATION PROJECT Credit and Project Summary Borrower: India, acting by its President. Beneficiary: The State of Haryana for canal modernization, rural water supply schemes and village roads; Agricultural Refinance and Development Corporation (ARDC) for refinancing loans by Lending Banks to farmers, to the Haryana State Minor Irrigation (Tubewells) Corporation (HSMITC), to the Haryana State Electricity Board (HSEB) and to the Haryana State Agricultural Marketing Board (HSAMB). Amount: US$111 million. Terms: Standard. Relending Terms: GOI (i) to GOR: As part of Central Assistance to States for development projects on terms and conditions appli- cable at the time; and (ii) to ARDC: For loans to be repaid 9 years from withdrawal at 6.75% per annum; and for loans to be repaid 15 years from withdrawal at 7.25% per annum, both less 0.25% for prompt payment. Exchange risk to be borne by GOI. ARDC to Lending Banks: Annual interest rate of not less than 7.5% with repayments to coincide, approximately, with expected collection from ultimate borrowers. Lending Banks (i) to HSMITC, HSEB and HSAMB: Annual interest rate of not less than 10.5% with a maximum repayment period of 12 years, including a grace period of up to 2 years; and (ii) to farmers: Annual interest rate of not less than 10.5%; repayment within 10 years (15 years for small farmers), including up to 2 years of grace. Project Description: The purpose of the project is to help Haryana complete modernizing (mainly by canal lining) about 30% of its surface irrigation systems; develop supplemental ground- water; accelerate development of irrigated agriculture in the Jui Lift Irrigation Command Area; construct or improve 26 produce markets and about 1,390 km of village link roads; provide drinking water to about 175 villages; and provide technical assistance to help project monitor- ing, evaluation, research and development. The project would comprise a four year phase of development designed 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.  - ii - to increase food production and the standards of living of the farmers in Haryana. The risks under the proposed project are those normally associated with irrigation projects in India. The principal uncertainties relate to accurately estimating the quantity of water saved for surface irrigation through lining of canals and water- courses in Haryana. Estimated Costs: US$ million Local Foreign Total Modernization of canals 43.0 7.1 50.1 Modernization of water- courses 42.4 5.5 47.9 Augmentation Tubewells 9.7 2.8 12.5 Jui Command 3.3 0.5 3.8 Markets 16.7 3.5 20.2 Village Roads 14.1 3.0 17.1 Village Water Supply 6.7 1.5 8.2 Technical Assistance and Applied Research & Development 0.4 - 0.4 Engineering and Supervision 17.3 - 17.3 Base Cost 153.6 23.9 177.5 Physical Contingencies 11.6 1.6 13.2 Price Contingencies 27.1 4.2 31.3 Total Project Costs 192.3 29.7 222.0 Financing Plan: US$ million Local Foreign Total IDA Credit 81.3 29.7 111.0 Local Financing: GOH 51.8 - 51.8 ARDC/Banks 53.2 - 53.2 Farmers 6.0 - 6.0 192.3 29.7 222.0 Estimated Disbursement: US$ Million FY79 FY80 FY81 FY82 FY83 Annual 8.0 28.0 33.5 31.0 10.5 Cumulative 8.0 36.0 69.5 100.5 111.0 Rate of Return: 32% Appraisal Report: No. 2038a-IN dated July 19, 1978  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF INDIA FOR THE RARYANA IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed development credit to India in an amount equivalent to US$111 million on standard IDA terms to help finance modernization of canals and watercourses, construct augmentation tubewells, build village roads, market places and provide drinking water in rural areas over the next four years throughout Haryana. US$69.6 million of the proceeds of the credit would be channeled to the Government of Haryana (GOH) in accordance with GOI's standard terms and arrangements for financing of State development projects. For watercourses, augmentation tubewells, Tmarket places and Jui Command development, GOI woold relend the balance of US$41.4 million to the Agricultural Refinance and Development Corporation (ARDC) for 9 and 15 years at not less than 6.75%o and 7.25% per annum, respectively. ARDC would in turn onlend the funds to lending banks participating in the project at annual interest of not less than 7.5%. The lending banks would relend the funds to the Haryana State Minor Irrigation (Tubewells) Corporation (HSMITC), Haryana State Electricity Board (HSEB) and the Haryana State Agricultural Marketing Board (HSAMB) with repayment periods not exceeding 12 years, including up to 2 years of grace, at not less than 10.5% annual interest, and to farmers at not less than 10.5% annual interest with repayment periods of up to 10 years (or up to 15 years in the case of small farmers), including grace periods of up to 2 years. PART I - THE ECONOM1Y 1/ 2. An economic report, "Economic Situation and Prospects of India" (2008-IN, dated April 17, 1978), was distributed to the Executive Directors on April 18, 1978. Country data sheets are attached as Annex I. Background 3. India is a vast, continental country with over twenty States divided on linguistic and ethnic grounds with a population of over 620 million people, almost as many as live in Africa and Latin America combined. It has a dual economy. While 79% of its population lives in rural areas their productivity is low. Agriculture's share in value added declined only gradually from about 50% to 43% over the last twenty years. The share of manufacturing has in- creased slowly and, since the late 1960s, has remained approximately constant at about 16%. Industry has a highly diversified structure with import substi- tution and self-sufficiency pushed to the point where India has the capacity to produce virtually every type of consumer and capital good required for a 1/ Parts I and II of this report are substantially the same as Parts I and II of the President's Report for the Second Bombay Water Supply and Sewerage Project (Report No. P-2308-IN), dated July 10, 1978.  - 2 - modern economy. As in the case of many other large economies, the foreign sector plays a relatively minor role; both exports and imports represent about 7% of GDP; foreign saving has supplied only about 5% of gross investment in the recent past. 4. Even though growth has been slow in the past, the economy enjoys many of the prerequisites for sustaining faster growth and development. Although literacy is far from universal, India has large resources of well trained administrative, scientific and technical manpower and a dynamic entre- preneurial class. Per capita consumption of commercial energy is low by international comparison and power shortages are a way of life; but India is relatively well-placed with regard to primary fuel sources. There are very large reserves of coal and nuclear ores, and considerable hydro-electric potential. Recent petroleum and gas discoveries have begun to be exploited and prospects are bright for further discoveries. The basic elements of the infrastructure needed to serve the economy have been established; in absolute terms the irrigation, railway, telecommunication, road and power systems are each among the largest in the developing, and in some cases the developed, world. However, considerable gaps remain as the situation varies greatly from state to state. 5. Given the size of India's population, its annual increase of 13 mil- lion people is such as to absorb a large portion of any provision to increase standards of living. It is not possible to discern any significant increase in the incomes of the vast mass of the rural and urban poor, who number 200 million with a per capita income of US$70 per annum or less. Although food- grain production may be persistently underestimated, there has been no perma- nent increase in per capita foodgrain consumption recorded in aggregate statistics since 1960/61. Many years after the initial target, primary educa- tion is still not universal. The labor force has grown faster than employment and a considerable backlog of unemployed exists. Nevertheless, there has been progress, with per capita income increasing on trend 1%-1.5% per annum; birth rates falling to below 37 per thousand from levels of 45-50 per thousand at the start of the 1950s, life expectancy increasing from about 32 years in the 1940s to 45-50 years in the 1970s, school enrollment rising from 32% to 65% of children of primary school age and from 5% to 29% of children of secondary school age since 1950/51. 6. The rate of growth of GDP has been 3.5% per annum over the period since Independence and 2.8% per annum over the period 1969/70 to 1976/77. These low rates of growth are only partly due to low availability of inves- tible resources, although there have been times that foreign exchange was a severe bottleneck. The net transfer of resources from abroad has never been above 3% of GDP and fell to as little as 0.8% between 1969/70 and 1973/74. India's saving effort has grown steadily since the beginning of planning in 1951, when it was 9% of GDP, to its recent level of 20% of GDP, which compares well with other countries' saving performance at the same level of per capita incomes. Despite a doubling in the rate of investment, from about 10% of GDP in the early 1950s to about 20% at present, the trend rate of GDP growth has not increased. This marks a decline in the efficiency of capital use which transcends fluctuations due to weather, war or international terms of trade shifts.  -3- Recent Trends 7. In many respects economic conditions during the last three years have been significantly different from those prevailing in previous years. In the late 1960s and early 1970s, the economy faced several shortages-- foodgrains, agricultural and industrial inputs and foreign exchange--which retarded production and investment and often led to price increases. An ad- verse shift in terms of trade, starting with the oil price hike in 1973 and continuing with the foodgrain and fertilizer price rises in the following year, greatly increased the cost of acquiring these essential commodities abroad. These external shocks combined with a spate of bad weather played havoc with the economy through 1974/75, causing slow growth in production and investment and a record level of inflation. 8. Since the excellent monsoon in the summer of 1975, a new situation has arisen. The period 1975 to 1978 has been characterized by much greater price stability, enhanced agricultural and industrial output and comfortable foodgrain and foreign exchange reserves. The new situation was a combined result of domestic policies and fortuitous circumstances. The increase in foodgrain stocks was only in part due to improved policies and programs. The more decisive factor has been the three good-to-excellent monsoons coming on top of substantial foodgrain imports in 1975 and 1976. Industrial output increased on average by 7% a year in 1975-1978 compared to 3% in 1970-75, due to greater power availability, better management in the public sector, improved labor relations, better transport and some increase in demand derived from increased incomes due to improved harvests, greater exports and higher levels of public investment. The most dramatic turnaround ocurred in the balance of payments, with a sharp real reduction of the import bill helped by good harvests and increased domestic production of iron and steel, fertilizer and oil, which reduced demand for imports. The supply of foreign exchange was also greatly increased by a significant step-up in the volume of exports, an increase in foreign aid and a substantial jump in remittances from Indians working in the Middle East, Europe and America. 9. In 1977/78, the growth of GDP was about 5%, a recovery over the rate of 1.6% in 1976/77 but less than the 8.5% reached two years earlier. Prices, which had been rising during 1976/77 after a decline in 1975/76, were stabilized; wholesale prices at the end of March 1978 stood at about the same level as in March 1977, and the yearly average was only 5.4% above that of the previous year. Exports in 1977/78 are estimated at US$6.4 billion and imports at US$6.6 billion. The inflow of invisibles from abroad at US$1.4 billion and net aid disbursements of US$1.2 billion more than offset the small trade deficit of US$200 million and IMF repurchases of US$330 million to in- crease reserves by US$2.1 billion to US$5.8 billion by end of March 1978. 10. The 1977/78 foodgrain crop may exceed the 1975/76 record level of 121 million tons due to very good weather and increased input use. Support purchases could result in peak foodgrain stocks as high or even higher than in 1977, when they were 21 million tons. In addition to ample and evenly distributed rainfall, more intensive and widespread use of three crucial inputs--irrigation water, fertilizer and extension advice--contributed to the bumper harvest. Fertilizer consumption surged 30% in 1977/78, continuing  - 4 - its recovery from the depressed level of 1974/75. Annual additions to irri- gated area have averaged 2 million hectares since 1975/76 compared with 1.3 million hectares per annum achieved from 1969 to 1975. An improved extension system, which has been getting heartening results, has been intro- duced in several states and is slated for further coverage. Development Prospects 11. India faces the future with large stocks of foodgrains, high and rising external reserves, excellent crop expectations, price stability and good prospects for sustaining the improved supply of foreign exchange. The circum- stances present a great opportunity for further promoting the development of the Indian economy. The Draft Five Year Plan for 1978-83, discussed though not yet approved by the National Development Council, responds to this chal- lenge by projecting a rapid growth in real terms of both overall investment and public Plan expenditures. Investment is to rise on average by 10.7% per annum and the economy is expected to grow on average by 4.7% per annum during the years 1978-83. 12. The new Draft Plan reveals an intention to reorient the country's development toward improving the living conditions of the poor. This is reflected in its principal objectives: (i) the removal of unemployment and significant underemployment; (ii) an appreciable rise in the standard of living of the poorest sections; and (iii) the provision of basic needs to low-income groups. To achieve these objectives, the Government proposes to emphasize agricultural development, cottage and small-scale industries, area planning for integrated rural development and the provision of minimum needs. As a first step toward complete removal of unemployment, the Plan envisages the creation of a large number of new jobs through a considerable expansion of construction activity as well as a boost in the consumption levels of the poor--which in turn would require the production of the necessary wage goods, largely in small-scale, labor-intensive units. Specific programs to achieve these objectives are still in the making. 13. In order to achieve a sizable rise in the income of the poorest classes of society, the Draft Plan--in conformity with the Janata Party policy-- places prime emphasis on the development of rural areas. A major impulse for agricultural development will be provided by the expansion of irrigation and related agricultural inputs, such as fertilizers and better farming techniques. The Draft Plan argues that efforts to increase productivity should be sup- plemented by measures with a redistributive impact such as supporting small farmers and small industry with institutional credit and material supplies and assistance for marketing. The Draft Plan also intends to complement the creation of employment and the increase in rural productivity by providing basic services to those groups which have so far been unaffected. For this purpose, the minimum needs program launched at the onset of the Fifth Plan is being revitalized and accelerated. 14. The allocation of the Draft Plan outlay for the next five years reflects these priorities. Out of a total expected spending of US$81 billion, US$35 billion--43%--have been earmarked for rural development programs includ- ing agriculture, irrigation, fertilizer and social infrastructure expenditures  directly benefitting the rural areas. The share of these sectors amounted to 37% during the Fifth Plan period and to 40% in the Annual Plan for 1978/79. It can thus be expected to rise further during the next four years. Similarly, spending on the minimum needs program in 1978-83 will absorb 6% of the Plan resources, as compared to less than 3% in the Fifth Plan. On the other hand, the shares of industry and of transport and communication have been reduced. 15. There is considerable scope for stepping up growth in agriculture. The most promising development is the sharp increase in government outlays and improved project implementation for irrigation. There are also indica- tions that private investment in tubewells is picking up again after a slump in the early 1970s. Other favorable indicators include the spread of an improved system of extension to more states and the recovery of fertilizer demand. With regard to more productive use of existing capacity, there is an increased awareness in the Government that the benefits of irrigation projects can be much increased, not only through command area development, but also through improved design standards in major surface irrigation infrastructure. Nevertheless, comprehensive improvement in water management remains a distant goal, particularly in existing systems and where farms are small and frag- mented. The bulk of the increase in private tubewell development in the last few years has come from the Eastern Region, where more and more farmers are sinking wells to enable them to grow a winter crop of wheat in addition to providing better water control for the summer rice crop. Improved water man- agement would make such investments even more productive. Increased farmer incomes from the recent good harvests, somewhat lower fertilizer prices, and grain prices supported at incentive levels have encouraged farmers to apply considerably more fertilizer. Finally, the reorganized and improved extension and research system which has been introduced recently in several states in northern and eastern India holds out the hope that sound advice will reach many more farmers in both irrigated and rainfed areas and will raise their productivity significantly. The improved extension system is an excellent example of how the growth effort can and must be structured so as to increase the incomes of small and marginal farmers, who work 25% of the cultivated land and account for somewhat more than 25% of production; more importantly, these farmers make up about 70% of the rural population and constitute the majority of those living below the poverty level in India. 16. Industrial prospects are somewhat more difficult to discern. Moderate growth in 1977/78 after an excellent year in 1976/77 suggests the persistence of problems plaguing the sector since the mid-1960s--large un- utilized capacity, stagnant capital formation in the private sector and low productivity growth. Lower investment than expected, of course, is one of the reasons for low capacity utilization in capital goods industries, which make up a significant portion of the sector. Sluggish demand for industrial products from all sources--not only from investments but also from agricul- ture, exports and import substitution--has been a basic constraint. Further import substitution cannot be a major source of growth for manufactured goods in the future because most opportunities for efficient import substitution have been exploited. Increased growth of real incomes from greater produc- tivity in both agriculture and manufacturing, sustained increases in exports and increased investment, particularly by the public sector, all can raise demand for industrial production.  17. The new industrial policy of the Janata government and the orienta- tion of the Draft Five-Year Plan emphasize small-scale industry over heavy industry and have accordingly promoted such measures as product reservation, credit rationing and, within the small-scale sector, plans to initiate special efforts for the growth of the "tiny" sector. While the priority accorded to the small-scale sector is laudable, there are doubts about the efficacy of the policy measures chosen. Past experience indicates that other factors are also crucial to its development, particularly effective demand, quality control, prices and marketing techniques. Some small-scale industry is cap- ital intensive and not well suited to as rapid employment generation as is hoped; nor can all goods be efficiently produced using small-scale technology. 18. India's population growth rate of about 2% is not high in comparison with that of most developing countries. Moreover, the rate is on the decline, after growing steadily census to census from 1920 through 1970, both because the birth rate continues to fall and because mortality is not falling as steeply as in the past. Family planning acceptor rates slowed down in the wake of the abandonment of the 1976 population policy after the 1977 general elections and the momentum of the program has yet to be recaptured, particu- larly in Northern India. However, the new Government has reaffirmed its com- mitment to a voluntary family planning program and has budgeted the resources to carry it out. Over the longer term, with a sustained family planning effort, it should be possible to bring the birth rate down from its 1970-75 level of about 37 per thousand to about 23 per thousand by the end of the century, implying a population growth rate somewhat under 1.1%. Our "best guess" pro- jection of India's population in the year 2000 is 885 million. Many of the benefits of family planning policy will only be felt beyond the turn of the century; the decline in fertility will, however, bring about an earlier change in the age structure of the population. The school age group will grow more slowly or not at all after 1981, thereby reducing the pressures on the primary and secondary education systems. However, the labor force will continue to grow at a faster rate -- 2.5% per annum -- until well into the 1990s, result- ing in an increasing proportion of the population in the labor force from 40.8% to 45% in 1991. 19. The Government's goal of eliminating unemployment in 10 years implies an expansion of the number of jobs at the rate of 9 million per annum -- 7 million new entrants to the labor force and the absorption of 2 million or so formerly unemployed. The majority of these will have to continue to be absorbed -- judging from the prevailing composition of the labor force -- in agriculture and the unorganized small-scale sector. The absorptive capacity of the modern organized sector is unfortunately low; its employment elasticity is expected to be no more than 0.5. Given its low current share of output, even rapid growth of this sector would not make much of a dent in the backlog of the unemployed. Employment in the organized sector has been growing at about 2.2% per annum in the past ten years, less than the labor force growth rate, and all of this in the public sector. Private sector employment has not grown at all since 1966. While the labor absorption elasticities of the small- scale sector may be higher in some cases than that of the large-scale sector, a major effort to expand production must succeed before an appreciable employ- ment impact will materialize.  - 7 - 20. In the short run India's balance of payments should not be a con- straint on growth and development. With good medium-term prospects for India's exports, the expected continuation of growth in invisible receipts and the potential for an increase in net aid disbursments, the net availability of foreign exchange to finance merchandise imports is projected to rise over the next five years, in current prices, from US$8.7 billion in 1977/78 to US$16.7 billion in 1982/83, an average of 14% per annum. Given the unlikely need to increase rapidly imports of some traditionally important items -- e.g., petroleum, fertilizer, foodgrains, edible oil and cotton -- other imports can increase at the rate of 20% a year over the next five years. 21. Altogether, these currently favorable circumstances present the opportunity to double India's trend rate of growth of per capita income from the average annual rate of 1.5% that prevailed for the last thirty years to 3% over the next five, and thereafter. This requires a continued fall in the rate of population growth to below 2% per annum and a rise in the growth of GDP from the historical rate of 3.5% to 5.0% per annum. Both of these targets are within reach. The first should be achieved barring a total abandonment of the family planning program. The second requires improved efficiency and increased investment by both the public and private sectors; it also means more fully harnessing the gains from trade through international specializa- tion, implying a strong export effort and continued easier access to imports. In addition to enabling a faster rate of per capita income growth, the pre- sent situation allows for increasing the coverage of the population's minimum needs. This requires formulating and administering effective, efficient programs of public investment and, of course, requires larger public outlays. 22. With the enhanced resources at India's disposal, the economy is poised for a higher rate of economic growth. The Government is moving to take advantage of this opportunity with increased public expenditure envi- sioned over the next five years, and the liberalized trade policies recently announced. It is yet too early to know whether the moves made so far will be sufficient to achieve the desired targets or whether additional steps will be necessary. Assured international support for India's development effort will be an important factor in moving the Government to take greater risks in pursuing a dynamic development program directed at meeting the huge needs of its large and impoverished population. PART II - BANK GROUP OPERATIONS IN INDIA 23. Since 1949, the Bank Group has made 54 loans and 103 development credits to India totalling US$2,117 million and US$5,932 million (both net of cancellation), respectively. Of these amounts, US$901 million had been repaid, and US$2,236 million was still undisbursed as of May 31, 1978. Annex II contains a summary statement of disbursements as of May 31, 1978, and notes on the execution of ongoing projects. 24. Since, 1957, IFC has made 15 commitments in India totalling US$63.6 million, of which US$14.5 million has been repaid, US$7.6 million sold and  - 8 - US$6.9 million cancelled. Of the balance of US$34.6 million, US$26.9 mil- lion represents loans and US$7.7 million equity. A summary statement of IFC operations as of May 31, 1978, is also included in Annex II (page 2). 25. 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 and medium irrigation, marketing, seed development, and dairy- ing are other agricultural activities supported by the Bank Group. Also, the Bank Group has been active in financing the expansion of output in the fer- tilizer sector and, through its sizeable assistance to development finance institutions, in a wide range of geographically scattered medium- and small- scale industrial enterprises. IDA financing of industrial raw materials and components 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, telecommunication, and railways. Family planning, education, water supply development, and urban investments have also received Bank Group support in recent years. 26. 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, urban development and water supply remains highly relevant. Projects designed to foster agricultural production through the provision of essential inputs such as credit for on-farm investments, command area development of existing irrigation schemes, intensification and streamlining of extension systems, and seed production form an important aspect of the Bank Group's program for the next several years. Special emphasis will be given to projects benefitting small farmers. Projects supporting water supply, sewerage, and urban development also form an integral part of the Bank's lending strategy to India for the next several years. Lending in support of infrastructure and industrial investments will focus on agriculture-, export- and energy-related projects. 27. The need for a substantial net transfer of external resources in support of the development of India's economy has been a recurrent theme of Bank economic reports and of the discussions within the India Consortium. Thanks in large part to the response of the aid community, India has success- fully adjusted to the changed world price situation. However, the basic need for foreign assistance, to augment domestic resources, stimulate investment and accelerate economic growth, remains. As in the past, Bank Group assist- ance for projects in India should include, as appropriate, the financing of local expenditures. India imports relatively few capital goods because of the capacity and competitiveness of the domestic capital goods industry. Con- sequently, the foreign exchange component tends to be small in most projects. This is particularly the case in such high-priority sectors as agriculture, irrigation, rural water supply and medium- and small-scale industry. 28. Although the growth prospects of the economy have improved, India's poverty and needs are such that as much as possible of India's external capi- tal 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  - 9 - allocated to India remains small in relation to India's needs for external support, and India may be regarded as creditworthy for some supplemental Bank lending. As of May 31, 1978, outstanding loans to India totaled US$1,254 million, of which US$591 million remained to be disbursed, leaving a net amount outstanding of US$663 million. 29. 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 62%, 27% and 38%, respectively, in 1977/78. On March 31, 1977, India's outstanding and dis- bursed external public debt was US$13.3 billion, of which the Bank Group's share was 28%. Because Bank Group assistance to India is predominantly in the form of IDA credits, debt service to the Bank Group will rise slowly. In 1977/78, about 16% of India's total debt service payments were to the Bank Group. PART III - AGRICULTURE AND IRRIGATION IN INDIA General 30. Agriculture is the most important sector in India; it engages 70% of the labor force, has recently contributed about 43% of value added and accounts for a major share of exports. Investments in agriculture have been given priority by GOI and the State Governments, especially since the mid- 1960s, and deserve continued emphasis in the future. 31. Since independence, the overall growth rate of agricultural pro- duction has averaged about 3% per annum. This low overall rate of growth obscures considerable variations over shorter periods of time, between crops, and between regions. The overall rate is very much affected by the serious droughts in 1965 and 1966 and again in 1972 and 1974. At the same time, the success of high yielding varieties of wheat led to annual increases in wheat production of about 20% between 1967 and 1971, and three consecutive favorable monsoon seasons in 1975, 1976 and 1977 resulted in bumper crops in these years. Other foodgrain crops, notably rice, have not enjoyed anything like the same success as wheat, mainly because of the difficulties of developing high yielding seeds. Consequently, the effects of the green revolution, which primarily affected wheat, have been concentrated in northwestern India. 32. Despite the progress made in many aspects of food production, India's agriculture remains heavily dependent upon the weather. A major factor in reducing this dependence is the expansion of irrigation and the extent to which more effective use can be made of existing investment in irrigation facilities. The Government is also placing emphasis on the im- proved supply of inputs such as seeds and fertilizer, agricultural credit, and extension services.  - 10 - Irrigat ion 33. Up to 1964/65, the irrigated area in India increased at a rate of only 2.1% per year, of which about two-thirds was from surface water resources and one-third from groundwater. Since then, the rate of increase has about doubled, mainly through an accelerated program of groundwater development. At present, the total irrigated area is approximately 45 million ha, of which about three-fifths is irrigated from surface sources and two-fifths from groundwater. 34. The pace of surface water development remained roughly constant at about 0.5 million ha per year until the end of the Fourth Plan (1969/70- 1973/74). During this period, actual increases in the surface irrigated area lagged behind GOI's physical plan targets for more rapid development. A major problem was the continuing tendency of the States to start a large number of projects, which, given the limited financial resources, could only be constructed slowly so that benefits accrued with much delay. However, in recent years, budgetary allocations have grown rapidly and the authorities have increased their efforts to complete on-going projects. As a result, the new area brought under command in 1976/77 was 1.1 million ha or about twice that achieved in any single year before the start of the Fifth Plan in 1974/75. However, while the increase in area brought under the command of new surface irrigation projects is impressive, the increase in area actually irrigated has been more modest than the figures imply - particularly in the case of major and medium irrigation schemes due to inadequate distribution and drain- age systems. In areas actually receiving water, irrigation efficiencies remain low and water supply is unreliable. 35. The Second Irrigation Commission of 1972 and the National Commis- sion on Agriculture, which reported in 1976, also found that the underutili- zation of irrigation potential was attributable to the lack of integrated development in the irrigation areas, insufficient farmer training, and lack of effective extension services and of administrative coordination. It has been estimated that the majority of recently completed irrigation projects require additional investments up to US$600 per ha to make them fully pro- ductive. Accordingly, GOI and the State Governments have adopted various measures to improve utilization, and a Command Area Development Department has been set up in the Ministry of Food and Agriculture to coordinate work on selected high priority projects. Such measures for command area develop- ment (CAD) include public investment in irrigation-associated infrastructure - such as drainage, roads, markets, agricultural extension and research - and private investments, mainly at the farm level - such as land shaping and leveling, watercourse lining, field channels and drains. 36. In view of the emergence of high productivity farm technologies dependent on effective water control - and given India's already substantial investment in surface irrigation - the economic return on investment that improves water delivery or facilitates better use of the water provided can be very high. Consequently, rehabilitation and modernization of irriga- tion infrastructure as well as command area development are being given high priority by GOI, and a relatively large proportion of public sector invest- ment in irrigation has been allocated for these purposes. Plan allocations  - 11 - have been supplemented by the resources of agricultural and commercial banks participating in financing command area development programs through farm credit. In addition, major institutional changes have been introduced affect- ing the coordination of services in command areas and the administration of credit. Moreover, new projects are being designed, implemented and operated on the basis of improved technologies. 37. While emphasizing the need to improve water utilization through command area development, the Government is at the same time pursuing the objective of increasing the area under irrigation, in particular where only incremental investments are required. Thus, modernization of existing irri- gation infrastructure and development of groundwater are given equally high priority as command area development. Agriculture and Irrigation in Haryana 38. The State of Haryana came into existence in 21966 and is situated in the northwest of India. With an area of 44,000 km and a population of about 10.8 million, it is one of the smallest States of India. About 82% of Haryana's population lives in villages and 65% of the State's labor force is engaged in agriculture. 39. The State is bounded by Punjab, Himachal Pradesh, Uttar Pradesh, Rajasthan, and the city of Delhi. Except for some minor ridges in the south- west and north, Haryana forms a part of the Indo-Gangetic Plain. Soils are alluvial in origin and mostly sandy loams, becoming slightly lighter in the southwestern part of the State. The climate is of sub-tropical monsoonal character, extremely hot in summer (490C) and near freezing in winter. The average annual rainfall is 660 mm, ranging from over 1,000 mm in the northeast to less than 300 mm in the southwest. About 80% of this falls during the monsoon months July to September. Light winter rains in December and January are important for spring wheat. 40. Haryana's agriculture is diversified, reflecting differences in rain- fall, soil types and availability of groundwater. In the northern region, soils are suitable for paddy cultivation. Rainfall is high, and a typical crop rotation is wheat-rice-fodder. Rice is usually tubewell irrigated. In some places potato is grown as a cash crop interspersed between paddy and wheat. Maize is also grown and,toward the east, substantial areas are under sugarcane. The southwest region of Haryana has low rainfall with high annual variations. Soils are very light and groundwater potential is poor because of salinity or low water table, except along the Ghaggar River. There is a sub- stantial difference between rainfed and irrigated agriculture. Under rainfed conditions and with traditional subsistence practices, the typical crop rota- tion is bajra-gram; crop failures are common. Irrigation allows cultivation of wheat and cash crops. Oilseeds are important but tend to be speculative because of price variations and vulnerability to frost. 41. Out of the entire State area (4.4 million ha), 3.8 million ha or about 86%, is used agriculturally. About 1.2 million ha is sown more than once annually. This gives a total cropped area of about 5.2 million ha,  - 12 - which, according to the 1971/72 census, was cultivated in about 913,000 holdings. 404,000 of these holdings were less than 2 ha and 73,000 over 10 ha. Haryana produces a surplus of foodgrains. Wheat is the most important single crop, occupying about 30% of the total cropped area. Other important crops are gram (26%), pearl millet (24%), and rice (7%). Total foodgrain production rose from about 2.0 million tons annually in the 1950's to 4.0 millions tons in 1967/68 and, after a drop to 2.8 million tons in 1968/69, production rebounded to 4.5 million tons in 1969/70, and to about 5.3 million tons in 1976/77 which was an all-time record for the State. In 1975/76 Haryana had a surplus of about 2 million tons of foodgrains, of which about 1 million was exported to other States. The increase in agricultural produc- tion has been due to an increase in net area irrigated from 1.3 million in 1968/69 to 2.4 million ha in 1975/76, to increased use of high yielding varieties and fertilizer, farm mechanization, and the adoption of improved agricultural practices. 42. About 2.1 million ha, or 55% of the State's arable land of 3.8 mil- lion ha, is irrigated annually. About 55% of all water is distributed through surface irrigation systems, while the remaining 45% is supplied from groundwater by dugwells and tubewells. The two main canal commands are the Bhakra System, serving about 1.2 million ha and supplied from the Indus River Basin, and the West Yamuna Canal System, serving about 1.1 million ha and supplied by the Yamuna river. Irrigated cropping intensity is presently low. Water, rather than land, is the constraining factor to increased agri- cultural production. Accordingly, the farmers practice light irrigation by conscious decision, because this, in their experience, provides the best returns per cubic meter of water. As only about one-third of the command area can be irrigated at any one time and any additional water can be used to increase the cropping intensity on existing farms, GOH is giving priority to the exploration of new groundwater resources, lining of canals and water- courses of the Bhakra and West Yamuna Canal Systems. Development of lift irrigation is also an important element in GOH strategy in agriculture. GOH intends to develop about 460,000 ha by lift irrigation along the southern State border to assist areas traditionally qualifying for drought relief. The Jui Irrigation System commanding about 30,000 ha, which would be assisted under the project, is an extension of the West Yamanu Canal System and is typical of lift irrigation schemes. 43. The Bank Group has been directly involved in agricultural develop- ment in Haryana through the Haryana Agricultural Credit Project, for which a US$25 million credit was approved in May 1971 (Cr. 249-IN dated June 11, 1971) and disbursed by January 31, 1977. Funds were made available to refinance loans for minor irrigation and farm mechanization. The project has essentially met the objectives formulated during appraisal, mainly to provide irrigation for about 69,000 ha, increase cropping intensity and facilitated a shift in cropping patterns by local farmers to more valuable and labor intensive crops. A project completion report is now under prep- aration and scheduled for distribution in late 1978.  - 13 - PART IV - THE PROJECT Project Formulation 44. In Haryana, the major constraint to increasing crop production is limited irrigation water supplies. Since the early 1970s, available surface water resources have been fully developed or committed. Groundwater develop- ment has been carried out aggressively by the private sector and, in many areas, is reaching the maximum sustainable yield. It thus emerges that fur- ther expansion of agricultural production can only be achieved by improved efficiency and reliability of existing surface irrigation systems. Haryana has made considerable strides in implementing a Statewide program of lining canals and watercourse channels and in developing groundwater. Nevertheless, there is a need to accelerate these programs and increase their cost effec- tiveness by improving planning and implementation standards. All-weather access to villages is necessary to facilitate flow of modern inputs, exten- sion advice and crop marketing services in the project area and, most import- antly, facilitate the transport of produce to the markets. In anticipation of the increased agricultural production resulting from irrigation moderniza- tion, there is also a need for additional rural markets. Finally, safe drink- ing water is not always available in the project area, and some of the exist- ing supplies to village ponds may be prejudiced by the proposed canal and watercourse lining program. 45. In support of GOH's program, the proposed project would finance, over the four-year period 1978-82, a statewide investment package to help accelerate completion of the above mentioned schemes. The proposed project was prepared by GOH with assistance from FAO/IBRD Cooperative Program in July 1977 and was appraised in December 1977. A supplementary Project Data Sheet is attached as Annex III. A report entitled "India - Staff Appraisal Report - Haryana Irrigation Project," Report No. 2038a-IN, dated July 19, 1978, is being circulated separately to the Executive Directors. Negotiations were held in Washington in June 1978. The Borrower, GOH and ARDC were represented by a delegation headed by Dr. Y.V. Reddy. The Project 46. The proposed project would help to modernize the existing irrigation network, thus saving water, now wasted, for bringing some 290,000 ha of addi- tional land under irrigation. It would also improve associated rural infra- structure in Haryana. Irrigation components would be modernization, in particular,lining of canals and watercourses, construction of augmentation tubewells and development of the Jui lift irrigation command area. The associated rural infrastructure components would be the provision of village drinking water schemes and the construction of village access roads and rural markets. 47. Under the proposed project, about 2,900 km of branch and minor canals throughout the Bhakra and West Yamanu Canal commands in Haryana would be lined and their control structures improved. Lining of the canals would  - 14 - reduce seepage and, thus, waterlogging and salinity, increase carrying capa- city and simplify operation and maintenance. Also, about 2,100 watercourses 1/ (33% of all watercourses in Haryana) would be lined, on average down to about 75% of their length. It would be a condition of disbursement for each of the first ten watercourses to be modernized under the project that GOH submits to the Association acceptable designs for these watercourses (Paragraph 4(d) of Schedule 1 to the Development Credit Agreement). To increase the quantity and reliability of surface water supplies, about 325 augmentation tubewells would be installed in groups, to be used conjunctively with the surface water canal system. The Haryana State Electricity Board (HSEB) would construct 11 kV power lines to each group of tubewells under the project. Lines would be separate from the general electricity network and would exclusively serve the project tubewells so that interruptions due to power failures can be minimized. The project would further include construction and lining of about 132 water- courses and levelling of about 12,000 ha of land in the Jiu Lift Irrigation System. The main irrigation works for the Jui System, serving a total of 30,000 ha, were completed in 1971, and the system was commissioned in 1973. However, very little progress has been made since then to induce farmers to complete on-farm development in the difficult terrain and sandy soils prevail- ing in the area. A Command Area Authority (CADA) to be strengthened under the project (para. 52 below) would be specifically geared to remedying this situation. The whole length of each watercourse would be lined to serve all farm outlets commanding about 5 ha. In addition about 10 experimental watercourses would be constructed to test alternative water conveyance systems for typical soils and topography in lift irrigation areas. 48. The project would further provide infrastructure associated with irrigation and needed to realize irrigation benefits and improve the living standard of farm families. 22 new markets would be constructed and four existing markets would be improved. About 692 km of village link roads would be constructed and about 750 km of existing village roads would be improved to connect 889 villages throughout the State to the existing all weather road network. All project roads would be designed and built to India Road Congress (IRC) standards and Haryana Public Works Department (PWD) specifications for village roads. About 52 village water supply schemes to serve 175 villages with a population of about 313,000 would also be constructed under the project. Village water supply schemes form an integral part of irrigation systems. Irrigation canals would be the source for 42 schemes. The 10 remaining schemes would be supplied from tubewells. All schemes would be designed for water consumption of 45 liters per capita per day. Canal-fed schemes would have storage/sedimentation basins for a 12 days supply to meet periods of canal closure. Water would be pumped either directly into the supply system or stored in elevated reservoirs. Both canal and tubewell based schemes would have gravity fed mains designed to supply village populations through stand- pipes each serving 200/300 consumers. 1/ A watercourse is the link channel between the main canal system operated by the Irrigation Department and the farm channels of individual farmers. It serves a command area of about 250 ha farmed by about 60 cultivators. The watercourse is the communal property of the cultivators served who operate and maintain it.  - 15 - Project Implementation 49. Canal modernization would be planned, designed, implemented, ope- rated and maintained by GOH's Irrigation Department. The Department is com- petent to execute these tasks and its staffing adequate. 50. The Haryana State Minor Irrigation (Tubewells) Corporation (HSMITC) would be responsible for modernization of watercourses and for the construc- tion and operation of augmentation tubewells. At present, HSMITC operates ongoing programs satisfactorily, but needs some strengthening of its manage- ment, financial control and staffing in order to carry out the expanded pro- gram under the project. To this end, HSMITC is being reorganized for project implementation, on the basis of a management plan acceptable to the Association. Assurances have been obtained from GOR that it would implement by March 31, 1979 this management plan and a financial adviser reporting to the Managing Director would be appointed by December 31, 1978 (Section 3.03 of the Project Agreement). 51. HSMITC finances its operations partly from institutional credit and partly from its own resources, which include share capital, loans from GOH, and income from management charges. For the modernization of watercourses, Lending Banks participating in the project would finance at least 80% of their cost at 10.5% annual interest with a maximum repayment period of 10 years including 1 year of grace. Lending Banks would be identified in a Banking Plan to be formulated by ARDC and to be submitted to the Association as a condition of effectiveness (Section 5.01(d) of the Development Credit Agree- ment). Loans provided by the Lending Banks would in part (up to 80%) be re- financed by the Agricultural Refinance and Development Corporation (ARDC), partly from the proceeds of the credit, at 7.5% annual interest with repayments to coincide with HSMITC's repayments to the Lending Banks. After a watercourse has been modernized, the Revenue Department would recover the cost of this investment from benefitting farmers as arrears on land taxes, and from the collections reimburse HSMITC for its advances. Financing arrangements for the installation and operation of augmentation tubewells are also made through HSMITC's borrowings from participating banks and from its own resources. Reimbursements to HSMITC would be effected by the Irrigation Department, which would purchase water from HSMITC. 52. Development of the Jui Irrigation Command area under the project would be implemented by a specific Command Area Development Authority (CADA), which would be strengthened for this purpose by the addition of a technical cell (para 55). CADA would also be in charge of land levelling in the Jui Command, required for some 40% of a typical holding in the area. The works would be implemented by the farmers themselves or, on their behalf, by CADA, the Haryana Land Development Corporation or other specialized agencies. The works would be financed, if required, by loans from participating banks to farmers at 10.5% annual interest with repayment within 10 years (or 15 years in the case of small farmers) including a grace period of up to 2 years. ARDC would refinance up to 90% of such loans from the proposed credit at 7.5% annual interest and with repayments corresponding to maturities of the refinanced loans.  - 16 - 53. For markets included in the project, the Construction Division of the Haryana State Agricultural Market Board (HSAMB) would prepare designs and cost estimates, arrange contracts for construction, finance and supervise com- pletion. The Bridges & Roads and Public HealLh Branches of GOH's Public Works Department would be responsible, respectively, for the design and construction of the roads and rural water supply components with financing from the budget. GOH gave assurances that HSAMB, HSMITC, and the Public Health Branch of GOH's Public Works Department, respectively, would submit to IDA the designs of each of the first five markets, each of the first five water supply schemes, and each of the first ten watercourses to be implemented under the project. Provision of satisfactory designs would be a condition of disbursement for the market, water supply and watercourse modernization components (Paragraph 4 (b, c and d) of Schedule 1 of the Development Credit Agreement). GOH also gave assurances that the water supply schemes under the project would be im- plemented only where the Panchayat (village council) concerned has agreed to contribute a portion of the operation and maintenance costs, and after it has advanced its portion for the first year of operation of the water supply scheme. The portion to be contributed by the Panchayat would be determined by GOH in consultation with the Association, mainly on the basis of the indivi- dual Panchayat's financial position (Section 3.13 of the Project Agreement). 54. To supervise overall project activities, a Planning and Monitoring Unit has been established under the project. It reports to GOH's Commis- sioner and Secretary, Irrigation and Power, who is also the project coordina- tor responsible for ensuring that all components are designed and constructed according to high standards. Day-to-day operations of the Unit would be handled by the Deputy Secretary, Irrigation and Power. Project Monitoring and Evaluation 55. Monitoring, Evaluation and Applied Development (MEAD) Units and a technical cell would be established in three agencies responsible for project implementation (Irrigation Department, Haryana State Minor Irrigation (Tube- wells) Corporation, and the Command Area Development Authority) to check pro- ject performance and recommend improvements tested through applied research, as the work proceeds (Section 3.09 of the Project Agreement). Measures designed to monitor project performance call for a multidisciplinary approach and would include surveys to establish a baseline from which to measure overall project impact, annual surveys after each crop season to measure the effects of varia- tions in water supply and use, cropping intensity, yields, crop inputs, and farm incomes. Studies for project evaluation would focus on design and con- struction techniques, work of labor intensive enterprises, quality control, specification standards, and contracting procedures. Project Cost and Financing 56. The estimated total cost of the project is US$222.0 million equiv- alent (net of taxes and duties, which are negligible), including US$29.7 million (13%) in foreign exchange. The principal cost components, net of physical and price contingencies, are: modernization of canals (US$50.1 million), modernization of watercourses (US$47.9 million), markets (US$20.2 million), augmentation tubewells (US$12.5 million), and village link roads  - 17 - (US$17.1 million). The balance is made up of: village water supply (US$8.2 million), watercourses and land levelling in the Jui Command (US$3.8 million), technical assistance, engineering and supervision (US$17.7 million), physical contingencies (US$13.2 million) and price escalation (US$31.3 million). The proposed credit of US$111 million would cover 50% of project cost, including all foreign exchange cost and US$81.3 million of local cost. Local cost financing is justified in India for projects such as this for the reasons discussed in para 27 above. The Government of Haryana would finance 23% of total project cost. The balance would be contributed by ARDC (15%), partici- pating banks (9%) and directly by beneficiaries (3%). Of the proceeds of the project, GOI would channel US$69.7 million to GOH on the standard terms and arrangements on which development funds are being provided to State governments by the Center. US$41.4 million would be passed on by GOI to ARDC, with 9 and 15 years maturity (depending on maturities of loans to be refinanced) at not less than 6.75% and 7.25% annual interest, respectively. ARDC in turn would onlend the funds to participating Lending Banks at not less than 7.5% annual interest. The Lending Banks would relend the funds to farmers in the Jui Command Area and to the agencies in charge of implementing the various project components with repayment periods not exceeding 12 years (except 15 years for small farmers), including up to 2 years of grace, at not less than 10.5% annual interest. 57. The proceeds of the proposed credit would be used to finance: civil works financed through institutional credit (US$38 million), other civil works (US$62 million), equipment (US$5 million) and technical assistance (US$0.3 million). The remaining US$5.6 million would be left unallocated. Procurement and Disbursement 58. Civil works would be labor intensive, relatively small and scattered throughout the State, and restricted to seasonal construction. In these cir- cumstances, it would not be feasible or economic to combine them into contracts large enough to attract international contractors. It is, therefore, proposed that they be carried out by local contractors, in accordance with GOH's stand- ing practice to contract most of the construction works after local competi- tive bidding. Haryana has a well developed construction industry, and the Government's procedures for local competitive bidding are satisfactory. Modern- ization of watercourses and some small canals have to be implemented rapidly and on a chak basis to limit interference with crop production. Such works would be awarded under small unit price contracts. Force account would be used only when required by safety or quality considerations and would be limited to a maximum of 10% of all civil works. The department or agency responsible for implementation usually procures key building materials through bulk purchases following standard procedures of GOH. Materials are supplied to contractors on a cost plus transportation basis. The estimated cost of vehicles and equipment to be procured under the project is US$4.1 million net of contingencies. Field vehicles, pumps, motors and electrical items for augmentation tubewells, which essentially make up this category, depend on existing servicing and spare part facilities, so that considerable benefits would be derived from procuring local models. No major items of construction equipment are to be procured, as existing machinery is adequate with normal expansion and replacement. Most contracts are likely to be less than US$100,000 each. For these, international competitive bidding would be quite  - 18 - inefficient. These items would therefore be procured through normal procure- ment procedures of GOH, which are acceptable to IDA. 59. The proceeds of the credit would be disbursed against the foreign exchange cost of directly imported equipment. For locally procured items, disbursements would be against the ex-factory price or, where the ex-factory price is not available, against 70% of cost. Disbursements for civil works would also be on a percentage basis (55% of ARDC's refinance for works financed through institutional credit, and 70% of cost for other civil works). Full documentation would be required for all disbursements, except for payments of up to Rs. 100,000 for civil works and Rs. 50,000 for equipment and vehicles, and for force account work, for which disbursements would be made against certificates of expenditure. The supporting documents for these payments would not be submitted to IDA but would be retained by GOH and ARDC for inspection by IDA review missions. It is expected that disbursements would be completed by March 1983, about eight months after project completion. Benefits and Economic Justification 60. The proposed project would assist in expanding the area under irri- gation by about 293,000 ha. At full development, the project would increase foodgrain production by 337,000 tons producing an annual incremental net income to farmers of about US$60 million equivalent by 1987/88. In addition, it would generate significant, albeit unquantifiable, indirect economic and social benefits, including in particular those derived from the provision of clean drinking water. The project would increase farm employment by about 21 million man days and generate about 61.5 million man days of construction employment during the four year implementation period. 61. For the modernization of canals, costing US$50.1 million or 28% of project base costs, the economic rate of return is estimated at 49%. Addi- tional unquantifiable benefits from this component are reduction of waterlog- ging, increased canal capacity, reduction of weed growth in certain areas, and improved canal operation. For modernization of watercourses costing US$47.9 or 27% of project base costs, the economic rate of return is esti- mated to be 35%. Augmentation tubewells, costing US$12.5 or 7% of project base costs, will have an economic rate of return of 43%. The economic rate of return for the Jui Command development, costing US$3.8 or 2% of project base costs, is estimated at 27%. Thus, the overall economic rate of return for the entire project investment is calculated at 32%. Cost Recovery 62. The provision of irrigation to rainfed land would increase seasonal farm incomes by about Rs. 1,800 per cropped ha. The corresponding "project rent" (net incremental income less the necessary rewards to the farm family for its labor, entrepreneurship and cultivation risk) is estimated at Rs. 1,550 per cropped ha. The direct water charges would recover about 4% of the project rent. However, taking into account the indirect recovery through marketing fees and credit repayments, the average farmer benefitting from project works would seasonally pay charges amounting to about Rs. 400 per ha brought under irrigation. This is equivalent to about 22% of net incremental farm income or 26% of project rent.  - 19 - 63. While there appenrs to be some scope for increasing water charges, the adequacy of GOH's cost recovery policy must be evaluated in terms of the need to generate public savings to finance future modernization and extension works in the State. Present water charges are sufficient to cover the full cost for O&M of the irrigation infrastructure. While they do not generate a significant surplus for financing future modernization and extension pro- grams, Haryana is making a strong resource mobilization effort in other ways. In recent years, GOH's revenues per capita have been about twice the national average. In percent of State income, GOH's revenues are the highest in India. These revenues have enabled GOH to successfully implement an ambitious program of investments in rural infrastructure including the electrification of all villages. Another factor to be considered is the usefulness of water charges in promoting efficient water use. Under existing irrigation practice in Haryana, each farmer is allocated a fixed amount of water based upon the size of his holding. Taking into account his water ration, each farmer selects his crops and his intensity of irrigation so as to optimize his return to water. This allocation system generally leads to an economically efficient use of water. A more efficient use of water could, however, be achieved through the introduction of volumetric charges. But this would only become technically feasible after watercourses have been modernized. In any case, all farmers in the project area have to be treated in an equitable manner for water charges to be politically feasible. Consequently, if water charges are to be increased to recover the full cost of canal lining, they have to be applied to all farmers in the command. This would not be politically feasible, since farmers who are already served by the present system would, with certain justification, argue that "their" system is already paid off and that they would not benefit directly from modernization. As GOH will face this situa- tion in all future irrigation modernization projects, the system of water charges needs to be analyzed on a statewide basis and within the framework of the State's agricultural taxation system, rather than in patchwork fashion. An assurance has been obtained from GOH that it would carry out a statewide review of alternative methods of collecting water and water-related charges in modernized irrigation projects with special emphasis on volumetric water pricing, having regard, inter alia, to farmers' capacity to pay, incentives for adopting procedures of modern irrigated agriculture, the effects of the alternative collecting methods on Haryana's revenues, and comparable systems of water and water-related charges in other states of India. This review would be completed and submitted to the Association for its comments by March 31, 1980 (Section 3.08 of the Project Agreement). Project Risks and Uncertainty 64. The overall risks associated with the project are those normally associated with irrigation projects in India. All components to be financed under the project would be implemented by agencies with proven experience. Where weaknesses have been identified, the project provides for measures to strengthen the capabilities of the participating agencies. The economic rate of return is somewhat sensitive to variations in project costs and yields. However, project cost estimates are based on actual costs of on-going programs, and benefits are estimated from monitored performance of completed works. Neither are likely to change substantially. Even if cost were to increase by 10% over the project estimate and at the same time benefits decrease by 20%,  - 20 - the overall economic return on project investments would still be 24%. Thus, overall investment risks under the project are acceptable. PART V - LEGAL INSTRUMENTS AND AUTHORITY 65. The draft Development Agreement between India and the Association, the draft Project Agreement between the Association and the State of Haryana, the draft ARDC Agreement between the Association and the Agricultural Refinance and Development Corporation, and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement are being distri- buted to the Executive Directors separately. 66. Special conditions of the project are listed in Section III of Annex III. The finalizing of financial arrangements between GOI and ARDC for relending part of credit proceeds to ARDC, and the receipt of a banking plan satisfactory to the Association, giving details of refinancing of loans by banks through ARDC are conditions of effectiveness of the credit (Section 5.01(c) and (d) of the Development Credit Agreement). The receipt and approval by the Association of designs for each of the first five market places, each of the first five village water supply schemes, and each of the first ten watercourses are conditions of disbursement in respect of these components of the project (Paragraph 4(b), (c) and (d) of Schedule 1 of the Development Credit Agreement). 67. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATIONS 68. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President July 19, 1978  ANNEX I Page 1 INDIA - SOCIAL INDICATORS DATA SHEET LAN) AREA IHOU KM2) ------------------------------------------------- _- ---------- INDIA REFERENCE COUNTRIES (1970) TOrAL 3280.5 MOST RECENT 4GRIC. 1797.5 1960 1970 ESTIMATE INDONESIA PHILIPPINES 3RAZIL** GNe *.R CAPITA (USS) 60.0 1Q0.0 150.0 130.0 230.0 550.0 POPULATION ANO VITAL STATISTICS POPULATION (MID-YR, MILLION) 434.9 547.5 620.4 /a 117.6 36.9 92.6 POPULATION DENSITY PER SQUARE KM. 133.0 167.0 189.0 62.0 123.0 11.0 PER SQ. KM. AGRICULTURAL LAND 247.0 308.0 345.0 411.0 375.0 49.0 VITAL STATIStICS CRUDE BIRTH RATE (/THOU, AV) 43.2 41.0 37.0 45.9 44.2 38.4 CRUDE DEATH RATE (/THOU,AV) 23.9 19.0 17.0 20.6 13.2 9.9 INFANT MORTALITY RATE (/THOU) 139.0/a .. 130.0 * 81.0 110.0 LIFE EXPECTANCY AT BIRTH (YRS) 41.7 47.2 49.5 .. 55.6 59.4 GROSS REPRODUCTION RATE 3.2 2.9 2.8 3.2 3.3 2.6 POPULATION GROWTH RATE (%) TOTAL 2.0 2.3 2.1 2.0 3.0 2.9 URBAN 2.5Lb 3.2 3.1 3.__a 4,0 5.D URBAN POPULArION (% OF TOTAL) 17.9 19.8 20.6 17.5Lb 27.6 56.0 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 41.0 41.6 40.1 44.0 45.6 42.0 1S TO 64 YEARS 55.9 55.3 56.7 53.5 51.6 55.0 65 YEARS AND OVER 3.1 3.1 3.2 2.5 2.8 3.0 AGE DEPENDENCY RATIO 0.8 0.8 p. 0.9 0.9 0.8 ECONOMIC DEPENDENCY RATIO 1:IL. 1i:t/a 11/b *- t.5 1.5 FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) 71.0 14585.0 37658.0 259.3 320.0 250.0 JSERS (% OF MARRIED WOMEN) .. .. 18.7 .. 2.0 1.6 EMPLOYMENT TOAL LABOR FORCE (THOUSAND) 175000.0 218000.0 261000.0/a 12400.0 29400 0 LABOR FORCE IN AGRICULTURE I%) 71.0 69.0 69.0 . 55.0/a 40.4 UNEMPLOYED (% OF LABOR FORCE) 4.8 /d 4.4 /b 4.4/c,d ,, 7.6 7.5 INCOME DISTRIBUTION % OF PRIVATE INCOME REC'D *Y- HIGHEST 5% OF HOUSEHOLDS 26.7 25 0 /c 35.0/a HIGHEST 20% OF HOUSEHOLDS 51.7 53.1 7 .. 54.0 62.507 LOWEST 20% OF HOUSEHOLDS 4.1 4 7? . 3. 01K LOWEST 40% OF HOUSEHOLDS 13 13.1 7 3 : 6 3 0. DISTRIBUTION OF LAND OWNERSHIP X OWNED BY TOP 10% OF OWNERS .. .. .. .. .. 45.0 X OWNED BY SMALLEST 10% OWNERS .. .- .. * ' 1.5 HEALTH AND NUTRITION POPULATION PER PHYSICIAN 5B40.0oP 4890.0 4220.0 26370.0 .. 1910.0 POPULATION PER NURSING PERSON 5310. i220.0/d 3680.0oA 7630.0/C *- 3220.0/b POPULATION PER HOSPITAL BED 2590.0/h 1610.0 ,, 1640. 0- 850.0 260.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 95.0 92.0 89.0 91.0 93.0 109.0 PROTEIN (GRAMS PER DAY) 55.0 53.0 48.0 43.0 45.0 84.0 -OF WHICH ANIMAL AND PULSE 19.0/i 16.0 12.6 14.0 22.0 39.0 DEATH RATE (/THOU) AGES 1-4 44.0 .. .. .. 6.6 EDUCATION ADOUSTED ENROLLMENT RATIO 63.0 65.0 75 7 PRIMARY SCHOOL 42.0 63.0 29.0 15.0 43.0 87.0 SECONDARO SCHOOL 23.0 30.0 29.0 15.0 49-0 6S.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 12.0 12.0 11.0 12.0 10.0 11.0 VOCATIONAL ENROLLMENT (X OF SECONDARY) 8.0 ., ,. 29.0 6.0 /b 17.0 ADULT LITERACY RATE I5) 24.0 33.0 36.04. 59.0 ., 64.0 HOU)SING PERSONS PER ROOM (URBAN) 2.6 2.8 ,, 2.1 1.0 OCCUPIED DWELLINGS WITHOUT PIPED WATER (%) *- - 76.0 73.0 /c ACCESS TO ELECTRICITY (% OF ALL DWELLINGS) .. .. .. .. 23.0 48.0 RURAL OWELLINGS CONNECTED TO ELECTRICITY (%) .. .. .. . 7.0 8.0 CONSUMPTION RADIO RECEIVERS (PER THOU POP) 5.0 21.0 25.0 114,0 39.0 60.0 PASSENGER CARS (PER THOU POP) 0.7 1.0 1.0 2.0 8.0 25.0 ELECTRICITY (KWH/YR PER CAP) 46.0 114.p 143.0 20.0 235.0 491.0 NEWSPRINT (kG/YR PER CAP) 0.2 0.13 0.3 0.3 2.0 2.7 SEE NOTES AND OEFINITIONS ON REVERSE  A-1NNX T Page 2 NOTES 'clatothrwsanoted, data for 1960 rfer to atly year between 1959 and 1961, for 1970 betwe.en 1969 and 1971, and for Most Rece.ct Estimate bete- l193 and 1976. Ars-il h.. been 0elect.d as an objective country becia.e of its sic. and conpsrable problems, of r-gional inequality. TDA 1960 /a 1951-61 average; lb 1951-60t /c Ratio of population under 15 and 65 and .ver to labor fo-c age 15 and over; /d tEtiotated by National Sample SurveY, in tarm, of the average mashe of person/weeks of unemployment as perentage of total pere on/w.eka to the labor force: /. 1962; /f Registered, not all practiciog in the co..ntry; ~g I-cluding m1dwives; /h l958; /I 1960-62. 1970 I Ratio of population under 15 and 65 and over to total labor force age IS and over; /b fEtinated by National 7oOple Survy, In teem of the -vraga number of persn/w...ka of unmoploymet a. percentage of total pereon/ ee.. k.ic the totsl labor force; /c 1967-68; /d including mid.ives. MOST RECENT ESTIMATE; /a 1978 mid-year population and labor force aetixated at 640.4 and 261 milli.n. repectively; /b Ratio of population under 11 and 65 and over to total labor force; Ic 1977; /d Estinated by National Sanple Survey, in terms of the average number of pereon/weeke of unemployment ae percentage of total person./weeks in the labor force; Ia Including midwives; /I Popolation 10 peera and over. INDOLNESIA 1970 I 1961-71- /b 1971; /. Incloding nidwivea. PHILIPPINES 1970 IAs~ percentage of employment; /b Not including private vocational .choolo. BRAZIL 1970 I E.onmeically active population; /b Noapital perennel; Ic insida only. R113, lay 2, 1970 DUfY5ITI(R55 OF SOCIAL INDICATORS Land Area (thu I.') Population per nursing person P-Ppulation dIvid.d by nashr of practicig Total T-toc1 a-rf-c or.. cmpriing land area end inland ,st.re. ,xal end faml. graduate nurses, 'trained or "certified" nur..ee, ad Agri. Most rece.nt satimata of agriculturl area uad temporarily or p-m- a.-Ilia. pereonnel with training or experience. nently for cropa, p.atur.e, arktt 6, bitchas gardene or to lie fsillw. Population per hoesita1 bad - Population divded by ..-ber of hoepita1 beds avalaeble in public end private general and specialised hoapita1 and GNP per capita (US$)l - GNIP par capite ostimatee at current market pricee, rehabilitation centers; e...ud.e nureing homes and etbalatsfor celc.l.t.d by sam convereion method as World Sank Atlas (1974-76 baeis); cuatodial and preveniva a.re. 1960; 1970 and 1976 data. Per capita supply of caoresi of reosiressents) - Computed frcm energy equivalent of net food aupplide available ie ..-stry per capita per day; Ponulalion and vital statistics availeble supplies camprise domeatic production, Imports lees exports. end Population Wad-year illionl - As of July firet: if not avi,sl vrage changes in stock; met supplies exclude animal feed, eseda, quantities uasd of ny sod- y-a ..tiatee; 1960, 1070 and 1976 data, in food pr.oeaing and bases. in distribotion; raquirants were etimated by FAO base.d on physiological seeda for normal activty end health consid- Ppopultion denaity -par square las - Mid-y.sr pepuletion per square kilomter ering envirosnmental tmperature, body .aighta, age and see distributions of (10-0 h.ctsres) of total area population, snd all1ing 101 for saste at hoseehold le.el. FPo .Claion denaity -per square las f anric, land - Computed a above for PenrcapiPtasupply of rotein fa;.rsd Mer day) - Protein contest of per capita ag,iculturaI land only. nt apl of food pedy;ne supply of food is defined as above; require- mets fnr all countriesa eatablished by USDA Econmic Research Services Vital Statistica provide for a nininmas allmwance of 60 grama of total protein per day, and Crude birth rare par thosuand. -vrsxe - Annual live birth. per thousand of 20 grin of animal and pulas protein, of which 10 grans ahould ho aniosal .id-y..r population; tax-year aritheetic everagod, -ding in 19.60 and 1970, protein; these standards are laowe than thoos of 71 grna of total proteic and five-year average ending in 1975 for moat recent estimate, and 23 grnas of asimal protein as an averge for the world, proposed by FAO Crude death rate par thousand, average - AnnalI deaths per thousand of mid-yea in rho Third World Food Survey. population; ten-y.sr aritheetic averags. ending in 1960 and 1970 and five- Per capita protein suonly from animl and pulas - Protein supply of food year average ending is 1975 for mast recant estimate, derived from animals and pulses in groand per day. Infant mortality ratbeif/thou) - A-.ual deatho of infants under one year of age Death rate f/thou) ages 1-4 - Annua deaths per thousand ix age group 1-4 per th-,sand live bith. years, to chiIdren in this age grop; .sugested ae an indicator of Life expectancy at birth (yre) - Average nasher of years of life remaining at malnutritlion. birth; uaually five-year vavrages ending in 1960, 1970 and 1975 for develop- ing counstrme. Ed,ac.tiam Groas reproduction rats - Averag number of live danght.rs i oa ll bear Adjusted enrollment rCthin - prmar shool - Enrollmen.t of all ages as per- In her norma reproductive period if she experiencaa present age-specific centage of primary scll-g opetion; includes children aged 6-11 years fertility raots; usually five-year averagea, ending in 1960, 1970 sod 1971 but adjuated for different lengthe of primary edoc..ciom; for countries wIth for deve loping coutries. univ-r-e-l education, esrs1lnnt may exceed 10 since samepupils are bel1w Population arouh rate 11) -total - Compound annua growth rarta of mid-year or above the official school aga. population for 1950-60, 190-70 and 197 0-75- Adiuated enrollment ratio - secondary school - Computed as above; secondory Fpopultion growth rate Ml - uban - Copu ted like growth rate of total educa tion requires at least four years of approved primary inottrci..; population; different dafinitioma, of urban areas may affect comparability of provides general, voca.tional or teachebr training instructions for pupils data among countries, of 12 no 17 years o~~~~~~~~~~~~~f age; correspondnc courses aregenerally.axclod.d. Urban population (% of total) - Ratio of urban to total population; different Yaso.coln rvdd(it an scond levels) -Total year of d.finitiona of urban areas may affect comparability of data among countries, schooling; at secondary level, voc..tisnel ine trutios may be partially or estuture (percet) - Children (0-li years), working-ege (15-64yer) Vocaionl enroll=ntCl of secondary) - Vocational institutions include Asnd retired (65 years and over) so percentages of mid-year population. t.chnicel, industrial or other progr- which operate independently or as Ax. dependenc.y catio - Ratio of population under 15 and 65 and ovr to those depsrteseot of secondary inetitutioma . of ages 15 throughB. Adult titeracy rate (I) - Literate adults (able to reed and write) as per- Zc_ onic depeodency ratio - Ratio of population under 15 and 61 and ovr to centage of total adult population aged 15 years and over. the labor force in aga group of 15-6 years. F_miy I.. cn.ng-acc.ptor (c,dau lative. thou) - Ccoulative nuber of ..c.sptors H Nsing of birth-cotrol devices under auspices of national family planning progrom Perdona per room, (urban) - Average number of persons per room in occupied sInce inception conventional dwellings in urban areas; dwellings exlude o. emnn Family Ilannina uaera C of maried women) - P-eretages of married wome of structures and unoccupied parts. child-bearing age 15-4c4 years) who use birth-control devices to all marrisd Occupied dwelling wthu pipe wt.ri(7.) - Occpied conention.1 dwellings vomon itnam ag -goP. in urban and mrura aeswtot insde or outside piped water facilities aspretageofl ocpied dwellngs. DEployment Access tO eletricity Cl of al wlingsta - Convwationa1 dwellings with Totallbr oc1thned - Economically active persone including rmed electricity in living quarters as percent of total dwelin.gs in orbac and force.s.and unemployed but excluIng housewivs., tudeots, artc. ; definitions rural areas. Inv veriua contr i". re not comparable. Rural dwellings connected to electricity Cl) - Computed as above for rural Labor force In agriculture CZ) - AgriouItural labor force (in farming, forestry, dwellings only. hu-tiog sod fishing) do percentage of total labor force. Unemployed (% of labor force) U-Ueployed are usully defined as parsons who Consumption are able and willOng to ta ke job, out of a job on a given day, remsained out Radio receivers (per thou pop) - All typea of rece.ivers for radio broadcas ts of a job, ad aseking work for specified Mainiu period not ecdigone, to general public par thousand of papulation; excludes onU.ensedreivs wek; may not becomparable betwee countries due no different deinitions in coutries and in years when registration of radio seats was in effect; of u-P,oyed and source of data, e.g., emplyoymet office statistics, ausple data for recen.t years may not be comparable since most noutries abolished auvy,compussory unoployment insurance, licensing. Passen:getrca.rs (par thou pop) - Passenger care comprise motor care ...sting Iot.- distribution - Percentage of private incmne (both in cash and kind) lasta ight persons; .mclude abulances, hearses and military recived by richbest It. richest 201, poorest 20%, and poorset 40% of house- vehicle.. holds g lectricity (kwh/yr par cap) - Annual consomption. of isdustri.1, Cadrcial. PubIlcan private el1ntricity In kilowatt bh-re per cpit., generally Distribution of land ownership - Percentages of land owned by wealthiest 107. basedo production data, withat allowance for losses in grids but allo-- and poorest 10% of land owne.rs. ing for Imports and exports of e1ectrioity. Newprint (ka/yr Per cePl - Per capita annual onaumption in kilogrsm Health and Nutrition estimated from dom tscg production plus net imports of news,print. Population por physician - PoPulation divided by -,.ber of practicing Phyicans qualified from s medical school an university level.  ANNEX I Page 3 ECONOMIC DEVMLONPENT DATA GNP PER CAPITA IN 1976 4 USS 150 5;)1S NXTI1NAL PRODUCT IN 1976/77 I/ ANNUAL RATE OF GROWTH (%. constant Prices) S/ us$ Bln. 5 1960/61-1964/65 1965/66-1969/70 1970/71-1979/76 GNP at Market Prices 86.04 100.0 3.9 3.8 2.9 Cross Domestic Investment 16.62 19.3 Cross National Saving 18.18 21.1 Current Account Balance 1.56 1.8 Resource Gap 0.95 1.1 OUTPUT, LABOR FORCE AND PRODUCTIVXTY IN 1975/76 Vale Added (at factor cost) Labor Force A.Per Worksr USUBin. _____ _ Mil, 0 'JS4 % of Ave Agriculture 30.2 43 179.0 69 169 63 Industry 16.7 24 33.9 13 494 193 Services 23.4 33 48.0 18 488 133 Total/average 70.3 100 261 100 277 100 GOVERNMBENT FINANCE General Government / Central Government (Rs. Binl _ aCDP (Rs. Bln) of GDP 1976/77 1976/7-7 -1974/75-1976/77 1976/77 1976/77 1974/75-1976/77 Current Receipts 147.46 19.1 17.9 83.78 10.9 10.4 Current Expenditures 140.18 18.2 16.2 84.25 10.99.6 Current Surplus/Deficit 7.28 0.9 1.7 - 0.47 - 0.8 Capital Expenditures j/ 59.05 7.6 7.1 40.39 5.2 5.0 External Assistance (net) 11.21 1.5 1.7 11.21 1.5 1-7 MONEY., CREDIT AND PRICES 1970/71 12ff 1973/74 1974i 75 i9fl/7 1976/77 September 1976 September 1977 (Billion Rs outstanding at end of period) Money and Quasi Money 105.7 142.2 169.0 186.9 215.0 262.6 238.2 284.8 Bank Credit to Public Sector(net) 56.9 82.5 92.9 102.6 109.1 117.3 112.7 130.7 Bank Credit to Private Sector 56.7 76.o 9