India - National Dairy Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Repet No. P-2309-IN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE NATIONAL DAIRY DEVELOPMENT PROJECT May 26, 1978 dTocs unt h_s a resticd dI*rIb tI d my be ud by recpients ly In e aem nane of heir officl dutis.. lb contents MY nst oderwie be dbesoed without Worl Bk authorIton.  CURRENCY EQUIVALENT (as of May 12, 1978) Rs 1.00 = Paise 100 US$1.00 = Rs 8.51 Rs 1.00 US$0.1175 Rs 1 million = US$117,500 (Since September 24, 1975, the Rupee has been officially valued relative to a "basket" of currencies. As these currencies are now floating, the U.S. Dollar/Rupee ex- change rate is subject to change. Conversions in the Appraisal Report were made at US$1 to Rs 8.60, which represents the projected exchange rate over the disburse- ment period). FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS AI - Artificial Insemination AMUL - Anand Milk Union Limited ARDC - Agricultural Refinance and Development Corporation DCS - Dairy Cooperative Societies EEC - European Economic Community GOI - Government of India GOS - State Government(s) ICB - International Competitive Bidding IDC - Indian Dairy Corporation lpd - liters per day NDDB - National Dairy Development Board NDRI - National Dairy Research Institute WFP - World Food Program  FOR OFFICIAL USE ONLY INDIA NATIONAL DAIRY DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower: India, acting by its President Beneficiaries: Indian Dairy Corporation (IDC) for onlending to coopera- tive dairy institutions; National Dairy Development Board (NDDB) for training and research. Amount: US$150 million. Terms: Standard. Relending Terms: (a) India to IDC: At interest rate of 7.5% per annum over twenty years. Installment repayments to coin- cide approximately with amortization of subloans under (b) below. (b) IDC to cooperative dairy institutions: At interest rate of 8.5% per annum, repayable over 20 years including up to five years grace on interest and principal. Interest during grace period to be capitalized. (c) India to NDDB: Funds to be provided as a grant. (d) GOI to carry exchange risk. Project Description: The Project is intended to increase the production of milk in about 20,000 villages of India through a cooperative development program which includes animal breeding, feed- ing and health improvement, and the development of facil- ities for milk collection, processing and marketing. The project would improve farm incomes and provide employment opportunities for some 3.5 million village farmers, inc- luding 500,000 landless laborers. The risks associated with the project are related mostly to the difficulty of managing and coordinating a large-scale organizational and training effort. The considerable experience already accumulated with cooperative dairy development in India using the AMUL pattern augurs well for a large-scale replication of the program. The assumptions made in regard to project phasing, costs, yields and commodity prices are based on recent experience of ongoing dairy 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.  projects in India. Measures to coordinate, monitor and expedite all phases of implementation have been discussed with GOI, NDDB, IDC and State Governments. The project, which would be implemented over 7 years, consists of: (a) the establishment of some 20,000 dairy cooperative societies (DCS) grouped into approximately 50 coop- erative dairy unions which would in turn be grouped into about 25 cooperative milk marketing federations; (b) the construction of dairy processing facilities with a total incremental capacity of about 5 million liters per day; (c) the provision of packaging, distribution and trans- port facilities to handle the marketing of project milk; (d) the provision of storage and long-distance transport facilities to support the establishment of a buffer- stock of dairy products and the development of a national marketing network to balance inter-regional disparities in milk supply and demand; and (e) the provision of training, research, and technical assistance. Estimated (US$ million) Cost: Local Foreign Total DCS Equipment 6.9 0.4 7.3 Union AI and Services 10.8 5.6 16.4 DCS and Union Establishment Cost 62.9 1.3 64.2 Processing 67.5 48.8 116.3 Distribution 36.9 30.2 67.1 Supporting Investments IDC - Lamination 1.3 1.7 3.0 - Storage .3 0 0.3 - Tankers 5.6 1.4 7.0 NDDB - Training 2.7 0.3 3.0 - Research 2.3 0.3 2.6 Technical Assistance 0 3.2 3.2 Sub-Total 197.1 93.3 290.4 Contingencies 49.8 23.6 73.4 Total Cost 246.9 116.9 363.8  Financing (US$ million) Plan: Local Foreign Total IDA 33.1 116.9 150.0 GOI 7.0 - 7.0 IDC /a 201.2 - 201.2 DCS 5.6 - 5.6 Total 246.9 116.9 363.8 /a Of this amount, about US$100 million equivalent is expected to come from the sale locally of skim milk powder and butter oil expected to be donated by the EEC to support the project. EEC has indicated to GOI that it would be prepared to donate up to 186,000 tons of skim milk powder and 72,000 tons of butter oil spread over the next six years, subject to a yearly review of requirements and IDA approval of this project. However, GOI has assured IDA that it will provide all funds required for the project irrespective of any possible commodity donations. Estimated Disbursements: (US$ millions) FY79 FY80 FY81 FY82 FY83 FY84 FY85 Annual 6 23 42 40 23 11 5 Cummulative 6 29 71 111 134 145 150 Rate of Return: 25% Appraisal Report: No. 1964-IN dated May 26, 1978.   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO INDIA FOR THE NATIONAL DAIRY PROJECT 1. I submit the following report and recommendation on a proposed development credit to India in an amount equivalent to US$150 million oA standard IDA terms to help finance a project for increasing the production of milk in about 20,000 villages of India through a cooperative development program which includes animal upgrading and health improvement, and the development of facilities for milk collection, processing and marketing. The bulk of the proceeds of the credit (US$146 million) would be relent to the Indian Dairy Corporation (IDC) for twenty years with interest at 7,5% per annum. IDC would in turn onlend the funds to dairy cooperative institutipns at 8.5% interest per annum, repayable over 20 years, including up to five years grace on interest and principal. Interest accrued during the grace period would be capitalized. Funds for training, research and te;hnieal assistance (US$4 million) would be passed to the National Dairy Development Board (NDDB) as a grant. The exchange risk would be borne by oQI. PART I - THE ECONOMY 1/ 2. An economic report, "Economic Situation and Prospectp 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 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. 1/ Parts I and II of this report are the same as Parts I and II of the President's Report for the Second National Seed Project (Report No. P-2149-IN), dated May 17, 1978.  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 entrepreneural 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 exist. 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 1950's; life expectancy increasing from about 32 years in the 1940's to 45-50 years in the 1970's; school enrollment rising from 32% to 65% of children in primary school ages and from 5% to 29% of children in secondary school ages 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 1950's 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. Recent Trends 7. In many respects economic conditions during the last three years have been significantly different from those prevailing in previous years.  -3- In the late 1960's and early 1970's, 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 adverse 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 in the import bill helped by good harvests and increased domestic production in 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 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  - 4 - 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 rabi crop expectations, price stability and good prospects for sustaining the improved supply of foreign exchange. The circumstances present a great opportunity for further promoting the devel- opment 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 challenge 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 towards 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 towards 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.  - 5 - 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 1970's. Other favorable indicators include the spread of an improved system of extension of 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 1960's--large unutilized 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. Low buoyancy of demand for industrial products from all sources--not only from investments but also from agriculture, exports and import substitution--has been a basic constraint. Further import substitution cannot be a major source of growth for manufac- tured goods in the future because most opportunities for efficient import substitution have been exploited. Higher effective demand from increased growth of real incomes from greater productivity in both agriculture and manufacturing, sustained increases in exports and increased investment, particularly from the public sector, all can raise demand for industrial production.  - 6 - 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 will not fall 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 thousand to 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 1990's, 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 to eliminate 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 in the next few years. 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 availaV`lity 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 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 present 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 53 loans and 97 development credits to India totalling US$2,013 million and US$4,934 million (both net of cancellation), respectively. Of these amounts, US$890 million has been repaid, and US$2,120 million was still undisbursed as of March 31, 1978. Annex II contains a summary statement of disbursements as of March 31, 1978, and notes on the execution of ongoing projects.  - 8 - 24. Since 1957, IFC has made 14 commitments in India totalling US$58.4 million, of which US$14.5 million has been repaid, US$7.6 million sold and US$6.9 million cancelled. Of the balance of US$29.4 million, US$22.9 mil- lion represents loans and US$6.5 million equity. A summary statement of IFC operations as of March 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 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 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 capac- ity utilization in industry. The Bank Group has also been active in support- ing infrastructure development for power, telecommunications, 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 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 March 31, 1978, outstanding loans to India totaled US$1,159 million, of which US$594 million remained to be disbursed, leaving a net amount outstanding of US$565 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 58%, 24% and 29%, respectively, in 1975/76. 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 1976/77, about 14% of India's total debt service payments were to the Bank Group. PART III - AGRICULTURE AND DAIRYING IN INDIA General 30. Agriculture is the most important sector in India; it engages about 70% of the labor force, has recently contributed about 43% of value added and accounts for a major share of exports. Consequently, investments in agriculture have been given priority by GOI and State Governments, espe- cially since the mid-1960s, and deserve continued emphasis in the future. 31. Some 20% of the working population in rural areas have non- agricultural occupations, another 30% are landless agricultural laborers and the residual 50% occupy land holdings wholly or partly their own. Farm hold- ings number about 50 million and cover 350 million acres of crop land distri- buted amongst 576,000 villages. About 20% of crop land is double cropped each year. Average farm size approximates 6 to 7 acres, but about 50% of farms have less than 2.5 acres (9% of all crop land) and 15% have more than 10 acres (61% of all crop land). Rice, wheat, coarse grains, pulses, and oilseeds are the crops which occupy most arable land. 32. Bullocks supply most of the energy required for land cultivation. The pattern of livestock kept throughout India is dominated by the need for draft power. All farmers who can afford to do so keep a pair of bullocks and, if possible, a cow to breed replacement bullocks. There are some 80 million draft males in use, 90% of which are cattle bred from 54 million cattle cows which also produce small quantities of milk; about 500 liters per cow each lactation. Buffalo males find favor for draft purposes only in those few  - 10 - paddy areas where roughage is plentiful. Additionally, most villages keep some buffalo cows mainly for milk production, each cow yielding about 800 liters per lactation. In total there are almost 30 million buffalo cows of breeding age accounting for some 40% of the national milk production, the other 60% being mainly cattle milk. Total milk production at 23 million tons per annum is sufficient to provide 105 grams of milk per capita per day, about 2/3 of the nutritional requirement 1/ in this largely vegetarian land. 33. Because most of India is subject to a highly seasonal pattern of rainfall and vegetative growth, milk supplies in most areas show signifi- cant seasonal variations. Peak supplies commonly occur in December when they reach a volume normally 2 to 3 times that available in April to August, the months of minimal supply. Seasonal peaks in supply are commonly converted to milk products, typically ghee (butter oil), curd and sweetened condensed milk, by villagers. 34. Dairy animals have the unique capacity to convert large quantities of otherwise unusable crop by-products to high value foods and there is, in most situations, a complementarity between milk and food grain production. This complementarity may, however, give way to competition as stock numbers and milk production increase, since crop residues are no longer sufficient to supply total livestock requirements. The introduction of suitable fodder crops in the cropping pattern, enhancement of animal productivity through crossbreeding and improvements in animal health are necessary to ensure that dairy activities lead to productive use of land. Organized village dairying has been shown to promote these objectives and to lead to higher milk output without a negative impact on foodgrain production. Modern dairying also enhances human nutrition and helps alleviate the plight of the landless by improving employment and income prospects in rural areas. Indirectly it helps improve crop yields by enabling farmers to spend more on fertilizers and other crop inputs. Dairy development has consequently been recognized by GOI as a key mechanism for effecting economic and social improvement in rural areas. Development of Organized Dairy Sector 35. In the first half of this century dairying in India was largely unorganized. Two important exceptions were the military farms largely stocked with western breeds to supply milk to army stations, and plantation areas into which purebred bulls were imported and randomly crossbred with local cows. Apart from the pockets of improved animals thus created, dairying was dominated by the makers of traditional milk products and by city milk vendors. In the years of World War II some private dairy companies were established to make butter and cheese for the army. One such company became the prime supplier to the country's first urban milk supply scheme by shipping milk in cans, by 1/ Indian Medical Research Institute, 1976. This statistic says nothing about access to milk supplies which is highly skewed in favor of higher income groups. By way of comparison, milk consumption per capita in the U.S. is about 730 grams per day.  - 11 - rail, from Kaira District in Gujarat to Bombay, some 425 km distant. After a checkered history, the private milk market monopoly gained by the company in Bombay was broken by the formation of a cooperative of the milk producers of Kaira District, subsequently to become known as the "Anand Milk Union Ltd." or "Amul". 36. By the mid-1960's a number of milk producer cooperatives, based on the Amul pattern, had been started and the National Dairy Development Board (NDDB) was established to assist in initiating new milk producer cooperatives in some of the major milksheds of the country. Throughout the next decade the Amul pattern of dairy development evolved further and has proven successful under widely varying ecological and cultural conditions in India. Essential elements of the Amul model involve the formation of a dairy cooperative society (DCS) of milk producers at the village level, the selection of a board of management which sets the policies of the DCS within the framework of a general set of bylaws applicable to all Amul type dairy cooperatives, and the appointment of a local person as a paid cooperative secretary. Each morning and evening the DCS buys milk from all producers in the village who wish to sell it and makes payment to each producer (usually within 12 hours) based on the fat content and volume of the milk. The DCS also sells compounded cattle feed to its members, and provides artificial insemination and first-aid services to cattle. All milk producers in the village are eligible to be members irrespective of caste or sex. 37. A further key element in the Amul model is that DCS within a 50-75 km radius (usually one district) are members of a collectively owned milk union. Milk from the village DCS is brought to the dairy factory of each union and pasteurized; some is then forwarded in insulated tankers to the major cities to be consumed as liquid milk, while the balance is processed into milk products. Each milk union, which typically processes and markets 100,000 to 300,000 liters of milk daily, has a Board of Directors elected by the producer-members. This Board employs a professional manager who is the union's chief executive. The union also provides to members the technical inputs needed to sustain and increase milk production. Thus, the unions organize mobile veterinary clinics, artificial insemination centers, supplies of balanced cattlefeed concentrates, etc., which are marketed to the producers through their own DCS. 38. Recently, existing milk unions have been joirlng with other nearby unions to form federations also registered under the Cooperatives Act, enabling all member-unions to benefit from shared processing, marketing, financing, and investment programs managed by specialists employed by each federation. Thus, the Amul model has evolved a "three-tier" structure of village dairy coopera- tives, unions of village dairy cooperatives, and federations of milk unions. The whole system is owned by the primary producers of rir, and thus operates to their benefit. 39. The margin required for financial viabii3 - 1:oi- tk process- ing and marketing in India is about two-thirds of thar tsu; c. btained by traditional milk vendors. Milk sold in liquid form from bulk ve,-ding units incurs the least processing and marketing charges (about Rs 0.30-0.40 per liter). The competitive status of city milk prod&ucers smid traditional milk  - 12 - vendors is thus being steadily eroded by the cheaper production costs rural milk producers incur, and by the economies of scale and better product util- ization offered by modern dairy technology. The consequence is a steady dwindling of the blight of city-kept cattle, a better and cheaper milk product for the consumer and a new remunerative activity for many small village farmers and landless laborers. 40. Milk provides about two-thirds of all animal protein consumed in India and family expenditure on milk and milk products tends to increase pro- portionately more than income. Daily per capita consumption in the four major cities of India is estimated at 226 grams, about twice the national average consumption, and urban demand is estimated to be expanding by 5% each year. Sales of milk in urban areas at present approximate 19 million liters per day (lpd). Of this amount about 3.4 million lpd is provided by the organized milk sector, and the balance by traditional milk vendors. In most markets the availability of milk from the organized sector limits sales, and some 20% of the 3.4 million lpd is provided from milk recombined from imported skim milk powder and butter oil. By 1985, GOI plans for the organized sector to pro- vide almost 40% of total marketed milk rather than the present 17%; it is also seeking to substitute present imports of milk powder and butter oil with local products. By 1985 sales of almost 10 million lpd are expected from the organized milk market. Other IDA Supported Dairy Projects 41. Current IDA operations in India include three dairy development projects, in Karnataka, Rajasthan and Madhya Pradesh, with total costs of approximately US$140 M (US$76.1 in IDA Credits). Each project is increasing milk production by financing the formation of district milk unions, each com- prising about 400 village dairy cooperative societies (DCS). Credit funds are channeled through the Agricultural Refinance and Development Corporation (ARDC) to commercial banks for onlending to milk unions. Project planning calls for the majority shareholding of each union, presently held by GOI and respec- tive state government, to be owned eventually by the member DCS to conform to the Amul pattern. Milk unions in the three projects are incorporated into state dairy corporations which provide overall services to their constituent unions, including the provision of bulls and semen, consultant services in specialist areas, assistance in financial arrangements, and market research and coordination. 42. Farmer response to the projects has been excellent. Some 1,500 societies have been organized so far, and the volume of milk collected and consequent revenues have exceeded appraisal expectations. About two-thirds of DCS members are small and marginal farmers with about 1-2 ha landholding, or landless laborers. Milk collections per DCS at present average 200 liters per day. DCS are profitable with average reserves of about Rs 1,000 obtained in the first year of operations, providing a commtnal resource now being used to finance village development programs such as schools, water supply systems, and access roads. At the dairy processing plant level, progress in arranging loan financing to the unions and in IDA disbursement has been slower than expected. The financial arrangements for financing union investments under  - 13 - these three projects are cumbersome, and have resulted in frustration, lengthy delays, and multiple appraisal of subproject loan requests as funds are channelled to unions in a two stage process through ARDC and commercial banks. Under the proposed project, financing arrangements have been streamlined and TDC will lend directly to milk unions. GOI has agreed that similar arrange- r ents should be incorporated into the three ongoing projects to L._ng them .nto harmony with the pattern proposed under the national project. GOI has requested that, upon approval of the proposed project, amendments be made to the credit agreements for the ongoing three projects to make IDC available as an alternative financing channel. These amendments would be made. PART IV - THE PROJECT 43. The project was prepared for GOI by the National Dairy Development Board. It was appraised by IDA in November/December 1977. The Staff Appraisal Report No. 1964-IN, dated May 26, 1978 is being distributed separately. Nego- tiations were held in Washington in May 1978. The negotiating delegation for India was headed by Dr. V. Kurien, Chairman, IDC, and Mrs. A.R. Malhotra, Additional Secretary, Ministry of Agriculture. A Supplementary Project Data Sheet is attached as Annex III. Project Description 44. The purpose of the project is to finance an integrated program for increasing the production of milk in about 20,000 villages of India through replicating the Amul cooperative development model which includes animal up- grading and health improvement, and the development of facilities for milk collection, processing and marketing (see paragraphs 35-37 above). The pro- ject also seeks to strengthen the principal institutions responsible for dairy development in India, the Indian Dairy Corporation (IDC) and the National Dairy Development Board (NDDB). The major components of the project, which would be implemented over 7 years, are as follows: (a) the establishment of 20,000 dairy cooperative societies (DCS) grouped into approximately 50 cooperative dairy unions and in turn up to 25 cooperative milk marketing federations; (b) the construction of dairy processing facilities with a total incremental capacity of about 5 million liters per day; (c) the provision of packaging, distribution and transport facilities to handle the marketing of project milk; (d) the provision of storage and long-distance transport facilities to support the establishment of a buffer stock of dairy products and the development of a national marketing network to balance inter-regional disparities in milk supply and demand; and  - 14 - (e) the strengthening of training and research facilities of the National Dairy Development Board (NDDB) and pro- vision of technical assistance. 45. The project represents the first phase of a broader GOI plan to develop about 33,000 dairy cooperative societies and their related unions and federations in selected milksheds of India. The target market includes the four major cities, about 150 smaller urban centers and other sizeable rural towns. The scope of this first phase project - to establish the first 20,000 dairy cooperative societies and related processing and marketing investments - is related to the capacity of the IDC and the NDDB to plan and commit expendi- tures over 3 years. Project funds are expected to be fully committed by IDC by the end of the third year of the project, after which a second phase proj- ect is expected to be presented by GOI to the Association for consideration. Project Implementation 46. Two institutions, the National Dairy Development Board (NDDB) and the Indian Dairy Corporation (IDC) would be responsible for carrying out the project. National Dairy Development Board (NDDB) 47. NDDB, a statutory body set up by GOI in 1965 with headquarters at Anand in Gujarat, provides technical, engineering, advisory, training, re- search and support services for the development of India's dairy industry. It would be the key technical agency responsible for this project. With a total staff of 515, the majority of whom are highly qualified and experienced engineers, livestock specialists and dairy technologists, NDDB has the capa- bility of preparing and implementing dairy development projects for GOI and state governments. Other services provided by NDDB include preparation of detailed engineering designs for dairies, milk chilling centers and cattle feed plants, the turnkey construction and commissioning of dairy plants, and the organization of field teams to assist client unions to establish DCS on the Amul pattern. NDDB has six regional offices in the major milk market centers. IDA's experience with NDDB in connection with ongoing Indian dairy projects confirms the technical competence of this institution. Under the project, it is expected that NDDB will be engaged by most of the partici- pating unions/federations to provide advisory services in project identifi- cation, preparation of feasibility studies, milk production enhancement programs, preparation of specifications and bidding documents, bid evaluations, supervision of procurement and construction, staff recruitment and training and market research. 48. To ensure that NDDB would be able to handle the increased volume of business implied by the project, several actions are being taken to strengthen it. To prepare for the increased volume of consultancy business, the manage- ment of NDDB have arranged to strengthen the Planning Department by recruiting five project analysts with expertise in finance and economics and two econo- mists specializing in marketing and to transfer from its other Departments engineers, livestock specialists and dairy technologists suitable for full  - 15 - time employment in feasibility study work. The immediate objective is to provide staff adequate for the formation of five project preparation teams, each with a full complement of necessary specialization. 49. In orier to assist in coordinating the work load of feasibility studies, and to assist training of new project staff in project identLfication, field investigations and report preparation, 60 man-months of technical assist- ance services are provided to NDDB in the project. The project would also enable NDDB to expand existing, and create new, training facilities. The pro- ject would finance expansion of staff and facilities at the Mansinh Itistitute, at NDDB headquarters in Anand, and the establishment of new training facilities at four regional centers, where courses patterned after those available at NDDB headquarters would be offered. Capital investments include hostel facilities, classrooms and teaching materials. Because training of key federation and union staff is an essential step towards project implementation, a sum not exceeding US$1.0 M would be made available by IDA as retroactive financing for expenditures incurred on project training and technical assistance between January 1, 1978 and credit signing. Indian Dairy Corporation (IDC) 50. IDC is the other national institution which carries major respon- sibility and deserves much credit for India's dairy development through cooperatives. This Corporation, wholly owned by GOI, was established in 1970. IDC's Board of Directors comprises nine members, including the Managing Director who is the chief executive; total staff numbers 160. IDC's financial functions are complementary to the technical services provided by NDDB. IDC has concentrated its efforts on increasing the availability of long term credit to dairy cooperatives and has worked in close collaboration with NDDB in plan- ning, promoting, financing and monitoring dairy development based on the Amul pattern. IDC's major activity to date has been to manage "Operation Flood I". Under this scheme, milk products given to India as food aid by World Food Program have been sold by IDC and the proceeds used for financing dairy devel- opment projects and related infrastructure. This approach would be continued under the proposed project, where EEC is expected to donate milk commodities to IDC (see paragraph 67). IDC would be the financing agency under the project and have major responsibility for monitoring implemention. Though established only in 1970, IDC has remarkable experience in promoting, planning, appraising, financing and monitoring dairy development projects. 51. The IDC provides financing to state governments, state dairy corpo- rations and cooperative institutions concerned with dairy development. IDC believes that the implementing institutions should be given all possible autonomy in their decision-making process and be free of government inter- ference in day-to-day management and pricing policy. To date IDC has declined to take equity capital in the institutions it has financed; it has also declined to nominate directors to the boards of these institutions. By assuming this position it has tried to be a pacesetter in providing autonomy to a cooperative movement dominated in the past by government nominees to management and board positions.  - 16 - 52. IDC has a share capital of Rs 10 million wholly owned by GOI. Although it has wide powers to receive money on deposit or loan and to borrow funds, bonds or debentures have not been issued nor has any long-term loan been obtained from government or banking institutions. IDC is a non-profit organization. Its Memorandum of Association accordingly prohibits disburse- ment of any part of its income as dividend to the shareholders. Thus, IDC is constituted as a service organization. The implementation of the Operation Flood I project has been financed solely by external grants and has not depended on the availability of share capital or borrowed funds. All other activities of the Corporation are in principle operated on a no-profit/no-loss basis. IDC's earnings are at present limited to interest on the surplus funds on deposit in banks and on project loans outstanding. 53. IDC's loan recovery record has been excellent. Overdues are small and invariably have been collected within six months of the due dates. As of March 31, 1977, the total of disbursements made by IDC for dairy development projects was Rs 540 million of which Rs 178 million had been paid out in the form of grants. Loans outstanding at that date were Rs 336 million. Loan repayments are recycled by further lending. The annual inflow of funds from loan repayments available for recycling would amount to Rs 40 million in 1977/78, rise gradually to almost Rs 100 million in 1981/82. IDC's financial position is sound. Its share capital has remained at the original Rs 10 mil- lion. Funds created by sales of WFP commodities amounted to Rs 234.6 million (US$26.9 million) and reserve accumulations amounted to Rs 76 million (US$8.7 million) as of March 31, 1977. Current assets and loans, net of current liabilities, were Rs 300 million. 54. In the past IDC's Project Division has had to call frequently on the technical expertise of NDDB to support its project appraisal and monitoring functions. With the expanded work load facing this division, the Board of IDC has recognized the desirability of IDC having an adequate staff of its own for project appraisal and monitoring. IDC management are therefore arranging to strengthen the Appraisal and Monitoring Divisions by recruiting additional professionally qualified executives specialized in project analysis and imple- mentation. IDC would recruit this additional staff by drawing on executives of proven ability from ongoing dairy and industrial projects, consultancy organizations and financing institutions. 55. The capability of IDC's Project Appraisal Division would also be strengthened with 24 man-months of technical assistance services provided in the project. The consultants engaged would, in addition to reviewing the appraisal reports prepared by IDC staff, undertake special training of IDC's professional staff engaged in project appraisal and monitoring work. Preparation and Appraisal of Subprojects 56. Project implementation would be on a state-by-state basis. All states would be eligible to participate. The first step in a given state would be the development of a general plan for dairy development which would be formulated following discussions between the state government and IDC. The state government and IDC would exchange letters which would outline the  - 17 - state's proposal for dairy .evelopment (i.e., location of milkshed areas, number of cooperatives and milk unions, transfer of existing state and dairy- ing facilities to the cooperative framework, etc.), and define the initial mutual responsibilities for subproject formulation and preparation. These letters would serve as an interim agreement between the Government and IDC upon which the planning of the federation and its constituent milK unions and DCS would be initiated. A number of states have already prepared dairy development proposals, and discussions have taken place, or are in progress, with IDC. IDC would review its work program annually with the Association (see Section 3.05 of draft Development Credit Agreement). IDC's probable investment program for the first year of the project was discussed during negotiations. 57. The establishment of the dairy cooperative industry in a state would follow the modus operandi developed successfully by the NDDB for initiating DCS, unions and federations in the past. The first step in a state will be to establish a nucleus, or skeleton, federation, which would be responsible for initiating and managing further action required to organize DCS and their unions. As each federation is started up, it will, be assisted by consultants, in most cases NDDB, in developing a detailed feasibility study and preparing a subproject report suitable for appraisal by IDC. This report would be com- prehensive and contain technical, organizational, commercial, market, and financial analyses. It would also define the requirements for a spearhead team. This team would comprise the initial staff of the federation, so that the federation would have the full professional staff complement required for implementing the subproject. The spearhead team will be recruited and trained by the NDDB, using the facilities of the original Anand Cooperative to give team members practical experience in working with, and for, farmers. The make-up of a typical spearhead team consists of various technical and man- agement disciplines and can include up to 180 professionals, depending on the stage of dairy development in the particular state where the team begins operations. 58. Appraisal by IDC of the individual subprojects would include a thorough review of these feasibility study reports including field investi- gations and the preparation of a summary appraisal report containing the recommendations of the appraisal teams for submission to IDC's board through the Managing Director. Subproject appraisals would be based on criteria agreed with IDA and would include sound technical, economic and marketing analyses (see Section 2.09 of draft Project Agreement). 59. Following satisfactory IDC appraisal of the subproject, IDC would enter into a loan agreement with the milk federation and with the state govern- ment concerned. Provision of field teams to create DCS, for the contracting and construction of processing plants, and plans and funds for staff training would be formalized in the loan agreement, mainly as subcontracts with NDDB. IDC, as the project authority, would have responsibility for monitoring imple- mentation of all subprojects. Monitoring of the progress of each subproject, against a specific implementation schedule specified in each IDC appraisal report, would be carried out by IDC with field visits and supported periodic- ally by IDA supervision missions. The first five subprojects appraised by IDC  - 18 - would be forwarded to IDA prior to IDC approval. Subsequently, each sub- project would be forwarded to IDA for review after IDC approval (see Section 2.10 of draft Project Agreement). Processing Facilities 60. The project aims at the construction of about 5 million liters per day (lpd) of processing capacity. Included in this processing capacity would be about 1.0 million lpd of product manufacture, mainly milk powder and butter, to provide for seasonal balancing of milk supplies. Processing investment costs per union are based on a model that assumes a mix of plant expansion and new plant construction and on a product mix that assumes 80% of sales as liquid milk and 20% for conversion to butter, milk powder and other dairy products. The project would provide for the takeover and expansion of existing process- ing plants where practical, and for the construction of new plants. The spe- cific investment plans for each federation would be based on a detailed study of existing processing facilities in each state and would contain a market analysis. To assist in the start up phase of newly established dairy process- ing plants, 50 man years of technical assistance in the form of experienced dairy plant managers would be provided. Distribution and Marketing 61. The project is geared to supplying milk to the 4 major metropolitan centers (Bombay, Calcutta, Delhi and Madras) and to about 150 cities each with a population of about 100,000 or more. The project would provide incremental facilities to market about 4.5 million lpd of liquid milk in these major urban markets and in the smaller cities and towns in the vicinity of project areas (20% of milk procured by the dairy plants would be converted to milk products). The major investments necessary to provide adequate milk distribution and marketing facilities would comprise storage and transportation facilities, milk packaging and paper lamination equipment, and bulk milk vending machines and dispensers. 62. Three major modes of distribution would be expanded under the pro- ject; bulk vending systems; sachets; and tetrapacks for specially sterilized "longlife" milk. Additionally, increased supplies to institutional purchasers and small-town markets would be packaged in 40-liter cans. Bottled milk, which in the past was favored by most dairies in the organized sector, is rapidly being replaced by these other distribution systems. Based on the experience of recent market development in the major cities of India it is expected that 50% of milk sales under the project would be handled through bulk vending units. About 20% of retail sales would occur with milk packed in plastic sachets, 20% of sales would be in cans sold to institutional pur- chasers, 10% as sterile milk in longlife packages. 63. The demand for milk to be supplied by the project is expected to be strong. The principal factors affecting demand for milk are urban popu- lation growth (3% per annum) and increases in household income (3% per annum). Thus, urban demand for milk is assessed to rise at an annual rate in excess of 5% during the project period. Other factors (e.g. change in income  - 19 - distribution, the pace of urbanization, change in tastes, food preferences and habits) are also likely to increase the market demand for milk over time. 64. The projected urban demand for milk in 1985 exceeds 26 million lpd; expected sales of milk from the modern sector, following implementation of this project, would be approximately 9.5 M lpd or 37% of the urban demand. During the project period, dairy imports would continue to be necessary to supplement the production of milk powder and butter oil required for recom- bination in the summer months of minimal milk supplies. Given the supply constraint, the opportunity for the cooperative dairy movement to strengthen production and focus supply efforts in the urban markets where demand is highly concentrated is excellent. Buffe.r Stock Storage and Milk Distribution 65. IDC maintains a stock of milk powder and butter in order to provide (a) a buffer against fluctuations in market demand for these products; and (b) a price stabilization mechanism for milk powder and butter oil in a mar- ket in which supplies are largely dependent upon overseas arrivals that have tended to be very erratic. Present use of buffer stocks approximates 12,000 tons of powder and 4,000 tons of butter oil a year, sufficient to reconstitute about 700,000 lpd of milk throughout the period of inadequate supply. IDC stores butter oil and powder mainly in rented accommodation, but some warehouses have had to be constructed in areas where rental has not been possible. At least 2,500 tons of additional storage will need to be constructed for project purposes. Each union would also have local storage facilities equivalent to 10% (700 tons) of its product processing capacity, the costs of which are included in plant construction estimates. Research 66. The Indian dairy industry is in a state of rapid evolution and developments in milk production, processing and marketing are occurring with great rapidity. NDDB has supported this development with an excellent applied research program which would be expanded as part of the project. A new research division within NDDB would be initiated comprising four main sections: (a) farm systems; (b) design engineering; (c) food technology; and (d) support services including market analysis. In addition, 9 man years of technical assistance in specialized research areas would be provided. It is expected that this research division would be largely self-supporting as revenues from patents, licensing arrangements and technical service fees are expected to grow at a rapid rate. Project Cost and Financing 67. The project cost is US$364 million equivalent over 7 years (includ- ing duties and taxes of about US$36 million) of which about US$117 million is the foreign exchange equivalent. The proposed credit of US$150 million would finance about 46% of the total cost net of import duties and taxes and would cover all foreign exchange costs and about US$33 million of local costs. The remaining local costs would be met by GOI (US$7 million), by IDC (US$201  - 20 - million) and by farmers (US$6 million). Of the IDC share of US$201 million, about US$100 million equivalent is expected to be generated through the sale locally of skim milk powder and butter oil to be donated by EEC. EEC has indicated to GOI that it would be prepared to donate about 186,000 tons of skim milk powder and up to 72,000 tons of butter oil over the next six years subject to a year by year review of requirements and IDA approval of this project. However, GOI has given IDA an assurance that it will provide all funds required for the project irrespective of any possible commodity dona- tions (see Section 3.01 of draft Development Credit Agreement). 68. US$4 million of IDA funds would be passed on by GOI to NDDB as a grant to finance training, research and technical assistance related to the project. The balance of IDA funds (US$146 million) would be channelled to IDC for relending to dairy cooperative federations. IDC would receive the funds from GOI on terms requiring repayment over 20 years at 7.5% interest per annum. Installment repayments would be set to coincide with amortization of subloans. IDC would relend the IDA funds to federations for 20 years, includ- ing up to 5 years grace on interest and principal, at 8.5% interest per annum. Interest accrued during the grace period would be capitalized. The IDC loan to a federation would cover 70% of the investment costs required. The remain- ing 30% would be provided as farmers' shareholders equity. The major propor- tion of this equity would be contributed on behalf of farmers by IDC and/or government. IDC contributions would be on a grant basis. Government contri- butions, if any, would be mainly in the form of existing dairy facilities and would be transferred to the project either as grants or equity, depending on the arrangements worked out between IDC and the State concerned (see below). 69. The above terms of financing include a subsidy element which is required to carry out the project successfully. The terms are designed to promote farmer ownership and control of cooperatives and their unions along the lines of the Amul model. For Amul-type development to succeed, the state must: be willing to change its Cooperative Act to ensure that dairy coopera- tives will be registered under carefully formulated Amul model bylaws; give autonomy to milk unions and federations to set their own prices for procure- ment and sale of milk; transfer existing state-owned dairying facilities in the project area to the cooperative framework; transfer responsibility for animal health care and husbandry services to the cooperative framework; and, in general, cooperate in spirit and action with the promotion of Amul dairy cooperatives. For states to be willing to undertake these sometimes poli- tically difficult steps, the incentive must be adequate. Hence, the project provides for the possibility of IDC making available the 30% non-loan portion of union investment, in part, or fully, as a grant. 70. The proposed interest rate of 8-1/2% is satisfactory for invest- ments of this kind. The IDC is a specialized lending institution making a relatively few number of large loans. The small spread it takes - 1% - is adequate to cover its administrative overheads. The rate is also consistent with the rate charged by other centrally funded institutions lending to cooperatives such as the National Cooperative Development Corporation. With long-run inflation estimated at no more than 5 to 6% per annum, IDC would be lending at a positive real rate of interest of 2-1/2 to 3-1/2%. The proposed rate is lower by 2 to 3 points than that charged by banks for investments in  - 21 - agriculture in other projects including the three ongoing dairy projects in India. However, these are loans mainly to individual farmers, and the rates reflect the higher cost of such lending. Also, as pointed out in paragraph 42 above, the multi-tiered financial arrangements under the three ongoing IDA dairy projects have proved to be cumbersome and slow. Under the proposed project, onlending has been streamlined with the removal of one tier in the channelling hierarchy and, consequently, the cost of lending is further reduced. Procurement 71. Major items of machinery and equipment for the milk distribution system totalling US$210 million would be bulked and procured by international competitive bidding (ICB) in accordance with IDA guidelines. Local manufac- turers would receive a margin of preference in bid evaluation of 15% or the prevailing customs duty whichever is lower. Minor equipment such as electrical components and other fixtures and fittings for the plants, milk vending equip- ment, and materials for research and training (US$35 million) would be procured on the basis of local competitive bidding advertised locally and in accordance with NDDB and IDC bid procedures which are satisfactory to IDA. It would not be practical to bulk these equipment and supplies because the items are many and varied, individually of small value, and spread over time and place. As there is adequate representation of local suppliers and local agents of foreign suppliers, competition is assured. For the same reasons, equipment, vehicles and supplies for the DCS and union services (US$34 million) would be purchased by local competitive bidding. In the case of vehicles, standardization with local makes is also required to ensure adequate maintenance and spares. 72. Contracts for civil works for construction of dairy processing plants, stores and administration buildings (US$46 million) would be individ- ually small, dispersed in time and place, and would not warrant ICB procedures. These would be let on the basis of local competitive bidding, advertised locally and in accordance with local procedures satisfactory to IDA. Tech- nical assistance services (US$4 million) would be engaged in accordance with IDA guidelines for selection of consultants. Urgent purchases of minor equip- ment and supplies up to a total value of US$2 million would be procured by prudent shopping. The balance of project costs (US$35 million) would cover permanent operating capital and manpower development costs not involving procurement. Retroactive financing of up to US$1.0 million would be provided by IDA to initiate project training activities. Disbursements 73. Disbursements from the proposed Credit would cover: (a) 100% of foreign expenditure for directly imported items and 100% of local expenditure (ex-factory) for items procured locally after ICB; (b) 60% of expenditure for locally manufactured items pro- cured after local bidding;  - 22 - (c) 60% of IDC disbursements for DCS and union establishment costs; civil works; and other processing and distribution facilities not financed under (a) and (b) above; (d) 100% of technical assistance services. Disbursements would be fully documented except that in the case of (c) dis- bursements would be made against statements of expenditures prepared by IDC. Documents supporting these disbursements would not be submitted to IDA but retained by IDC and audited quarterly by IDC's statutory auditors. Such documents would be made available for inspection by IDA during supervision mission visits. Appropriate assurances were obtained from GOI and IDC in this regard (see Schedule 1, paragraph 5 of draft Development Credit Agree- ment and Sections 2.05 and 4.02 of draft Project Agreement). Projects Benefits and Risks 74. The project would permanently improve the income of some 3.5 million rural families, about 20 million people. Most project beneficiaries would be subsistence and small farmers whose average per capita farm income is less than one half the national average. Under the project, farm incomes from increased milk sales would quadruple, while increased sales of agricultural produce are expected to add to farm income. Major benefits would accrue from the increase in milk production attained by augmenting the productivity of existing dairy animals and facilitating the marketing of this milk. Because incremental income from milk sales would be used by farmers for more and time- ly crop inputs, foodgrain production would also be increased. Additional important benefits would arise from year-round employment opportunities pro- vided to landless and smaller farmers amongst India's rural people, while the organizational arrangements introduced under the project would strengthen the decision making process at the village level as well as local capabilities for project planning, design and implementation. Most importantly, the project would lead to marked improvement in the social and economic environment of participating villages. 75. Small tenant farmers are particularly favored by dairy development as tenancy agreements normally provide for all income from livestock going to the tenant. Tenants therefore have a particularly strong incentive to increase livestock production. Project benefits are also weighted in favor of landless laborers and marginal land owners because of the intensive labor demand associated with milk production. This feature of the project enables the landless and small farmers who own cattle to use surplus family labor for milk production; it also means a rapid expansion in the demand for hired labor by larger farmers who move into dairy development. Farm employment created by the project is extremely large, about .75 million man years of work. 76. The overall impact of the project in year seven includes the incre- mental production of about 5 million liters per day of milk, leading to an increase in annual farm income of about Rs 1,990 million (US$230 million) and the substantial growth of rural employment noted above. Although not included in the rate of return calculations, the project would also significantly  - 23 - contribute toward increasing crop production in addition to milk, with con- sequent additional employment benefits. 77. The economic rate of return of the project from milk alone would be about 25%. The typical DCS is expected to show a cash surplus as early as year one and steadily to increase bonus payments to members. In these projections, milk sales from the typical union milk plant have been held constant at about 144,000 liters per day from year 7 as an increase in plant capacity would then be required. Based on the spread of prices prevailing between farmgate and urban markets the financial rate of return of each union is expected to be close to 20%. 78. The risks involved in this project are not great. The considerable experience now accumulated with dairy development in India using the Amul model demonstrates that projects of this nature work well, as long as there is adequate staff, and that benefits to participants are high. Demand for milk exceeds available supplies and markets for project output are assured. What risks there are relate mostly to administrative delays in establishing, financing, and operating the various project organizations, thereby delaying the growth of project benefits. Conservative assumptions have been made in regard to project phasing, costs, yields and commodity prices. The main imple- menting institutions, IDC and NDDB, are experienced and staffed with competent and motivated people. Measures to coordinate, monitor and expedite all phases of implementation have been discussed with GOI, NDDB, IDC and state governments. The risks are acceptable in view of the benefits which would accrue to a large number of landless and small farmers, and to the economy as a whole. PART V - LEGAL INSTRUMENTS AND AUTHORITY 79. The draft Development Credit Agreement between the Borrower and the Association, the draft Project Agreement between the Association and the Indian Dairy Corporation and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 80. Special conditions of the project are listed in Section III of Annex III. 81. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 82. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments May 26, 1978   ANNEX I Page 1 INDIA - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) ----------------------------------- --------------- INDIA REFERENCE COUNTRIES (1970) TOTAL 3280.5 MOST RECENT AGRIC. 1797.5 1960 1970 ESTIMATE INDONESIA PHILIPPINES 6RAZIL** GNP PER CAPITA (USS) 60.0 l1O.0 150.0 130.0 230.0 550.0 POPULATION AND VITAL STATISTICS _______________________________ POPULATION (MID-YR. MILLION) 434.9 547.6 620.4 /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 3.7/a 4.0 5.0 URBAN POPULAtION l% OF TOTAL) 17.9 19.8 20.6 17.5/b 27.6 56.0 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 41.0 41.6 40.1 44.0 45.6 42.o 15 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 0.9 0.9 0.8 ECONOMIC DEPENDENCY RATIO 1-I/lS 1.1/a .l.